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AIG Seeks Principal-Protection Flexibility

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A large New York insurer wants permission to use affiliates to back its own investment funds’ guarantees.[@@]

Asset-management units of American International Group Inc., New York, have filed an application asking the U.S. Securities and Exchange Commission for an exemption from a securities law that limits the ability of investment advisors to do business with affiliates.

The AIG asset-management units, AIG Sun America Asset Management Corp. and the Variable Annuity Life Insurance Company, want to be able to arrange for sister companies to insure the principal in principal-protected mutual funds and variable annuities through reinsurance contracts and derivatives contracts.

In the past, AIG asset-management units have reported that they have been using other companies, such as a unit of Prudential Financial Inc., Newark, N.J., to guarantee the principal in the principal-protected funds.

AIG is a strong, creditworthy company, and AIG asset-management units might have an easier time getting sister companies to make good on their principal-guarantee commitments, AIG SunAmerica and VALIC argue in their application for the securities law exemption.

AIG SunAmerica and VALIC agree in the application to abide by several conditions to protect against conflicts.

Before AIG SunAmerica or VALIC hires a sister company to protect investors’ principal, it “will conduct a competitive bidding process in which the advisor solicits bids on at least 3 protection agreements that would not constitute affiliated protection arrangement,” the asset-management units promise in the application.

In addition, “if an AIG affiliate is chosen as the protection provider or hedging counterparty, it will not charge a higher fee for its protection agreement or hedging transaction,” the units promise.

A notice that includes the AIG asset-management units’ application for the securities law exemptions appears in the Federal Register at


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