[Federal Register Volume 64, Number 232 (Friday, December 3, 1999)]
[Notices]
[Pages 67957-67962]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31390]


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SECURITIES AND EXCHANGE COMMISSION

[Rel No. IC-24178; File No. 812-11686]


American General Annuity Insurance Company, et al.; Notice of 
Application

November 29, 1999.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order under Sections 26(b) and 
17(b) of the Investment Company Act of 1940 (the ``1940 Act'' or 
``Act'').

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SUMMARY OF APPLICATION: Applicants seek an order under Section 26(b) of 
the 1940 Act approving the proposed substitution of shares of certain 
series of American General Series Portfolio Company, OCC Accumulation 
Trust (``OCCAT''), and Van Kampen Life Investment Trust (``LIT'') for 
shares of comparable series of A.G. Series Trust held by A.G. Separate 
Account A to fund certain individual fixed and variable deferred 
annuity contracts issued by American General Annuity Insurance Company. 
Applicants also seek an order under Section 17(b) of the 1940 Act 
granting exemptions from Section 17(a) to permit certain in-kind 
redemption and purchase transactions in connection with the 
substitutions.

APPLICANTS: American General Annuity Insurance Company (``AGAIC''), 
A.G. Separate Account A (the ``Account''), A.G. Series Trust (``the 
``Trust'') and American General Series Portfolio Company (``AGSPC'').

FILING DATE: The application was filed on July 7, 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 
Secretary of the SEC and serving the 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 December 20, 1999, and must be 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 writer'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, Securities and Exchange Commission, 450 Fifth 
Street, NW, Washington, DC 20549-0609. Applicants, c/o Huey P. Falgout, 
Jr., 2929 Allen Parkway, Houston, Texas 77019.

FOR FURTHER INFORMATION CONTACT: Joyce Merrick Pickholz, Senior 
Counsel, or Susan M. Olson, 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, NW, Washington, DC 
20549-0102 (tel. (202) 942-8090).

Applicants' Representations

    1. AGAIC is a stock life insurance company incorporated in Texas. 
AGAIC is wholly owned by Western National Corporation which is a wholly 
owned subsidiary of AGC Life Insurance Company, a subsidiary of 
American General Corporation.
    2. The Account was established by AGAIC under Texas law. The 
Account is registered under the 1940 Act as a unit investment trust and 
serves as funding vehicles for certain individual flexible premium 
fixed and variable deferred annuity contracts issued by AGAIC (the 
``Contracts''). The Account is currently divided into fifteen sub-
accounts.
    3. Under the Contracts, a Contract owner may select between seven 
of the Account's sub-accounts each of which invests in a corresponding 
series of the Trust and two fixed account options. An owner of any 
Contract may make transfers between these options subject to the 
following limits: (a) the minimum transfer is $250 or the value of the 
account, if less (or if the value of the account after the transfer 
would be less than $500, the entire balance is transferred); (b) only 
one transfer per day is permitted between the variable options; (c) 
only one transfer every six months is permitted from the variable 
account options to the non dollar cost averaging fixed account option; 
and (d) transfer from the dollar cost averaging fixed account option to 
the variable account options are limited to 20% of the dollar cost 
averaging account value. No fees of other charges are currently imposed 
on transfers, though AGAIC reserves the right to impose a fee of the 
lesser of $25 or 2% of the amount transferred for each transfer. Any 
transfer limits and charges will be suspended in connection with the 
substitution.
    4. The Trust, an unincorporated business trust established under 
Massachusetts law, is registered under the 1940 Act as an open-end 
management investment company. Shares of the Trust's seven portfolios 
are sold exclusively to the Account to fund benefits under the 
Contracts. A.G. Advisory Services, Inc. (``AGAIS''), an indirect 
subsidiary of Western National Corporation, is the investment advisor 
to the Trust.
    5. Shares of AGSPC are sold exclusively to separate accounts to 
fund benefits under variable annuity contracts and variable life 
insurance policies sponsored by The Variable Annuity Life Insurance 
Company (``VALIC''), its affiliates or employer thrift plans maintained 
by VALIC or American General Corporation. VALIC is an indirect wholly 
owned subsidiary of American General Corporation. AGSPC is a Maryland 
corporation registered under the 1940 Act as an open-end management 
investment company. VALIC serves as AGSPC's investment advisor. Bankers 
Trust Company serves as sub-advisor to the AGSPC's Stock Index Fund.
    6. OCCAT is a Massachusetts business trust registered under the 
1940 Act as an open-end management investment company. Shares of OCCAT 
are sold only to variable accounts of life insurance companies as an 
investment vehicle for variable annuity and variable life insurance 
contracts and to qualified pension and retirement plans. OpCap Advisors 
serves as investment advisor for OCCAT.

