[Federal Register Volume 66, Number 240 (Thursday, December 13, 2001)]
[Notices]
[Pages 64485-64489]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-30809]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25313; File No. 812-12616]


United Investors Life Insurance Company, et al.

December 7, 2001.
AGENCY: Securities and Exchange Commission (the ``Commission'').

[[Page 64486]]


ACTION: Notice of an application for an Order of Approval pursuant to 
section 26(c) of the Investment Company Act of 1940, as amended (the 
``Act'').

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    Applicants: United Investors Life Insurance Company (``United 
Investors''), Titanium Annuity Variable Account of United Investors 
Life Insurance Company (``Annuity Account''), and Titanium Universal 
Life Variable Account of United Investors Life Insurance Company 
(``Life Account''), (all collectively, the ``Applicants'').
    Summary of Application: Applicants seek an order of the Commission, 
pursuant to section 26(c) of the Act, approving the substitution of 
shares of the AIM V.I. Capital Appreciation Fund portfolio of the AIM 
Variable Insurance Funds for shares of the Strong Discovery Fund II 
portfolio of the Strong Variable Insurance Funds, Inc. held by the 
Annuity Account and Life Account (together, the ``Accounts'') to 
support variable annuity and life insurance policies issued by United 
Investors.
    Filing Date: The application was filed on August 28, 2001 and 
amended and restated on December 3, 2001 and on December 7, 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 December 28, 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 may request notification of a hearing by 
writing to the Secretary of the Commission.

ADDRESSES: Secretary, Commission, 450 Fifth Street NW, Washington, DC 
20549-0609. Applicants, c/o John H. Livingston, Esq., United Investors 
Life Insurance Company, 2001 Third Avenue South, Birmingham, Alabama 
35233. Copies to Frederick R. Bellamy, Esq., Sutherland Asbill & 
Brennan LLP, 1275 Pennsylvania Avenue, NW, Washington, DC 20004-2415.

FOR FURTHER INFORMATION CONTACT: Kenneth C. Fang, Attorney, or Keith E. 
Carpenter, Branch Chief, at (202) 942-0670, Office of Insurance 
Products, Division of Investment Management.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained 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

    1. United Investors is a stock life insurance company originally 
incorporated under the laws of Missouri on August 17, 1981, as a 
successor to a company of the same name established in Missouri on 
September 27, 1961. United Investors is engaged in the sale of life 
insurance and annuity products and is admitted to do business in the 
District of Columbia and all states except New York. United Investors 
is an indirect subsidiary of Torchmark Corporation, a publicly traded 
life insurance and diversified financial services company. For purposes 
of the Act, United Investors is the depositor and sponsor of the 
Annuity Account and the Life Account, as those terms have been 
interpreted by the Commission, with respect to variable annuity and 
variable life separate accounts.
    2. United Investors established the Annuity Account on September 
15, 1999 as a segregated investment account under Missouri law. Under 
Missouri law, the assets of the Annuity Account are owned by United 
Investors but are held separately from all other assets of United 
Investors for the benefit of the owners of, and the persons entitled to 
payment under, the variable annuity policies. Assets in the Annuity 
Account attributable to the policy values are not chargeable with 
liabilities arising out of any other business that United Investors may 
conduct. The Annuity Account currently has 32 subaccounts, each of 
which invests in shares of a single mutual fund portfolio. Income, if 
any, and gains and losses, realized or unrealized, arising from the 
assets of each subaccount shall be credited to or charged against the 
amounts allocated to that subaccount without regard to the income, 
gains or losses of any other subaccount or any other business of United 
Investors. The Annuity Account is a ``separate account'' as defined by 
Rule 0-1(e) under the Act, and is registered with the Commission as a 
unit investment trust (File No. 811-10035). The variable annuity 
policies have been registered as securities under the Securities Act of 
1933, as amended (the ``1933 Act'') on Form N-4 (File No. 333-43022).
    3. United Investors established the Life Account on September 15, 
1999 as a segregated investment account under Missouri law. Under 
Missouri law, the assets of the Life Account are owned by United 
Investors but are held separately from all other assets of United 
Investors for the benefit of the owners of, and the persons entitled to 
payment under, the variable life policies. Assets in the Life Account 
attributable to the variable life policy values are not chargeable with 
liabilities arising out of any other business that United Investors may 
conduct. The Life Account currently has 32 subaccounts, each of which 
invests in shares of a single mutual fund portfolio. Income, if any, 
and gains and losses, realized or unrealized, arising from the assets 
of each subaccount shall be credited to or charged against the amounts 
allocated to that subaccount without regard to the income, gains or 
losses of any other subaccount or any other business of United 
Investors. The Life Account is a ``separate account'' as defined by 
Rule 0-1(e) under the Act, and is registered with the Commission as a 
unit investment trust (File No. 811-09657). The variable life policies 
have been registered as securities under the 1933 Act on Form S-6 (File 
No. 333-89875).
    4. Strong Variable Insurance Funds, Inc. (the ``Strong Fund'') is a 
series investment company as defined by Rule 18f-2 under the Act and is 
registered under the Act as an open-end management investment company 
(File No. 811-6553). The Strong Fund issues a separate series of shares 
of stock in connection with each series and has registered these shares 
under the 1933 Act on Form N-1A (File No. 33-45321). Strong Fund 
Capital Management, Inc. serves as investment adviser to the Strong 
Funds. One of the subaccounts of each of the Annuity Account and the 
Life Account invests in shares of the Strong Discovery Fund II 
(``Discovery Fund'').
    5. The Discovery Fund seeks capital growth. The Discovery Fund's 
May 1, 2001 prospectus explains its principal investment strategies as 
follows:

