83 FR 62924 - American Fidelity Assurance Company, et al.

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 234 (December 6, 2018)

[Federal Register Volume 83, Number 234 (Thursday, December 6, 2018)]
[Notices]
[Pages 62924-62928]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-26384]


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

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 33309; File No. 812-14822]


American Fidelity Assurance Company, et al.

November 29, 2018.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice.

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

    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'').

APPLICANTS: American Fidelity Assurance Company (the ``Insurance 
Company''), American Fidelity Separate Account B and American Fidelity 
Separate Account C (each, a ``Separate Account'' and together, the 
``Separate Accounts''). Together, the Insurance Company and the 
Separate Accounts are referred to as the ``Applicants.''

SUMMARY OF APPLICATION: Applicants seek an order pursuant to section 
26(c) of the 1940 Act approving the substitution of shares of American 
Funds IS Blue Chip Income and Growth Fund (the ``American Funds Blue 
Chip Fund'') and Dreyfus VIF Opportunistic Small Cap Portfolio (the 
``Dreyfus Small Cap Fund,'' and together with the American Funds Blue 
Chip Fund, the ``Replacement Funds''), respectively, for shares of 
BlackRock Basic Value V.I. Fund (the ``BlackRock Basic Value Fund''), 
and BlackRock Advantage U.S. Total Market V.I. Fund (the ``BlackRock 
Total Market Fund,'' and together with the BlackRock Basic Value Fund, 
the ``Existing Funds''), respectively, held by the Separate Accounts 
(the ``Substitution''), to support the Separate Accounts' variable 
annuity contracts (each, a ``Contract'' and collectively, the 
``Contracts'') that are issued by the Insurance Company.

FILING DATES: The application was filed on September 26, 2017, and 
amended

[[Page 62925]]

on January 31, 2018, March 8, 2018, August 10, 2018 and November 7, 
2018.

HEARING OR NOTIFICATION OF HEARING: An order granting the requested 
relief 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 December 24, 2018, and should be accompanied 
by proof of service on Applicants, in the form of an affidavit or, for 
lawyers, a certificate of service. Pursuant to rule 0-5 under the 1940 
Act, hearing requests should state the nature of the writer's interest, 
any facts bearing upon the desirability of a hearing on the matter, 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 
Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street NE, Washington, DC 20549-1090; Applicants: Christopher T. 
Kenney, General Counsel, American Fidelity Assurance Company, P.O. Box 
73125, Oklahoma City, OK 73125-0523.

FOR FURTHER INFORMATION CONTACT: Asen Parachkevov, Senior Counsel, or 
Andrea Ottomanelli Magovern, Branch Chief, at (202) 551-6821 (Division 
of Investment Management, Chief Counsel's Office).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's website by searching for the file number, or an Applicant 
using the Company name box, at http://www.sec.gov/search/search.htm or 
by calling (202) 551-8090.

Applicants' Representations

    1. The Insurance Company is a stock life insurance company 
incorporated under the laws of Oklahoma. The Insurance Company is a 
wholly-owned subsidiary of American Fidelity Corporation, which is a 
Nevada corporation that is controlled by a family investment 
partnership. The Insurance Company is the depositor of the Separate 
Accounts.
    2. Each of the Separate Accounts is a segregated asset account of 
the Insurance Company, and each Separate Account is registered with the 
Commission under the 1940 Act as a unit investment trust. The Separate 
Accounts are used by the Insurance Company to issue the Contracts. The 
Separate Accounts meet the definition of ``separate account'' contained 
in Section 2(a)(37) of the 1940 Act. The assets of the Separate 
Accounts are held in the Insurance Company's name on behalf of the 
Separate Accounts and legally belong to the Insurance Company.
    3. The Insurance Company established Separate Account B to hold the 
assets that underlie the AFAdvantage[supreg] Variable Annuity 
contracts, and established Separate Account C to hold the assets that 
underlie the AFMaxx[supreg] 457(b) Group Variable Annuity contracts. 
Separate Account B offers individual contracts, and Separate Account C 
offers group contracts. Separate Accounts B and C are divided into 12 
sub-accounts, and each sub-account invests in the securities of a 
single underlying mutual fund.
    4. Interests under the Contracts are registered under the 
Securities Act of 1933 (the ``1933 Act''). The prospectus for each of 
the Contracts contains a provision reserving the Insurance Company's 
right to substitute another eligible investment option for any one of 
the portfolios available under the Contract.\1\ Each Contract permits 
each contract owner or participant in a group account (each, a 
``Contract Owner'') to transfer Contract value from one subaccount to 
another subaccount available under the Contract at any time, subject to 
certain restrictions and charges described in the prospectuses for the 
Contracts. None of the Contract restrictions, limitations or transfer 
fees will apply in connection with the Substitution. The application 
sets forth the registration statement file numbers for the Contracts 
and the Separate Accounts.
---------------------------------------------------------------------------