[[Page 67958]]

    7. Shares of LIT, a Delaware business trust registered under the 
1940 Act as an open-end management investment company, are sold only to 
variable accounts of life insurance companies as an investment vehicle 
for their variable annuity and variable life insurance contracts. Van 
Kampen Management Inc. serves as LIT's investment advisor.
    8. AGAIC proposes to substitute:
    (a) shares of AGSPC's Government Securities Fund for shares of the 
Trust's American General U.S. Government Securities Portfolio;
    (b) shares of AGSPC's Growth & Income Fund for shares of the 
Trust's Credit Suisse Growth and Income Portfolio;
    (c) shares of AGSPC's International Equities Fund for shares of the 
Trust's Credit Suisse International Equities Portfolio;
    (d) shares of OCCAT's Managed Portfolio for shares of the Trust's 
Elite Value Portfolio;
    (e) shares of AGSPC's Stock Index Fund for shares of the Trust's 
State Street Global Advisors Growth Equity Portfolio;
    (f) shares of AGSPC's Money Market Fund for shares of the Trust's 
State Street Global Advisors Money Market Portfolio; and
    (g) shares of LIT's Emerging Growth Portfolio for shares of the 
Trust's Van Kampen Emerging Growth Portfolio.
    9. American General U.S. Government Securities Portfolio of the 
Trust seeks a high level of current income by investing primarily in 
fixed income securities and mortgage-backed securities issued or 
guaranteed by the U.S. Government and its agencies or instrumentalities 
and collateralized mortgage obligations. AGSPC's Government Securities 
Fund seeks high current income and protection of capital through 
investments in intermediate and long-term U.S. Government debt 
securities.
    10. The Trust's Credit Suisse Growth and Income Portfolio seeks 
long-term growth of capital, current income and growth of income, 
consistent with reasonable investment risk through investments 
primarily in equity securities, fixed income securities and cash 
instruments. AGSPC's Growth and Income Fund seeks to provide long-term 
growth of capital and, secondarily, income through investment in common 
stocks and equity-related securities.
    11. The Trust's Credit Suisse International Equity Portfolio seeks 
long-term capital appreciation by investing in equity and equity 
related securities of companies located in at least five foreign 
countries, excluding the United States. AGSPC's International Equities 
Fund has as its investment objective the long-term growth of capital 
through investments in a diversified portfolio of equity and equity-
related securities of foreign issuers that, as a group, are expected to 
provide investment results closely corresponding to the performance of 
the EAFE Index.
    12. The investment objective of both the Trust's Elite Value 
Portfolio and OCCAT's Managed Portfolio is growth of capital over time 
through investment in a portfolio consisting of common stocks, bonds 
and cash equivalents.
    13. The Trust's State Street Global Advisors Growth Equity 
Portfolio has as its investment objective to provide total returns that 
exceed, over time, the S&P Index through investment in equity 
securities. AGSPC's Stock Index Fund seeks long-term capital growth 
through investment in common stocks that as a group, are expected to 
provide results closely corresponding to the performance of the S&P 
Index.
    14.The Trust's State Street Global Advisors Money Market Portfolio 
seeks maximum current income, to the extent consistent with the 
preservation of capital and liquidity and the maintenance of a stable 
$1.00 per share net asset value, by investing in dollar denominated 
securities with remaining maturities of one year or less. AGSPC's Money 