    The Discovery Fund II invests, under normal conditions, in 
securities that its manager believes offer attractive opportunities 
for growth. The fund usually invests in a diversified portfolio of 
common stocks from small-, medium-, and large-capitalization 
companies. These are chosen through a combination of in-depth 
fundamental analysis of a company's financial reports and direct, 
on-site research during company visits. When the manager believes 
market conditions favor fixed-income investments, the manager has 
the flexibility to invest a significant portion of the fund's assets 
in bonds. The fund would primarily invest in intermediate- and long-
term investment grade bonds. To a limited extent, the fund may also 
invest in foreign securities. The manager may sell a holding if

[[Page 64487]]

its growth potential or fundamental qualities change. The fund's 
active trading approach may increase the fund's costs, which may 
reduce the fund's performance. The fund's active trading approach 
may also increase the amount of capital gains tax that you pay on 
the fund's returns.
    The manager may invest without limitation in cash or cash-type 
securities (high-quality, short-term debt securities issued by 
corporations, financial institutions, the U.S. government, or 
foreign governments) as a temporary defensive position during 
adverse market, economic, or political conditions if the fund's 
manager determines that a temporary defensive position is advisable. 
This could reduce the benefit to the fund if the market goes up. In 
this case, the fund may not achieve its investment goals.

    6. AIM Variable Insurance Funds (``AIM Fund'') is a series 
investment company as defined by Rule 18f-2 under the Act and is 
registered under the Act as an open-end diversified management 
investment company (File No. 811-7452). The AIM Fund issues a separate 
series of shares of beneficial interest in connection with each series 
and has registered these shares under the 1933 Act on Form N-1A (File 
No. 33-57340). A I M Advisors, Inc. serves as investment adviser to the 
AIM Fund. One of the subaccounts of each of the Annuity Account and the 
Life Account invests in the AIM V.I. Capital Appreciation Fund Series I 
shares (``AIM Capital Appreciation Fund''). United Investors is not 
affiliated with the AIM Fund or A I M Advisors, Inc., except to the 
extent that it might be an ``affiliated person'' of the AIM Fund solely 
by record ownership of more than 5% of a class of shares of the AIM 
Fund (i.e., ownership of shares held in the Accounts for the benefit of 
policy owners).
    7. The AIM Capital Appreciation Fund's investment objective is 
growth of capital. The AIM Capital Appreciation Fund's May 1, 2001 
prospectus explains its principal investment strategies as follows:

