No-Action Letter under:
Investment Company Act -
Section 8 and 11

Aid Association for Lutherans/Lutheran Brotherhood

December 21, 2001

RESPONSE OF THE OFFICE OF INSURANCE PRODUCTS DIVISION OF INVESTMENT MANAGEMENT

Aid Association for Lutherans Lutheran Brotherhood

Based on the facts and representations in your letters dated August 29, 2001, and December 21, 2001, and without necessarily agreeing with your legal analysis, we would not recommend enforcement action to the Commission against Aid Association for Lutherans ("AAL") or Lutheran Brotherhood ("LB") under Section 5 of the Securities Act of 1933 (the "1933 Act"), and Rule 145 thereunder, or Sections 8 and 11 of the Investment Company Act of 1940 (the "1940 Act"), if LB transfers its separate accounts (the "LB Separate Accounts") to AAL in connection with the proposed merger of AAL and LB (the "Merger"). In addition, we would not recommend enforcement action to the Commission if: (1) the change in depositor for the LB Separate Accounts as a result of the Merger is effected through the filing of an amendment to the registration statements under the 1940 Act for the LB Separate Accounts; and (2) new registration statements under the 1933 Act are filed by AAL and the LB Separate Accounts to cover any securities issued after the Merger in connection with the variable annuity contracts and variable life insurance policies funded by the LB Separate Accounts.

We also would not recommend enforcement action to the Commission against AAL if, after consummation of the Merger, it continues to rely on the exemptive order cited in your August 29, 2001 letter and obtained on behalf of LB, LB Series Fund, and other parties named therein, without filing an amended or new application for the same relief.

Because our position is based on the facts and representations in your letter, you should note that different facts or representations may require a different conclusion. Further, this response expresses the position of the Division on enforcement only, and does not purport to express any legal conclusions on the issues presented.

Mark A. Cowan
Senior Counsel

Incoming Letters

STEPHEN E. ROTH
DIRECT LINE: 202.383.0158
Internet: sroth@sablaw.com

August 29, 2001

Securities Act of 1933, Section 5 and Rule 145
Investment Company Act of 1940, Sections 8 and 11

VIA MESSENGER

William J. Kotapish
Assistant Director
Mail Stop 0506
Division of Investment Management
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20459

Re:

Aid Association for Lutherans and Lutheran Brotherhood

Dear Mr. Kotapish:

We are writing on behalf of Aid Association for Lutherans ("AAL"), and Lutheran Brotherhood ("LB") to request that the staff advise us that it would not recommend that the Securities and Exchange Commission (the "Commission") take any enforcement action against AAL and LB under Section 5 of the Securities Act of 1933, as amended (the "1933 Act"), and Rule 145 thereunder, and Sections 8 and 11 of the Investment Company Act of 1940, as amended (the "1940 Act"), if LB transfers its separate accounts, each registered under the 1940 Act as a unit investment trust, to AAL (the "Transfers") in connection with the proposed merger of LB and AAL (the "Merger"), as described below (the Merger, the Transfers, and any related transactions are referred to collectively as the "Merger").

I. BACKGROUND

A. Description of AAL and LB

AAL and LB are fraternal benefit societies which provide insurance and other services to their members. Insurance operations represent the principal commercial activities of each company, and each company is licensed to sell insurance and annuity contracts in all 50 states and the District of Columbia. As fraternal benefit societies, AAL and LB serve their members throughout the country with educational and volunteer opportunities and charitable outreach. The merger of these companies will form a combined organization which has as its objectives offering a wide array of products and services to Lutherans and others. As of December 31, 2000, AAL had total consolidated assets of $22.11 billion and surplus in excess of 2.62 billion, and LB had total consolidated assets of over $22.72 billion and surplus in excess of $2.45 billion.

AAL currently has over 1.8 million members nationwide and LB has over 1.2 million members nationwide. Generally, a person becomes a member of either AAL or LB by the purchase of a benefit contract (i.e., a fixed or variable life insurance or annuity contract). Each benefit contract owner ("member") is entitled to one vote in the election of the members of the supreme governing body of AAL or LB, respectively. The supreme governing body of AAL is its Board of Directors, and the supreme governing body of LB is its General Convention.

