[Federal Register Volume 66, Number 208 (Friday, October 26, 2001)]
[Notices]
[Pages 54310-54313]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-27019]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25219; File No. 812-12252]


Great American Life Insurance Company of New York, et al.

October 22, 2001.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order pursuant to Section 6(c) of 
the Investment Company Act of 1940 (the ``Act'') granting exemptions 
from Sections 2(a)(32), 22(c) and 27(i)(2)(A) of the Act and Rule 22c-1 
thereunder for the recapture of certain bonus credits.

-----------------------------------------------------------------------

Applicants: Great American Life Insurance Company of New York (``GALIC 
NY''), Annuity Investors Life Insurance Company (``Annuity Investors,'' 
and together with GALIC NY, the ``Insurance Companies''), GALIC of New 
York Separate Account I (``Separate Account I''), Annuity Investors 
Variable Account A (``Variable Account A''), Annuity Investors Variable 
Account B (``Variable Account B,'' and together with Separate Account I 
and Variable Account A, the ``Current Accounts''), and Great American 
Advisors, Inc. (together with Insurance Companies and Current Accounts, 
the ``Applicants'').

SUMMARY OF APPLICATION: Applicants seek an order to permit, under 
specified circumstances, the recapture of certain bonuses applied to 
purchase payments made under: (1) Certain deferred variable annuity 
contracts and certificates, described herein, that the Insurance 
Companies issue through any of their Current Accounts (the contracts 
and certificates, including certain data pages and endorsements, are 
collectively referred to herein as the ``Bonus Contracts''); and (2) 
contracts and certificates, including certain data pages and 
endorsements, that the Insurance Companies may issue in the future 
(``Future Bonus Contracts,'' and together with the Bonus Contracts, 
``Contracts'') through any of their Current Accounts or through any 
future separate account of the Insurance Companies (``Future 
Accounts,'' and together with the Current Accounts, the ``Accounts''). 
Such Future Bonus Contracts will be substantially similar to the Bonus 
Contracts in all material respects. Applicants also request that the 
order being sought extend to any other National Association of 
Securities Dealers, Inc. (``NASD'') member broker-dealer controlling or 
controlled by, or under common control with the Insurance Companies, 
whether existing or created in the future, that serves as a distributor 
or principal underwriter of the Contracts offered through the Accounts 
(collectively, ``Future Underwriters'').

FILING DATE: The application was filed on September 13, 2000, and 
amended and restated on October 15, 2001.
    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 by writing to the Secretary of 
the Commission 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 November 16, 2001, and should 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 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 Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, Carol Edwards Dunn, 
Esq., Great American Life Insurance Company of New York, Annuity 
Investors Life Insurance Company, P.O. Box 5420, Cincinnati, Ohio 
45201-5420.

FOR FURTHER INFORMATION CONTACT: Kenneth C. Fang, Attorney at (202) 
942-0685, or Keith E. Carpenter, Branch Chief, at (202) 942-0679, 
Office of Insurance Products, Division of Investment Management.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee from the 
Public Reference Branch of the Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (tel. (202) 942-8090).

