[Federal Register Volume 62, Number 11 (Thursday, January 16, 1997)]
[Notices]
[Pages 2404-2409]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1035]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22456; File No. 812-9096]
The Palladian Trust, et al.
January 9, 1997.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the
``Commission'').
ACTION: Notice of Application for Exemptions under the Investment
Company Act of 1940 (the ``1940 Act'').
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APPLICANTS: The Palladian Trust (the ``Trust'') and Palladian Advisors,
Inc. (``PAI'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act for exemptions from the provisions of Sections 9(a), 13(a),
15(a) and 15(b) of the 1940 Act and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) thereunder.
SUMMARY OF APPLICATION: Applicants seek an order to the extend
necessary to permit shares of the Trust to be sold and held by: (1)
separate accounts (the ``Separate Accounts'') funding variable annuity
and variable life insurance contracts issued by both affiliated and
unaffiliated life insurance companies (the ``Participating Insurance
Companies''); (2) qualified pension and retirement plans; and (3)
investment advisers to the Trust.
FILING DATE: The application was filed on July 1, 1994, and amended on
October 26, 1994, June 20, 1996, and December 23, 1996.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing on this application by writing to the
Secretary of the SEC and serving Applicants with a copy of the request,
in person or by mail. Hearing requests must be received by the
Commission by 5:30 p.m. on February 3, 1997, and accompanied by proof
of service on the Applicants in the form of an affidavit or, for
lawyers, a certificate of service. Hearing requests should state the
nature of the interest, the reason for the request and the issues
contested. Persons may request notification of the date of a hearing by
writing to the Secretary of the SEC.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, c/o Shea & Gardner, 1800 Massachusetts Avenue, N.W.,
Washington, D.C. 20036, Attention: Christopher E. Palmer, Esq.
FOR FURTHER INFORMATION CONTACT:
Megan L. Dunphy, Attorney, or Patrice M. Pitts, Branch Chief, Office of
Insurance Products, Division of Investment Management, at (202) 942-
0670.
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the Public
Reference Branch of the SEC.
Applicant's Representations
1. The Trust is an open-end, management investment company
organized as a Massachusetts business trust. It currently offers shares
of capital stock (``shares'') in five separate investment portfolios
(the ``Portfolios''), each of which has its own investment objective:
The Value Portfolio, The Growth Portfolio, The International Growth
Portfolio, the Global Strategic Income Portfolio, and the Global
Interactive/Telecomm Portfolio. Additional portfolios may be added in
the future.
2. PAI is a corporation organized under the laws of Delaware, and
is registered as an investment adviser under the Investment Advisers
Act of 1940. PAI serves as overall investment manager of the
Portfolios. The Trust retains other investment advisers (the
``Portfolio Managers'') to handle the day-to-day investment management
of the Portfolios.
3. The Trust currently sells shares of the Portfolio to First ING
of New York Separate Account A1, a separate account of First ING Life
Insurance Company of New York, an affiliate of Security Life of Denver
Insurance Company (collectively, ``Security Life''). The Trust intends
to offer shares of the Portfolios to Separate Accounts of other
Participating Insurance Companies, including insurance companies that
are not affiliated with Security Life, to serve as investment vehicles
for various types of insurance products, including variable annuity
contracts, single premium variable life insurance contracts, scheduled
premium variable life insurance contracts, and flexible premium
variable life insurance contracts (collectively, the ``Contracts'').
4. The Trust also intends to offer its shares to qualified pension
or retirement plans (``Plans'') described in Treasury Regulation
Sec. 1.817-6(f)(3)(iii).
5. Each Portfolio Manager has agreed that it or an affiliate
(either directly or through a qualified pension or retirement plan)
will invest $1 million in the shares of the Portfolio(s) it manages.
Each Portfolio Manager purchasing Portfolio shares has agreed that all
such shares will be automatically redeemed if and when the Portfolio
Manager's advisory agreement with the Trust terminates.
6. PAI will not act as an investment adviser to any Plan which
purchases shares of the Trust. While a Portfolio Manager may serve as
investment adviser to one or more Plans which invest in the Trust, none
of the assets of any Plan advisory account actually managed by such
Portfolio Manager will be invested in the Trust. Nor may such Portfolio
Manager advise any Plan to invest in the Trust. Plans advised by a
Portfolio Manager may independently choose to invest in the Trust.
