[Federal Register Volume 64, Number 98 (Friday, May 21, 1999)]
[Notices]
[Pages 27831-27835]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-12816]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23842; File No. 812-11450]


Anchor National Life Insurance Company; et al.; Notice of 
Application

May 14, 1999.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of Application for an order pursuant to Section 26(b) 
and Section 17(b) of the Investment Company Act of 1940 (``1940 Act'').

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[[Page 27832]]

    Summary of Application: Applicants seek an order approving the 
substitution of: (a) Shares of the Government and Quality Bond 
Portfolio (``Government and Quality Bond Portfolio'') of the Anchor 
Series Trust (the ``Trust'') for shares of the Fixed Income Portfolio 
(``Fixed Income Portfolio'') of the Trust; and (b) shares of the 
Strategic Multi-Asset Portfolio (``Strategic Multi-Asset Portfolio'') 
of the Trust for shares of the Foreign Securities Portfolio (``Foreign 
Securities Portfolio'') of the Trust, each held by Variable Annuity 
Account One of Anchor National Life Insurance Company, Variable Annuity 
Account One of First SunAmerica Life Insurance Company and Presidential 
Variable Account One, (collectively the ``Variable Accounts'') as 
underlying investment vehicles for certain variable annuity contracts 
(the ``Contract'') offered by the Variable Accounts (the 
``Substitutions''). Applicants also seek an order exempting them from 
Section 17(a) of the 1940 Act to the extent necessary: (a) To permit 
certain in-kind transactions in connection with the Substitutions; and 
(b) as part of the Substitutions, to permit divisions of the Variable 
Accounts holding the same securities to be combined.
    Applicants: Anchor National Life Insurance Company (``Anchor 
National''), First SunAmerica Life Insurance Company (``First 
SunAmerica''), Presidential Life Insurance Company (``Presidential'' 
together with Anchor National and First SunAmerica, the ``Life 
Companies''), Variable Annuity Account One of Anchor National (``AN 
Account''), Variable Annuity Account One of First SunAmerica (``FS 
Account''), Presidential Variable Account One (``Presidential 
Account''), and Anchor Series Trust.
    Filing Date: The Application was filed on January 5, 1999, and 
amended on April 30, 1999.
    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 by writing 
to the Commission's Secretary and serving Applicants with a copy of the 
request, personally or by mail. Hearing requests must be received by 
the Commission by 5:30 p.m., on June 8, 1999, and must be accompanied 
by proof of service on Applicants in the form of an affidavit or, for 
lawyers, a certificate of service. Hearing requests should state the 
nature of the writer's interest, the reason for the request, and the 
issues contested. Persons who which to be notified of a hearing may 
request notification by writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549-0609. Applicants Anchor National, 
AN Account, First SunAmerica, FS Account, and Trust c/o Robert M. 
Zakem, Esq., SunAmerica Asset Management Corporation, The SunAmerica 
Center, 733 Third Avenue, New York, New York 10017-3204; and Applicant 
Presidential and Presidential Account, c/o Charles Snyder, Presidential 
Life Insurance Company, 69 Lydecker Street, Nyack, New York 10906. 
Copies to Joan E. Boros, Esq., Jorden Burt Boros Cicchetti Berenson & 
Johnson, 1025 Thomas Jefferson Street, N.W., East Lobby, Suite 400, 
Washington, D.C. 20007.

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

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee from the 
SEC's Public Reference Branch, 450 Fifth Street N.W., Washington, DC 
20549-0102 [tel. (202) 942-8090]