Market Portfolio seeks liquidity, protection of capital and current 
income through investments in short-term money market instruments.
    15. The Trust's Van Kampen Emerging Growth Portfolio's investment 
objective is capital appreciation and any ordinary income from 
portfolio securities is entirely incidental. The investment objective 
of LIT's Emerging Growth Portfolio is capital appreciation by investing 
in a portfolio of securities consisting principally of common stocks of 
small and medium sized companies considered by the portfolio's 
investment advisor to be emerging growth companies.
    16. Applicants submit that the substitutions are expected to result 
in enhanced administrative efficiency. Applicants state that the 
portfolios of the Trust have remained relatively small and their 
expense ratios have, therefore, remained relatively high because the 
costs of administering the portfolios is spread over a relatively small 
asset base. To maintain expense ratios at competitive levels, AGAIC has 
subsidized the portfolios' expenses and until May 1, 1998, the 
portfolios' investment advisor, AGAIC, was also waiving a portion of 
its investment advisory fee. Since the Trust's inception, AGAIC has 
subsidized other expenses of the Trust, limiting such expense to .12%. 
Without those fee waivers and subsidies, total portfolio expenses would 
have ranged from 1.41% for the Elite Portfolio to 3.78% for the Credit 
Suisse International Equity Portfolio. AGAIC is unwilling to continue 
fee reimbursements indefinitely because of the cost to AGAIC. For 1998, 
fee waivers and reimbursements amounted to approximately $876,000. The 
AGSPC funds, OCCAT Managed Portfolio, and LIT Emerging Growth Portfolio 
are much larger and, therefore, enjoy economies of scale that the 
Trust's portfolios do not.
    17. Applicants state that for all substitutions, the gross total 
expense ratios for the Trust's portfolios are substantially higher than 
those of the much larger AGSPC funds, OCCAT Managed Portfolio, and LIT 
Emerging Growth Portfolio that would replace them. On a net basis 
(after waivers or reimbursements), the proposed substitutions of 
AGSPC's Government Securities Fund for the Trust's American General 
U.S. Government Securities Portfolio, AGSPC's Money Market Fund for the 
Trust's State Street Global Advisors Money Market Portfolio, OCCAT's 
Managed Portfolio for the Trust's Elite Value Portfolio, and LIT's 
Emerging Growth Portfolio for the Trust's Van Kampen Emerging Growth 
Portfolio results in increases in total expense ratios of .01%, .05%, 
.13% and .05%, respectively. Applicants state that those differences 
are, however, at least partly attributable to the waiver by AGAIS of 
its investment advisory fees for part of 1998. Applicants state that 
since those waivers have already been discontinued, it is likely that 
the expense ratios of the Trust's portfolios would be higher than their 
proposed replacements.
    18. Applicants expect that the substitution of AGSPC's Stock Index 
Fund for the Trust's State Street Global Advisors Growth Equity 
Portfolio, AGSPC's Money Market Fund for the Trust's State Street 
Global Advisors Money Market Portfolio, and OCCAT's Managed Portfolio 
for the Trust's Elite Value Portfolio will result in increases in 
advisory fees of .25%, .05% and .13%, respectively, but the gross total 
expense ratios are expected to decline .35%, 1.9%, and .59%, 
respectively.
    19. The chart below shows for each proposed substitution the total 
net assets, management fee (with and without waiver in the case of the 
Trust's portfolios), and total expense ratios (with and without 
reimbursement in the case of the Trust's portfolios) for the year ended 
December 31, 1998.

