[Federal Register Volume 63, Number 198 (Wednesday, October 14, 1998)]
[Notices]
[Pages 55156-55158]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-27415]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23479; File No. 812-11116]


American Fidelity Assurance Company, et al.; Notice of 
Application

October 6, 1998.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the 
``Commission'').

ACTION: Notice of application for an order pursuant to Section 17(b) of 
the Investment Company Act of 1940 (the ``1940 Act'').

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SUMMARY OF APPLICATION: The Applicants seek an order pursuant to 
Section 17(b) of the 1940 Act exempting the Applicants from the 
provisions of Section 17(a) of the 1940 Act, to the extent necessary to 
permit the transfer of securities and other instruments held by Account 
A to the Dual Strategy Fund in exchange for shares of the Dual Strategy 
Fund in connection with the reorganization of Account A (the 
``Reorganization'') that will change Account A from a management 
investment company to a unit investment trust (Continuing Account A).

APPLICANTS: American Fidelity Assurance Company (``American 
Fidelity''), American Fidelity Variable Annuity Fund A (``Account A'') 
and American Fidelity Dual Strategy Fund, Inc. (the ``Dual Strategy 
Fund'') (collectively, the ``Applicants'').

FILING DATE: The application was filed on April 30, 1996, and amended 
and restated on August 6, 1998.

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 this application by writing to the 
Secretary of the SEC and serving Applicants with a copy of the request, 
in person or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on November 2, 1998, and accompanied by proof 
of service on the Applicants in the form of an affidavit or, for 
lawyers, a certificate of service. Hearing requests should state the 
nature of the requester's interest, the reason for the request and the 
issues contested. Persons who wish to be notified of a hearing may 
request notification by writing to the Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, Stephen P. Garrett, Senior Vice President, American 
Fidelity Assurance Company, 2000 Classen Center, Oklahoma City, 
Oklahoma 73106.

FOR FURTHER INFORMATION CONTACT:
Megan L. Dunphy, Attorney, or Mark Amorosi, 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 Public 
Reference Branch of the SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549 (tel. (202)942-8090).

Applicants' Representations

    1. American Fidelity, a stock life insurance company incorporated 
in Oklahoma, is the sponsoring insurance company for Account A and will 
become the depositor of Continuing Account A pursuant to the 
Reorganization.
    2. Account A is a separate account of American Fidelity that was 
established in 1968 to fund variable annuity contracts (``Contracts''). 
Account A is registered under the 1940 Act as an open-end diversified 
management investment company and consists of a diversified portfolio 
of primarily equity securities. The primary investment objective of 
Account A is long-term capital growth. The secondary investment 
objective is the production of current income. American Fidelity serves 
as the investment adviser to Account A and has retained Lawrence W. 
Kelly & Associates, Inc. (``Kelly'') and Todd Investment Advisors, Inc. 
(``Todd Investment'') to act as sub-advisers for Account A.
    3. The Dual Strategy Fund is a registered open-end, diversified 
management investment company, established as a Maryland corporation on 
March 18, 1998. Immediately after the Reorganization, the Dual Strategy 
Fund will consist solely of the portfolio of securities and other 
instruments received by it from Account A pursuant to the 
Reorganization. The Dual Strategy Fund initially will offer its shares 
solely to Continuing Account A as a funding vehicle for the Contracts 
supported by Continuing Account A. In the future, the Dual Strategy 
Fund may offer its shares to another American Fidelity separate account 
supporting other variable annuity contracts.
    4. The primary investment objective of the Dual Strategy Fund is 
long-term capital growth and its secondary investment objective is 
production of current income. Pursuant to an investment advisory 
agreement and subject to the authority of the Dual Strategy Fund's 
Board of Directors, American Fidelity will serve as the Dual Strategy 
Fund's investment adviser and will retain Kelly and Todd Investment to 
serve as its subadvisers.
    5. As part of the Reorganization, Continuing Account A, will be 
renamed American Fidelity Separate Account A, will be registered under 
the 1940 Act as a unit investment trust. Continuing Account A will 
invest exclusively in shares of the Dual Strategy Fund.
    6. Applicants state that only one type of Contract has been offered 
through Account A, a group variable annuity contract issued by American 
Fidelity for use by employers and self-employed persons in connection 
with certain tax-qualified group retirement plans. The Contract 
provides for, among other things: (a) four monthly payout options 
beginning at any time elected by a Contract participant; (b) certain 
minimum initial and subsequent purchase payments; and (c) a death