Applicants' Representations

Applicants

    1. GALIC NY is a stock life insurance company organized under the 
laws of the State of New York. GALIC NY is a wholly-owned subsidiary of 
Great American Life Insurance Company, a life insurance company 
domiciled in the State of Ohio, that is a wholly-owned subsidiary of 
Great American Financial Resources, Inc. (formerly known as American 
Annuity Group, Inc.), a publicly-traded insurance holding company. 
Great American Financial Resources, Inc. is indirectly controlled by 
American Financial Group, Inc., a publicly-traded holding company. 
GALIC NY serves as depositor of Separate Account I, which was 
established in May 1999. GALIC NY may establish one or more Future 
Accounts for which it will serve as depositor.
    2. Annuity Investors is a stock life insurance company organized 
under the laws of the State of Ohio. Annuity Investors also is a 
wholly-owned subsidiary of Great American Life Insurance Company. 
Annuity Investors serves as depositor of both Variable Account A and 
Variable Account B, which were established in May 1995 and December 
1996, respectively. Annuity Investors may establish one or more Future 
Accounts for which it will serve as depositor.
    3. Great American Advisors, Inc. (``GAA'') (formerly known as, 
``AAG Securities, Inc.'') is the principal underwriter of the Current 
Accounts and is the distributor of the variable annuity contracts 
funded through those Current Accounts. GAA is a wholly-owned subsidiary 
of Great American Financial Resources, Inc. GAA is registered with the 
Commission as a broker-dealer under the Securities Exchange Act of 1934 
(``Exchange Act'') and is a member of the NASD. The variable annuity 
contracts issued by the Current Accounts are offered or will be offered 
through registered representatives of GAA or others who are registered 
broker-dealers under the Exchange Act and NASD members and who have 
entered into selling agreements with GAA or any Future Underwriter. GAA 
or any Future Underwriter may act as principal underwriter for any 
Future Account and distributor for any Future Bonus Contracts. A Future 
Underwriter also may act as principal underwriter for any of the 
Accounts and distributor for any of the Contracts.
    4. Separate Account I is a segregated asset account of GALIC NY, 
and Variable Account A and Variable Account B are each segregated asset 
accounts of Annuity Investors. Each Account is or will be registered 
with the Commission as a unit investment trust under the Act. Each 
Account funds or will fund the variable benefits available under the 
Contracts issued through that Account. Units of interest in each

[[Page 54311]]

Account are registered or will be registered under the Securities Act 
of (``1933 Act'').
    5. GALIC NY and/or Annuity Investors may issue Future Bonus 
Contracts through their respective Current Accounts or Future Accounts. 
That portion of the respective assets of the Current Accounts that is 
equal to the reserves and other contract liabilities with respect to 
the Current Accounts is not chargeable with liabilities arising out of 
any other business of GALIC NY or Annuity Investors, as the case may 
be. Any income, gains or losses, realized or unrealized, from assets 
allocated to any Current Account are, in accordance with the Bonus 
Contracts, credited to or charged against the Current Account, without 
regard to other income, gains or losses of GALIC NY or Annuity 
Investors, as the case may be. The same will be true of any Future 
Accounts of either Insurance Company.