[[Page 67959]]



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                                                         Eliminated    Eliminated   Eliminated   Eliminated
                                            Eliminated    fund mgmt    fund mgmt    fund total   fund total  Replacement    Replacement     Replacement
            Substituting funds             fund assets     fee w/o       fee w/      exp. w/o     exp. w/    fund assets   fund mgmt fee    fund total
                                             (000's)      reimburs      reimburs      reimb.       reimb.      (000's)                         exp.
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AGSPC Growth & Income for Credit Suisse        $16,713         0.75          0.69         2.01         0.81     $285,108         0.75            0.80
 Growth & Income.........................
AGSPC International Equities for Credit          5,996         0.90          0.82         3.78         0.94      148,785         0.35            0.40
 Suisse International Equity.............
AGSPC Gov't Securities for American              8,679         0.475         0.41         2.46         0.53      113,555         0.50            0.54
 General U.S. Gov't Securities Portfolios
AGSPC Stock Index for State Street Global       15,500         0.61          0.54         1.96         0.66    4,100,923         0.27            0.31
 Advisors Growth Equity..................
AGSPC Money Market for State Street              9,253         0.45          0.37         2.44         0.49      273,628         0.50            0.54
 Global Advisors Money Market............
LIT Emerging Growth with waivers                11,674         0.75          0.68         2.64         0.80       33,400         0.32            0.85
 (without) for Van Kampen Emerging Growth                                                                                       (0.75)          (1.23)
OCCAT Managed Portfolio for Elite Value..       20,620         0.65          0.59         1.41         0.71      777,087     \1\ 0.78            0.84
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\1\ Effective fee rate based on the following schedule: 0.80% on the first $400 Million, 0.75% on the next $400 Million, and 0.70% on the excess over
  $800 Million.

    20. Below is a chart showing the total returns for each of the 
funds involved in the proposed substitutions for the past one, three, 
and five fiscal years (if available) or since inception (if less than 
five years), as the case may be. Applicants state the performance of 
the proposed replacement AGSPC funds, OCCAT Management Portfolio, and 
LIT Emerging Growth Portfolio for comparable periods exceeds the 
performance of the substituted Trust portfolios in all but one case. 
For the proposed substitution of AGSPC's Money Market Fund for the 
Trust's State Street Global Advisors Money Market Portfolio, the 
replaced portfolio's performance for the one- and three-year period 
exceeds that of the AGSPC fund. However, Applicants submit that 
performance was accomplished with substantially subsidized total 
expenses. Without those subsidies the Trust's portfolios would likely 
have significantly underperformed the AGSPC fund in the past and would 
likely continue to do so in the future owing to its substantially 
higher expenses. Applicants state that the State Street Global Advisors 
Money Market Portfolio out-performance of .08% to .20% would be 
eliminated by the 1.90% increase reflected in the gross total expense 
ratio.

----------------------------------------------------------------------------------------------------------------
                                        Trust portfolios                       Replacement funds performance
                                     performance (percent)       Since                   (percent)
        Substituting funds        ---------------------------  Inception  --------------------------------------
                                      1 year        3 Year                    1 Year       3 Year       5 Year
----------------------------------------------------------------------------------------------------------------
AGSPC Growth & Income for Credit         14.16         16.71        17.89        14.56        20.49          N/A
 Suisse Growth and Income........
AGSPC International Equities for         (0.86)         6.40         7.27        17.76         9.04         9.17
 Credit Suisse International
 Equity..........................
AGSPC Gov't Securities for                7.49           N/A         6.79         8.96         5.54         6.29
 American General U.S. Gov't
 Securities......................
AGSPC Stock Index for State              21.60         24.79        24.40        27.14        26.74        22.51
 Street Global Advisors Growth
 Equity..........................