B. AAL Variable Annuity and Variable Life Accounts

AAL currently has three registered separate accounts (collectively, the "AAL Accounts"): AAL Variable Life Account I, which funds a variable universal life insurance contract issued by AAL, AAL Variable Annuity Account I, which funds a variable annuity contract issued by AAL and AAL Variable Annuity Account II, which funds a different variable annuity contract issued by AAL. (The AAL variable life insurance contract and the AAL variable annuity contracts are referred to collectively as "AAL Contracts.") The AAL Accounts are separate accounts created pursuant to Wisconsin insurance law and are each registered as unit investment trusts with the Commission under the 1940 Act, and the AAL Contracts supported by the AAL Accounts are registered as securities with the Commission under the 1933 Act. ¹ The AAL Accounts consist of subaccounts, each investing exclusively in shares of a corresponding investment portfolio of The AAL Variable Products Series Fund, Inc., an open-end, diversified management investment company registered under the 1940 Act.

C. LB Variable Annuity and Variable Life Accounts and the LB Contracts

LB currently has two registered separate accounts (collectively, the "LB Accounts"): LB Variable Insurance Account I ("LB Life Account"), which funds a variable universal life insurance contract issued by LB ("LB Life Contract"), and LB Variable Annuity Account I ("LB VA Account"), which funds a variable annuity contract issued by LB ("LB Variable Annuity Contract"). (The LB Life Contract and the LB Variable Annuity Contract are referred to collectively as "LB Contracts.") The LB Accounts are separate accounts created pursuant to Minnesota insurance law and are each registered as unit investment trusts with the Commission under the 1940 Act, and the LB Contracts supported by the LB Accounts are registered as securities with the Commission under the 1933 Act. ² The LB Accounts consist of subaccounts, each investing exclusively in shares of a corresponding investment portfolio of LB Series Fund, Inc. ("LB Series Fund"), an open-end, diversified management investment company registered under the 1940 Act.

The LB Contracts permit additional payments and allow transfers among subaccounts, subject to certain conditions. The LB Contracts also offer a general account option, which is not registered with the Commission in reliance on certain exemptive and exclusionary provisions in the federal securities laws. Lutheran Brotherhood Securities Corp. ("LBSC"), a wholly-owned subsidiary of LB, is the principal underwriter for the LB Contracts. LBSC is an "affiliated person" (as that term is defined in Section 2(a)(3) of the 1940 Act) of LB.

II. THE PROPOSED TRANSACTION

A. The Proposed Merger

In order to achieve certain business objectives, AAL and LB (collectively, the "Companies") have entered into an agreement dated June 27, 2001 (the "Merger Agreement"), under which LB will merge with and into AAL, leaving AAL which will be renamed following the Merger, as the surviving company. The Merger Agreement, which provides for the Transfers and related transactions, has received preliminary approval from the Boards of Directors of AAL and LB and is subject to approval from several governmental agencies and certain other conditions. Among those conditions, the supreme governing body of each company must grant final approval. The Merger is expected to close on or before December 31, 2001. Each member of LB would thereafter be a member of AAL by operation of law. The Merger Agreement would not affect the current AAL members, including those owning AAL Contracts ("AAL Contract owners").

The AAL Accounts and the LB Accounts (collectively, the "Accounts") are not parties to the Merger Agreement, which was entered into by their depositors. As a result of the Merger, the Accounts, which are registered under the 1940 Act, will continue to maintain their separate account status as unit investment trusts under the 1940 Act and as separate accounts under applicable state insurance law. The Accounts will not be merged into one another. The only change resulting from the Merger by operation of law is that the assets of the LB Accounts subsequently will be owned by AAL; the LB Accounts themselves will not change. That is, upon the effective date of the Merger (the "Effective Date"), the transferred LB Accounts, in effect, will become new separate accounts of AAL; AAL will assume legal ownership of all of the assets of the LB Accounts; AAL will become responsible for LB's liabilities and obligations with respect to the LB Contracts then outstanding; and the assets and liabilities which comprised each LB Account immediately prior to the Merger will remain intact and legally separate from any other business of AAL, as the surviving company, after the Merger.

