[Federal Register Volume 78, Number 123 (Wednesday, June 26, 2013)]
[Notices]
[Pages 38413-38416]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-15242]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 30564; File No. 812-14109]


American Family Life Insurance Company, et al.

June 20, 2013.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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Applicants:  American Family Life Insurance Company (the ``Company''), 
American Family Variable Account I (the ``Life Account''), and American 
Family Variable Account II (the ``Annuity Account'') (together, the 
``Applicants'').

Summary of Application:  The Applicants seek an order pursuant to 
Section 26(c) of the 1940 Act, approving the substitution of shares of 
the Vanguard Money Market Portfolio (``Replacement Portfolio'') of the 
Vanguard Variable Insurance Fund (``Vanguard Fund'') for Initial Class 
Shares of the Fidelity Variable Insurance Products Money Market 
Portfolio (``Replaced Portfolio'') of the Fidelity Variable Insurance 
Products Fund (``Fidelity Fund''), currently held by the Life Account 
and the Annuity Account (each an ``Account,'' together, the 
``Accounts'') to support variable life insurance and annuity contracts 
issued by the Company (collectively, the ``Contracts'').

DATES: Filing Date: The application was filed on January 8, 2013, and 
the amended and restated application was filed on May 16, 2013.

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 the 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 July 15, 2013, and should be accompanied by 
proof of service on the Applicants in the form of an affidavit or, for 
lawyers, a certificate of service. Hearing requests should state the 
nature of the 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, 100 F Street 
NE., Washington, DC 20549-1090.

Applicants:  David C. Holman, Esq., American Family Life Insurance 
Company, 6000 American Parkway, Madison, Wisconsin 53783-0001; Thomas 
E. Bisset, Esq., Sutherland Asbill & Brennan LLP, 700 Sixth Street NW., 
Suite 700, Washington, DC 20001-3980.

FOR FURTHER INFORMATION CONTACT: Patrick Scott, Senior Counsel, or 
Michael Kosoff, Branch Chief, Insured Investments Office, Division of 
Investment Management, at (202) 551-6795.

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 by calling (202) 551-8090.
    Applicants' Representations:
    1. American Family Life Insurance Company conducts a conventional 
life insurance business and is authorized to transact the business of 
life insurance, including annuities, in twenty-seven states. For 
purposes of the 1940 Act, the Company is the depositor and sponsor of 
each of the Accounts as those terms have been interpreted by the 
Commission with respect to variable life insurance and variable annuity 
separate accounts.
    2. The Annuity Account and the Life Account issue Contracts and the 
Company owns the assets of each Account attributable to a Contract. 
Such assets are held separately from the other assets of the Company 
for the benefit of the owners of, and the persons entitled to payment 
under, those Contracts. Each Account is a ``separate account'' as 
defined by Rule 0-1(e) under the 1940 Act and is registered with the 
Commission as a unit investment trust.\1\ Each Account is comprised of 
a number of subaccounts and each subaccount invests exclusively in one 
of the insurance dedicated mutual fund portfolios made available as 
investment vehicles underlying the Contracts. Currently, the Replaced 
Portfolio is available as an investment option under the Company's 
variable life insurance and variable annuity Contracts.
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    \1\ File No. 811-10097 (the Life Account); File No. 811-10121 
(the Annuity Account).
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    3. The Fidelity Fund is registered \2\ as an open-end management 
investment company under the 1940 Act and currently offers five (5) 
investment portfolios, each with multiple share classes. The Fidelity 
Fund issues a series of shares of beneficial interest in connection 
with each portfolio and has registered such shares under the Securities 
Act of 1933 (``1933 Act'') on Form N-1A.\3\
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    \2\ File No. 811-05361.
    \3\ File No. 33-17704.
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    4. Each portfolio of the Fidelity Fund has entered into an advisory 
agreement with Fidelity Management & Research Company (``FMR'') under 
which FMR acts as investment adviser for the portfolio.
    5. Neither the Fidelity Fund, any of its portfolios, nor 
subadvisers are affiliated with the Applicants. The Fidelity Fund