Applicants' Representations

    1. Anchor National is a stock life insurance company organized 
under the insurance laws of the State of California in April 1965 and 
redomesticated under the laws of the state of Arizona on January 1, 
1996. Anchor National is an indirect wholly-owned subsidiary of 
American International Group, Inc. (``AIG''). Anchor National is 
authorized to sell annuities and life insurance in the District of 
Columbia and all states except New York.
    2. First SunAmerica is a stock life insurance company organized 
under the insurance laws of the state of New York on December 5, 1978. 
First SunAmerica is a wholly-owned subsidiary of AIG. First SunAmerica 
is authorized to sell annuities and life insurance business in the 
states of New York, New Mexico, and Nebraska.
    3. Presidential is a stock life insurance company organized under 
the laws of the state of New York in 1965. Presidential is a wholly-
owned subsidiary of Presidential Life Corporation, a publicly-owned 
holding company. Presidential offers life insurance and annuities and 
is admitted to do business in forty-eight states and the District of 
Columbia.
    4. The Variable Accounts are segregated investment accounts 
registered under the 1940 Act as unit investment trusts. Each Variable 
Account is divided into divisions that correspond to the portfolios of 
the Trust. Each Variable Account is used to fund certain variable 
annuity contracts issued by the corresponding Life Company.
    5. The Trust is a series type open-end management investment 
company, organized as a Massachusetts business trust on August 26, 
1983. The Trust consists of eleven series (``Portfolios''). Shares of 
the Portfolios are currently available to the public only through the 
purchase of certain variable annuity contracts issued by the Life 
Companies. SunAmerica Asset Management Company (``SAAMCo'') acts as the 
Trust's investment adviser. Wellington Management Company, LLP serves 
as sub-adviser for all the Portfolios of the Trust. SAAMCo is under 
common control with and therefore affiliated with Anchor National and 
First SunAmerica. SAAMCo is not affiliated with Presidential.
    6. The Life Companies have decided to discontinue offering 
divisions investing in the Fixed Income Portfolio and the Foreign 
Securities Portfolio (the ``Replaced Portfolios'') as investment 
options under the Contracts and substitute shares of the Government and 
Quality Bond Portfolio and the Strategic Multi-Asset Portfolio (the 
``Substituted Portfolios'') because the Replaced Portfolio have not 
retained sufficient Contract owner interest and are dwindling in size. 
Moreover, the small size of the Replaced Portfolio makes it difficult 
to manage the assets so as to maximize performance.
    7. The investment objective of the Fixed Income Portfolio is to 
obtain a high level of current income consistent with preservation of 
capital. The Government and Quality Bond Portfolio seeks relatively 
high current income, liquidity and security of principal. Both 
Portfolios invest primarily in fixed income securities. The primary 
differences are that the Government and Quality Bond Portfolio invests 
a higher percentage of its assets in government securities as compared 
to the Fixed Income Portfolio; the Government and Quality Bond 
Portfolio has higher credit rating requirements for its non-government 
fixed income portfolio securities, and the Fixed Income Portfolio may 
(but is not required to) invest up to 20% of its assets in convertible 
debt securities, warrants, non-investment grade debt securities and 
dividend paying marketable common stock. The Life Companies do not 
believe that any of these differences

[[Page 27833]]

are significant, partly because notwithstanding its somewhat more 
restrictive investment practices and guidelines, the Government and 
Quality Bond Portfolio generally has outperformed the Fixed income 
portfolio.
    8. The Foreign Securities Portfolio has as its investment objective 
long-term capital appreciation through investment in a diversified 
portfolio of primarily equity securities issued by foreign companies 
and primarily denominated in foreign currencies. The investment 
objective of the Strategic Multi-Asset Portfolio is to achieve high 
long-term total investment return by actively allocating its assets 
among sub-portfolios consisting of a Global Core Equity Sub-Portfolio, 
a Global Core Bond Sub-Portfolio, a Capital Appreciation Sub-Portfolio 
and a Money Market Sub-Portfolio. Although the Strategic Multi-Asset 
Portfolio can invest in a wider range of asset classes than can the 
Foreign Securities Portfolio, the investment objectives of the two 
Portfolios are similar, and the Life Companies believe that the 
Strategic Multi Asset Portfolio is an appropriate replacement for the 
Foreign Securities Portfolio.
    9. The Government and Quality Bond Portfolio has a lower expense 
ratio (.7%) than the Fixed Income Portfolio (1.0%). While the Foreign 
Securities Portfolio and the Strategic Multi-Asset Portfolio currently 
have equivalent expense ratios of 1.4%, the Life Companies believe the 
addition of assets resulting from the substitutions may reduce the 
expense ratio of the Strategic Multi-Asset Portfolio whereas the 
expense ratio of the Foreign Securities Portfolio has risen from 1.2% 
to 1.5% of average net assets since 1994.
    10. As of June 30, 1998, total net assets of the Government and 
Quality Bond Portfolio were $272.1 million; $17.5 million for the Fixed 
Income Portfolios; $53.9 million for the Strategic Multi-Asset 
Portfolio and $35.5 million for the Foreign Securities Portfolio.
    11. Total Returns for the Portfolios were as follows:

                                                  [In percent]
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                                                     1994         1995         1996         1997         1998
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Fixed Income Portfolio.........................        (3.2)         19.2          2.4         9.4           8.0
Government and Quality Bond Portfolio..........        (3.1)         19.4          2.9         9.5           9.2
Foreign Securities Portfolio...................        (3.2)         12.6         11.5        (1.0)         10.7
Strategic Multi-Asset Portfolio................        (2.6)         22.8         14.8        14.3          15.2
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    12. The Life Companies have determined that the Substituted 
Portfolios are appropriate replacements for the Replaced Portfolios, 
because: (a) the Government and Quality Bond Portfolio has a similar 
investment objective to the Fixed Income Portfolio, invests in the same 
types of securities, i.e., fixed income securities, and has generally 
better performance and lower expenses; and (b) the Strategic Multi-
Asset Portfolio has a similar investment objective to the Foreign 
Securities Portfolio, generally invests a significant portion of its 
assets in foreign securities, has generally better performance, and has 
a similar expense ratio, which may decline as a result of the 
additional assets resulting from the Substitutions Accordingly, each 
Life Company proposes substituting (a) shares of the Government and 
Quality Bond Portfolio for shares of the Fixed Income Portfolio; and 
(b) shares of the Strategic Multi-Asset Portfolio for shares of the 
Foreign Securities Portfolio.
    13. Each of the Life Companies will redeem for cash or in kind all 
of the shares of each Replaced Fund that it currently holds on behalf 
of its applicable Variable Account at the close of business on the date 
selected for the Substitutions. It is anticipated that the redemptions 
will be partly or wholly in-kind, and thus purchases of the applicable 
Substitute Portfolios will be paid for partly or wholly with portfolio 
securities.
    14. Each Life Company, on behalf of its Variable Account, will 
simultaneously place a redemption request with each Replaced Portfolio 
and a purchase order with the corresponding Substituted Portfolio so 
that each purchase will be for the exact amount of the redemption 
proceeds. As a result, at all times, monies attributable to Contract 
owners (``Owners'') then invested in the Replaced Funds will remain 
fully invested and will result in no change in the amount of any 
Owner's contract value or investment in the applicable Variable 
Account.
    15. The Trust will effect the redemptions-in-kind and the transfers 
of portfolio securities in a manner that is consistent with the 
investment objectives, policies and restrictions, and federal tax law 
and 1940 Act diversification requirements applicable to the Substituted 
Portfolio. The Life Companies each will take appropriate steps to 
assure that the portfolio securities selected for redemptions-in-kind 
are suitable investments for the Substituted Portfolios. In effecting 
the redemptions-in-kind and transfers, the Trust will comply with the 
requirements of Rule 17a-7 under the 1940 Act to the extent possible 
and the procedures established thereunder by the Board of Trustees of 
the Trust.
    16. The full net asset value of the redeemed shares held by the 
Variable Accounts will be reflected in the Owners' accumulation unit or 
annuity unit values following the Substitution. The Life Companies will 
assume all transaction costs and expenses relating to the 
Substitutiuon, including any direct or indirect costs of liquidating 
the assets of the Replaced Portfolios, so that the full net asset value 
of redeemed shares of the Replaced Portfolios held by the Variable 
Accounts will be reflected in the Owners' accumulation unit or annuity 
unit values following the Substitution.
    17. The Trust's investment adviser and subadviser have been fully 
advised of the terms of the Substitutions. Applicants anticipate that 
the investment adviser and subadviser, to the extent appropriate, will 
conduct the trading of portfolio securities in a manner that provides 
for the anticipated redemptions of shares held by the Variable 
Accounts.
    18. As part of the Substitutions, each Life Company will combine 
the divisions invested in the Replaced Portfolios with the divisions 
that currently invest in the corresponding Substituted Portfolios.
    19. Each Life Company will supplement the prospectus for its 
applicable Variable Account to reflect the proposed Substitutions. 
Within five days after the Substitutions, the Life Companies will send 
to their respective Owners written notice of the Substitutions (the 
``Notice'') identifying the shares of the shares of the Replaced 
Portfolios which have been eliminated and the shares of the Substituted 
Portfolios which have been substituted.

[[Page 27834]]

Owners will already have received a copy of the Trust's current 
prospectus, which includes a description of the Substituted Portfolios.
    20. Owners will be advised in the Notice that, for a period of 
thirty-one days from the mailing of the Notice, Owners may transfer all 
assets, as substituted, to any other available division without 
limitation or charge and without any such transfer counting as one of 
the limited number of transfers permitted in a contract year free of 
charge (the ``Free Transfer Period'').