[[Page 67960]]

 
AGSPC Money Market for State              5.23          5.31         5.30         5.15         5.11         4.93
 Street Global Advisors Money
 Market..........................
LIT Emerging Growth for Van              36.56                      25.11        37.56        24.56    \2\ 26.31
 Kampen Emerging Growth..........
OCCAT Managed Portfolio for Elite         6.72                      17.86         7.12        17.15    \3\ 19.15
 Value...........................
----------------------------------------------------------------------------------------------------------------
\2\ Since Inception 7/3/95.
\3\ On September 16, 1994, an investment company then called Quest for Value Accumulation Trust (the ``Old
  Trust'') was effectively divided into two investment funds, the Old Trust and OCCAT, at which time the Fund
  commenced operations. The total net assets for each of the Equity, Small Cap and Managed Portfolios
  immediately after the transaction were $86,789,755, $139,812,573, and $682,601,380, respectively, will respect
  to the Old Trust and for each of the Equity, Small Cap and Managed Portfolios, $3,764,598, $8,129,274, and
  $51,345,102, respectively, with respect to OCCAT. For the period prior to September 16, 1994, the performance
  figures above for each of the Equity, Small Cap and Managed Portfolios reflect the performance of the
  corresponding Portfolios of the Old Trust. The Old Trust commenced operations on August 1, 1998.

    21. By supplements to the prospectus for the Contracts and the 
Account, AGAIC will notify all owners of the Contracts of its intention 
to take the necessary actions to substitute shares of the funds. The 
supplements will advise Contract owners that from the date of the 
supplement until the date of the proposed substitutions, owners are 
permitted to make transfers among the sub-accounts as usual, except 
that the limit on frequency of transfers from the variable account 
options to the non dollar cost averaging fixed account option will be 
waived. The supplements will also inform Contract owners that AGAIC 
will not exercise any rights reserved under any Contract to impose 
additional restrictions on transfers until at least 30 days after the 
proposed substitutions.
    22. The proposed substitutions will take place at relative net 
asset value with no change in the amount of any Contract owner's 
Contract value, cash value or death benefit or in the dollar value of 
his or her investment in the Separate Account. Contract owners will not 
incur any fees or charges as a result of the proposed substitutions, 
nor will their rights or AGAIC's obligations under the Contracts be 
altered in any way. All expenses incurred in connection with the 
proposed substitutions, including legal, accounting and other fees and 
expenses, will be paid by AGAIC. In addition, the proposed 
substitutions will not impose any tax liability on Contract owners. The 
proposed substitutions will not cause the Contract Fees and charges 
currently being paid by existing Contract owners to be greater after 
the proposed substitutions than before the proposed substitutions. The 
proposed substitutions will not be treated as a transfer for the 
purpose of assessing transfer charges or for determining the number of 
remaining permissible transfers in a Contract year.
    23. In addition to the prospectus supplements distributed to 
Contract owners, within five days after the substitutions, contract 
owners will be sent a written notice informing them that the 
substitutions were carried out and that they may make open transfer of 
all contract value or cash value under a Contract invested in any one 
of the sub-accounts on the date of the notice to another sub-account 
available under their Contract without regard to the usual limit on the 
frequency of transfers from the variable account options to the non 
dollar cost averaging fixed account option. The notice will also 
reiterate that AGAIC will not exercise any rights reserved by it under 
the Contracts to impose additional restrictions on transfers until at 
least 30 days after the proposed substitutions. Notices delivered in 
certain states may also explain that, under the insurance regulations 
in those states, affected contract owners may exchange their Contracts 
for other annuity contracts issued by AGAIC (or one of its affiliates) 
during the 60 days following the proposed substitutions. The notices 
will be accompanied by current prospectuses for the portfolios/funds 
involved.