[[Page 38414]]

does not have manager-of-managers relief for the Replaced Portfolio.
    6. The Vanguard Fund is registered as an open-end management 
investment company under the 1940 Act \4\ and currently offers 
seventeen (17) portfolios, including the Replacement Portfolio. The 
Vanguard Fund issues a series of shares of beneficial interest in 
connection with each portfolio and has registered such shares under the 
1933 Act on Form N-1A.\5\
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    \4\ File No. 811-05962.
    \5\ File No. 33-32216.
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    7. Pursuant to an investment advisory agreement between the 
Replacement Portfolio and The Vanguard Group, Inc. (``Vanguard''), 
Vanguard provides investment advisory services to the Replacement 
Portfolio. Vanguard manages the Replacement Portfolio subject to the 
supervision and oversight of the Replacement Portfolio's board of 
directors.
    8. Neither the Vanguard Fund, any of its portfolios, nor Vanguard 
are affiliated with the Applicants. The Vanguard Fund and Vanguard have 
received an order from the Commission that allows the Vanguard Fund and 
Vanguard to utilize a multi-manager structure to manage the assets of 
the Replacement Portfolio. Pursuant to the order, Vanguard is permitted 
to select sub-advisers that are not affiliates of Vanguard (other than 
by virtue of serving as investment advisers to one or more Vanguard 
funds) and revise selected advisory agreements without obtaining 
shareholder approval, subject to the approval of the Vanguard Fund 
board of trustees and certain other conditions.
    9. The Contracts are flexible premium variable annuity and variable 
life insurance contracts. The variable annuity contracts (file no. 333-
45592) provide for the accumulation of values on a variable basis, 
fixed basis, or both, during the accumulation period, and provide 
settlement or annuity payment options on a fixed basis. The variable 
life insurance contracts (file nos. 333-44956 and 333-147408) provide 
for the accumulation of values on a variable basis, fixed basis, or 
both, throughout the insured's life, and for a substantial death 
benefit upon the death of the insured. Under each of the Contracts, the 
Company reserves the right to substitute shares of one fund for shares 
of another, or of another investment portfolio, including a portfolio 
of a different management company. Applicant state that the prospectus 
for the Contracts and the Accounts contain appropriate disclosure of 
this right.
    10. For as long as a variable life insurance Contract remains in 
force or a variable annuity Contract has not yet been annuitized, a 
Contract owner may transfer all or any part of the Contract value from 
one subaccount to another subaccount or to a fixed account.
    11. The Company proposes to substitute shares of the Replacement 
Portfolio for Initial Class shares of the Replaced Portfolio currently 
held in the Accounts (the ``proposed substitution'').
    12. The application states that, the proposed substitution is part 
of an effort by the Company to provide a portfolio selection within the 
Contracts that: (1) Provides competitive long-term returns relative to 
other funds in the asset class peer group with lower investment risk; 
(2) provides a more competitive fee structure relative to other funds 
in the asset class peer group; and (3) maintains the goal of offering a 
mix of investment options covering basic categories in the risk/return 
spectrum.
    13. The application states that, replacing the Replaced Portfolio 
with the Replacement Portfolio is appropriate and in the best interests 
of Contract owners because the stated investment objective, principal 
investment strategies, and principal investment risks of the 
Replacement Portfolio are substantially similar to those of the 
Replaced Portfolio, so that Contract owners will have continuity in 
investment expectations with somewhat lower risk. A comparison of the 
investing objectives, strategies, and risks of the Replaced Portfolio 
and the Replacement Portfolio is included in the application.
    14. The following charts compare advisory fees, other expenses, and 
total operating expenses for the year ended December 31, 2012, 
expressed as an annual percentage of average daily net assets, of the 
Replaced Portfolio and the Replacement Portfolio. Neither the Replaced 
Portfolio nor the Replacement Portfolio impose a redemption fee.
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    \6\ FMR has voluntarily agreed to reimburse the Initial Class of 
the Replaced Portfolio to the extent total operating expenses 
(excluding interest, taxes, brokerage commissions, and extraordinary 
expenses) as a percentage of average net assets exceed 0.40%.
    \7\ Vanguard and the Replacement Portfolio's board of directors 
have agreed to temporarily limit certain net operating expenses in 
excess of the Replacement Portfolio's daily yield to maintain a zero 
or positive yield for the Portfolio. Vanguard and the Replacement 
Portfolio's board of directors may terminate the expense limitation 
at any time. The ratio of total expenses to average net assets after 
the voluntary expense limitation was 0.06%.

