No-Action Letter under:
Investment Company Act -
Section 26(c)

AIG Life Insurance Company -
American International Life Assurance Company of New York

November 6, 2001

RESPONSE OF THE OFFICE OF INSURANCE PRODUCTS DIVISION OF INVESTMENT MANAGEMENT

AIG Life Insurance Company, et al.

By letter dated July 30, 2001, as supplemented by letter dated November 2, 2001, you request that the staff of the Division of Investment Management advise you that it will not recommend that the Commission take any enforcement action under Section 26(c) of the Investment Company Act of 1940 (the "Act") against AIG Life Insurance Company ("AIG"), with respect to its Variable Account I, or American International Life Assurance Company of New York ("American International"), with respect to its Variable Account A, if AIG and American International proceed with certain transactions without obtaining an order pursuant to Section 26(c) of the Act. The transactions involve replacing a class of fund shares with higher total expenses with a class of shares of the same fund with lower total expenses.

I. Facts

Your July 30 letter states that AIG and American International (collectively, the "Insurance Companies") are the depositors, respectively, of Variable Account I and Variable Account A (collectively, the "Separate Accounts"). Each Separate Account is registered as an investment company under the Act and is a unit investment trust ("UIT"). You state that the Separate Accounts offer various variable annuity contracts, certain of which are funded by the Growth Portfolio (Class B) and the Growth and Income Portfolio (Class B) (each a "Class B Alliance Portfolio") of Alliance Variable Products Series Fund, Inc. (the "Fund") and the Growth Portfolio and the Growth and Income Portfolio (each a "Brinson Portfolio") of Brinson Series Trust (the "Trust").

Your July 30 letter states that, at separate meetings held in July 2001, the Board of Trustees of the Trust and the Board of Directors of the Fund voted to approve an agreement and plan of reorganization, pursuant to which the Growth Portfolio (Class A) and the Growth and Income Portfolio (Class A) of the Fund (each, a "Class A Alliance Portfolio") would acquire substantially all the assets and stated liabilities of the corresponding Brinson Portfolio in exchange for shares of the Class A Alliance Portfolios (the "Reorganization"). Your November 2 letter further states that the Brinson Portfolio shareholders approved the Reorganization at a meeting held on Thursday, October 25, 2001, and that the Reorganization took place on Friday, October 26, 2001.

You state that, upon consummation of the Reorganization, contracts that previously were funded by shares of a Brinson Portfolio will be funded by shares of the corresponding Class A Alliance Portfolio. You also state that, as an immediate result of the Reorganization, some contracts will be funded by shares of the Class A Alliance Portfolios and some contracts will be funded by shares of the Class B Alliance Portfolios. In addition, you state that the same contract may hold both Class A and Class B shares.

You represent that the substantive difference between the Class A Alliance Portfolios and the Class B Alliance Portfolios is that the latter have each adopted a plan of distribution pursuant to rule 12b-1 under the Act (a "12b-1 Plan"). Each 12b-1 Plan provides that a Class B Alliance Portfolio may pay asset-based sales charges for the distribution and sale of its shares in the amount of 0.25% of the Class B Alliance Portfolio's average daily net assets. You also represent that, in addition to the difference attributable to the 12b-1 Plans, the Class B Alliance Portfolios' other expenses are one to two basis points higher than those of the Class A Alliance Portfolios.

You state that, in view of the fact that shares of the Class A Alliance Portfolios will become available under the contracts as a result of the Reorganization, the Insurance Companies desire to give contract owners with assets currently allocated to the Class B Alliance Portfolios the benefit of lower fees. You also state that the Insurance Companies seek to avoid any confusion and administrative difficulty that may arise as a result of having two different classes of the same portfolio funding a contract. Therefore, the Insurance Companies propose to replace shares of the Class B Alliance Portfolios with shares of the Class A Alliance Portfolios.

You represent that the result of the transactions will be that, immediately after they occur, owners of contracts with account values allocated to the Class B Alliance Portfolios will have the exact same investment medium and the exact same account values, but with an investment vehicle that is at least 25 basis points less expensive because the Class A Alliance Portfolios do not have a rule 12b-1 fee. You also represent that neither the Class A Alliance Portfolios nor the Class B Alliance Portfolios have a front-end sales load, back-end sales load, or redemption fees. You state that there will be no adverse effect on any of the contract owners who have allocated contributions to the Separate Accounts or to the Class B Alliance Portfolios.

