[Federal Register Volume 75, Number 233 (Monday, December 6, 2010)]
[Notices]
[Pages 75708-75711]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-30461]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-29521; File No. 812-13780]


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

November 30, 2010.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of Application for an order pursuant to Section 26(c) of 
the Investment Company Act of 1940, as amended (``1940 Act''), the 
substitution of securities.

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Applicants: American United Life Insurance Company (``AUL''), AUL 
American Unit Trust (``AUL Account''). AUL and the AUL Account are 
together referred to herein as the ``Applicants.''

Summary of Application: The AUL account is used to fund variable 
annuity contracts issued by AUL (``Contracts''). Applicants request an 
order to permit the substitution of units issued by the Vanguard 
Variable Insurance Fund Small Company Growth Portfolio (the 
``Substituted Portfolio'' or ``VVIF''), for units issued by the 
Vanguard Explorer Fund (the ``Removed Portfolio'' or ``VEF''), a fund 
currently available as an investment option under certain Contracts.

Filing Date: The application was filed on June 8, 2010 and amended and 
restated applications were filed on September 2, and October 15, 2010.

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 Commission's Secretary 
and serving Applicants with a copy of the request, personally or by 
mail. Hearing requests should be received by the SEC by 5:30 p.m. on 
December 27, 2010 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 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 Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-0609. Applicants: c/o Richard M. Ellery, 
Esq., American United Life Insurance Company, One American Square, 
Indianapolis, Indiana 46282. Copies to: Frederick H. Sherley, Esq., 
Dechert LLP, 100 North Tryon Street, Suite 4000, Charlotte, NC 28202.

FOR FURTHER INFORMATION CONTACT: Patrick Scott, Senior Counsel, Office 
of Insurance Products, Division of Investment Management, SEC, at (202) 
551-6763, or Zandra Bailes, Branch Chief, at (202) 551-6975.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application; the complete application may be obtained via the 
Commission's Web site by searching for the file number, or for an 
applicant using the Company name box, at http://www.sec.gov/search/search.htm, or obtained for a fee from the Public Reference Branch of 
the Commission, 100 F Street, NE., Washington, DC 20549, or by calling: 
(202) 551-8090.
    Applicants' Representations:
    1. AUL is an Indiana stock insurance company. AUL is the depositor 
and sponsor of the AUL Account, a separate investment account 
established under Indiana law.
    2. The AUL Account is used to fund variable annuity contracts 
issued by AUL (each, a ``Contract'').\1\ The income, gains or losses of 
the AUL Account are credited to or charged against the assets of the 
AUL Account without regard to other income, gains or losses of AUL. AUL 
owns the assets in the AUL Account and is required to maintain 
sufficient assets in the AUL Account to meet all AUL Account 
obligations under the Contracts. AUL may transfer to its general 
account assets that exceed anticipated obligations of the AUL Account. 
All obligations arising under the Contracts are general corporate

[[Page 75709]]