The Bonus Contracts

    6. The Bonus Contracts are individual or group flexible premium 
deferred annuity contracts that may be issued on a tax-qualified or 
non-tax-qualified basis. Currently, the Bonus Contracts may be 
purchased: (1) With a minimum initial payment of $2,000 for tax-
qualified Bonus Contracts and $5,000 for non-tax-qualified Bonus 
Contracts, or (2) under a periodic payment program in minimum 
installments of $50 per month for tax-qualified Bonus Contracts and 
$100 per month for non-tax-qualified Bonus Contracts. A Bonus Contract 
owner may make additional payments, which require a $50 minimum for 
either tax-qualified or non-tax-qualified Bonus Contracts, subsequent 
to the initial payment. The maximum single purchase payment on either a 
tax-qualified or non-tax-qualified Bonus Contract is $500,000 without 
prior approval from the respective Insurance Companies. These maximums 
and minimums may be different for Future Bonus Contracts, and may be 
prospectively changed by rider or endorsement for Bonus Contracts. Any 
such changes would be disclosed in the applicable prospectus(es). 
Future Bonus Contracts will be substantially similar in all material 
respects to the Bonus Contracts.
    7. Each time one of the Insurance Companies receives a purchase 
payment from an owner of a Bonus Contract, it will credit to the 
owner's account value a bonus (``Bonus'') equal to 4% of each purchase 
payment. The Bonus will be allocated according to the allocation 
instructions in effect for purchase payments under the particular Bonus 
Contract and will generally be deemed to be a purchase payment under a 
Bonus Contract. This means that a contingent deferred sales charge 
(``CDSC''), to the extent applicable to the purchase payment, will be 
deducted from the Bonus amount if the Bonus is returned to the Bonus 
Contract owner (rather than being recaptured) on a full or partial 
surrender after the first Contract year. A CDSC would not be imposed 
with respect to any Bonus amounts that are recaptured upon cancellation 
during the free-look period. A CDSC is also not imposed with respect to 
any Bonus amounts upon full or partial surrender during the first 
Contract year. The CDSC is calculated separately for each purchase 
payment surrendered, based on the number of full years elapsed between 
the date of receipt of the purchase payment and the date that the 
request for surrender was received. No portion of the Bonus will be 
recaptured on a partial surrender.
    8. The Insurance Companies will fund Bonus amounts from their 
respective general account assets. The Insurance Companies will 
recapture from a Bonus Contract owner: (1) Any Bonus previously 
credited if the owner returns the Bonus Contract for a refund during 
the free-look period; and (2) any Bonus previously credited to any 
purchase payment made during the First Contract year, if the Bonus 
Contract is surrendered in full during the first Contract year.
    9. The owner of an individual Bonus Contract may cancel the Bonus 
Contract before midnight of the 20th day following the date the owner 
receives the Bonus Contract unless a longer period is required by state 
law. If the owner cancels the Bonus Contract during the applicable time 
period, the Bonus Contract will be void, and the Insurance Companies 
will refund the purchase payment(s) in full, less the Bonus amounts 
credited to the purchase payment(s) and plus or minus any investment 
gains or losses under the Bonus Contract as of the end of the valuation 
period during which the returned Bonus Contract or the cancellation 
request is received by the Insurance Company (unless a full return of 
purchase payments is required under state law).
    10. Owners of the Bonus Contracts may allocate their purchase 
payments to any of the available sub-accounts or fixed account options. 
Each sub-account invests in shares of a corresponding registered 
investment company or series thereof (each, a ``Portfolio'').
    11. The Bonus Contracts provide for various surrender options, 
annuity benefits, and annuity payout options, as well as transfer 
privileges among the Portfolios, dollar cost averaging, and other 
features. The Bonus Contracts contain the following charges: (1) a CDSC 
based on the number of full years elapsed between the date of receipt 
of the purchase payment and the date that the request for surrender was 
received equal to a maximum of 8% of purchase payments surrendered 
(including, after the first contract year, any Bonuses credited 
thereto), declining to 0% after seven years, which may be waived in 
certain circumstances as disclosed in the prospectus for the Bonus 
Contract; (2) a $30 annual Bonus Contract maintenance fee, which may be 
waived in certain circumstances as disclosed in the prospectus for the 
Bonus Contract; (3) a mortality and expense risk fee at an effective 
annual rate of 1.25%; (4) an administration charge at an effective 
annual rate of 0.15%, which may be waived where the Insurance Company 
incurs reduced sales and servicing expenses; (5) a transfer fee of $25 
for each transfer in excess of twelve in any Bonus Contract year; and 
(6) any applicable state and local government premium taxes. In 
addition, assets invested in the Portfolios are charged with annual 
operating expenses of those Portfolios. All such fees and charges, and 
circumstances under which such fees and charges may be reduced or 
waived, are described in greater detail in the ``CHARGES AND 
DEDUCTIONS'' section of the prospectus contained in the Form N-4 
Registration Statements of the Insurance Companies and the Current 
Accounts.

Applicants' Legal Analysis

    1. Section 6(c) of the Act authorizes the Commission to exempt any 
person, security or transaction, or any class or classes of persons, 
securities or transactions from the provisions of the Act and the rules 
promulgated thereunder, if and to the extent that such exemption is 
necessary or appropriate in the public interest and consistent with the 
policy and provisions of the Act.
    2. Applicants request that the Commission, pursuant to Section 6(c) 
of the Act, grant the exemptions summarized above with respect to the 
Bonus Contracts and any Future Bonus Contracts funded by the Current 
Accounts or Future Accounts, which are issued by GALIC NY or Annuity 
Investors and underwritten or distributed by GAA or Future 
Underwriters. Applicants state that Future Bonus Contracts funded by 
the Current Accounts or Future Accounts will be substantially similar 
in all material respects to the Bonus

