[Federal Register Volume 61, Number 155 (Friday, August 9, 1996)]
[Notices]
[Pages 41665-41667]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-20346]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22115; File No. 812-10004]


AUSA Life Insurance Company, Inc., et al.

August 2, 1996.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (``1940 Act'').

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APPLICANTS: AUSA Life Insurance Company, Inc. (``AUSA'') and 
Diversified Investors Variable Funds (``Variable Account'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 26(b) of the 
1940 Act approving a proposed substitution of securities.

SUMMARY OF APPLICATION: Applicants seek an order to permit the 
substitution (the ``Substitution'') of interests in the Diversified 
Investors Portfolios' International Equity Portfolio (``Diversified 
International Series'') for shares in the International Portfolio of 
the Scudder Variable Life Investment Fund (``Scudder International 
Series'').

FILING DATE: The application was filed on February 21, 1996, and 
amended on July 18, 1996.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing on the application, or ask to be notified 
if a hearing is ordered, by writing to the Commission's Secretary and 
serving the Applicants with a copy of the request, either personally or 
by mail. Hearing requests must be received by the Commission by 5:30 
pm., on August 27, 1996, and should be accompanied by proof of service 
on the Applicants, either by affidavit, or, for lawyers, by certificate 
of service. Hearing requests should state the nature of the writer's 
interest, the reason for the request, and the issues contested. Persons 
may request notification of the date of the hearing by writing to the 
Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549. Applicants, c/o David R. 
Woodward, Esq., LeBoeuf, Lamb, Greene & MacRae, L.L.P., 1875 
Connecticut Avenue, N.W., Suite 1200, Washington, D.C. 20009.

FOR FURTHER INFORMATION CONTACT:
Joyce Merrick Pickholz, Senior Counsel, or Patrice M. Pitts, Special 
Counsel, Office of Insurance Products, Division of Investment 
Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: Following is a summary of the application. 
The complete application is available for a fee from the SEC's Public 
Reference Branch.

Applicants' Representations

    1. AUSA is a stock life insurance company organized under the laws 
of New York State. The Variable Account, a separate account established 
by AUSA, is registered with the Commission under the 1940 Act as a unit 
investment trust. The Variable Account serves as the funding vehicle 
for group variable annuity contracts (``Contracts'') that are issued 
and administered by AUSA and available for sale to various types of 
retirement plans. Diversified Investors Securities Corp. serves as 
principal underwriter of the Contracts.
    2. The Variable Account is divided into a number of sub-accounts 
(``Sub-Accounts'') that correspond to the mutual funds in which each 
Sub-Account's assets are invested, including the Calvert Responsibly 
Invested Balanced Portfolio, the Scudder International Series, and 
eleven series of Diversified Investors Portfolios (``Trust'')--a New 
York business that is registered under the 1940 Act as an open-end 
management company.
    3. The Sub-Accounts that invest in the Trust do so under a ``Hub & 
Spoke'' arrangement. Each Sub-Account which invests in a series of the 
Trust is a ``spoke'' or feeder fund. The corresponding series of the 
Trust is a ``hub'' or master fund. Interests in the Trust may also be 
sold to other types of collective investment vehicles or institutional 
investors. Variations in

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sales commissions and other operating expenses permit these other 
investors to sell their shares at different public offering prices from 
the Sub-Accounts, and, consequently, to experience returns that differ 
from the returns of holders in Contracts in the Variable Account 
(``Holders'').
    4. The investment objective of the Diversified International Series 
of the Trust is to provide a high level of long term capital 
appreciation through investment in a diversified portfolio of 
securities of foreign issuers. Under normal circumstances 65% of the 
assets of the Diversified International Series is invested in foreign 
equity securities and its assets are invested in a minimum of three 
countries outside of the United States. Diversified Investment 
Advisors, Inc. serves as advisor, and Capital Guardian Trust Company 
serves as sub-advisor, to the Diversified International Series. The 
annual fee for advisory services provided in connection with the 
Diversified International Series is .75% of the Series' average net 
assets; other expenses for the Diversified International Series were 
estimated to be .15% of average net assets. A Sub-Account of the 
Variable Account was organized in order to invest in interests of the 
Diversified International Series. To date, however, no investment has 
been made, and all of the interests in the Diversified International 
Series are held by other spoke/feeder funds.
    5. Under Scudder International Equity Sub-Account of the Variable 
Account (``International Equity Sub-Account'') currently invests in the 
Scudder International Series of the Scudder Variable Life Investment 
Fund (``Scudder Fund''), a Massachusetts business trust registered 
under the 1940 Act as a diversified open-end investment company. The 
investment objective of the Scudder International Series is to achieve 
long term growth of capital primarily through diversified holdings of 
marketable foreign equity investments. The Scudder International Series 
invests in companies, wherever organized, that do business primarily 
outside the United States. The Scudder International Series intends to 
diversify investments among several countries and to have represented 
in its holdings business activities in not less than three different 
countries. Scudder, Stevens & Clark is the investment advisor of the 
Scudder International Series. The advisory fee for the Scudder Series 
is .875%; other expenses associated with the Scudder Series in 1995 
were estimated to be .205% of average net assets.
    6. Under the Contracts, AUSA reserves the right to effect a 
substitution; the prospectus through which the Contracts are offered 
discloses this substitution right. For the following reasons, AUSA on 
its own behalf and on behalf of the Variable Account proposes to 
substitute interests of the Diversified International Series for shares 
of the Scudder International Series currently held in the International 
Equity Sub-Account. Retirement plans that have entered into Contracts 
have done so because they wished to invest in the Trust, and to receive 
the benefits of investment management services provided to the Trust 
and the efficiencies available under the Trust's master-feeder 
structure. The two Sub-Accounts that do not invest in the Trust were 
established in 1993 to provide certain investment options for which no 
corresponding series was available under the Trust. An international 
equity option now is available under the Trust, and the best interests 
of Holders are served by providing that investment option under the 
Contracts. Because the Diversified International Series and the Scudder 
International Series have substantially similar investment objectives 
and policies, the Substitution is necessary to avoid the confusion and 
duplication that would result from having two Sub-Accounts that invest 
in different international equity funds.
    7. The Substitution will be at net asset value of the respective 
shares, without the imposition of any transfer, sales, or similar 
charge. AUSA will pay all expenses and transaction costs of the 
Substitution, including any applicable brokerage commission.
    8. AUSA will file a post-effective Amendment to the registration 
statement on Form N-4 for the Variable Account to reflect the 
Substitution in its prospectus, as well as information relating to the 
Diversified International Series and the elimination of the Scudder 
name from the Sub-Account.
    9. Within five days after the Substitution, AUSA will send to the 
Holders a written notice (``Notice'') of the substitution that 
identifies the interests in the Diversified International Series that 
have been substituted. AUSA will include in such mailing an updated 
prospectus of the Variable Account that discloses the completion of the 
Substitution and that the International Equity Sub-Account will 
henceforth invest in the Diversified International Series. Holders will 
be advised in the Notice that for a period of sixty days from the 
mailing of the Notice, they may transfer all assets as substituted to 
any other available Sub-Account. No transfer charge is currently in 
effect, and none will be imposed prior to the expiration of the sixty 
day period. Following the substitution, Holders will be afforded the 
same contact rights, including surrender and other transfer rights with 
regard to amounts invested under the Contracts, as they currently have.