    \1\ The Replacement Funds were not investment options in the 
Separate Accounts as of the date of the original application; 
however, the Insurance Company added the Dreyfus Small Cap Fund as 
an investment option in each Separate Account on July 31, 2017 and 
added the American Funds Blue Chip Fund as an investment option in 
each Separate Account as of May 1, 2018.
---------------------------------------------------------------------------

    5. The Applicants propose to substitute shares of each of the 
Replacement Funds for shares of the corresponding Existing Fund held by 
the Separate Accounts. The investment adviser for the American Funds 
Blue Chip Fund is Capital Research and Management Company. The 
investment adviser for the Dreyfus VIF Small Cap Fund is the Dreyfus 
Corporation. The Replacement Funds are advised by registered investment 
advisers that are not affiliates of the Applicants. Comparisons of the 
investment objectives, investment strategies, principal risks and past 
performance of the Existing Funds and Replacement Funds are included in 
the application.
    6. Applicants state that they are seeking the Substitution because 
the BlackRock Total Market Fund (f/k/a BlackRock Value Opportunities 
V.I. Fund (the ``BlackRock Value Opportunities Fund'')) made material 
changes to its investment objectives and policies effective in June 
2017. Due to the changes to its investment objectives, the fund is no 
longer categorized as a small cap fund. Additionally, the fund's entire 
portfolio management team was replaced with a new team that has a new 
investment process. As a result of these changes, Separate Account 
investors who originally invested in the BlackRock Value Opportunities 
Fund are now invested in a fund with new investment objectives, a new 
management team and new investment processes. The Applicants are 
seeking the Substitution in order to replace BlackRock Total Market 
Fund with a fund that more closely resembles the original BlackRock 
Value Opportunities Fund in which the Separate Account participants 
originally chose to invest.
    7. The Applicants also are seeking the Substitution to replace 
shares of the BlackRock Basic Value Fund with shares of the American 
Funds Blue Chip Fund. Applicants have an ongoing relationship with 
American Funds, and the Separate Accounts currently offer another 
American Funds product in their portfolio line-up. Applicants prefer to 
build on their existing relationship with American Funds by adding the 
American Funds Blue Chip Fund as the large cap investment option 
offered under the Contracts in place of the BlackRock Basic Value Fund.
    8. The Applicants have analyzed the proposed Substitution and have 
determined that the objectives and strategies of each of the 
Replacement Funds are substantially similar to the objectives and 
strategies of the corresponding Existing Fund, such that the essential 
objectives and risk expectations of those Contract Owners with 
interests in sub-accounts of the Existing Funds will continue to be met 
after the Substitution. Additionally, the total annual expenses of the 
American Funds Blue Chip Fund (0.41%) are less than those of the 
corresponding Existing Fund (0.84%); and the total annual expenses of 
the Dreyfus Small Cap Fund (0.86%) are less than those of the 
corresponding Existing Fund (1.01%). The Substitution of the American 
Funds Blue Chip Fund (0.41%) in place of the BlackRock Basic Value Fund 
(0.73%) will also result in a decreased net expense ratio. Due to 
expense waivers by the BlackRock Total Market Fund,