II. Analysis

Section 26 (c) of the 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. 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 policy and provisions of [the Act].

Prior to the enactment of Section 26(c), Section 26(a)(4)(B) of the Act required that the trust instrument of a unit investment trust provide that the sponsor or trustee notify the trust's shareholders within five days after a substitution of underlying securities. According to the legislative history of Section 26(c), Congress was concerned that, in the case of a unit investment trust holding the securities of a single issuer, notice of a substitution does not provide adequate protection to investors, since the only relief available to the shareholders, if dissatisfied, would be to redeem their shares. A shareholder who redeems and reinvests the proceeds in another unit investment trust or in an open-end company would under most circumstances be subject to a new sales load. The proposed amendment would close this gap in shareholder protection by providing for Commission approval of the substitution.¹

You argue that the proposed transactions do not involve any of the abuses that Section 26(c) was designed to prevent. You state that contract owners will have their account value managed by the same investment adviser according to the same investment objectives and policies and for the same investment advisory fees as before the transaction. You represent that the only difference is that overall expenses in connection with the contract will be reduced because Class A Alliance Portfolio shares are not subject to a rule 12b-1 fee.

We agree that the proposed transactions do not involve any of the abuses that Section 26 (c) was designed to prevent. The effect of the transactions is to give contract owners an investment in the same fund managed by the same investment adviser at lower cost.

Based on the facts and representations set forth in your letter, and without necessarily agreeing with your legal analysis, we would not recommend enforcement action under Section 26(c) of the Act against the Insurance Companies if they proceed with the replacement of shares of Class B Alliance Portfolios with shares of Class A Alliance Portfolios without obtaining an order of approval from the Commission. Because our position is based on the facts and representations set forth in your letter, you should note that different facts or representations may require a different conclusion.

Zandra Y. Bailes
Senior Counsel

Footnote

1	S. Rep. No. 184, 91st Cong., 1st Sess. 41 (1969).

Incoming Letters

Michael Berenson
(202) 467-7450
mberenson@morganlewis.com

November 2, 2001

VIA HAND DELIVERY AND FACSIMILE

William J. Kotapish, Esq.
Assistant Director
Office of Insurance Products
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0506

Re: AIG Life Insurance Company
American International Life Assurance Company of New York

Dear Mr. Kotapish:

Pursuant to our telephone conversation today, this letter supplements our July 30, 2001 no-action letter request. In that letter, we requested that the Staff of the Division of Investment Management advise us that it will not recommend that the Securities and Exchange Commission take any enforcement action under Section 26(c) of the Investment Company Act of 1940 (the "Act") against AIG Life Insurance Company, with respect to its Variable Account I, or American International Life Assurance Company of New York, with respect to its Variable Account A, if the Insurance Companies proceed with the substitutions described in that letter without obtaining an order pursuant to Section 26(c) of the Act. The substitutions involve replacing a class of fund shares with higher total expenses with a class of shares of the same fund with lower total expenses.

You have asked us to update certain information included in the July 30 letter and to provide additional information with respect to the mutual funds involved in the proposed substitutions. The capitalized terms used in this supplement are defined in the July 30 letter.

The meeting of Brinson Portfolio shareholders took place on Thursday, October 25, 2001, and the Reorganization was approved by shareholders at that meeting. The Reorganization took place on Friday, October 26, 2001. The Insurance Companies have not yet engaged in the substitutions pending the Staff's response to our no-action letter request. We confirm that neither the Class A Alliance Portfolios nor the Class B Alliance Portfolios involved in the proposed substitutions have a front-end sales load, back-end sales load, or redemption fees.

We believe that this supplement is responsive to your questions. For all the reasons set forth in the July 30 no-action letter request, we respectfully request that the Staff of the Division of Investment Management advise us that it will not recommend that the Commission take enforcement action against the Insurance Companies if they proceed with the proposed substitutions.

