[Federal Register Volume 68, Number 15 (Thursday, January 23, 2003)]
[Notices]
[Pages 3284-3287]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-1453]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25889; File No. 812-12845]


American United Life Insurance Company, et al.; Notice of 
Application

January 16, 2002.
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, as amended (``1940 Act''), 
providing exemptions from sections 2(a)(32), and 27(i)(2)(A) of the 
1940 Act and rule 22c-1 thereunder to the extent necessary to permit 
the recapture of certain bonus credits.

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Applicants: American United Life Insurance Company (``AUL''), AUL 
American Individual Variable Annuity Unit Trust (the ``Separate 
Account''), and OneAmerica Securities, Inc. (the ``Distributor''), 
collectively the ``Applicants.''

Summary of Application: Applicants seek an order pursuant to Section 
6(c) of the 1940 Act exempting them, to the extent deemed necessary, 
from Sections 2(a)(32) and 27(i)(2)(A) of the 1940 Act and Rule 22c-1 
thereunder, to permit AUL to recapture part or all of a credit applied 
to premium payments made within the first twelve months after a 
Contract is issued, in the following instances: (i) When a Contract 
owner exercises the Contract's free look provision; and (ii) when a 
Contract owner makes any withdrawal from a Contract within the first 
seven Contract years. Applicants request that the order extend to other 
variable annuity contracts that are substantially similar in all 
material respects to the Contracts that AUL, its affiliates and 
successors in interest may issue in the future.

Filing Date: The application was filed on June 28, 2002, and amended 
and restated on November 8, 2002, December 26, 2002 and January 16, 
2003.

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 should be received by the 
Commission by 5:30 p.m. on February 10, 2003, and should be accompanied 
by proof of service on Applicants, in the form of an affidavit, or 
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 may request notification of a hearing by 
writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549. Applicants: c/o John C. Swhear, 
Esq., American United Life Insurance Company, One American Square, 
Indianapolis, Indiana 46282. Copies to: Ethan D. Corey, Esq., Dechert, 
1775 Eye Street, NW., Washington, DC 20006-2401.

FOR FURTHER INFORMATION CONTACT: Patrick F. Scott, Attorney, or Lorna 
J. MacLeod, 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 may be obtained for a fee from 
the Public Reference Branch of the Commission, 450 Fifth Street, NW., 
Washington, DC 20549 (202) 942-8090.

Applicants' Representations

    1. AUL is an Indiana stock insurance company. AUL is the depositor 
and sponsor of the Separate Account, a separate account established 
under Indiana law.
    2. The Separate Account is registered with the Commission under the 
1940 Act as a unit investment trust. AUL owns the assets of the 
Separate Account that supports obligations under certain individual 
variable annuity contracts (the ``Contracts''). The Separate Account is 
currently divided into sub-accounts referred to as Investment Accounts. 
Each Investment Account invests exclusively in shares of one of the 
underlying open-end management investment companies, or series thereof, 
available as investment options under the Contracts. Premiums may be 
allocated to one or more Investment Accounts available under a 
Contract. AUL may in the future establish additional Investment 
Accounts of the Separate Account, which may invest in other securities, 
mutual funds, or investment vehicles.
    3. The individual variable annuity contracts, which are issued by 
AUL through the Distributor, are unbundled. That is, there is a base 
contract, with a standard death benefit, and annuity payout options, as 
well as transfer privileges and dollar cost averaging. Other features 
under the contract include several optional benefit riders that may be 
added at the time the Contract is issued for an additional asset-based 
fee. The Contract has the following charges: (i) A deferred sales 
charge as a percentage of contributions withdrawn as described above; 
(ii) an administrative expense fee equal to 0.15% of average Variable 
Account value on an annual basis; (iii) an annual Contract fee of $50 
for contracts with Account Values less than $20,000; $30 for contracts 
with Account Values $20,000 or greater, but less than $50,000; and $0 
for contracts with Account Values $50,000 or greater; (iv) a mortality 
and expense risk charge equal to 1.15% of average Variable Account 
value on an annual basis; and (v) any applicable charge for each of the 
selected riders, described in the Application. Contract owners in 
certain states may also be required to pay any applicable state premium 
tax. In addition, assets invested in the Investment Accounts are 
charged with the annual operating expenses of the underlying Funds.