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                                                                  Replaced portfolio--
                                                                   Fidelity VIP money    Replacement portfolio--
                                                                    market portfolio      Vanguard money market
                                                                 (initial class)  as of   portfolio as of 12/31/
                                                                  12/31/12  (percent)          12 (percent)
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Advisory Fees.................................................                     0.17                     0.12
12b-1 Fee.....................................................                      N/A                      N/A
Other Expenses................................................                     0.09                     0.04
Total Expenses................................................                 \6\ 0.26                     0.16
Less Contractual Fee..........................................                      N/A                      N/A
Waivers and Expense
Reimbursements
Net Expenses..................................................                     0.26                 \7\ 0.16
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    15. Applicants state that they believe that the Replacement 
Portfolio is an appropriate replacement for the Replaced Portfolio for 
each Contract, and that the Replacement Portfolio represents an 
investment option that is more compatible with the Replaced Portfolio 
than are any other investment options under the Contracts.
    16. The Replacement Portfolio for the fiscal years ended 2012, 
2011, 2010 and 2009 has a significantly lower expense ratio than the 
Replaced Portfolio. In light of the substantial level of assets of the 
Replacement Portfolio, the continued decline of the level of assets of 
the Replaced Portfolio, and the lower expense ratio of the Replacement

[[Page 38415]]

Portfolio, Applicants believe that the Replacement Portfolio is a 
viable money market investment option for the Contracts whose expenses 
should not trend upward over time.
    17. Applicants maintain that Contract owners will be better served 
by the proposed substitution and that the proposed substitution is 
appropriate given the Replacement Portfolio, the Replaced Portfolio, 
and other investment options available under the Contracts. For each 
one-year, five-year and ten-year period ended December 31, 2012, the 
Replacement Portfolio has had investment performance comparable to that 
of the Replaced Portfolio, but with lower investment risk.