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.'' 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 which might, in effect, 
force shareholders dissatisfied with the substituted security to redeem 
their shares, thereby possibly 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. AGAIC and the Account (the ``Section 26(b) Applicants'') request 
that the Commission issue an order pursuant to Section 26(b) of the Act 
approving the substitutions by AGAIC of shares held by corresponding 
sub-accounts of the Account as follows: (a) Shares of AGSPC's 
Government Securities Fund for shares of the Trust's American General 
U.S. Government Securities Portfolio; (b) shares of AGSPC's Growth & 
Income Portfolio for shares of the Trust's Credit Suisse Growth and 
Income Portfolio; (c) shares of AGSPC's International Equities Fund for 
shares of the Trust's Credit Suisse International Equities Portfolio; 
(d) shares of OCCAT's Managed Portfolio for shares of the Trust's Elite 
Value Portfolio; (e) shares of AGSPC's Stock Index Fund for shares of 
the Trust's State Street Global Advisors Growth Equity Portfolio; (f) 
shares of AGSPC's Money Market Fund for shares of the Trust's State 
Street Global Advisors Money Market Portfolio; and (g) shares of LIT's 
Emerging Growth Portfolio for shares of the Trust's Van Kampen Emerging 
Growth Portfolio.
    3. The Contracts expressly reserve to AGAIC the right, subject to 
compliance with applicable law, to substitute shares of another open-
end management investment company for shares of an open-end management 
investment company held by a sub-account of the Account. The 
prospectuses for the Contracts contain appropriate disclosure of this 
right.
    4. In the case of the proposed substitution of shares of OCCAT's

[[Page 67961]]