[[Page 54312]]

Contracts. Applicants believe that the requested exemptions are 
appropriate in the public interest and consistent with the protection 
of investors and the purposes fairly intended by the policy and 
provisions of the Act.
    3. Applicants state that it is not administratively feasible to 
track the Bonus amount in any of the Accounts after the Bonus is 
applied. Accordingly, the asset-based charges applicable to the 
Accounts will be assessed against the entire amounts held in the 
respective Accounts, including the Bonus amount, including during the 
period when the Bonus is not completely vested (i.e., upon cancellation 
during the free-look period or upon full surrender during the first 
contract year). As a result, during such periods, the aggregate asset-
based charges assessed against a Contract owner's account value will be 
higher than those that would be charged if the Contract owner's account 
value did not include the Bonus.
    4. Section 27(i) of the Act provides that Section 27 does not apply 
to any registered separate account funding variable insurance 
contracts, or to the sponsoring insurance company and principal 
underwriter of such account, except as provided in paragraph (2) of the 
subsection. Paragraph (2) provides that it shall be unlawful for any 
registered separate account funding variable insurance contracts or a 
sponsoring insurance company of such account to sell a contract funded 
by the registered separate account unless, among other things, such 
contract is a ``redeemable security.'' Section 2(a)(32) of the Act 
defines ``redeemable security'' as any security, other than short-term 
paper, under the terms of which the holder, upon presentation to the 
issuer, is entitled to receive approximately his proportionate share of 
the issuer's current net assets, or the cash equivalent thereof.
    5. Applicants submit that the Bonus recapture provisions described 
herein would not deprive a Contract owner of his or her proportionate 
share of the issuer's current net assets. Applicants state that a 
Contract owner's interest in the amount of the Bonus allocated to his 
or her annuity account value upon receipt of an initial purchase 
payment is not vested if the Contract is returned during the applicable 
free-look period. Similarly, Applicants submit that a Contract owner's 
interest in the amount of any Bonuses allocated upon receipt of any 
purchase payments made during the first contract year is not vested if 
the Contract is surrendered in full during the first Contract year. 
Until or unless the amount of any Bonus is vested, Applicants argue 
that the applicable Insurance Company retains the right and interest in 
the Bonus amount, although not in the earnings attributable to that 
amount. Thus, when any Bonus amounts are recaptured, the Insurance 
Companies are simply retrieving their own assets. Because the Contract 
owner's interest in the Bonus is not vested, Applicants contend that 
the Contract owner has not been deprived of a proportionate share of 
the applicable Account's assets.
    6. Applicants state that, with respect to the Bonus recapture upon 
the exercise of the free-look privilege, it would be patently unfair to 
allow a Contract owner to exercise that privilege and retain a Bonus 
amount under a Contract that has been returned for a refund after a 
period of a few weeks or days. If the Insurance Company could not 
recapture the Bonus, individuals could purchase a Contract with no 
intention of retaining it, and simply return it for a quick profit.
    7. Applicants also state that the recapture of Bonuses relating to 
all purchase payments made within the first Contract year if the 
Contract is surrendered in full during that year is designed to afford 
the Insurance Companies with a measure of protection from anti-
selection. The risk here is that the Contract owner could make very 
large purchase payments throughout the first year of the Contract and 
then fully surrender the Contract, thereby leaving GALIC NY or Annuity 
Investors less time to recover the cost of the Bonuses, to its 
financial detriment.
    8. For the foregoing reasons, Applicants submit that the provisions 
for recapture of any applicable Bonus under the Bonus Contracts do not, 
and any provisions in Future Bonus Contracts will not, violate Section 
2(a)(32) and 27(i)(2)(A) of the Act. Indeed, Applicants believe that a 
contrary conclusion would be inconsistent with a stated purpose of the 
National Securities Markets Improvement Act of 1996 (``NSMIA''), which 
is ``to amend the [act] to * * * provide more effective and less 
burdensome regulation.'' Sections 26(e) and 27(i), of course, were 
added to the Act pursuant to Section 205 of NSMIA to implement the 
purposes of NSMIA and the Congressional intent. Thus, the recapture of 
a Bonus credited to purchase payments made under the Contracts should 
not raise any questions as to the Insurance Companies' compliance with 
the provisions of Section 27(i). Nevertheless, to avoid any 
uncertainties as to full compliance with the Act, Applicants request 
exemptions from Sections 2(a)(32) and 27(i)(2)(A), to the extent deemed 
necessary, to permit the recapture of any Bonus under the circumstances 
described herein with respect to the Bonus Contracts and any Future 
Bonus Contracts, without the loss of the relief from Section 27 
provided by Section 27(i).
    9. Section 22(c) of the Act authorizes the Commission to make rules 
and regulations applicable to registered investment companies and to 
principal underwriters of, and dealers in, the redeemable securities of 
any registered investment company to accomplish the same purposes as 
contemplated by Section 22(a). Rule 22c-1 thereunder prohibits a 
registered investment company issuing any redeemable security, a person 
designated in such issuer's prospectus as authorized to consummate 
transactions in any such security, and a principal underwriter of, or 
dealer in, such security, from selling, redeeming, or repurchasing any 
such security except at a price based on the current net asset value of 
such security which is next computed after receipt of a tender of such 
security for redemption or of an order to purchase or sell such 
security.
    10. Applicants state that the Insurance Companies' recapture of the 
Bonus might be viewed as resulting in the redemption of redeemable 
securities for a price other than one based on the current net asset 
value of the Accounts. Applicants contend, however, that recapture of 
the Bonus does not violate Section 22(c) and Rule 22c-1.
    11. Applicants maintain that the recapture does not involve either 
of the problems that Rule 22c-1 was designed to prevent, namely (i) the 
dilution of the value of outstanding redeemable securities of 
registered investment companies through their sale at a price below net 
asset value or their redemption or repurchase at a price above it, and 
(ii) other unfair practices such as speculative trading practices. 
These problems were the result of backward pricing, the practice of 
basing the price of a mutual fund share on the net asset value per 
share determined as of the close of the market on the previous day. 
Backward pricing allowed investors to take advantage of increases in 
net asset value that were not yet reflected in the price, thereby 
diluting the value of outstanding mutual fund shares.
    12. Applicants also maintain that the proposed recapture of the 
Bonus poses no such threat of dilution. To effect a recapture of a 
Bonus, the Insurance Companies will redeem interests in the Contract 
owner's annuity account at a price determined on the basis of current 
net asset value of the respective Accounts. The amount recaptured will