    The fund seeks to meet its objective by investing principally in 
common stocks of companies the portfolio managers believe are likely 
to benefit from new or innovative products, services or processes as 
well as those that have experienced above-average, long-term growth 
in earnings and have excellent prospects for future growth. The 
portfolio managers consider whether to sell a particular security 
when any of those factors materially changes. The fund may also 
invest up to 25% of its total assets in foreign securities.
    In anticipation of or response to adverse market conditions, for 
cash management purposes, or for defensive purposes, the fund may 
temporarily hold all or a portion of its assets in cash, money 
market instruments, shares of affiliated money market funds, bonds 
or other debt securities. As a result, the fund may not achieve its 
investment objective.

    8. The policies are individual and group flexible premium variable 
life and deferred variable annuity policies. The variable annuity 
policies provide for the accumulation of values on a variable basis, 
fixed basis, or both, during the accumulation period, and for 
settlement or annuity payment options on a variable basis, fixed basis, 
or both. The variable life insurance policies provide for the 
accumulation of values on a variable basis, fixed basis, or both and 
for death benefit options and other life insurance features. Under the 
policies and as disclosed in the prospectuses, United Investors 
reserves the right to substitute shares of one fund for shares of 
another, including a fund of a different management investment company.
    9. A policy owner may transfer all or part of the policy value from 
one subaccount to another or the fixed account, up to twelve times per 
year free of charge (for the annuity policies, before the annuity 
benefit date). Owners of variable annuities may transfer policy value 
once per year after the annuity benefit date. Each transfer must be for 
at least $100 or, if less, the entire subaccount value. United 
Investors charges $25 per transfer for each additional transfer after 
twelve per year.
    10. United Investors, on its behalf and on behalf of the Accounts, 
proposes to substitute shares of the AIM Capital Appreciation Fund for 
shares of the Discovery Fund. Applicants believe that by making the 
proposed substitution, they can better serve the interests of the 
policy owners.
    11. On April 5, 2001, the board of directors of the Strong Fund 
(the ``Board'') voted to close the Discovery Fund to new separate 
account investors effective April 6, 2001. Subsequently, on June 1, 
2001, Strong Capital Management, Inc. notified United Investors of the 
Board's intention to terminate the Strong Fund's participation 
agreements with United Investors effective December 1, 2001 and cease 
the Discovery Fund's operations soon thereafter. The Board indicated 
that it decided to close the Discovery Fund because of the Discovery 
Fund's small asset base, lack of expected asset growth, and lack of 
economies of scale. The Board also requested that all of the insurance 
companies currently having separate accounts invested in the Discovery 
Fund, including United Investors, seek an order from the Commission 
approving the substitution of other securities for shares of the 
Discovery Fund currently held by these separate accounts.
    12. Applicants had no influence or control over the Board's 
decision to terminate United Investors' relationship with Discovery 
Fund. Indeed, United Investors was not even consulted. Further, 
Applicants believe that some or all of these other insurance companies 
will seek an order from the Commission to substitute shares of certain 
securities for shares of Discovery Fund. Accordingly, Applicants 
believe that the resulting decrease in the assets of Discovery Fund 
would likely result in higher expenses and less favorable performance, 
to the detriment of the policy owners.
    13. Applicants submit that the AIM Capital Appreciation Fund is a 
very suitable and appropriate substitute for the Discovery Fund. The 
AIM Capital Appreciation Fund and the Discovery Fund have the same 
objective of capital growth. Their investment strategies are very 
similar, as evidenced from the language quoted above from their 
prospectuses. They are both stock funds that use a ``growth'' style of 
stock selection (as opposed to a ``value'' style); both can invest in 
any size company (small, medium, or large capitalization companies); 
both can invest, to a limited extent, in foreign stocks; both can 
invest substantially in debt securities for defensive purposes.
    14. The AIM Capital Appreciation Fund is an attractive fund to 
investors, and Applicants believe that policy owners should actually be 
better off with the proposed substitution because the AIM Capital 
Appreciation Fund has more assets, better performance, a substantially 
lower portfolio turnover rate, and substantially lower expenses than 
the Discovery Fund. Over the last five years, the AIM Capital 
Appreciation Fund has grown over 400%. Conversely, the Discovery Fund 
has declined by approximately 41% in asset size over the last five 
years. The AIM Capital Appreciation Fund's growing asset base of $1.5 
billion allows it to achieve and maintain reasonable economies of scale 
as evidenced by an expense ratio that at 0.82% is considerably lower 
than the Discovery Fund's expense ratio of 1.2% (figures are for 
calendar year 2000). The AIM Capital Appreciation Fund also has a 
substantially lower management fee.
    15. The AIM Capital Appreciation Fund has performed comparably to 
its benchmark index, the S&P 500 Index, since its inception. Whereas 
the AIM Capital Appreciation Fund has an average annual total return of 
17.37% since its inception on May 5, 1993, its benchmark index has 
returned 17.72% in that period. For the five-year period