[[Page 3285]]

    4. Premiums under the Contracts may vary in amount and frequency, 
subject to certain limitations. The Contracts also provide for the 
accumulation of values either on a variable basis, a fixed basis, or 
both, as well as several options for fixed and variable annuity 
payments to begin on a future date. Premium payments under the 
Contracts may be made at any time during the Contract owner's life and 
before the Contract's annuity date. The Contract owner has the right to 
return the Contract for any reason within the ``free look'' period, 
which is a ten-day period beginning when the Contract owner receives 
the Contract. If a particular state requires a longer free look period, 
then eligible Contract owners in that state will be allowed the longer 
statutory period to return the Contract. The returned Contract will be 
deemed void and AUL will refund the Account Value, which is the total 
sum of a Contract owner's interest in the Variable Account and the 
Fixed Account(s). Initially, the Account Value is equal to the initial 
premium less any applicable premium tax and thereafter reflects the net 
result of premiums, investment experience, charges deducted, and any 
withdrawals taken.
    5. The optional Extra Credit Premium Rider offers a credit of 3%, 
5% or 6% of the total first year premium payments (the ``Credit''). The 
Contract owner may select the 3% Credit rider only when the Six Year 
Contract Withdrawal Charge Rider is selected. If a Contract owner 
selects the Extra Credit Premium Rider at the time of application, AUL 
will credit an extra amount to the Contract each time the Contract 
owner makes a premium payment within the first twelve months after the 
Contract is issued. AUL will allocate Credit amounts pro rata among the 
Investment Accounts in the same ratio as the premium payment to which 
the Credit relates. AUL will fund the Credit amounts from its general 
account assets.
    The annual charge for the Credit Rider will be initially set at 
0.55%, 0.65% and 0.75%, of average Account Value, respectively, for the 
3%, 5% and 6% Credit amounts. This rider charge will apply until the 
Credit is totally vested, according to the following vesting schedule:

------------------------------------------------------------------------
                                    3% credit    5% credit    6% credit
          Contract year             (percent)    (percent)    (percent)
------------------------------------------------------------------------
1................................            0            0            0
2................................            0            0        4.167
3................................           25        16.67        16.67
4................................           50        33.33        33.33
5................................           75           50           50
6................................          100        66.67        66.67
7................................          100        83.33        83.33
8................................          100          100          100
------------------------------------------------------------------------

    AUL will discontinue the charge for the Extra Credit Premium Rider 
at the end of the fifth contract year for the 3% Extra Credit Premium 
Rider and at the end of the seventh contract year for the 5% and 6% 
Extra Credit Premium Riders.
    6. If a Contract owner exercises the free look right, his or her 
Account Value will be adjusted to reflect the recapture of non-vested 
Credit amounts paid on the Contract, consistent with the vesting 
schedule above. However, any earnings or loss on the non-vested Credit 
will be fully vested and considered part of the Account Value. AUL will 
refund the premium paid in those states where required by law and for 
individual retirement annuities. In all other cases, the Contract owner 
bears the investment risk during the period prior to AUL's receipt of 
request for cancellation. In addition, all or part of the Credit may be 
recaptured by AUL if the Contract owner makes a withdrawal in the first 
seven contract years, depending upon the vesting schedule above. 
Regardless of whether or not the Credit is vested, all gains or losses 
attributable to the Credit are part of the Contract owner's Contract 
value and are immediately vested.
    7. During the lifetime of the annuitant, at any time before the 
annuity date and subject to the limitations under any applicable 
qualified plan and applicable law, a Contract owner may surrender a 
Contract or take a withdrawal from a Contract. A withdrawal may be 
requested for a specified percentage or dollar amount of a Contract 
owner's Account Value. Upon payment, the Contract owner's Account Value 
will be reduced by an amount equal to the payment, any applicable 
withdrawal charge, calculated as a percentage of first year premium, 
and any recapture of non-vested Credit amounts consistent with the 
vesting schedule above. The withdrawal charge is based on the following 
schedule:

------------------------------------------------------------------------
                                                             Withdrawal
                       Contract year                           charge
                                                             percentage
------------------------------------------------------------------------
1.........................................................             7
2.........................................................             6
3.........................................................             5
4.........................................................             4
5.........................................................             3
6.........................................................             2
7.........................................................             1
8.........................................................             0
------------------------------------------------------------------------

    An amount withdrawn during a Contract year, referred to as the 
``free withdrawal amount,'' will not be subject to an otherwise 
applicable withdrawal charge. The free withdrawal amount is 12% of 
Account Value, including any vested and non-vested Credit amounts, at 
the beginning of the Contract year in which the withdrawal is being 
made.
    8. Applicants state that if a contract owner has not chosen an 
Extra Credit Premium Rider, AUL will first provide a 12% free 
withdrawal amount, which is calculated based on the Account Value at 
the most recent contract anniversary. Any amounts withdrawn in excess 
of the free withdrawal amount will be assessed a withdrawal charge 
based on the table above. The withdrawal charge is calculated as a 
percentage of first year premium not previously withdrawn. After the 
withdrawal, the first year premium amount upon which a withdrawal 
charge may be assessed in the future is reduced by the total amount of 
the withdrawal, which includes the free withdrawal amount.
    9. Applicants further state that, if a contract owner has chosen an 
Extra Credit Premium Rider, AUL will first provide a 12% free 
withdrawal amount. Next, any amounts withdrawn in excess of the free 
withdrawal amount will be subject to a recapture of non-vested Credit 
amounts (see vesting schedule in paragraph 5 above, explaining the 
``Extra Credit Premium Rider'') and assessed a withdrawal charge as 
described above. The credit will be