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benefit payable if the participant dies before the commencement of 
annuity payments.
    7. American Fidelity deducts transaction expenses from each 
purchase payment made under the Contract (3% for front-end sales load, 
.25% for administrative expense, and .75% for minimum death expense), a 
per payment charge of $.50 and any applicable premium taxes. Under each 
Contract, there are daily deduction from the assets of Account A made 
for mortality risk equal to an annual rate of .85% and for expense risk 
equal to an annual rate of .11025%. An investment management charge of 
.50% also is deducted annually. There is a one time Contract fee of 
$15.00 and there is no surrender or withdrawal charge imposed.

The Proposed Reorganization

    1. The Board of Directors of American Fidelity, the Board of 
Managers of Account A, and the Board of Directors of the Dual Strategy 
Fund, including a majority of the disinterested members of each of the 
latter two boards, have approved an Agreement and Plan of 
Reorganization (the ``Reorganization Agreement'') and have each adopted 
resolutions authorizing the restructuring of Account A from a 
management investment company into a unit investment trust investing 
exclusively in the Dual Strategy Fund and the transfer of the portfolio 
assets and related liabilities of Account A to the Dual Strategy Fund 
at net asset value in exchange for shares of the Dual Strategy Fund of 
equal value. The Dual Strategy Fund will mirror the investment and 
policies of Account A. The membership of the Board of Managers of 
Account A is the same as that of the Board of Directors of the Dual 
Strategy Fund. The annuity features of the Contracts will not be 
affected by the Reorganization.
    2. In connection with the approval of the Reorganization Agreement, 
a disinterested majority of the Board of Managers of Account A and the 
Board of Directors of the Dual Strategy Fund determined that the 
Reorganization would be in the best interests of Account A and the Dual 
Strategy Fund and that the interests of existing Contract owners would 
not be diluted as a result of the Reorganization. The Reorganization is 
subject to be the consideration and approval of the Contract owners and 
participants of Account A.
    3. At the effective time of the Reorganization, American Fidelity 
will transfer the portfolio assets and related liabilities of Account A 
to the Dual Strategy Fund in exchange for shares of the Dual Strategy 
Fund of equal value. American Fidelity will record shares issued by the 
Dual Strategy Fund as assets of Continuing Account A. The total net 
assets of Account A will be determined, in the customary manner, as of 
the business day immediately preceding the effective time of the 
Reorganization. The number of Dual Strategy Fund shares issued will be 
determined by dividing the value of the net portfolio assets to be 
transferred from Account A by the net asset value per share of the Dual 
Strategy Fund. Both determinations will be made in accordance with 
Section 22(c) of the Act and Rule 22c-1. Immediately following the 
Reorganization, a Contract owner's interest in Continuing Account A 
will be equal to its former interest in Account A. American Fidelity 
will take all action necessary to insure that such interest in 
Continuing Account A immediately following the effective time of the 