obligations of AUL. AUL serves as sponsor and depositor of the AUL 
Account.
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    \1\ The registration statement relating to these contracts is 
incorporated by reference into the application, to the extent 
necessary to support and supplement the descriptions and 
representations set forth in the application.
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    3. The AUL Account is currently divided into 419 sub-accounts 
referred to as Investment Accounts. Each Investment Account invests 
exclusively in shares of one of the mutual fund portfolios offered by 
the fund companies with whom AUL has executed agreements so that the 
portfolios of those fund companies are eligible to be selected by a 
Contract Owner as an investment option under a Contract issued by AUL. 
Contributions may be allocated to one or more Investment Accounts 
available under a Contract. Not all of the Investment Accounts may be 
available under a particular Contract and some of the Investment 
Accounts are not available for certain types of Contracts. Each 
Contract permits allocations of value to available fixed and variable 
subaccounts; each variable subaccount invests in a specific investment 
portfolio of an underlying mutual fund. The group variable annuity 
Contracts may allow ongoing contributions that can vary in amount and 
frequency. All of the Contracts provide for the accumulation of values 
on a variable basis, a fixed basis or both. The Contracts also provide 
several options for fixed annuity payments to begin on a future date.
    4. The AUL Account does not impose any limitations on the number of 
transfers between Investment Accounts available under a Contract or 
between Investment Accounts and the Fixed Interest Account (an 
investment option under the Contracts to which contributions may be 
allocated for accumulation at rates guaranteed by AUL) or impose 
charges on transfers. Under certain circumstances, amounts transferred 
from the Fixed Interest Account to an Investment Account during any 
given year may not exceed 20% of the Fixed Interest Account's value as 
of the beginning of that year. AUL reserves the right, however, at a 
future date, to impose a different minimum or maximum transfer amount, 
to assess transfer charges, to change the limit on remaining balances, 
to limit the number and frequency of transfers, and to suspend the 
transfer privilege or the telephone authorization, interactive voice 
response, or Internet based transfers.
    5. Each Contract reserves the right, upon notice to Contract Owners 
and in compliance with applicable law, to add, combine or remove 
subaccounts, or to withdraw assets from one subaccount and put them 
into another subaccount. Each Contract's prospectus provides that 
Applicants may add, remove or combine subaccounts or withdraw assets 
relating to a Contract from one subaccount and put them into another.
    6. Applicants propose to substitute units of the VEF with units of 
the VVIF (the proposed ``Substitution''). Applicants state that no 
material differences exist between VEF and VVIF from the perspective of 
the Contract Owners. As represented in the application, and as the 
table below indicates, the investment objectives and primary risks of 
the two portfolios are the same, and the investment strategies are 
substantially similar. Further, the expense ratio of the VVIF is lower 
than the expense ratio of VEF and the one, five and ten year 
performance of the VVIF for the period ended December 31, 2009 is 
better than that of the VEF over the same period. While VEF has seven 
investment advisers and VVIF has two, VVIF's advisers are both advisers 
of VEF.
    7. Applicants submit that the foregoing demonstrates that no 
material difference exists between the Removed Portfolio and the 
Substituted Portfolio; both invest in small company stocks using a 
growth strategy and share the same primary risks. Accordingly, 
Applicants believe that the Contract Owners have a reasonable 
continuity in their investment expectation.
    8. As of July 31, 2010, VEF had assets of approximately 
$6,231,000,000. As of July 31, 2010, VVIF had assets of approximately 
$601,000,000. Applicants believe that both VEF and VVIF hold sufficient 
assets such that the Substitution should be immaterial to portfolio 
management.
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    \2\ The application represents that the information in this 
table was transcribed as it appears in the registration statement 
dated February 24, 2010, File Nos. 811-01530, 002-27203. That 
registration statement was incorporated by reference into the 
application to the extent necessary to support and supplement the 
descriptions and representations set forth in the application.
    \3\ The application represents that the information in this 
table was transcribed as it appears in the registration statement 
dated April 30, 2010, File Nos. 811-05962, 033-32216. That 
registration statement was incorporated by reference into the 
application to the extent necessary to support and supplement the 
descriptions and representations set forth in the application.