[[Page 3286]]

recaptured in proportion to the amount in excess of the free withdrawal 
amount.
    After the withdrawal, the first year premium amount from which non-
vested Credit amounts may be recaptured and upon which a withdrawal 
charge may be assessed in the future, is reduced by the total amount of 
the withdrawal, which includes the free withdrawal amount. In other 
words, while a withdrawal charge will be assessed and credit recaptured 
only on the amount in excess of the free withdrawal amount, the premium 
upon which future recaptures and withdrawals may be assessed is reduced 
by the total amount of the withdrawal. Once the remaining premium is 
reduced to zero, no further withdrawal charges may be assessed and no 
further credits may be recaptured, since withdrawal charges and 
recaptures are based on first year premium, and the first year premium 
has been exhausted.
    10. The Six Year Contract Withdrawal Charge Rider will reduce the 
withdrawal charge period by two years. The final two years of the 
withdrawal charge will be dropped, and the withdrawal charges assessed 
during the previous years are consistent with the Withdrawal Charge 
schedule listed above. The annual charge for this rider will be 
initially set at 0.30% of average Value. The 3% optional Extra Credit 
Premium Rider must be selected with the Six Year Contract Withdrawal 
Charge Riger. No other Extra Credit Premium Rider is available with 
this rider.
    11. The Long Term Care Facility and Terminal Illness Rider provides 
a waiver of both withdrawal charges and recapture of Credits if the 
Extra Premium Rider is selected, on withdrawals that qualify under the 
Rider. Therefore, under the rider, if a Contract owner is confined for 
a continuous 90-day period to a long-term care facility or for a 30-day 
period to a hospital, as defined by the rider provisions, Withdrawal 
charges will not apply and Credits will not be recaptured, if the Extra 
Credit Premium Rider is selected. In addition, if the Contract owner 
has been diagnosed by a physician to have a terminal illness, as 
defined by the rider, and AUL has received a physician's letter at its 
home office, no withdrawal charges will be deducted upon withdrawal, 
and no Credits will be recaptured, if the Extra Credit Premium Rider is 
chosen. The charge for this benefit is included in the base mortality 
and expense risk charge.

Applicants' Legal Analysis

    1. Section 27(i) of the 1940 Act was added to the Act to implement 
the purpose of the National Securities Markets Improvement Act of 1996. 
Section 27(i)(2)(A) of the 1940 Act provides that it shall be unlawful 
for a separate account or sponsoring insurance company to sell a 
contract funded by the registered separate account unless such contract 
is a redeemable security. Section 2(a)(32) 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 or her proportionate share of the issuer's 
current net assets, or the cash equivalent thereof.
    2. Applicants assert that the recapture of the Credit in the 
circumstances set forth in this application would not deprive a 
Contract owner of his or her proportionate share of the issuer's 
current net assets. A Contract owner's interest in the Credit allocated 
to his or her Contract value upon receipt of a contribution is not 
fully vested until the eighth contract year. Until the right to 
recapture has expired and any Credit amount is vested, AUL retains the 
right and interest in the Credit, although not in the earnings 
attributable to that amount. Thus, Applicants assert, when AUL 
recaptures any Credit, it is merely retrieving its own assets, and the 
Contract owner has not been deprived of a proportionate share of the 
applicable Separate Account's assets because his or her interest in the 
Credit has not vested.
    3. Applicants additionally represent that permitting a Contract 
owner to retain a Credit under a Contract upon the exercise of the free 
look provision would not only be unfair, but would also encourage 
individuals to purchase a Contract with no intention of keeping it and 
to return it for a quick profit. Furthermore, the recapture of the full 
amount of Credits applied to premium payments made within the first 
twelve months after issuance is designed to provide AUL with a measure 
of protection against anti-selection. The risk here is that, rather 
than spreading contributions over a number of years, a Contract owner 
might make very large contributions during the first Contract year, the 
Credits vest, the Contract owner then returns the Contract and is 
permitted to keep the Credit amounts, thereby leaving AUL little time 
to recover the cost of the Credits.
    4. For the foregoing reasons, Applicants submit that the provisions 
for recapture of Credits under the Contracts and other variable annuity 
contracts that are substantially similar in all material respects to 
the contracts described in the application, that AUL, its affiliates 
and successors in interest may issue in the future (``Future 
Contracts''), do not violate Sections 2(a)(32) and 27(i)(2)(A) of the 
1940 Act because the recapture would not deprive a Contract owner of 
his or her proportionate share of the issuer's current net assets.
    5. Applicants further assert that a Contract owner's interest in 
the Credit allocated to his or her Contract value upon receipt of a 
contribution is not fully vested until the eighth contract year, when 
the right to recapture has expired and any Credit amount has vested. 
Until that time, Applicants state, AUL retains the right and interest 
in the Credit, although not in the earnings attributable to that 
amount. Thus, when AUL recaptures any Credit, it is merely retrieving 
its own assets, and the Contract owner has not been deprived of a 
proportionate share of the applicable Separate Account's assets because 
his or her interest in the Credit has not vested.
    6. In addition Applicants state, permitting a Contract owner to 
retain a Credit under a Contract upon the exercise of the free look 
provision would not only be unfair, but would also encourage 
individuals to purchase a Contract with no intention of keeping it and 
to return it for a quick profit. On the other hand, Applicants assert, 
the recapture of the full amount of Credits applied to premium payments 
made within the first twelve months after issuance is designed to 
provide AUL with a measure of protection against such anti-selection.
    7. Applicants submit that the application of a Credit to premium 
payments made under the Contracts should not raise any questions as to 
AUL's compliance with the provisions of Section 27(i). However, to 
avoid any uncertainty as to full compliance with the 1940 Act, 
Applicants request an exemption from Section 2(a)(32) and 27(i)(2)(A), 
to the extent deemed necessary, to permit the recapture of any Credit 
under the circumstances described in this application without the loss 
of relief from Section 27 provided by Section 27(i).
    8. Rule 22c-1, promulgated under Section 22(c) of the 1940 Act, 
prohibits a registered investment company issuing any redeemable 
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. Rule 22c-1 
is intended to avoid the dilution of the value of outstanding 
redeemable securities of registered investment companies through their 
sale at a price