Applicants' Legal Analysis

    1. Section 26(b) of the 1940 Act provides, in pertinent part, that 
it 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. The purpose of Section 26(b) is both 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 a substituted security to 
redeem their shares, thereby incurring either a loss of the sales load 
deducted from initial purchase payments, an additional sales load upon 
reinvestment of the redemption proceeds, or both. Section 26(b) affords 
this protection to investors by preventing a depositor or trustee of a 
unit investment trust holding the shares of one issuer from 
substituting for those shares the shares of another issuer, unless the 
Commission approves that substitution.
    2. Applicants represent that the purposes, terms and conditions of 
the Substitutions are consistent with the principles and purposes of 
Section 26(b) and do not entail any of the abuses it is designed to 
prevent. Applicants submit that the Substitutions are an appropriate 
solution to the insufficient size of the Replaced Portfolios, which 
makes it difficult to achieve consistent investment performance and to 
reduce operating expenses. Applicants assert that the Substitutions 
will solve these problems in a manner that is in the Owners' best 
interests because: (a) the Government and Quality Bond has a similar 
investment objective to the Fixed Income Portfolio, invests in the same 
types of securities, i.e., fixed income securities, and has generally 
better performance and lower expenses; and (b) the Strategic Multi-
Asset Portfolio has a similar investment objective to the Foreign 
Securities Portfolio, invests a portion of its assets in foreign equity 
securities, has generally better performance, and has a similar expense 
ratio, which may decline as a result of the additional assets resulting 
from the Substitutions.
    3. Applicants represent 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 for the following reasons:

    (a) the Substitute Portfolios will continue to fulfill the 
Owners' objectives and risk expectations, because the Government and 
Quality Bond Portfolio has investment objectives, policies, and 
restrictions substantially similar to the objectives, policies and 
restrictions of the Fixed Income Portfolio and, of the Trust's 
Portfolios, the Strategic Multi-Asset Portfolio has investment 
objectives, policies and restrictions most similar to those of the 
Foreign Securities Portfolio;
    (b) during the Free Transfer Period, an Owner may request that 
assets be reallocated to another division selected by the Owner, and 
Applicants represent that the Free Transfer Period provides 
sufficient time for Owners to consider their reinvestment options;
    (c) the Substitution will, in all cases, be at the net asset 
value of the respective shares, without the imposition of any 
transfer or similar charge;
    (d) the Life Companies have undertaken to assume the expenses, 
including, but not limited to, legal and accounting fees and any 
brokerage commissions, in connection with the Substitutions and are 
effecting the redemption of shares in a manner that attributes all 
transaction costs to the Life Companies;
    (e) the Substitutions will in no way alter the contractual 
obligations of the Life Companies;
    (f) the Substitutions in no way will alter the tax benefits to 
Owners; and
    (g) the Substitutions are expected to confer certain economic 
benefits on Owners by virtue of the enhanced asset size and lower 
expenses, as stated above.

    Applicants consent to be bound by the terms and conditions listed 
immediately above in this paragraph.
    4. Applicants represent that they have determined that it is in the 
best interests of Owners to effect the Substitutions. Applicants have 
determined that the investment objective and related investments of the 
Government and Quality Bond Portfolio is substantially similar to those 
of the Fixed Income Portfolio, that the investment objectives and 
related investments of the Strategic Multi-Asset Portfolio, among all 
the Portfolios, are most similar to those of the Foreign Securities 
Portfolio, and that the proposed Substitutions are consistent with 
Commission precedent.
    5. Applicants state that the Government and Quality Bond Portfolio 
has a lower expense ratio than the Fixed Income Portfolio. The expense 
ratio of the Foreign Securities Portfolio has risen from 1.2% to 1.5% 
of average net assets since 1994. While the Foreign Securities 
Portfolio and the Strategic Multi-Asset Portfolio currently have 
equivalent expense ratios, the Applicants believe the addition of 
assets resulting from the substitutions may reduce the expense ratio of 
the Strategic Multi-Asset Portfolio.
    6. Applicants submit that the investment performance of the 
Substituted Portfolios are generally higher than the performance of the 
corresponding Replaced Portfolios. The total returns of the Government 
and Quality Bond Portfolio have been slightly higher than those of the 
Fixed Income Portfolio, while the total returns of the Strategic Multi-
Asset Portfolio generally have been significantly higher than the total 
returns of the Foreign Securities Portfolio.
    7. Section 17(a)(1) of the 1940 Act prohibits any affiliated person 
of a registered investment company, or an affiliated person of such 
affiliated person, from selling any security or other property to such 
registered investment company. Section 17(a)(2) of the 1940 Act 
prohibits any of the persons described above from purchasing any 
security or other property from such registered investment company. 
Certain of the Substitutions will be effected partly or wholly in-kind. 
Moreover, after the Substitutions the Life Companies will combine their 
respective separate account divisions invested in the Replaced 
Portfolios with the divisions invested in the corresponding Substituted 
Portfolios. The combination may be deemed to involve the indirect 
purchase of shares of the Substituted Portfolios with portfolio 
securities of the corresponding Replaced Portfolios, and the indirect 
sale of securities of the Replaced Portfolios for shares of the 
Substituted Portfolios. Thus each Portfolio would be acting as 
principal, in the purchase and sale of securities to the other 
Portfolio, in contravention of Section 17(a). The Commission has taken 
the interpretive position that divisions of a registered separate 
account are to be treated as separate investment companies in 
connection with substitution transactions. The Life Companies are 
arguably transferring unit values between their separate account 
divisions. The transfer of unit values may involve purchase and sale 
transactions between divisions that are affiliated persons. The sale 
and

