SEC Articulates Standards for Relief Under Section 26(c) for Variable Insurance Product Substitution Orders


On December 4, 2020, the SEC granted a substitution order beneath Part 26(c) of the Funding Firm Act of 1940 to Allianz Life Insurance coverage Firm of North America and Allianz Life Insurance coverage Firm of New York, along with their respective separate accounts (collectively, Allianz). Part 26(c) of the 1940 Act prohibits the substitution of shares of mutual funds supplied as an funding choice to variable annuity and variable life insurance coverage contracts with shares of a distinct mutual fund (a Substitution) except the SEC determines that the proof establishes that the Substitution is in step with the safety of buyers and the needs of the 1940 Act.
Following Allianz’s software for a Substitution, a fund firm raised a number of points regarding Allianz’s proposed Substitution, and requested that the SEC contemplate such points in a listening to. The objecting celebration made the next assertions in difficult the appliance for a Substitution order:

  • Prior Substitutions dealt primarily with single-fund Substitutions, as an alternative of “slate-clearing” Substitutions. Accordingly, the SEC ought to analyze the results and hurt of slate-clearing Substitutions in a different way than single-fund Substitutions and require completely different phrases and circumstances for the proposed Substitutions.
  • A Substitution ought to solely be permitted the place affected buyers would demonstrably profit from the modifications.
  • Contract holders and their monetary advisers could incur further bills resulting from contract holders searching for recommendation on the Substitutions.
  • The consequences of the proposed Substitutions on the contractual advantages and ensures of the contracts needs to be thought-about.
  • Contract holders will expertise a lack of economies of scale from the switch of their belongings from the funds being changed (or Goal Funds) to the a lot smaller substitute funds (or Vacation spot Funds).
  • The proposed Substitutions come up from the industrial goals and never from necessity.
  • As an alternative of changing the Goal Funds with the Vacation spot Funds, Allianz ought to add the Vacation spot Funds as further funding choices.
  • The Vacation spot Funds have funding methods which are insufficiently much like the Goal Funds and thus, the Substitutions will adversely have an effect on the funding selections out there to contract holders.
  • After the belongings are transferred from the Goal Funds to the Vacation spot Funds, the remaining shareholders of the Goal Funds could also be adversely affected.

In granting a Substitution order to Allianz, the SEC responded to objecting celebration’s assertions as follows:

  • A slate-clearing Substitution shouldn’t be handled in a different way than a single-fund Substitution, and the SEC has granted related Substitutions prior to now to different candidates. Accordingly, the SEC declined to require completely different phrases or circumstances.
  • Part 26(c) requires {that a} Substitution be in step with the safety of buyers; it doesn’t require a demonstrable profit to buyers, however moderately the absence of hurt.
  • Part 26(c) is anxious with the safety of buyers, not the burden on an investor’s monetary adviser and doesn’t take note of the price of private monetary recommendation that an investor could search. In actual fact, the legislative historical past signifies that the aim of Part 26(c) was to guard shareholders from being topic to a brand new gross sales load.
  • Part 26(c) doesn’t require consideration of the affect on the worth of contract ensures or economies of scale as a result of such evaluation can be speculative, complicated and depend on quite a few assumptions and can be of restricted use in figuring out whether or not a Substitution is in step with the safety of buyers.
  • Part 26(c) doesn’t require distinctive or exigent circumstances to ensure that an insurance coverage firm to interact in a Substitution.
  • Part 26(c) doesn’t require the candidates or the SEC to research different actions to a Substitution.
  • The related variable annuity and variable life insurance coverage contracts provide quite a few funding choices with the understanding that the insurance coverage firm can have the flexibility to make modifications among the many funding choices in applicable circumstances, and such contracts expressly allow Substitutions.
  • The objecting sponsor’s assertion that the Vacation spot Funds will need to have considerably related funding methods to the Goal Funds isn’t a requirement beneath Part 26(c); nevertheless, Allianz agreed to research the comparability of the funds as one of many circumstances to being granted a Substitution order. As well as, the safety of investor selection was not a elementary goal of Part 26(c), however moderately the safety of buyers from incurring sure prices.
  • Consideration of the results {that a} Substitution can have on third-party buyers is inconsistent with the textual content and goal of Part 26(c) and, accordingly, the extension of such a dedication beneath Part 26(c) isn’t required. 

Accordingly, the SEC discovered that the Substitutions have been in step with the safety of buyers and the needs pretty meant by the coverage and provisions of the 1940 Act and granted the Substitution order beneath Part 26(c) to Allianz.
The SEC order is out there here.



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