[[Page 62926]]

however, the Substitution of the Dreyfus Small Cap Fund (0.86%) in 
place of the BlackRock Total Market Fund (0.55% after June 12, 2017; 
0.92% before June 12, 2017) will not result in decreased net expense 
ratios. The application sets forth the fees and expenses of each 
Existing Fund and its corresponding Replacement Fund in greater detail.
    9. Applicants represent that as of the Substitution Date (defined 
below), the Separate Accounts will redeem shares of the Existing 
Portfolios for cash. Redemption requests and purchase orders will be 
placed simultaneously so that Contract values will remain fully 
invested at all times.
    10. Each Substitution will take place at the relative net asset 
values of the respective shares (in accordance with section 22(c) of 
the 1940 Act and rule 22c-1 thereunder) without the imposition of any 
transfer or similar charges by Applicants. The Substitution will be 
effected with no change in the amount or value of any Contract held by 
Contract Owners whose assets are allocated to the Replacement Funds as 
part of the Substitution (the ``Affected Contract Owners'').\2\
---------------------------------------------------------------------------

    \2\ Applicants state that, because the Substitution will occur 
at relative net asset value, and the fees and charges under the 
Contracts will not change as a result of the Substitution, the 
benefits offered by the guarantees under the Contracts will be the 
same immediately before and after the Substitution. Applicants also 
state that what effect the Substitution may have on the value of the 
benefits offered by the Contract guarantees would depend, among 
other things, on the relative future performance of the Existing 
Funds and Replacement Funds, which Applicants cannot predict. 
Nevertheless, Applicants note that at the time of the Substitution, 
the Contracts will offer a comparable variety of investment options 
with as broad a range of risk/return characteristics.
---------------------------------------------------------------------------

    11. The Substitution is designed to provide Contract Owners with 
the ability to continue their investment in a similar investment option 
without interruption and at no additional cost to them. In this regard, 
the Insurance Company has agreed to bear all expenses incurred in 
connection with the Substitution and related filings and notices, 
including legal, accounting, brokerage, and other fees and expenses. 
The Contract values of the Contract Owners impacted by the Substitution 
will not change on the date of the Substitution as a result of the 
Replacement Funds replacing the Existing Funds.
    12. The proposed Substitution will not cause the Contract fees and 
charges currently being paid by Contract Owners to be greater after the 
proposed Substitution than before the proposed Substitution. No 
brokerage commissions, fees or other remuneration will be paid by 
either the Existing Funds or the Replacement Funds or by Contract 
Owners in connection with the Substitution. The terms of the benefits 
available under the Contracts will not change as a result of the 
proposed Substitutions. The Substitution will not result in adverse tax 
consequences to Affected Contract Owners and will not alter any tax 
benefits associated with the Contracts and no tax liability will arise 
for the Affected Contract Owners as a result of the Substitution.
    13. At least 30 days prior to the Substitution Date, Contract 
Owners will be notified, via prospectus supplements, that Applicants 
received or expect to receive Commission approval of the proposed 
Substitution and of the anticipated date of implementation of the 
proposed Substitution (the ``Substitution Date'', and such supplements, 
the ``Pre-Substitution Notice''). Pre-Substitution Notices sent to 
Contract Owners will be filed with the Commission pursuant to rule 
497(e) under the 1933 Act. The Pre-Substitution Notice will advise 
Contract Owners that, for at least 30 days before the Substitution Date 
through at least 30 days after the Substitution Date, (i) Affected 
Contract Owners may make at least one transfer of Contract value from 
the subaccount investing in the respective Existing Fund (before the 
Substitution Date) or the corresponding Replacement Fund (after the 
Substitution Date) to any other available investment option under the 
Contract without charge, and (ii) that, except with respect to market 
timing/short-term trading, the Applicants will not exercise any right 
they may have under the Contracts to impose restrictions on transfers 
between subaccounts under the Contract,. In addition, Affected Contract 
Owners will receive a prospectus for the applicable Replacement Fund at 
least 30 days before the Substitution Date.
    14. In addition to the Pre-Substitution Notices distributed to the 
Contract Owners, within five business days of the Substitution Date, 
Affected Contract Owners will be sent a written confirmation that will 
include: (1) A confirmation that the Substitution was carried out as 
previously notified, (2) a notice reiterating the information set forth 
in the Pre-Substitution Notice, and (3) the values of the Contract 
Owner's positions in the Existing Fund before the Substitution and the 
Replacement Fund after the Substitution.