[[Page 27835]]

purchase transactions between divisions may come within the scope of 
Sections 17(a)(1) and 17(a)(2) of the 1940 Act, respectively. 
Therefore, the combination of divisions may require an exemption from 
Section 17(a) of the 1940 Act, pursuant to Section 17(b).
    8. Section 17(b) of the 1940 Act provides that the Commission may 
grant an order exempting transactions prohibited by Section 17(a) upon 
application 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 over-reaching on the part of any 
person concerned; (b) the proposed transaction is consistent with the 
investment policy of each registered investment company concerned, as 
recited in its registration statement and reports filed under the 1940 
Act; and (c) the proposed transaction is consistent with the general 
purposes of the 1940 Act. Applicants represent that the terms of the 
proposed transactions, as described in the Application are: reasonable 
and fair, including the consideration to be paid and received; do not 
involve over-reaching; are consistent with the policies of the 
Portfolios; and are consistent with the general purposes of the 1940 
Act.
    9. Applicants represent that, for all the reasons stated above with 
regard to Section 26(b) of the 1940 Act, the Substitutions are 
reasonable and fair and do not involve overreaching on the part of any 
person. Applicants expect that existing and future Owners will benefit 
from the consolidation of assets in the Substituted Portfolios. 
Applicants state that the transactions effecting the Substitutions will 
be effected in conformity with Section 22(c) of the 1940 Act and Rule 
22c-1 thereunder. Moreover, Applicants state that the partial 
redemptions-in-kind of portfolio securities of certain of the Replaced 
Portfolios will be effected in conformity with Rule 17a-7 under the 
1940 Act to the extent possible. Applicants submit that Owners' 
interests after the Substitution, in practical economic terms, will not 
differ in any measurable way from such interests immediately prior to 
the Substitution. In each case, Applicants assert that the 
consideration to be received and paid is, therefore, reasonable and 
fair. Applicants each believe, based on their review of existing 
federal income tax laws and regulations and advice of counsel, that the 
Substitutions will not give rise to any taxable income for Owners.
    10. Applicants submit that the investment objectives of each of the 
Substituted Portfolios are sufficiently similar to the investment 
objectives of the Replaced Portfolios that, in this regard, the 
Substitutions are consistent with Commission precedent pursuant to 
Section 17 of the 1940 Act. Also, the Substitutions are consistent with 
the general purposes of the 1940 Act, as enunciated in the Findings and 
Declaration of Policy in Section I of the 1940 Act. The proposed 
transactions do not present any of the issues or abuses that the 1940 
Act is designed to prevent. Moreover, the proposed transactions will be 
effected in a manner consistent with the public interest and the 
protection of investors. Owners will be fully informed of the terms of 
the substitutions through prospectus supplements and the Notice, and 
will have an opportunity to reallocate investments prior to and 
following the Substitutions.

Conclusion

    Applicants submit that, for the reasons summarized above, their 
requests meet the standards set out in Sections 17(b) and 26(b) of the 
1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-12816 Filed 5-20-99; 8:45 am]
BILLING CODE 8010-01-M