Applicant's Legal Analysis
1. Applicants request that the Commission issue an order under
Section 6(c) of the 1940 Act granting exemptions from Sections 9(a),
13(a), 15(a) and 15(b) thereof, and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) thereunder to the extent necessary to permit ``mixed'' and
``shared'' funding, as defined below.
2. Section 6(c) authorizes the Commission, by order upon
application, to conditionally or unconditionally exempt any person,
security, or transaction, or class or classes of persons, securities,
or transactions, from any provision of the 1940 Act, or the rules or
regulations thereunder, if and to the extent that such exemption is
necessary or appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the policy
and provisions of the 1940 Act.
3. In connection with the funding of scheduled premium variable
life insurance contracts issued through a separate account registered
under the 1940 Act as a unit investment trust (``UIT''), Rule 6e-
2(b)(15) provides partial exemptions from Sections 9(2), 13(a), 15(a)
and 15(b) of the 1940 Act. The exemptions granted to a separate account
by Rule 6e-2(b)(15) are available only where all of the assets of the
separate account consist of the shares of one or more registered
management investment companies which offer shares ``exclusively to
variable life insurance separate accounts of the life insurer, or of
any affiliated life insurance company.'' \1\ Therefore, the relief
grant by Rule 6e-2(b)(15) is
[[Page 2405]]
not available with respect to a scheduled premium variable life
insurance separate account that owns shares of a management company
that also offers its shares to a variable annuity separate account of
the same insurance company or any affiliated insurance company. The use
of a common management investment company as the underlying investment
medium for both variable annuity and variable life insurance separate
accounts of the same life insurance company (or of any affiliated life
insurance company) is referred to as ``mixed funding.'' The use of a
common management company as the underlying investment medium for
variable annuity and/or variable life insurance separate accounts of
more than one unaffiliated insurance company is referred to as ``shared
funding.'' The relief granted by Rule 6e-2(b)(15) is not available to a
scheduled premium variable life insurance separate account that owns
shares of an underlying management investment company (``underlying
fund'') which offers its shares to Plans or to its investment advisers.
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\1\ The exemptions provided by Rule 6e-2 also are available to
the investment adviser, principal underwriter, and sponsor or
depositor of the separate account
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4. In connection with flexible premium variable life insurance
contracts issued through a separate account registered under the 1940
Act as a UIT, Rule 6e-3(T)(b)(15) provides partial exemptions from
Section 9(a), 13(a), 15(a), and 15(b) of the 1940 Act. The exemptions
granted to a separate account by Rule 6e-3(T)(b)(15) are available only
to separate accounts owning shares of underlying funds which offer
shares ``exclusively to separate accounts of the life insurer, or of
any affiliated life insurance company, offering either scheduled or
flexible contracts, or both; or which also offer their shares to
variable annuity separate accounts of the life insurer or of an
affiliated life insurance company.'' Thus, Rule 6e-3(T) permits mixed
funding, but does not permit shared funding.
5. Current tax law permits the Trust to increase its asset base
through the sale of shares to Plans. Section 817(h) of the Internal
Revenue Code of 1986, as amended (the ``Code''), imposes certain
diversification standards on the underlying assets of variable
insurance contracts. Treasury regulations provide that, to meet the
diversification requirements, all of the beneficial interests in an
underlying fund must be held by the segregated asset accounts of one or
more insurance companies. Treas. Reg. Sec. 1.817-5 (1989). The
regulations do contain certain exceptions to this requirement, however,
one of which permits the trustee(s) of a qualified pension or
retirement plan to hold shares of an underlying fund, the shares of
which are held by the separate accounts of insurance companies, without
adversely affecting the status of the underlying fund as an adequately
diversified underlying investment vehicle for variable insurance
contracts issued through such separate accounts. Treas. Reg.
Sec. 1.817-5(f)(3)(iii).
6. Applicants state that the promulgation of Rules 6e-2 and 6e-3(T)
under the 1940 Act preceded the issuance of these Treasury regulations.
Applicants assert that, given the then-current tax law, the sale of
shares of the same underlying fund to separate accounts and to Plans
could not have been envisioned at the time of the adoption of Rules 6e-
2(b)(15) and 6e-3(T)(b)(15).