Reorganization is duly and validly recorded in the individual account 
records of Contract participants.
    4. Applicants expect to use the Dual Strategy Fund as an underlying 
investment medium for Continuing Account A and other American Fidelity 
separate accounts funding variable annuity contracts. As a result of 
its increase in size, the Dual Strategy Fund should experience 
administrative efficiencies and economies of scale, and should be able 
to satisfy diversification requirements more easily.
    5. The Dual Strategy Fund will have the same investment objectives, 
substantially the same investment policies and restrictions, the same 
Board of Directors and the same investment adviser and sub-advisers as 
Account A, provided such arrangements are approved by the Account A 
Contract owners and participants. The Applicants represent that all the 
assets to be acquired by the Dual Strategy Fund in the Reorganization 
will be suitable investments for the Dual Strategy Fund. Further, the 
parties do not anticipate that there will be any need to liquidate any 
portfolio securities held by Account A in order to complete the 
Reorganization. If such a need should arise, American Fidelity would 
bear any associated transaction costs of the liquidation.
    6. American Fidelity will bear all of the costs of the 
Reorganization. The Reorganization will not affect the total amount of 
fees and charges assessed, directly or indirectly, under the Contracts. 
The Dual Strategy Fund will incur certain operating expenses in 
addition to the management and investment advisory fee. To ensure that 
annual expenses to be charged against the Contracts by Continuing 
Account A plus the Dual Strategy Fund's expenses will not be greater in 
amount than the annual expenses that would have been charged by Account 
A had the Reorganization not occurred, American Fidelity will bear all 
of the Dual Strategy Fund's expenses of a type or in an amount which 
would not have been borne by Account A had the Reorganization not 
occurred.
    7. Following the Reorganization, Contract owners will be charged 
the same fees and expenses that applied before the Reorganization, 
except that American Fidelity will receive the fee for its management 
and investment advisory services from the Dual Strategy Fund, and there 
will be no such charge by Continuing Account A. The management and 
investment advisory fee, brokerage fees and commissions, other 
investment transaction expenses and taxes, if any, will be expenses 
borne by the Dual Strategy Fund, and they will be reflected in the net 
asset value per share of the Dual Strategy Fund. All other expenses 
incurred by the Dual Strategy Fund, such as custodial fees, fees of 
disinterested directors, costs of meetings of shareholders, legal and 
accounting expenses, reporting costs and registration fees, will be 
borne by American Fidelity and will not be reflected in the Dual 
Strategy Fund's net asset value.
    8. Following the Reorganization, American Fidelity will offer each 
Contract owner pursuant to instructions from participants, the 
opportunity to instruct American Fidelity in voting the Dual Strategy 
Fund shares attributable to that Contract owner. American Fidelity will 
vote shares of the Dual Strategy Fund held by Continuing Account A for 
which no voting instructions have been received in the same proportion 
as those for which instructions have been received.