Applicants' Legal Analysis

    1. Section 26(b) of the 1940 Act provides in pertinent part that 
``[i]t shall be unlawful for any depositor or trustee of a registered 
unit investment trust holding the security of a single issuer to 
substitute another security for such security unless the Commission 
shall have approved such substitution.'' Section 26(b) provides that 
the Commission will approve a substitution if it is consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the 1940 Act. The purpose of Section 26(b) is to 
protect the expectation of investors in a unit investment trust that 
the unit investment trust will accumulate the shares of a particular 
issuer, and to prevent unscrutinized substitutions which might, in 
effect, force shareholders dissatisfied with the substituted security 
to redeem their shares, thereby incurring either a loss of the sales 
load deducted from initial proceeds, an additional sales load upon 
reinvestment of the redemption proceeds, or both. Section 26(b) affords 
protection to investors by preventing a depositor or trustee of a unit 
investment trust holding shares of one issuer from substituting for 
those shares the shares of another issuer, unless the Commission 
approves that substitution.
    2. Applicants submit that the purposes, terms and conditions of the 
proposed Substitution are consistent with the principles and purposes 
of Section 26(b). Applicants further submit that the Substitution will 
not result in the type of costly forced redemption that Section 26(b) 
was intended to guard against, and is consistent with the protection of 
investors and the purposes fairly intended by the 1940 Act.

    a. The objectives, policies and restrictions of the Diversified 
International Series are sufficiently similar to the objectives of 
the Scudder International Series so as to continue fulfilling the 
Holders' present objectives and risk expectations.
    b. The Substitution will be at net asset value of the respective 
shares, without the imposition of any transfer, sales or similar 
charge.
    c. AUSA has undertaken to assume the expenses and transaction 
costs relating to the Substitution, including, among others, legal 
and accounting fees and any brokerage commissions.
    d. Within five days after the Substitution, AUSA will send to 
the Holders written notice of the Substitution, identifying the 
interests

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in the Diversified International Series that were substituted, and 
disclosing that the International Equity Sub-Account will henceforth 
invest in the Diversified International Series.
    e. For sixty days following the receipt of Notice of the 
Substitution, a Holder may transfer assets as substituted to any 
other Sub-Account available under the Contract. No transfer charge 
or limitation on the number of transfers currently is in effect, and 
none will be imposed before the expiration of sixty days from the 
date on which Notice of the Substitution is given.
    f. After the Substitution, Holders may transfer among Sub-
accounts in accordance with the terms of their Contracts. Currently, 
the Contracts neither limit allowable transfers nor do they 
currently impose a charge for transfers.
    g. The Substitution will not alter the insurance benefits to 
Holders or the contractual obligations of AUSA.
    h. AUSA has been advised by counsel that the Substitution will 
not give rise to any tax consequences to the Holders.
    i. Currently, Holders may withdraw amounts credited to them 
following the Substitution without any Contract charge, subject to a 
penalty tax upon premature withdrawals, if applicable.
    j. The Substitution will: (A) provide a more appropriate 
international equity investment option within the context of the 
overall investment program available under the Contracts; (B) avoid 
the confusion which would be caused by having two international 
equity investment options available through the Variable Account; 
and (C) provide economic benefits to Holders through lower 
investment advisory fees and other expenses.

Applicants' Conclusions

    Applicants assert that, for the reasons and upon the facts set 
forth in the application, the requested order approving the proposed 
substitution meets the standards set forth in Section 26(b) of the 1940 
Act and should be granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 96-20346 Filed 8-8-96; 8:45 am]
BILLING CODE 8010-01-M