Managed Portfolio and LIT's Emerging Growth Portfolio for shares of the 
Trust's Elite Value and Van Kampen Emerging Growth Portfolios, the 
Trust's portfolios are being replaced by the funds after which they 
were modeled. However, Applicants state that the replacement funds have 
substantially lower expense ratios, on a gross basis (and within 0.13% 
on a net basis); superior historical performance and investment 
objectives that are essentially identical.
    5. With respect to the substitution of shares of AGSPC's Government 
Securities Fund for shares of the Trust's American General U.S. 
Government Securities Portfolio, shares of AGSPC's Growth & Income Fund 
for shares of the Trust's Credit Suisse Growth and Income Portfolio, 
and shares of AGSPC's Money Market Fund for the Trust's State Street 
Global Advisors Money Market Portfolio, Applicants state that the 
replacement funds have substantially lower expense ratios, on a gross 
basis (and within .05% on a net basis); superior historical 
performances, and investment objectives that are substantially the 
same.
    6. With respect to the substitution of shares of AGSPC's 
International Equity Fund for shares of the Trust's Credit Suisse 
International Equity Portfolio, and shares of AGSPC's Stock Index 
Portfolio for shares of the Trust's State Street Global Advisors Growth 
Equity Portfolio, Applicants state that the replacement funds also have 
lower expense ratios, on a subsidized and unsubsidized basis, superior 
historical performance, and sufficiently similar investment objectives 
to make them appropriate replacement candidates.
    7. The Substitution Applicants anticipate that Contract owners will 
be at least as well off with the array of sub-accounts offered after 
the proposed substitutions as they have been with the array of sub-
accounts offered prior to the substitutions. If the proposed 
substitutions are carried out, all Contract owners will be permitted to 
allocate purchase payments and transfer Contract values between and 
among the same number of sub-accounts as they could before the proposed 
substitutions.
    8. Applicants submit that none of the proposed substitutions is the 
type of substitution that Section 26(b) was designed to prevent. Unlike 
traditional unit investment trusts where a depositor could only 
substitute an investment security in a manner that permanently affected 
all the investors in the trust, the Contracts provide each Contract 
owner with the right to exercise his or her own judgment and transfer 
contract values into other sub-accounts. Moreover, Contract owners will 
be offered the opportunity to transfer amounts out of the affected sub-
accounts without cost or other disadvantage. The proposed 
substitutions, therefore, will not result in the type of costly forced 
redemption that Section 26(b) was designed to prevent. In addition, 
other factors that may have influenced a Contract owner to purchase a 
Contract, such as AGAIC's size, financial condition, and reputation and 
the type of insurance coverage and benefits provided by the Contract, 
will remain the same.
    9. The Section 26(b) Applicants request an order of the Commission 
pursuant to Section 26(b) of the Act approving the proposed 
substitutions by AGAIC. The Section 26(b) Applicants submit that, for 
all the reasons stated above, the proposed substitutions are 
inconsistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act.
    10. AGAIC, the Account, AGSPC and the Trust (``Section 17(b) 
Applicants'') request an order pursuant to Section 17(b) of the 1940 
Act exempting them from the provisions of Section 17(a) of the Act to 
the extent necessary to permit them to carry out the following proposed 
substitutions of shares held by corresponding sub-accounts of the 
Account: (1) Shares of AGSPC's Government Securities Fund for shares of 
the Trust's American General U.S. Securities Portfolio; (2) shares of 
AGSPC's Growth & Income Fund for shares of the Trust's Credit Suisse 
Growth and Income Portfolio; (3) shares of AGSPC's International Equity 
Fund for shares of the Trust's Credit Suisse International Equity 
Portfolio; (4) shares of AGSPC's Stock Index Fund for shares of the 
Trust's State Street Global Advisors Growth and Equity Portfolio; and 
(5) shares of AGSPC's Money Market Fund for shares of the Trust's State 
Street Global Advisors Money Market Portfolio (the ``In Kind 
Transactions'').
    11. Section 17(a)(1) of the 1940 Act, in relevant part, prohibits 
any affiliated person of a registered investment company, or any 
affiliated person of such a person, acting as principal, from knowingly 
selling any securities or other property to that company. Section 
17(a)(2) of the Act generally prohibits the same persons, acting as 
principals, from knowingly purchasing any security or other property 
from the registered investment company.
    12. Section 2(a)(3) of the 1940 Act defines the term ``affiliated 
person of another person'' in relevant part as: (A) Any person directly 
or indirectly owning, controlling, or holding with power to vote, 5 
percent or more of the outstanding voting securities of such other 
person; (B) any person 5 percent or more of whose outstanding voting 
securities are directly or indirectly owned, controlled, or held with 
power to vote, by such other person; and (C) any person directly or 
indirectly controlling, controlled by, or under common control with, 
such other person.
    13. Applicants submit that the Trust and AGSPC and the portfolios/
funds of each may be affiliated persons of each other or affiliated 
persons of affiliated persons of each other. Each may also be an 
affiliate person of AGAIC. The proposed In Kind Transactions could be 
seen as the indirect purchase of shares of AGSPC funds with portfolio 
securities of the Trust's portfolios and the indirect sale of portfolio 
securities of the Trust's portfolios for shares of the AGSPC funds. 
Pursuant to this analysis, the proposed In Kind Transactions could also 
be viewed as a purchase or sale of such securities to funds of AGSPC by 
AGAIC acting as principal. If categorized in this manner, the proposed 
In Kind Transactions would contravene Section 17(a).
    14. Section 17(b) of the Act provides that the Commission may, upon 
application, issue an order exempting any proposed transaction from the 
provisions of Section 17(a) 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 the policy of each registered investment company 
concerned, as recited in its registration statement and reports filed 
under the Act; and (3) the proposed transaction is consistent with the 
general purposes of the Act.
    15. Rule 17a-7 under the 1940 Act exempts from the prohibitions of 
Section 17(a), subject to certain enumerated conditions, a purchase or 
sale transaction between registered investment companies or separate 
series of registered investment companies, which are affiliated 
persons, or affiliated persons of affiliated persons, of each other, 
between separate series of a registered investment company, or between 
a registered investment company or a separate series of a registered 
investment company and a person which is an affiliated person of such 
registered investment company (or affiliated person of such person) 
solely by reason of having a common investment advisor or investment 
advisors which are affiliated persons of