The AAL Contracts issued prior to the Effective Date will continue to be funded by the segregated assets held in the AAL Accounts. The Merger will not affect the provisions of, and the rights and obligations under, the AAL Contracts. Moreover, the Merger will not dilute or otherwise adversely affect the economic interests of AAL Contract owners in connection with the AAL Accounts. The net asset value per unit of interest in the AAL Accounts in effect immediately after the Merger will be identical to the net asset value in effect immediately prior to the Merger.

The LB Contracts issued by LB prior to the Effective Date will continue to be funded by the segregated assets held in the LB Accounts formerly owned by LB. The Merger will not affect the provisions of, and the rights and obligations under, the LB Contracts. Moreover, the Merger will not dilute or otherwise adversely affect the economic interests of LB members who own LB Contracts ("LB Contract owners"). As a result of the Merger, the transferred LB Contracts will become variable contracts supported by a separate account of AAL. Each transferred LB Account will continue to support the LB Contracts outstanding at the time the Transfers are effected and to receive additional payments made under the LB Contracts to the extent allocated to that LB Account. Each transferred LB Account also will support any variable contracts issued thereafter through the LB Account as a separate account of AAL.

The Transfers will have the effect of AAL replacing LB as the depositor for the transferred LB Accounts. No charges will be imposed or other deductions made in connection with the Transfers. The Transfers also will not affect the net asset value of any subaccount of the LB Accounts; the net asset value per unit of interest for the subaccounts of the LB Accounts in effect immediately after the Transfers will be identical to the net asset value per unit of interest in effect immediately prior to the Transfers. The only change will be the assumption of liabilities under the LB Contracts by AAL, as the surviving company, and that the LB Contract owners will be owners of AAL Contracts by operation of law. All costs of the Transfers will be borne by AAL and LB and not by the AAL Contract owners and the LB Contract owners (collectively, the "Contract owners").

In order to reflect the change of sponsorship of the LB Accounts, a new registration statement under the 1933 Act for each of the currently-registered LB Contracts will be filed to ensure that the new registration statement will become effective on or immediately following the Effective Date. The registration statements will include financial statements reflecting consummation of the Merger and reflect AAL's sponsorship of the LB Accounts as a result of the Merger, but will retain the historical financial information of the LB Accounts. The prospectus information included in the new registration statement will be sent to LB Contract owners.

Except for the succession of AAL to LB's obligations and liabilities arising under the LB Contracts, the Transfers will not affect the provisions of, or rights and obligations under, the LB Contracts, nor will the Transfers affect the values determined under the LB Contracts. No new investment options will be made available to LB Contract owners in connection with, or by virtue of, the Transfers, nor will any existing investment options be substituted or terminated. Each LB Account subaccount will continue to invest in the same underlying Portfolio of LB Series Fund in which that subaccount invested prior to the Merger. No payments will be required or charges imposed under the LB Contracts in connection with, or by virtue of, the Transfers that would not otherwise be required or imposed.³ Finally, the succession of AAL to LB's obligations and liabilities under the LB Contracts will not dilute or otherwise adversely affect the economic interests of the LB Contract owners.

After the Transfers, AAL intends to accept additional payments under the transferred LB Contracts outstanding at the time the Transfers are effected and to continue offering new contracts through the LB Accounts identical to the LB Contracts currently being offered, but for the change in depositor. Payments so accepted and new contracts so offered will be covered by the new registration statements to be filed with the Commission under the 1933 Act in connection with the Transfers. Payments will not be accepted, and no offers will be made, until the new registration statements filed with the Commission are effective. AAL in the future may register other variable contracts to be offered through the LB Accounts or other separate accounts.

It is contemplated that, immediately following the Merger, there will be no change in LBSC and its service as the principal underwriter of the LB Contracts.

LB acts as the investment adviser for LB Series Fund. The consummation of the Merger may be deemed to result in an "assignment" of the investment advisory agreements for purposes of the 1940 Act and the Investment Advisers Act of 1940. Accordingly, in order to ensure that an investment advisory agreement is in effect on the Effective Date, the Companies intend to execute a new investment advisory agreement between AAL and LB Series Fund pursuant to Rule 15a-4 of the 1940 Act, which will be presented to the LB Series Fund Board of Directors and, if approved, will require shareholder ratification.