[[Page 64488]]

ended December 31, 2000, the AIM Capital Appreciation Fund's average 
annual total return was 15.45%; the Discovery Fund's annual return for 
that period was only 5.73%.
    16. The AIM Capital Appreciation Fund is also managed efficiently. 
Its portfolio turnover rate has never been above 100% in the last five 
years. The Discovery Fund, on the other hand, has a high portfolio 
turnover rate ranging from 194% to 970% in the last five years.
    17. The following charts show the approximate year-end size (in net 
assets), expense ratio (ratio of operating expenses as a percentage of 
average net assets), portfolio turnover rate, and annual total returns 
for each of the past five years for both of the Funds.

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                                                   Expense
                                                    ratio
                                     Net assets    (before       Actual     Management   Portfolio      Total
     Strong discovery fund II       at year-end   imposition    expense        fee        turnover      return
                                     (millions)   of expense     ratio      (percent)       rate      (percent)
                                                    caps)      (percent)                 (percent)
                                                  (percent)
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1996..............................         $229          1.2          1.2         1.00          970          0.8
1997..............................          214          1.2          1.2         1.00          198         11.4
1998..............................          196          1.2          1.2         1.00          194          7.3
1999..............................          152          1.2          1.1         1.00          235          5.1
2000..............................          136          1.3          1.2         1.00          480          4.4
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                                                   Expense
                                                    ratio
                                     Net assets    (before       Actual     Management   Portfolio      Total
AIM V.I. Capital appreciation fund  at year-end   imposition    expense        fee        turnover      return
                                     (millions)   of expense     ratio      (percent)       rate      (percent)
                                                    caps)      (percent)                 (percent)
                                                  (percent)
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1996..............................         $370         0.73         0.73         0.64           59        17.58
1997..............................          523         0.68         0.68         0.63           65        13.50
1998..............................          647         0.67         0.67         0.62           83        19.30
1999..............................        1,131         0.73         0.73         0.62           65        44.61
2000..............................        1,534         0.82         0.82         0.61           98       -10.91
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    Neither the AIM Capital Appreciation Fund nor the Discovery Fund 
imposes a Rule 12b-1 fee, and no Rule 12b-1 Plan has been authorized 
for the AIM Capital Appreciation Fund.
    18. Prior to the date the substitution is effected, by supplements 
to the various prospectuses for the policies and the Accounts, United 
Investors notified all owners of the policies invested in the Discovery 
Fund of their intention to take the necessary actions, including 
seeking the order requested by this Application, to substitute shares 
of the AIM Capital Appreciation Fund as described herein. The 
supplements advised policy owners that from the date of the supplement 
until 30 days after the date of the proposed substitution, owners are 
permitted to make one transfer (free of charge) of all amounts under a 
policy invested in the Discovery Fund to any other subaccount available 
under the policy without that transfer counting as a ``free'' transfer 
permitted under a policy. The supplements also informed policy owners 
that United Investors will not exercise any rights reserved under any 
policy to impose additional restrictions on transfers until at least 30 
days after the proposed substitution.
    19. United Investors will redeem the shares of Discovery Fund for 