[[Page 67962]]

each other, common directors, and/or common officers.
    16. AGAIC, the Trust and AGSPC cannot, however, rely on Rule 17a-7 
in connection with their participation as principals in the proposed In 
Kind Transaction because they are not affiliated persons of each other 
solely by reason of having a common investment advisor or affiliated 
investment advisors, common directors, and/or common officers. 
Moreover, one of the conditions enumerated in Rule 17a-7 requires that 
the transaction be a purchase or sale, for no consideration other than 
cash payment against prompt delivery of a security for which market 
quotations are readily available. The proposed purchase of AGSPS shares 
with the Trust's securities, however, entails the purchase and sale of 
securities for securities.
    17. The Section 17(b) Applicants submit that the terms of the 
proposed substitutions by AGAIC, including the consideration to be paid 
and received, are reasonable and fair and do not involve overreaching 
on the part of any person concerned. The Section 17(b) Applicants also 
submit that the proposed In Kind Transactions are consistent with the 
policies of each of the investment companies involved as recited in the 
current registration statements and reports filed by the Trust filed 
under the 1940 Act.
    18. The Section 17(b) Applicants maintain that the terms of the 
proposed transaction, including the consideration to be paid and 
received, are reasonable, fair and do not involve overreaching because 
(1) the transactions do not cause owner's interests under a contract to 
be diluted and (2) the transactions will comply with the conditions set 
forth in Rule 17a-7, other than the requirement related to 
consideration. The In Kind Transaction will take place at relative net 
asset value with no change in amount of any Contract owner's contract 
or cash value or death benefit or the dollar value of his or her 
investment in the account.
    19. The Section 17 Applicants state that the board of trustees/
directors of the Trust and AGSPC have adopted procedures, as required 
by paragraph (e)(1) of Rule 17a-7, pursuant to which the series of each 
may purchase and sell securities to and from their affiliates. The 
Section 17(b) Applicants represent that they will carry out the 
proposed substitutions in conformity with the conditions of Rule 17a-7 
and each series' procedures thereunder, except that the consideration 
paid for the securities being purchased or sold will not be entirely in 
cash. The proposed transactions will be effected based upon the 
independent current market price of the portfolio securities valued as 
specified in paragraph (b) of Rule 17a-7 and the net asset value per 
share of each fund involved will be valued in accordance with the 
procedures disclosed in the Trust's and AGSPC's registration statements 
and as required by Rule 22c-1 under the Act. No brokerage commission, 
fee, or other remuneration will be paid to any party in connection with 
the proposed transactions. In addition, the boards of trustees/
directors of each of the Trust and AGSPC will subsequently review the 
proposed substitutions and make determinations required by paragraph 
(e)(3) of Rule 17a-7.
    20. Applicants assert that the proposed redemption of shares of the 
Trust is consistent with the investment policy of the Trust and each of 
its portfolios, provided that the shares are redeemed at their net 
asset value in conformity with Rule 22c-1 under the Act. Likewise, the 
sales of shares of the AGSPC funds for investment securities, as 
contemplated by the proposed substitutions, is consistent with the 
investment policies of each its funds, as recited in AGSPC's 
registration statement, provided that (a) the shares are sold at their 
net asset value and (b) the investment securities are of the type and 
quality that the respective funds would each have acquired with the 
proceeds from share sales had the shares been sold for cash. To assure 
that the second condition is met, VALIC will examine the portfolio 
securities being offered to each AGSPC fund and accept only those 
securities as consideration for shares that it would have acquired for 
such fund in a cash transaction.
    21. The Section 17(b) Applicants submit that, for all the reasons 
stated above, the terms of the proposed In Kind Transactions, including 
the consideration to be paid and received, are reasonable and fair to: 
(1) AGSPC and its funds, (2) the Trust and its portfolios, and (3) 
Contract owners invested in AGSPC's funds and the Trust portfolios; and 
do not involve overreaching on the part of any person concerned. 
Furthermore, the Section 17(b) Applicants represent that the proposed 
substitutions will be consistent with the policies of: (a) AGSPC and 
its funds and (b) the Trust and its portfolios, as is, or will be, 
stated in the registration statement and reports filed under the Act by 
each, and with the general purposes of the Act.

Conclusion

    Applicants assert that, for the reasons and upon the facts set 
forth above, the requested orders meet the standards set forth in 
Sections 26(b) and 17(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. 99-31390 Filed 12-2-99; 8:45 am]
BILLING CODE 8010-01-M