III. ANALYSIS

A. Introduction

As discussed more fully below, it is our view, with regard to the proposed Merger (including the proposed Transfers of the LB Accounts from LB to AAL), that: (1) Section 5 of the 1933 Act and Rule 145 thereunder are inapplicable to the Merger, and no registration statements on Form N-14 are required; (2) Section 11 of the 1940 Act is inapplicable to the Merger, but if Section 11 is viewed as applicable to the Merger transactions, the transactions would comply with the conditions of Section 11(a) of the 1940 Act, and Rule 11a-2 thereunder; and (3) Section 8 of the 1940 Act is inapplicable to the Merger. Neither AAL nor LB seeks no-action reassurance under Section 17(a) or Section 17(d) of the 1940 Act with respect to the Transfers.⁴

In support of our views, we note that the proposed Merger is analytically the same as numerous reorganizations that have been the subject of previous no-action requests, seeking substantially identical relief from the provisions of the 1933 Act and 1940 Act noted above, to which the staff responded favorably and which deal with stock and mutual life insurance companies involved in mergers where one or both of such companies issued variable insurance products.⁵ We are aware of no previous fraternal benefit society merger raising the issue presented in this no-action request. Therefore, this no-action request is novel in terms of AAL and LB being fraternal benefit societies. Nonetheless, we believe the proposed Merger poses no different issues than those present in these previous transactions.⁶

B. Section 5 of the 1933 Act and Rule 145 Thereunder are Inapplicable to the Transfers

It is our view that the succession of AAL to the position of depositor of the LB Accounts and co-issuer of the LB Contracts pursuant to the Transfers and any related transactions, would not result in the offer or sale of any new or different security or in the creation of a new or different investment company issuer for purposes of Section 5 of the 1933 Act or Rule 145 thereunder. Rule 145, an interpretive rule adopted by the Commission, provides guidance on when certain corporate reorganizations may entail the offer or sale of a new security in exchange for outstanding securities of a corporation involved in the reorganization.⁷

Similar to the facts in previously-issued no-action letters,⁸ the terms of the Merger Agreement will not result in any material change to the LB Contracts, except that, by operation of law, the identity of the sponsor/depositor will be different. These previously-issued no-action letters involve circumstances substantially similar to those presented above: two insurance companies merging where one or both of the companies have variable contracts outstanding. Each of the previously-issued no-action letters indicates that, just as in this case, the assets and liabilities which comprised the separate account remained intact after the merger, and were legally segregated from the other business of the surviving life insurance company.

In this case, each of the LB Accounts will remain intact after the Merger and the assets of each of the transferred LB Accounts will be legally segregated from all other assets of the depositor and will not be combined with those of any other separate account or other entity. The transferred LB Contracts would continue to provide Contract owners with the same rights and benefits after the proposed Merger as before, including surrender rights, loan privileges, annuity options and death benefits. In addition, the LB Contracts would continue to be funded by the transferred LB Accounts (albeit under a new name) investing in the same underlying investment vehicles as are currently available under the LB Contracts. The financial history of the transferred LB Accounts would be carried forward, and, with the exception of the assumption of liabilities by AAL (which would be reflected by filing an amendment to each registration statement of an LB Account under the 1940 Act), would not change. Furthermore, the assumption of the insurance guarantees under the LB Contracts by AAL by operation of state law would not affect those aspects of the Contracts that caused them to be treated as securities (i.e., the variable nature of the benefits under the LB Contracts, which benefits will continue to be based on the same pool of assets).⁹

As discussed above, the Merger is not subject, by either state law or federal securities law, to the vote or consent of the Contract owners of either of the Companies. In the case of AAL, its Board of Directors, as supreme governing body, will vote on final approval of the Merger, and delegates to LB's General Convention, LB's supreme governing body, will vote on the merger. There is no material change to the security aspect of the LB Contracts issued by LB and no new or different investment options will be made available to the Contract owners as a result of the Merger; the only changes involved are the change in the depositor of the transferred LB and the assumption of existing LB Contracts by AAL. Since there will be no vote of the Contract owners relating to a new investment decision, or otherwise, Rule 145 does not apply for the same reasons set forth in the foregoing no-action letters.¹⁰ Based on the foregoing, we have concluded that neither Section 5 of the 1933 Act nor Rule 145 thereunder is applicable to the proposed Merger, including the Transfers and any related transactions.