We appreciate your attention to this matter. If you have any questions or need any additional information, please call me at (202) 467-7450 or my colleague, Magda El Guindi-Rosenbaum, at (202) 467-7778.

Sincerely yours,

Michael Berenson

cc: Kenneth F. Judkowitz, Esq.
Robert B. Saginaw, Esq.

MB:ll

Michael Berenson
(202) 467-7450
mberenson@morganlewis.com

July 30, 2001

VIA HAND DELIVERY AND FACSIMILE

William J. Kotapish, Esq.
Assistant Director
Office of Insurance Products
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0506

Re: AIG Life Insurance Company
American International Life Assurance Company of New York

Dear Mr. Kotapish:

We are writing to request that the Staff of the Division of Investment Management advise us that it will not recommend that the Securities and Exchange Commission (the "Commission") take any enforcement action under Section 26(c) of the Investment Company Act of 1940 (the "Act") (Section 26(b) prior to May 12, 2001) against AIG Life Insurance Company, with respect to its Variable Account I, or American International Life Assurance Company of New York, with respect to its Variable Account A,¹ if the Insurance Companies proceed with the substitutions described below without obtaining an order pursuant to Section 26(c) of the Act. The substitutions involve replacing a class of fund shares with higher total expenses with a class of shares of the same fund with lower total expenses.

Background

Each Separate Account is registered as an investment company under the Act and is a unit investment trust ("UIT"). Each Insurance Company is the depositor for its Separate Account. The Separate Accounts offer various variable annuity contracts, certain of which are funded by several separate series of both Brinson Series Trust (formerly, Mitchell Hutchins Series Trust) (the "Trust") and Alliance Variable Products Series Fund, Inc. (the "Fund"). As here relevant, the Growth Portfolio and the Growth and Income Portfolio of the Trust (each, a "Brinson Portfolio") and the Growth Portfolio (Class B) and the Growth and Income Portfolio (Class B) of the Fund (each, a "Class B Alliance Portfolio") presently serve as investment options for certain contracts (the "Contracts").²

At separate meetings held in July, 2001, the Board of Trustees of the Trust and the Board of Directors of the Fund voted to approve an agreement and plan of reorganization pursuant to which, as here relevant, the Growth Portfolio (Class A) and the Growth and Income Portfolio (Class A) of the Fund (each, a "Class A Alliance Portfolio") will acquire substantially all the assets and stated liabilities of the corresponding Brinson Portfolio in exchange for shares of the Class A Alliance Portfolios (the "Reorganization").³ The Reorganization was proposed by Brinson Advisors, Inc., the Brinson Portfolios' investment manager, because the Brinson Portfolios had not been increasing their assets and, thus, their expense ratios were quite high.⁴ The Reorganization would provide shareholders with an equal investment opportunity due to the fact that (1) the investment objective, policies, and restrictions of each Brinson Portfolio are substantially similar to those of the corresponding Class A Alliance Portfolio and (2) each of the relevant portfolios already is advised by Alliance Capital Management L.P. It is anticipated that each combined portfolio will have a larger asset base to invest, which should provide greater opportunities for diversifying investments and realizing economies of scale.

The Trustees of the Trust have determined that the Reorganization will be in the best interests of shareholders of the Brinson Portfolios and that neither shareholders' interests nor the interests of owners of the Contracts will be diluted as a result of the Reorganization. Having unanimously approved the Reorganization, the Trustees of the Trust will recommend that shareholders of each Brinson Portfolio vote to approve the Reorganization.⁵ It is anticipated that the shareholder meeting will occur on or about October 9, 2001. Assuming shareholder approval is obtained, Contracts that previously were funded by shares of the Brinson Portfolios will be funded by shares of the corresponding Class A Alliance Portfolios immediately upon consummation of the Reorganization.⁶

As an immediate result of the Reorganization, some Contracts will be funded by shares of the Class A Alliance Portfolios and some Contracts will be funded by shares of the Class B Alliance Portfolios. Indeed, the same Contract may hold both Class A and Class B shares. The substantive difference between the Class A Alliance Portfolios and the Class B Alliance Portfolios is that the latter have each adopted a plan of distribution pursuant to Rule 12b-1 under the Act (the "12b-1 Plan"). Each 12b-1 Plan provides, in substance, that the Class B Alliance Portfolios may pay asset-based sales charges for the distribution and sale of their shares. The amount of these charges as a percentage of each Class B Alliance Portfolio's average daily net assets is 0.25%. In addition to the 12b-1 Plans, the Class B Alliance Portfolios' "Other Expenses," as shown below, are one to two basis points higher than those of the Class A Alliance Portfolios.