Applicants' Legal Analysis

    1. Section 17(a) of the 1940 Act generally prohibits any affiliated 
person of a registered investment company, or any affiliated person of 
an affiliated person, from selling or purchasing any security or other 
property to or from such registered investment company. Section 17(b) 
of the 1940 Act authorizes the Commission to grant an order exempting a 
transaction otherwise prohibited by Section 17(a) of the 1940 Act if 
evidence establishes that: (1) The terms of the proposed transaction, 
including the consideration to be paid or received, are reasonable and 
fair and do not involve overreaching on the part of any person 
concerned; (2) the proposed transaction is consistent with

[[Page 55158]]

the policy of each registered investment company concerned; and (3) the 
proposed transaction is consistent with the general purposes of the 
1940 Act.
    2. Each Applicant may be deemed to be an affiliated person of the 
other Applicants or an affiliated person of an affiliated person by 
virtue of being under the common control of American Fidelity, and the 
Reorganization may be deemed to entail the purchase or sale of 
securities or other property by or between Applicants. Accordingly, 
Account A's sale of its portfolio assets to the Dual Strategy Fund and 
the Dual Strategy Fund's purchase of those assets from Account A may be 
prohibited by Section 17(a) of the 1940 Act absent an exemptive order 
permitting the purchase and sale transaction.
    3. Rule 17a-8 under the 1940 Act provides exemptive relief for 
sales of substantially all of the assets of one registered investment 
company to another if such companies are affiliated solely because of 
common directors, officers, or investment advisers. Because of the 
various relationships among them, Applicants state that they may not be 
able to rely on Rule 17a-8 in connection with the Reorganization. 
Applicants state that they intend to conform to the conditions set 
forth in Rule 17a-8, including the requirement that a majority of the 
independent directors of the Board of Managers of Account A and a 
majority of the independent directors of the Board of Directors of the 
Dual Strategy Fund make the determinations prescribed by Rule 17a-8.
    4. Applicants maintain that the proposed Reorganization is in the 
best interests of Account A, to the extent the Dual Strategy Fund is 
used to fund other separate accounts. Applicants state that Contract 
owners and participants will benefit from administrative efficiencies 
and economies of scale, particularly with respect to the level of fixed 
administrative expenses. Applicants state that these benefits are 
created without any diminution or dilution of Contract owners and 
participants interests and at no cost to Contract owners or 
participants.
    5. Applicants state that the restructuring of Account A into a unit 
investment trust also will benefit future owners of other variable 
contracts issued by American Fidelity because they will benefit from 
administrative efficiencies and economies of scale created by this 
structure without bearing the organizational costs.
    6. The conversion of Account A from a management investment company 
to a unit investment trust will result in Contract owner and 
participant interests which, in practical economic terms, do not differ 
in any measurable way from such interests immediately prior to the 
Reorganization. The exchange of the portfolio assets of Account A for 
shares of the Dual Strategy Fund will be effected in conformity with 
Section 22(c) of the 1940 Act and Rule 22c-1 thereunder. American 
Fidelity will assume all expenses incurred in preparing for and 
carrying out the transactions constituting the Reorganization. As a 
result, Contract owners' and participants' interests in Continuing 
Account A immediately after the Reorganization will be equal to their 
former interests in Account A immediately prior to the Reorganization 
and their interests will not be diluted as a result of the 
Reorganization.
    7. Applicants state the Reorganization will not require the 
liquidation of any assets of Account A because the Reorganization will 
take the form of an exchange of the portfolio investments of Account A 
for shares of the Dual Strategy Fund. Because the investment policies 
and restrictions of the Dual Strategy Fund will be indentical in 
substance to those of Account A the only sales of Account A assets 
following the Reorganization will be those arising in the ordinary 
course of business. Therefore, neither Account A nor the Dual Strategy 
Fund will incur any extraordinary costs, such as brokerage commissions, 
in effecting the transfer of assets.
    8. American Fidelity believes that the transfer of portfolio assets 
from Account A to the Dual Strategy Fund in exchange for the issuance 
of shares of the Dual Strategy Fund will be a tax-free event. As a 
condition to the closing of the Reorganization. American Fidelity will 
receive an opinion of counsel confirming the tax-free nature of the 
Reorganization. However, to the extent any tax liability arises out of 
this transfer, Applicants state that such liability will be borne by 
American Fidelity.
    9. Applicants maintain that because the investment objectives of 
the Dual Strategy Fund will be substantially identical to the 
investment objectives of Account A immediately prior to the 
Reorganization, the transactions are consistent with the objectives and 
policies of Account A and the Dual Strategy Fund. Applicants state that 
they will obtain Contract owner and participant approval of the 
transactions by at least the vote required under the 1940 Act to effect 
any change in fundamental investment policy. This eliminates any 
questions that might otherwise exist as to whether investment in the 
Dual Strategy Fund is in compliance with the investment objectives and 
policies of Account A. The Account A Contract owners and participants 
will be fully informed of the terms of the Reorganization through proxy 
materials and will have an opportunity to approve or disapprove the 
Reorganization Agreement at a meeting of Account A Contract owners.

Conclusion

    For the reasons summarized above, Applicants assert that the 
requested exemption from Section 17(a) of the 1940 Act to permit the 
Reorganization and the related transactions meets the standards set 
forth in Section 17(b) of the 1940 Act. In this regard, Applicants 
assert the Reorganization is fair and reasonable, does not involve any 
overreaching on the part of any person concerned, is consistent with 
the policy of each registered investment company concerned, and is 
consistent with the provisions, policies, and purposes of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-27415 Filed 10-13-098; 8:45 am]
BILLING CODE 8010-01-M