Legal Analysis

    1. 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 prohibits any depositor or trustee of a 
registered unit investment trust that invests exclusively in the 
securities of a single issuer from substituting the securities of 
another issuer without the approval of the Commission. Section 26(c) 
provides that such approval shall be granted by order from the 
Commission if the evidence establishes that the substitution is 
consistent with the protection of investors and the purposes of the 
1940 Act.
    2. Applicants submit that the Substitution meets the standards set 
forth in section 26(c) and that, if implemented, the Substitution would 
not raise any of the concerns that Congress intended to address when 
the 1940 Act was amended to include this provision. Applicants state 
Substitution of the American Funds Blue Chip Fund in place of the 
BlackRock Basic Value Fund will result in decreased net expense ratios 
for investors in the BlackRock Basic Value Fund. Thus, the Substitution 
protects the Contract Owners who are invested in the BlackRock Basic 
Value Fund by providing a replacement fund that (1) is substantially 
similar to the Existing Fund, and (2) reduces net operating expenses.
    3. Applicants submit that, although the Substitution of the Dreyfus 
Small Cap Fund in place of the BlackRock Total Market Fund will not 
result in decreased net expense ratios because of expense waivers by 
the BlackRock Total Market Fund that were implemented as of June 12, 
2017 when the fund changed its investment strategy from a small cap 
strategy to an all cap strategy, the proposed Substitution will result 
in Contract Owners holding shares of a fund that has investment 
objectives and policies that are substantially similar to the 
corresponding Existing Fund, prior to the investment strategy changes. 
Therefore, the Substitution of the Dreyfus Small Cap Fund in place of 
the BlackRock Total Market Fund is consistent with the protection of 
Contract Owners and the purposes fairly intended by the policy and 
provisions of the 1940 Act and, thus, meets the standards necessary to 
support an order pursuant to Section 26(c) of the 1940 Act.
    4. The Insurance Company has reserved the right under the each of 
the Separate Account's Contracts to substitute shares of another 
underlying mutual fund for one of the current underlying mutual funds 
offered as an investment option under the Contracts. The Contract 
prospectuses disclose this right.

[[Page 62927]]