As of December 31, 2000, the expenses of each Class A Alliance Portfolio and each Class B Alliance Portfolio were as follows:

Alliance Growth Portfolio

	Class A	Class B
Management Fee	0.75%	0.75%
12b-1 Fee	0.00%	0.25%
Other Expenses	0.06%	0.08%
Total	0.81%	1.08%

Alliance Growth and Income Portfolio

	Class A	Class B
Management Fee	0.63%	0.63%
12b-1 Fee	0.00%	0.25%
Other Expenses	0.06%	0.07%
Total	0.69%	0.95%

As previously stated, shares of the Class B Alliance Portfolios presently serve as investment options under the Contract. In view of the fact that shares of the Class A Alliance Portfolios will become available under the Contract as a result of the Reorganization, the Insurance Companies desire to give contract owners with assets currently allocated to the Class B Alliance Portfolios the benefit of lower fees. In addition, the Insurance Companies seek to avoid any confusion and administrative difficulty that may arise as a result of having two different classes of the same portfolio funding the Contract. Accordingly, the Insurance Companies propose to exchange shares of the Class B Alliance Portfolios for shares of the Class A Alliance Portfolios immediately after the Reorganization is effected.

The result of the substitutions will be that immediately after they occur, owners of Contracts with account values currently allocated to the Class B Alliance Portfolios will have the exact same investment medium and the exact same account values, but with an investment vehicle that is at least 25 basis points less expensive because it does not charge a Rule 12b-1 fee. There will be no adverse effect on any of the contract owners who have allocated contributions to the Separate Accounts or to the Class B Alliance Portfolios. In fact, for periods following the substitutions, less of a contract owner's premium dollar will be used to pay expenses. For the reasons described more fully below, the Insurance Companies do not believe that the proposed substitutions should require a Commission order pursuant to Section 26(c).

Analysis

Section 26(c) of the Act makes it unlawful for any depositor or trustee of a registered UIT holding the security of a single issuer to substitute another security for such security unless the Commission approves the substitution. The Commission will approve such a substitution if the evidence establishes that it is consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act.

Section 26(c) of the Act was enacted as part of the Investment Company Act Amendments of 1970 ("1970 Amendments"). Prior to the enactment of the 1970 Amendments, Section 26(a)(4)(B) of the Act only required that the trust instrument of a UIT provide that the sponsor or trustee notify the trust's shareholders within five (5) days after a substitution of the underlying securities. The legislative history of Section 26(c) describes the underlying purpose of the amendment to the section:

The proposed amendment recognizes that in the case of a unit investment trust holding the securities of a single issuer notification to shareholders does not provide adequate protection since the only relief available to the shareholders, if dissatisfied, would be to redeem their shares. A shareholder who redeems and reinvests the proceeds in another unit investment trust or in an open-end company would under most circumstances be subject to a new sales load. The proposed amendment would close this gap in shareholder protection by providing for Commission approval of the substitution. The Commission would be required to issue an order approving the substitution if it finds the substitution consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act.⁷

The legislative history makes clear that the purpose of Section 26(c) is to protect the expectation of investors in a UIT that the UIT will accumulate shares of a particular issuer by preventing unscrutinized substitutions that might, in effect, force shareholders dissatisfied with the substituted security to redeem their shares, thereby possibly incurring a loss of the sales load deducted from initial premium payments, an additional sales load upon reinvestment of the redemption proceeds, or both.⁸ The proposed substitutions do not involve any of the abuses that Section 26(c) was designed to prevent. Contract owners have their account value managed by the same investment adviser according to the same investment objectives and policies and for the same investment advisory fees as before the transaction. The only difference is that their overall expenses in connection with the Contract will be reduced because Class A Alliance Portfolio shares are not subject to a Rule 12b-1 fee.