Moreover, with respect to registration statements under the 1933 Act, we believe that no registration statement on Form N-14 would be required to be filed in connection with the Transfers or any related transactions.¹¹ Nonetheless, we believe that the registration statements for the transferred LB Contracts issued through each LB Account, as a separate account of AAL, need to be in effect under the 1933 Act to cover any securities issued after the Transfers, which may include any additional payments accepted on the transferred LB Contracts outstanding at the time the Transfers are effected and any new LB Contracts issued thereafter. As noted above, in connection with effecting the Transfers, AAL and the LB Accounts would file new registration statements with the Commission under the 1933 Act for the transferred LB Contracts, which registration statements would be requested to be declared effective in conjunction with the Transfers.

These new registration statements, which will be filed on Form N-4 for the LB Variable Annuity Contract and on Form S-6 for the LB Life Contract, would reflect AAL's assumption of LB's contractual obligations and liabilities with respect to the Contracts pursuant to the Transfers. Because the Transfers are to be made in connection with the Merger of LB into AAL, the registration statements also would include appropriate financial information reflecting the Merger. The new prospectus would be sent to owners of LB Contracts outstanding at the time the Transfers are effected, and would retain the historical financial information of the LB Accounts and would disclose that new premium payments will be accepted under the LB Contracts after the Merger. Prior to the effective date of the Transfers, owners of outstanding LB Contracts would have received disclosure from LB informing the owners of the proposed Transfers and any related transactions expected to be effected in connection therewith.

C. Section 8 of the 1940 Act is Inapplicable to the Transfers

It is our view that the succession of AAL to the position of depositor for the transferred LB Accounts as a result of the Merger will not result in the organization or creation of any new investment company pursuant to Section 8 of the 1940 Act, and, therefore, can, and should, be effected through the amendment of the existing registration statements of the transferred LB Accounts (on either Form N-4 or N-8B-2) under the 1940 Act. The filing of these amendments with the Commission will be made as part of the process of filing new 1933 Act registration statements discussed above for the LB Contracts. These amendments will reflect AAL as the depositor of the LB Accounts and the transfer of contractual obligations and liabilities from LB to AAL as of the Effective Date. This procedure will not necessitate the filing of new notifications of registration or registration statements for the transferred LB Accounts pursuant to Section 8 of the 1940 Act.

The proposed Merger would cause a change in the depositor of the transferred LB Accounts, which would involve a change in the co-issuer of the LB Contracts. The resulting change in the depositor due to the Transfers of the LB Accounts, however, would not change the structure or operations of the LB Accounts or the relationship of the LB Accounts to their depositor or to the LB Contract owners. The LB Accounts would continue to be treated as separate entities for all relevant purposes, including financial reporting. AAL and the LB Accounts, accordingly, will amend the existing registration statements for the transferred LB Accounts under the 1940 Act on the Effective Date, as discussed above.

D. Section 11 of the 1940 Act is Inapplicable to the Transfers

Based on the analysis set forth above relating to Section 5, it is also our view that the Merger, including the Transfers and any related transactions, would not involve an exchange of securities issued by an investment company for any other security of an investment company for purposes of Section 11 of the 1940 Act. However, should these transactions be viewed as an offer of an exchange of investment company securities within the meaning of Section 11 of the 1940 Act, we believe that the transactions would comply with the conditions of Section 11(a) of the 1940 Act, and Rule 11a-2 thereunder. Thus, Commission approval should not be required under Section 11 of the 1940 Act in connection with effecting the Merger, including the Transfers and any related transactions.