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         Removed portfolio \2\              Substituted portfolio \3\
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Vanguard Explorer Fund (cusip-           Vanguard Variable Insurance
 921926101).                              Fund Small Company Growth
                                          Portfolio (cusip-921925889).
Objective: Long-term capital             Objective: Long-term capital
 appreciation.                            appreciation.
Principal Investment Strategies:.......  Principal Investment
The Fund invests mainly in the stocks     Strategies: The portfolio
 of small companies. These companies      invests at least 80% of its
 tend to be unseasoned but are            assets primarily in common
 considered by the Fund's advisors to     stocks of smaller companies.
 have superior growth potential. Also,    These companies tend to be
 these companies often provide little     unseasoned but are considered
 or no dividend income. The Fund uses     by the Portfolio's advisors to
 multiple investment advisors.            have superior growth
                                          potential. Also, these
                                          companies often provide little
                                          or no dividend income. The
                                          Portfolio's 80% policy may be
                                          changed only upon 60 days'
                                          notice to shareholders. The
                                          Portfolio uses multiple
                                          investment advisors.
Primary Risks: An investment in the      Primary Risks: An investment in
 Fund could lose money over short or      the Portfolio could lose money
 even long periods. You should expect     over short or even long
 the Fund's share price and total         periods. You should expect the
 return to fluctuate within a wide        Portfolio's share price and
 range, like the fluctuations of the      total return to fluctuate
 overall stock market. The Fund's         within a wide range, like the
 performance could be hurt by:            fluctuations of the overall
                                          stock market. The Portfolio's
                                          performance could be hurt by:
     Stock market risk, which        Stock market risk,
     is the chance that stock prices         which is the chance that
     overall will decline. Stock             stock prices overall will
     markets tend to move in cycles,         decline. Stock markets tend
     with periods of rising prices and       to move in cycles, with
     periods of falling prices.              periods of rising prices
                                             and periods of falling
                                             prices.
     Investment style risk,          Investment style
     which is the chance that returns        risk, which is the chance
     from small-capitalization growth        that returns from small-
     stocks will trail returns from the      capitalization growth
     overall stock market.                   stocks will trail returns
     Historically, small-cap stocks          from the overall stock
     have been more volatile in price        market. Historically, small-
     than the large-cap stocks that          cap stocks have been more
     dominate the overall market, and        volatile in price than the
     they often perform quite                large-cap stocks that
     differently.                            dominate the overall
                                             market, and they often
                                             perform quite differently.

[[Page 75710]]

 
     Manager risk, which is the      Manager risk, which
     chance that poor security               is the chance that poor
     selection or focus on securities        security selection or focus
     in a particular sector, category,       on securities in a
     or group of companies will cause        particular sector,
     the Fund to underperform relevant       category, or group of
     benchmarks or other funds with a        companies will cause the
     similar investment objective.           Portfolio to underperform
                                             relevant benchmarks or
                                             other funds with a similar
                                             investment objective.
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      Total annual fund oTotal annual fund operating expenses: 0.40%
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Average annual total returns for periods ended December
                   Average annual total returns for periods ended December
                                           31, 2009
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         1 Year            5 Years           10 Years             1 Year            5 Years           10 Years
         36.21%              0.44%              3.35%             39.38%              0.50%              4.47%
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    9. Among the reasons for the proposed Substitution, Applicants 
state that the proposed Substitution will strengthen the fund offerings 
within the Contracts' fund lineup. Applicants expect the proposed 
Substitution to provide benefits to the Contract Owners including a 
better performing, lower cost portfolio. The application states that 
Vanguard has been consulted about the proposed Substitution and has no 
objection to it.
    10. Moreover, Applicants state that after the proposed 
Substitution, Contract Owners will continue to be able to select among 
portfolios with a full range of investment objectives, investments 
strategies and risks.
    11. In sum, the Applicants also have concluded that the Substituted 
Portfolio is better suited than the Removed Portfolio to serve as the 
underlying portfolio for the AUL Account as an operational and 
procedural matter; the Substituted Portfolio is designed to serve as an 
investment vehicle for insurance company separate accounts.
    12. In comparing expense ratios, the application states that as set 
forth in the Prospectuses of the Substituted Portfolio and Removed 
Portfolio, the Substituted Portfolio has a lower total expense ratio 
(0.40%) than the Removed Portfolio (0.54%). Neither the Substituted 
Portfolio nor the Removed Portfolio pays fees pursuant to Rule 12b-1 of 
the Act.
    13. The chart below, as included in the application, provides a 
comparison of expenses:

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                                                                                                  Total annual
                                             Management           12b-1        Other expenses       operating
                                            expenses  (in   distribution fee    (in percent)      expenses  (in
                                              percent)                                              percent)
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Removed Portfolio, Investor Shares......              0.50              None              0.04              0.54
Substituted Portfolio...................              0.35              None              0.05              0.40
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    14. In addition to expenses, Applicants state in the application 
that relative performance is a reason for the substitution. According 
to Vanguard, the Substituted Portfolio has outperformed the Removed 
Portfolio over the last one, five and ten year periods for the period 
ended December 31, 2009. In these time periods, respectively, the 
Substituted Portfolio has returned 39.38%, 0.50% and 4.47%, while the 
Removed Portfolio has returned 36.21%, 0.44% and 3.35%, each before 
taxes.
    15. The proposed Substitution will take place at each Portfolio's 
relative net asset values determined on the date of the Substitution in 
accordance with Section 22 of the 1940 Act and Rule 22c-1 thereunder 
with no change in the amount of any Contract Owner's cash value of his 
or her investment in any of the subaccounts. Accordingly, there will be 
no financial impact on any Contract Owner. The Substitution will be 
effected by having the subaccount that invests in the Removed Portfolio 
redeem its shares at the net asset value calculated on the date of the 
Substitution and purchase shares of the Substituted Portfolio at the 
net asset value calculated on the same date.
    16. The application notes that the Substitution will be described 
in detail in a written notice mailed to Contract Owners. The notice 
will inform Contract Owners of Applicants' intent to implement the 
Substitution and describe the Substitution, the reasons for engaging in 
the proposed Substitution and how the Substitution will be implemented. 
The notice will be mailed to all Contract Owners at least 30 days prior 
to the Substitution and will inform affected Contract Owners that they 
may transfer assets from the subaccount investing in the Removed 
Portfolio at any time after receipt of the notice, and from the 
subaccount investing in the Substituted Portfolio for 30 days after the 
Substitution, to any subaccounts investing in other portfolios 
available under their respective Contracts without the imposition of 
any transfer charge or limitation and without diminishing the number of 
free transfers that may be made in a given contract year. A supplement 
will be filed with the Commission for the current prospectus containing 
the information to be included in the notice.
    17. Applicants state further that each Contract Owner will be 
provided a prospectus for the Substituted Portfolio. Within five 
business days after the Substitution, Applicants will send each 
affected Contract Owner written confirmation that the Substitution has 
occurred.
    18. The application also indicates that:
    (a) Applicants will pay all expenses and transaction costs of the 
Substitution, including all legal, accounting and allocated brokerage 
expenses relating to the Substitution;
    (b) that no costs will be borne by the Contract Owners;
    (c) that affected Contract Owners will not incur any fees or 
charges as a result of the Substitution, nor will their rights or the 
obligations of Applicants under the Contracts be altered in any way.
    19. Applicants state that the proposed Substitution will not cause 
the fees and charges under the Contracts currently being paid by 
Contract Owners to be greater after the Substitution than before the 
Substitution. The Substitution will

[[Page 75711]]

have no adverse tax consequences to Contract Owners and will in no way 
alter the tax benefits to Contract Owners.

Applicants' Legal Analysis:

    1. Section 26(c) of the 1940 Act provides that it shall be unlawful 
for any depositor or trustee of a registered unit investment trust 
holding the security of a single issuer to substitute another security 
for such security unless the Commission shall have approved such 
substitution; and 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 
policies and provisions of the 1940 Act. Section 26(c) protects the 
expectation of investors that the unit investment trust will accumulate 
shares of a particular issuer and is intended to insure that 
unnecessary or burdensome sales loads, additional reinvestment costs or 
other charges will not be incurred due to unapproved substitutions of 
securities.
    2. The proposed Substitution of shares held by the AUL Account, as 
described above, may be deemed to involve a substitution of securities 
within the meaning of Section 26(c) of the 1940 Act. The Applicants 
therefore request an order from the Commission pursuant to Section 
26(c) approving the proposed Substitution.
    3. The investment objective and primary risks of the Substituted 
Portfolio are the same as that of the Removed Portfolio and the 
investment strategies of the two are nearly identical; thus, Contract 
Owners will have reasonable continuity in investment expectations. 
Accordingly, the Substituted Portfolio is an appropriate investment 
vehicle for those Contract Owners who have Contract values allocated to 
the Removed Portfolio. Further, the Substituted Portfolio has lower 
expenses and better historical performance than that of the Removed 
Portfolio.
    4. In connection with assets held under the Contracts affected by 
the Substitution, Applicants will not receive for three (3) years from 
the date of substitution any direct or indirect benefits from the 
Substituted Portfolio, its advisors or underwriters (or their 
affiliates) at a rate higher than that which they had received from the 
Removed Portfolio, its advisors or underwriters (or their affiliates) 
including but without limitation, 12b-1, shareholder service, 
administration or other service fees, revenue sharing or other 
arrangements.
    5. Applicants represent and warrant that the Substitution and the 
selection of the Substituted Portfolio were not motivated by any 
financial consideration paid or to be paid to AUL or its affiliates by 
the Substituted Portfolio, its advisors or underwriters or their 
respective affiliates.
    6. The Substitution will not result in the type of costly forced 
redemption that Section 26(c) was intended to guard against because the 
Contract Owner will continue to have the same type of investment 
choice, with better potential returns and lower expenses and will not 
otherwise have any incentive to redeem their shares or terminate their 
Contracts.
    7. The purposes, terms and conditions of the proposed Substitution 
are consistent with the protection of investors, and the principles and 
purposes of Section 26(c), and do not entail any of the abuses that 
Section 26(c) is designed to prevent.
    (a) The Substituted Portfolio has better historical performance 
than the Removed Portfolio.
    (b) The current total annual operating expenses and management fee 
of the Substituted Portfolio are lower than those of the Removed 
Portfolio.
    (c) The Substituted Portfolio is an appropriate portfolio to move 
Contract Owners' values currently allocated to the Removed Portfolio 
because the portfolios have the same objectives and risks and very 
similar strategies.
    (d) All costs of the Substitution, including any allocated 
brokerage costs, will be borne by Applicants and will not be borne by 
Contract Owners. No charges will be assessed to effect the 
Substitution.
    (e) The Substitution will be at the net asset value of the 
respective portfolio shares without the imposition of any transfer or 
similar charge and with no change in the amount of any Contract Owners' 
Contract values.
    (f) The Substitution will not cause the fees and charges under the 
Contracts currently being paid by the Contract Owners to be greater 
after the Substitution than before the Substitution and will result in 
Contract Owners Contract values being moved to a portfolio with lower 
current total annual operating expenses.
    (g) Notice of the proposed Substitution will be mailed to all 
Contract Owners at least 30 days prior to the Substitution, All 
Contract Owners will have an opportunity at any time after receipt of 
the notice of the Substitution and for 30 days after the Substitution 
to transfer Contract account value affected by the Substitution to 
other available subaccounts without the imposition of any transfer 
charge or limitation and without being counted as one of the Contract 
Owner's free transfers in a contract year.
    (h) Within five business days after the Substitution, Applicants 
will send to their affected Contract Owners a written confirmation that 
the Substitution has occurred.
    (i) The Substitution will, in no way, alter the terms of the 
Contracts or the obligations of Applicants under them.
    (j) The Substitution will have no adverse tax consequences to 
Contract Owners and will, in no way, alter the tax benefits to Contract 
Owners.

Conclusion

    Applicants assert that, for the reasons summarized above, the 
Commission should grant the requested order approving the Proposed 
Substitution.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-30461 Filed 12-3-10; 8:45 am]
BILLING CODE 8011-01-P