In addition to there being no policy reason in support of the position that these transactions require an application to be filed pursuant to Section 26(c), there are relevant no-action letters that support granting the no-action assurances the Insurance Companies are seeking. On various occasions, the Staff of the Division of Investment Management has been presented with circumstances in which variable product contract owners had the right to vote on transactions that unquestionably resulted in share substitutions and the Staff granted no-action assurances based on the fact that such owners would have the right to vote on the transactions that resulted in the substitutions.⁹

Thus, the Staff has taken the position in the context of an enforcement no-action letter that in certain circumstances a favorable shareholder vote can take the place of a Commission order issued pursuant to Section 26(c). The Staff has also taken the position that it will not require compliance with the Act's voting requirements applicable to a fund's advisory agreement with its investment adviser in circumstances in which the only change in the advisory agreement was the reduction of the percentage advisory fee being charged.¹⁰ The Staff reasoned that shareholders always would approve a proposed advisory contract amendment that had no effect other than to reduce the percentage fee and that requiring a shareholder vote would result in the fund bearing unnecessary expenses and a delay in implementing the advisory fee reduction.

Under the current circumstances, we are presented with a situation in which it can similarly be assumed that owners of Contracts with account value allocated to the Class B Alliance Portfolios would have voted to approve the substitution of their shares for shares of the Class A Alliance Portfolios, if they had had the opportunity to do so. Given that the Staff has permitted a shareholder vote to take the place of a Section 26(c) order and that the Staff has not required a shareholder vote on an advisory agreement in circumstances where the Staff believes that shareholders would always approve the advisory agreement, we do not believe that what is in effect an unobjectionable exchange of shares should require filing of a Section 26(c) application.

Conclusion

For all the reasons set forth above, we respectfully request that the Staff of the Division of Investment Management advise us that it will not recommend that the Commission take enforcement action against the Insurance Companies if they proceed with the substitutions described above, the end result of which will be that the relevant subaccounts of the Separate Accounts will hold Class A Alliance Portfolio shares with no Rule 12b-1 fees. We appreciate your attention to this matter. If you have any questions or need any additional information, please call me at (202) 467-7450 or my colleague, Magda El Guindi-Rosenbaum, at (202) 467-7778.

Sincerely yours,

Michael Berenson

cc: Kenneth F. Judkowitz, Esq.
Robert B. Saginaw, Esq.

Footnotes

1	AIG Life Insurance Company and American International Life Assurance Company of New York are together referred to herein as the "Insurance Companies." Variable Account I (File No. 811-5301) and Variable Account A (File No. 811-4865) are together referred to herein as the "Separate Accounts."
2	Alliance Capital Management, L.P. serves as the subadviser to the Brinson Portfolios and as the investment adviser to the Class A and Class B shares of the Alliance Portfolios.
3	A registration statement/proxy statement on Form N-14 relating to the Reorganization was filed with the Commission on July 27, 2001.
4	As of December 31, 2000, the total annual operating expenses for the Brinson Portfolios were 1.11% for the Growth Portfolio and 1.14% for the Growth and Income Portfolio.
5	In accordance with applicable state law, shareholders of the corresponding Class A Alliance Portfolios are not being asked to approve the Reorganization.
6	The Insurance Companies are not seeking no-action assurances with respect to the Reorganization. See footnote 9 infra and accompanying text.
7	S.Rep. No. 91-184 (1969), at 41; reprinted in 1970 U.S.C.C.A.N. 4897, 4936.
8	House Comm. On Interstate and Foreign Commerce, Report of the Securities and Exchange Commission on the Public Policy Implications of Investment Company Growth, H.R. Rep. No. 2337, 89th Cong. 2d Sess. 337 (1966).
9	See, e.g., Northwestern National Life Ins. Co. (pub. avail. April 10, 1995); Bankers Security Life Ins. Society (pub. avail. July 11, 1991); and Northwestern National Life Ins. Co. (pub. avail. April 27, 1990).
10	See Limited Term Municipal Fund (pub. avail. November 17, 1992).

http://www.sec.gov/divisions/investment/noaction/aig-american110601.htm