7. Section 9(a) of the 1940 Act provides that it is unlawful for
any company to serve as investment adviser to or principal underwriter
for any registered open-end investment company if an affiliated person
of that company is subject to a disqualification enumerated in Section
9(a) (1) or (2). Rules 6e-2(b)(15) and 6e-3(T)(b)(15) provide
exemptions from section 9(a) under certain circumstances, subject to
the limitations on mixed and shared funding. These exemptions limit the
application of the eligibility restrictions to affiliated individuals
or companies that directly participate in the management of the
underlying fund.
8. Applicants state that the partial relief from Section 9(a)
provided by Rules 6e-2(b)(15) and 6e-3(T)(b)(15), in effect, limits the
amount of monitoring necessary to ensure compliance with Section 9 to
that which is appropriate in light of the policy and purposes of
Section 9. Applicants state that those Rules recognize that it is not
necessary for the protection of investors or the purposes fairly
intended by the policy and provisions of the 1940 Act to apply the
provisions of Section 9(a) to the many individuals in a large insurance
company complex, most of whom will have no involvement in matters
pertaining to investment companies within that organization. Applicants
assert, therefore, that applying the restrictions of Section 9(a) to
individuals in various unaffiliated insurance companies (or affiliated
companies of Participating Insurance Companies) serves no regulatory
purpose.
9. Applicants state that the relief requested should not be
affected by the proposed sale of shares of the Trust to the Plans
because the Plans are not investment companies and will not be deemed
affiliates by virtue of their shareholdings. Applicants further state
that no regulatory purpose is served by extending the Section 9(a)
monitoring requirements in the context of the Trust selling its shares
to Portfolio Managers. Rules 6e-2 and 6e-3(T) provide relief from the
eligibility restrictions of Section 9(a) only for officers, directors
of employees of Participating Insurance Companies or their affiliates.
Applicants note that Portfolio Managers are not likely to be employees
of the Participating Insurance Companies or their affiliates, and if
they were, the Section 9(a) eligibility restrictions would apply to
those who participate directly in the management of administration of
the Trust. Applicants also maintain that the monitoring requirements
should not extend to all officers, directors and employees of the
Participating Insurance Companies and their affiliates simply because
the Trust sells certain shares to the Portfolio Managers. This
monitoring would not benefit Contract owners and Plan participants and
would only increase costs, thereby reducing net rates of return.
10. Applicants submit that Rules 6e-2(b)(15)(iii) and 6e-
3(T)(b)(15)(iii) assume the existence of a ``pass-through voting''
requirement with respect to management investment company shares held
by a separate account. Applicants state that Rules 6e-2(b)(15)(iii) and
6e-3(T)(b)(15)(iii) provide exemptions from the pass-through voting
requirement with respect to several significant matters, assuming the
limitations on mixed and shared funding imposed by the 1940 Act and the
rules thereunder are observed. More specifically, Rules 6e-
2(b)(15)(iii)(A) and 6e-3(T)(b)(15)(iii)(A)(1) provide that an
insurance company may disregard the voting instructions of its contract
owners with respect to the investments of an underlying fund, or any
contract between a fund and its investment adviser, when required to do
so by an insurance regulatory authority and subject to certain
requirements. In addition, Rules 6e-2(b)(15)(iii)(B) and 6e-
3(T)(b)(15)(iii)(a)(2) provide that an insurance company may disregard
the voting instructions of its contract owners if the contract owners
initiate any change in the company's investment policies, principal
underwriter, or any investment adviser, provided that disregarding such
voting instructions is reasonable and complies with the other
provisions of Rules 6e-2 and 6e-3(T). Applicants note that Rules 6e-2
and 6e-3(T) both require
[[Page 2406]]
that disregard of voting instructions by an insurance company be
reasonable and based on specific good faith determinations. If a
decision of a Participating Insurance Company to disregard the
instructions of Contract owners represents a minority position or would
preclude a majority vote approving a particular change, however, such
Participating Insurance Company may be required, at the election of the
Trust, to withdraw the investment of its Separate Account in the Trust.
No charge or penalty will be imposed as a result of such withdrawal.
11. Applicants further represent that the sale of Trust shares to
Plans would not affect the circumstances and conditions under which any
veto right would be exercised by a Participating Insurance Company.