Similar to the facts in previously-issued no-action letters,¹² the terms of the Merger Agreement will not result in any change to the LB Contracts, except that, by operation of law, the identity of the depositor will change. These previously-issued no-action letters involve circumstances substantially similar to those presented above: two insurance companies merging with one or both of the companies having variable contracts outstanding. Each of the previously-issued no-action letters indicates that, just as in this case, the assets and liabilities which comprised the funding separate account after the merger remained intact, and were legally segregated from the other business of the surviving life insurance company.

In this case, the assets in each of the transferred LB Accounts would not be combined with those of any other separate account or other entity. The transferred LB Contracts would continue to provide Contract owners with the same rights and benefits after the proposed Merger as before, including surrender rights, loan privileges, annuity options and death benefits. In addition, the LB Contracts would continue to be funded by the transferred LB Accounts (albeit under a new name). The financial history of the transferred LB Accounts would be carried forward, and, with the exception of the assumption of liabilities by AAL the LB Contracts would not change. Furthermore, the assumption of the insurance guarantees under the LB Contracts by AAL by operation of state law would not affect those aspects of the Contracts that caused them to be treated as securities (i.e., the variable nature of the benefits under the LB Contracts).¹³

E. Reliance by AAL on Exemptive Orders previously Granted to LB

It is our view that the exemptive orders granted by the Commission under the 1940 Act to LB should continue to be applicable to AAL without the filing amended or new applications for the same exemptive orders. This would include exemptions received by LB and LB Series Fund from certain sections and rules of the 1940 Act in connection with a deferred compensation plan for the non-interested directors of LB Series Fund.¹⁴ The continued applicability of the exemptions regarding the deferred compensation plan is appropriate because the Merger, practically speaking, will not change either the structure or operations of either LB Series Fund or its deferred compensation plan. The only change after the Merger is that AAL rather than LB would be the participant in certain possible joint transactions incident to the deferred compensation plan.

IV. NO-ACTION REQUEST

In view of these circumstances, we respectfully request that the staff issue a letter stating that the staff will not recommend that the Commission take any enforcement action against AAL or LB in connection with the proposed Merger, including the Transfers and any related transactions, described herein with respect to Section 5 of the 1933 Act and Rule 145 thereunder and Sections 8 and 11 of the 1940 Act. In addition, we request that the staff further indicate in this letter that the staff would not recommend that the Commission take any action if: (1) the change in the depositor for the transferred LB Accounts as a result of the Merger is effected through the filing of amendments to the registration statements for the transferred LB Accounts

under the 1940 Act; and (2) new registration statements for the transferred LB Contracts under the 1933 Act are filed by AAL and the transferred LB Accounts to cover any securities issued in connection with the LB Contracts after the Merger is effected.

Further, we request that the staff indicate in its letter that the exemptive orders obtained by LB, to the extent these exemptive orders continue to be relied upon, will continue to be applicable after the Effective Date, in the manner described above, to AAL, and any other parties named therein without the filing amended or new applications for the same exemptive orders.

Please do not hesitate to call the undersigned at the above number or David S. Goldstein at (202) 383-0606 if you have any questions or would like further information.

Sincerely,

Stephen E. Roth

Footnotes

STEPHEN E. ROTH
DIRECT LINE: 202.383.0158
Internet: sroth@sablaw.com

December 21, 2001

VIA FACSIMILE

William J. Kotapish
Assistant Director
Mail Stop 0506
Division of Investment Management
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20459

Re:

Aid Association for Lutherans and Lutheran Brotherhood

Dear Mr. Kotapish:

This letter supplements our letter dated August 29, 2001. Specifically, you requested clarification of the information set forth in Section III. E. of our August 29 letter concerning any exemptive orders granted by the Commission under the 1940 Act that LB or its affiliates may be currently relying upon. The only exemptive order being relied upon, and therefore the only order for which comfort is being sought as continuing to be applicable after the merger, is the order cited in Section III. E. of our August 29 letter.

I trust this is responsive to your request. Thank you in advance for your prompt attention to this matter.

Sincerely,

Stephen E. Roth

cc: Mr. Brett Agnew
    Aid Association for Lutherans
Mr. James Nelson
    Lutheran Brotherhood

SER:Ar

http://www.sec.gov/divisions/investment/noaction/lutheran122101.htm