[[Page 3287]]

below net asset value or repurchase at a price above it, and other 
unfair results, including speculative trading practices.
    9. The proposed recapture of the Credit, Applicants assert, does 
not pose such a threat of dilution, nor does it promote speculative 
trading practices, calculated to take advantage of backward pricing, 
the two evils that Rule 22c-1 was intended to eliminate or reduce. To 
effect a recapture of a Credit, AUL will redeem interests in a Contract 
at a price determined on the basis of the current accumulation unit 
value(s) of the Investment Account(s) to which the Contract owner's 
Contract value is allocated. The amount recaptured will equal the 
amount of the Credit paid out of AUL's general account assets. Although 
the Contract owner will be entitled to retain any investment gain 
attributable to the Credit, the amount of that gain will be determined 
on the basis of the current accumulation unit values of the applicable 
Investment Accounts. Thus, Applicants assert, no dilution will occur 
upon the recapture of the Credit.
    10. Applicants argue that because neither of the harms that Rule 
22c-1 was meant to address is found in the recapture of the Credit, 
Rule 22c-1 should not apply to any Credit. However, to avoid any 
uncertainty as to full compliance with the 1940 Act, Applicants request 
an exemption from the provision of Rule 22c-1 to the extent deemed 
necessary to permit them to recapture the Credit under the Contracts 
and Future Contracts.
    11. Applicants submit that their request for an order that applies 
to the Separate Account and any Future Accounts established by AUL, in 
connection with the issuance of the Contracts and Future Contracts, is 
appropriate in the public interest. Such an order would promote 
competitiveness in the variable annuity market by eliminating the need 
to file redundant exemptive applications, thereby reducing 
administrative expenses and maximizing the efficient use of Applicants' 
resources. Applicants further submit that Investors would not receive 
any benefit or additional protection by requiring Applicants to 
repeatedly seek exemptive relief that would present no issue under the 
Act that has not already been addressed in this application. 
Additionally, Applicants state that requiring Applicants to file 
additional applications would impair Applicants' ability to take 
advantage of business opportunities as they arise. Further, if 
Applicants were required repeatedly to seek exemptive relief with 
respect to the same issues addressed in this application, investors 
would not receive any benefit or additional protection thereby. 
Applicants undertake that Future Contracts funded by the Separate 
Accounts or by Future Accounts, which seek to rely on the order issued 
pursuant to this Application, will be substantially similar to the 
Contracts in all material aspects.

Conclusion

    Section 6(c) of the Act, in pertinent part, provides that the 
Commission, by order upon application, may conditionally or 
unconditionally exempt any persons, security or transaction, or any 
class or classes of persons, securities or transactions, from any 
provisions of the Act, or any rule or regulation thereunder, to the 
extent that such exemption is necessary or 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. 
Applicants submit, for the reasons stated herein, that their exemptive 
requests meet the standards set out in Section 6(c) and that an 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. 03-1453 Filed 1-22-03; 8:45 am]
BILLING CODE 8010-01-M