cash and use the redemption proceeds to purchase shares of the AIM 
Capital Appreciation Fund. The proposed substitution will take place at 
relative net asset value with no change in the amount of any policy 
owner's policy value in either of the Accounts. The number of 
subaccount units credited to the affected policy owners will, of 
course, be adjusted to reflect the differences in subaccount unit 
values between the Discovery Fund and the AIM Capital Appreciation Fund 
subaccounts on the date of the substitution. As a result, policy owners 
will remain fully invested. Policy owners will not incur any fees or 
charges as a result of the proposed substitution, nor will their rights 
or United Investors' obligations under the policies be altered in any 
way. All expenses incurred in connection with the proposed 
substitution, including legal, accounting, and other fees and expenses, 
will be paid by United Investors. Any brokerage expenses relating to or 
resulting from the proposed substitution will be borne by United 
Investors or Strong Capital Management, Inc., so they will not be borne 
directly or indirectly by policy owners. In addition, the proposed 
substitution will not impose any tax liability on policy owners. The 
proposed substitution will not cause the policy fees and charges 
currently being paid by existing policy owners to be greater after the 
proposed substitution than before the proposed substitution. United 
Investors will not exercise any right they may have under the policies 
to impose additional restrictions on transfers under any of the 
policies for a period of at least 30 days following the substitution. 
Any transfers of amounts involved in the substitution made during the 
30 days following the proposed substitution will be free of charge and 
will not count as a ``free'' transfer.
    20. Within five days after the proposed substitution, any policy 
owners who were affected by the substitution will be sent a written 
notice informing them that the substitution was carried out, and that 
until 30 days after the substitution they may make one transfer, free 
of charge, of all policy value under a policy affected by the 
substitution to another subaccount or separate account available under 
their policy without that transfer counting as one of any limited 
number of transfers permitted in a policy year or as one of a limited 
number of transfers permitted in a policy year free of charge. The 
notice will also reiterate the fact that United Investors will not 
exercise any rights reserved by them under the policies to impose 
additional restrictions on transfers until at least 30 days after the 
proposed substitution. The notice as delivered in certain states also 
may explain any other rights they may have under state insurance 
regulations.

[[Page 64489]]

Legal Analysis

    1. Applicants request that the Commission issue an order pursuant 
to section 26(c) of the Act approving the proposed substitution. 
section 26(c) of the Act requires the depositor of a registered unit 
investment trust holding the securities of a single issuer to receive 
Commission approval before substituting the securities held by the 
trust. Specifically, Section 26(c) states:

    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 Commission 
shall issue an order approving such substitution if the evidence 
establishes that it is consistent with the protection of investors 
and the purposes fairly intended by the policy and provisions of 
this title.

    2. Section 26(c) was added to the Act by the Investment Company 
Amendments of 1970 (it was originally section 26(b)). Prior to the 
enactment of the 1970 amendments, a depositor of a unit investment 
trust could substitute new securities for those held by the trust by 
notifying the trust's security holders of the substitution within five 
days of the substitution. In 1966, the Commission, concerned with the 
high sales charges then common to most unit investment trusts and the 
disadvantageous position in which such charges placed investors who did 
not want to remain invested in the substituted fund, recommended that 
Section 26 be amended to require that a proposed substitution of the 
underlying investments of a trust receive prior Commission approval.
    3. Congress responded to the Commission's concerns by enacting 
section 26(c) to require that the Commission approve all substitutions 
by the depositor of investments held by unit investment trusts. The 
Senate Report on the bill explained the purpose of the amendment as 
follows:

    The proposed amendment recognizes that in the case of the unit 
investment trust holding the securities of a single issuer 
notification to shareholders does not provide adequate protection 
since the only relief available to shareholders, if dissatisfied, 
would be to redeem their shares. A shareholder who redeems and 
reinvests the proceeds in another unit investment trust or in an 
open-end company would under most circumstances be subject to a new 
sales load. The proposed amendment would close this gap in 
shareholder protection by providing for Commission approval of the 
substitution. The Commission would be required to issue an order 
approving the substitution if it finds the substitution consistent 
with the protection of investors and provisions of the Act.

    4. The proposed substitution appears to involve the substitution of 
securities within the meaning of section 26(c) of the Act. Applicants 
therefore request an order from the Commission pursuant to section 
26(c) approving the proposed substitution.
    5. The policies expressly reserve for United Investors the right, 
subject to compliance with applicable law, to substitute shares of 
another management company for shares of a management company held by a 
subaccount of the Accounts. The prospectuses for the policies contain 
appropriate disclosure of this right.
    6. United Investors reserved this right of substitution both to 
protect itself and its policy owners in situations where either might 
be harmed or disadvantaged by circumstances surrounding the issuer of 
the shares held by one or more of their separate accounts and to afford 
the opportunity to replace such shares where to do so could benefit 
themselves and policy owners.
    7. The proposed substitution is necessary because the Board decided 
to close down and liquidate the Discovery Fund. Allowing the proposed 
substitution will effortlessly transition policy owners into a fund 
that closely approximates their current investment in terms of 
investment objective and policies but with lower expenses and better 
long-term performance.
    8. In addition to the foregoing, Applicants generally submit that 
the proposed substitution meets the standards that the Commission and 
its staff have applied to similar substitutions that have been approved 
in the past.
    9. The proposed substitution is not the type of substitution that 
section 26(c) was designed to prevent. Unlike traditional unit 
investment trusts where a depositor could only substitute an investment 
security in a manner which permanently affected all the investors in 
the trust, the policies provide each policy owner with the right to 
exercise his or her own judgment and transfer policy or cash values 
into other subaccounts. Moreover, the policies will offer policy owners 
the opportunity to transfer amounts out of the affected subaccounts 
into any of the remaining subaccounts without cost or other 
disadvantage. The proposed substitution, therefore, will not result in 
the types of costly forced redemption that section 26(c) was designed 
to prevent.
    10. The proposed substitution also is unlike the type of 
substitution that section 26(c) was designed to prevent in that by 
purchasing a policy, policy owners select much more than a particular 
investment company in which to invest their account values. They also 
select the specific type of insurance coverage offered by United 
Investors under its policies as well as numerous other rights and 
privileges set forth in the policies. Policy owners may also have 
considered United Investors' size, financial condition, type, and 
reputation for service in selecting their policy. These factors will 
not change as a result of the proposed substitution.
    11. United Investors does not currently receive (and will not 
receive for three years from the date of the Commission order requested 
herein) any direct or indirect benefit from the AIM Capital 
Appreciation Fund or A I M Advisors, Inc., or any of its affiliates, 
that would exceed the amount that United Investors has received from 
the Discovery Fund or Strong Capital Management Inc., or any of its 
affiliates, including without limitation Rule 12b-1 fees, shareholder 
service or administrative or other service fees, revenue sharing or 
other arrangements, either with specific reference to the AIM Capital 
Appreciation Fund or as part of an overall business arrangement.

Conclusion

    Applicants request an order of the Commission pursuant to section 
26(c) of the Act approving the proposed substitution by United 
Investors. Applicants submit that, for all the reasons stated above, 
the proposed substitution is consistent with the protection of 
investors and the purposes fairly intended by the policy and provisions 
of the Act.
    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-30809 Filed 12-12-01; 8:45 am]
BILLING CODE 8010-01-P