Legal Analysis and Conditions

    1. The Applicants request that the Commission issue an order 
pursuant to Section 26(c) of the 1940 Act approving the proposed 
substitution. Section 26(c) of the 1940 Act requires the depositor of a 
registered unit investment trust holding securities of a single issuer 
to obtain Commission approval before substituting the securities held 
by the trust.
    2. 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 Contracts provide each Contract owner with the right to 
exercise his or her own judgment and transfer Contract values into 
other subaccounts and the fixed account. Moreover, the application 
asserts, the Contracts will offer Contract owners the opportunity to 
transfer amounts out of the affected subaccount into any of the 
remaining subaccounts without cost or disadvantage. The proposed 
substitution, therefore, will not result in the type of costly forced 
redemption that Section 26(c) was designed to prevent.
    3. Applicants believe that Contract owners will be better off with 
the Replacement Portfolio than with the Replaced Portfolio. The 
proposed substitution retains for Contract owners the investment 
flexibility that is a central feature of the Contracts. If the proposed 
substitution is carried out, all Contract owners will be permitted to 
allocate purchase payments and transfer Contract values between and 
among the remaining subaccounts as they could before the proposed 
substitution.
    4. Applicants believe that the Replacement Portfolio and the 
Replaced Portfolio are substantially the same in their stated 
investment objectives and principal investment strategies as to afford 
investors continuity of investment and risk. In addition, 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.
    5. Supplements to the prospectus for the Contracts dated January 
29, 2013, disclosed the Company's intent to seek the order approving 
the substitution; moreover the supplements disclosed that from the date 
of the supplement until the date of the proposed substitution, the 
Company will not exercise any rights reserved by it under any Contract 
to impose additional charges for transfers until at least 30 days after 
the proposed substitution. Similarly, the supplements disclosed that 
from the date of the supplement until the date of the proposed 
substitution, the Company will permit Contract owners to transfer 
Contract value out of the subaccount currently holding shares of the 
Replaced Portfolio to other subaccounts and the fixed account without 
those transfers being treated as transfers for purposes of determining 
the remaining number of transfers that may be permitted in the Contract 
year without a transfer charge. In addition, prospectuses for the 
Contracts dated May 1, 2013 disclosed substantially similar information 
as set forth in the supplements.
    6. Within five days after the proposed substitution, Contract 
owners who are affected by the substitution will be sent a written 
notice informing them that the substitution was carried out. The notice 
will also reiterate the facts that the Company: (1) Will not exercise 
any rights reserved by it under any of the Contracts to impose 
additional charges for transfers until at least 30 days after the 
proposed substitution, and (2) will, for at least 30 days following the 
proposed substitution, permit such Contract owners to transfer Contract 
values out of the subaccount holding shares of the Replacement 
Portfolio to other subaccounts and the fixed account without those 
transfers being treated as transfers for purposes of determining the 
remaining number of transfers permitted in the Contract year without a 
transfer charge.
    7. Applicants represent that the Company will carry out the 
proposed substitution by redeeming shares of the Replaced Portfolio 
held by the Accounts for cash and applying the proceeds to the purchase 
of shares of the Replacement Portfolio. The proposed substitution will 
take place at relative net asset value with no change in the amount of 
any Contract owner's Contract value or death benefit or in the dollar 
value of his or her investment in either of the Accounts. Contract 
owners will not incur any fees or charges as a result of the proposed 
substitution, nor will their rights or the Company's obligations under 
the Contracts be altered in any way. All applicable expenses incurred 
in connection with the proposed substitution, including brokerage 
commissions and legal, accounting, and other fees and expenses, will be 
paid by the Company. In addition, the proposed substitution will not 
impose any tax liability on Contract owners. The proposed substitution 
will not cause the Contract fees and charges currently being paid by 
existing Contract owners to be greater after the proposed substitution 
than before the proposed substitution.
    8. Applicants represent that the proposed substitution will not be 
treated as a transfer of Contract value for the purpose of assessing 
transfer charges or for determining the number of remaining ``free'' 
transfers in a Contract year. The Company will not exercise any right 
it may have under the Contracts to impose additional charges for 
Contract value transfers under the Contracts for a period of at least 
30 days following the proposed substitution. Similarly, from the date 
of the supplements until the date of the proposed substitution, the 
Company will permit Contract owners to make transfers of Contract value 
out of the Replaced Portfolio subaccount to other subaccounts or the 
fixed account without those transfers being treated as transfers for 
purposes of determining the remaining number of transfers permitted in 
the Contract year without a transfer charge. Likewise, for at least 30 
days following the proposed substitution, the Company will permit 
Contract owners affected by the substitution to transfer Contract value 
out of the Replacement Portfolio subaccount to other subaccounts or the 
fixed account without those transfers being treated as transfers for 
purposes of determining the remaining number of transfers permitted in 
the Contract year without a transfer charge.
    9. The Applicants acknowledge that reliance on the exemptive relief 
requested herein, if granted, depends upon compliance with all of the 
representations and conditions set forth in this Application.
    10. The Applicants represent that they will not receive, for three 
years from the date of the substitution, any direct or indirect 
benefits paid by the Replacement Portfolio, its advisors or 
underwriters (or their affiliates), in

[[Page 38416]]

connection with assets attributable to Contracts affected by the 
substitution, at a higher rate than Applicants have received from the 
corresponding Replaced Portfolio, its advisors or underwriters (or 
their affiliates), including, without limitation, Rule 12b-1 fees, 
revenue sharing, or other service fees or arrangements in connection 
with such assets. Applicants represent that the substitution is not 
motivated by any financial consideration paid or to be paid to the 
Company or its affiliates by the Replacement Portfolio, its advisors, 
underwriters, or their respective affiliates.
    11. Applicants represent that the Company is also seeking approval 
of the proposed substitution from any state insurance regulators whose 
approval may be necessary or appropriate.
    12. The Applicants submit that the proposed substitution meets the 
standards set forth in Section 26(c) and assert that the replacement of 
the Existing Fund with the Replacement Fund is consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the 1940 Act.
    Conclusion:
    For the reasons and upon the facts set forth above and in the 
application, the Applicants assert that the requested order meets the 
standards set forth in Section 26(c) of the 1940 Act and should 
therefore, be granted.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-15242 Filed 6-25-13; 8:45 am]
BILLING CODE 8011-01-P