[[Page 54313]]

equal the amount of the Bonus that the applicable Insurance Company 
paid or will pay out of its general account assets. Although Contract 
owners will be entitled to retain any investment gain attributable to 
the Bonus, the amount of such gain will be determined on the basis of 
the current net asset value of the respective Accounts. Thus, no 
dilution will result from the recapture of the Bonus. The second 
problem that Rule 22c-1 was designed to address, namely, speculative 
trading practices calculated to take advantage of backward pricing, 
also will not occur as a result of the recapture of the Bonus.
    13. Applicants argue that, because neither of the problems that 
Rule 22c-1 was designed to address is found in the recapture of the 
Bonus, Rule 22c-1 and Section 22(c) should have no application to any 
Bonus under the Bonus Contracts or Future Bonus Contracts. However, to 
avoid any uncertainty as to full compliance with the Act, Applicants 
request exemptions from the provisions of Section 22(c) and Rule 22c-1 
to the extent deemed necessary to permit them to recapture the Bonus 
under the Bonus Contracts and Future Bonus Contracts.

Conclusion

    For the reasons summarized above, Applicants submit that their 
request for exemptions from Section 2(a)(32), 22(c) and 27(i)(2)(A) of 
the Act and Rule 22c-thereunder meets the standards set out in Section 
6(c) of the Act. Applicants submit that the requested order should 
therefore be granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-27019 Filed 10-25-01; 8:45 am]
BILLING CODE 8010-01-M