    5. Applicants submit that the Substitution will provide Contract 
Owners with a comparable investment vehicle which will not circumvent 
Contract Owner-initiated decisions and the Insurance Company's 
obligations under the Contracts, and will enable Contract Owners to 
continue to use the full range of applicable Contract features as they 
currently use them. The Substitution will have no impact on the 
Contract Owners' rights or privileges under the Contracts.
    6. Applicants submit that the proposed Substitution is not the type 
of costly forced redemption that section 26 was designed to prevent. 
The Contracts provide Contract Owners with investment discretion to 
allocate and reallocate their Contract values among the available sub-
accounts that invest in the underlying mutual fund investment options. 
Applicants submit that, after the proposed Substitution, ten investment 
options will be offered under the Separate Account Contracts, and as 
such, the likelihood of a Contract Owner being invested in an undesired 
underlying mutual fund is minimized because the Contract Owners are 
able to select from ten investment options that have a full range of 
investment objectives, investment strategies and managers. Applicants 
further state that the proposed Substitution is designed to provide 
Contract Owners with the foregoing benefits while enabling them to 
continue their investment in a similar investment option without 
interruption and at no additional cost to them.
    7. The proposed transactions will take place at relative net asset 
value in conformity with the requirements of section 22(c) of the 1940 
Act and rule 22c-1 thereunder without the imposition of any transfer or 
similar charges by the Applicants. The Substitution will be effected 
without change in the amount or value of any Contract held by the 
Affected Contract Owners. The Substitution will in no way alter the tax 
treatment of Affected Contract Owners in connection with their 
Contracts, and no tax liability will arise for Affected Contract Owners 
as a result of the Substitution. The Substitution will not result in an 
increase in Contract fees and expenses, including mortality and expense 
risk fees and administration and distribution fees charged by the 
Separate Accounts.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. The Substitution will not be effected unless the Insurance 
Company determines that: (a) The Contracts allow the substitution of 
shares of registered open-end investment companies in the manner 
contemplated by the application; (b) the Substitution can be 
consummated as described in the application under applicable insurance 
laws; and (c) any regulatory requirements in each jurisdiction where 
the Contracts are qualified for sale have been complied with to the 
extent necessary to complete the Substitution.
    2. The Insurance Company or its affiliates will pay all expenses 
and transaction costs of the Substitution, including legal and 
accounting expenses, any applicable brokerage expenses and other fees 
and expenses. No fees or charges will be assessed to the Affected 
Contract Owners to effect the Substitution. The proposed Substitution 
will not cause the Contract fees and charges currently being paid by 
Contract Owners to be greater after the proposed Substitution than 
before the proposed Substitution.
    3. The Substitution will be effected at the relative net asset 
values of the respective shares of the Replacement Funds in conformity 
with section 22(c) of the 1940 Act and rule 22c-1 thereunder without 
the imposition of any transfer or similar charges by Applicants. The 
Substitution will be effected without change in the amount or value of 
any Contracts held by Affected Contract Owners.
    4. The Substitution will in no way alter the tax treatment of 
Affected Contract Owners in connection with their Contracts, and no tax 
liability will arise for Affected Contract Owners as a result of the 
Substitution.
    5. The obligations of the Applicants and the rights of the Affected 
Contract Owners under the Contracts will not be altered in any way. The 
Substitution will not adversely affect any riders under the Contracts.
    6. Affected Contract Owners will be permitted to make at least one 
transfer of Contract value from the subaccount investing in the 
respective Existing Fund (before the Substitution Date) or the 
corresponding Replacement Fund (after the Substitution Date) to any 
other available investment option under the Contract without charge for 
a period beginning at least 30 days before the Substitution Date 
through at least 30 days following the Substitution Date. Except as 
described in any market timing/short-term trading provisions of the 
relevant prospectus, the Applicants will not exercise any right they 
may have under the Contracts to impose restrictions on transfers 
between the subaccounts under the Contracts, including limitations on 
the future number of transfers, for a period beginning at least 30 days 
before the Substitution Date through at least 30 days following the 
Substitution Date.
    7. All Affected Contract Owners will be notified at least 30 days 
before the Substitution Date about: (a) The intended substitution of 
the Existing Funds with the Replacement Funds; (b) the intended 
Substitution Date; and (c) information with respect to transfers as set 
forth in Condition 6 above. In addition, the Applicants will deliver to 
all Affected Contract Owners, at least thirty (30) days before the 
Substitution Date, a prospectus for the applicable Replacement Fund.
    8. The Applicants will deliver to each Affected Contract Owner 
within five (5) business days of the Substitution Date a written 
confirmation which will include: (a) A confirmation that the 
Substitution was carried out as previously notified; (b) a restatement 
of the information set forth in the Pre-Substitution Notice; and (c) 
the values of the Contract Owners' positions in the Existing Funds 
before the Substitution and the Replacement Funds after the 
Substitution.
    9. Applicants and their affiliates will not receive, for three 
years from the Substitution Date, any direct or indirect benefits from 
the Replacement Funds, their investment advisers or underwriters (or 
their affiliates), in connection with assets attributable to Contracts 
affected by the Substitution, at a higher rate than they had received 
from the Existing Funds, their investment advisers or underwriters (or 
their affiliates), including without limitation 12b-1 fees, shareholder 
service, administrative or other service fees, revenue sharing, or 
other arrangements.
    10. Applicants agree that for those Contracts with assets allocated 
to the BlackRock Total Market Fund on the Substitution Date, for a 
period of one year following the Substitution Date, the Insurance 
Company or an affiliate thereof will reimburse, at least as frequently 
as the last business day of each fiscal quarter, the Contract Owners 
whose subaccounts invest in the Dreyfus Small Cap Fund to the extent 
that the Dreyfus Small Cap Fund's net annual operating expenses (taking 
into account fee waivers and expense reimbursements) for such period 
exceed, on an annualized basis, the net annual operating expenses of 
the BlackRock Total Market Fund for the most recent fiscal year 
preceding the date of the most recently filed application. The 
Insurance Company will not increase the Contract fees and charges that 
would otherwise be assessed under the terms of the

[[Page 62928]]

Contracts for a period of at least one year following the Substitution 
Date.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-26384 Filed 12-4-18; 8:45 am]
 BILLING CODE 8011-01-P