Shares of the Trust sold to Plans would be held by the trustees of such
Plans as required by Section 403(a) of the Employee Retirement Income
Security Act of 1974 (``ERISA''). Section 403(a) also provides that the
trustee(s) must have exclusive authority and discretion to manage and
control the Plan with two exceptions: (a) when the Plan expressly
provides that the trustee(s) is (are) subject to the direction of a
named fiduciary who is not a trustee, in which case the trustee(s) is
(are) subject to proper directions made in accordance with the terms of
the Plan and not contrary to ERISA; and (b) when the authority to
manage, acquire or dispose of assets of the Plan is delegated to one or
more investment managers pursuant to Section 402(c)(3) of ERISA. Unless
one of the two exceptions stated in Section 403(a) applies, Plan
trustees have the exclusive authority and responsibility for voting
proxies. Where a named fiduciary appoints an investment manager, the
investment manager has the responsibility to vote the shares held
unless the right to vote such shares is reserved to the trustees or to
the named fiduciary. In any event, ERISA does not require pass-through
voting to the participants in Plans. Accordingly, Applicants note that,
unlike the case with insurance company separate accounts, the issue of
the resolution of material irreconcilable conflicts with respect to
voting is not present with Plans.
12. Applicants note, however, that some Plans do provide
participants with the right to give voting instructions. Applicants
submit that there is no reason to believe that Plan participants
generally, or participants of a particular Plan, either as a single
group or in combination with other Plans, would vote in a manner that
would disadvantage Contract owners. Therefore, the purchase of Trust
shares by Plans that provide voting rights to their participants does
not present any complications not otherwise occasioned by mixed and
shared funding.
13. Applicants state that no increased conflicts of interest would
be presented by the granting of the requested relief. Applicants submit
that shared funding does not present any issues that do not already
exist where a single insurance company is licensed to do business in
several states. In this regard, Applicants not that a particular state
insurance regulatory body could require action that is inconsistent
with the requirements of other states in which the insurance company
offers its policies. Accordingly, Applicants submit that the fact that
different insurers may be domiciled in different states does not create
a significantly different or enlarged problem.
14. Applicants state that there is no reason why the investment
policies of the Trust providing mixed funding would or should be
materially different from what those policies would or should be if the
Trust funded only variable annuity or variable life insurance contracts
whether flexible premium or scheduled premium contracts. In this
regard, Applicants note that each type of variable insurance product is
designed as a long-term investment program, and that Plans also have
long-term investment horizons. Moreover, Applicants submit that each
Portfolio of the Trust will be managed to attempt to achieve the
investment objective of the Portfolio, and not to favor or disfavor any
particular Participating Insurance Company or type of variable
insurance product.
15. Applicants note that no single investment strategy can be
identified as appropriate to a particular variable insurance product.
Each pool of variable annuity and variable life insurance contract
owners is composed of individuals of diverse financial status, age,
insurance, and investment goals. An underlying fund supporting even one
type of variable insurance product must accommodate these diverse
factors in order to attract and retain purchasers.
16. Applicants further note that Section 817(h) imposes certain
diversification standards on the underlying assets of variable annuity
contracts and variable life insurance contracts held in the portfolios
of management investment companies. Treasury Regulation 1.817-
5(f)(3)(iii), which established diversification requirements for such
portfolios, specifically permits ``qualified pension or retirement
plans'' and investment separate accounts to share the same underlying
investment company. Therefore, Applicants have concluded that neither
the Code, nor the Treasury Regulations, nor the revenue rulings
thereunder present any inherent conflicts of interest if Plans,
variable annuity separate account and variable life insurance Separate
Accounts all invest in the same management investment company.
17. Applicants note that while there are differences in the manner
in which distributions are taxed for variable annuity contracts,
variable life insurance contracts and Plans, these tax consequences do
not raise any conflicts of interest. When distributions are to be made,
and the Separate Account or the Plan is unable to net purchase payments
to make the distributions, the Separate Account or the Plan will redeem
shares of the Trust at their respective net asset value. The Plan will
then make distributions in accordance with the terms of the Plan, and a
Participating Insurance Company will make distributions in accordance
with the terms of the Contract.
18. With respect to voting rights, Applicants state that it is
possible to provide an equitable means of giving such voting rights to
Contract owners and to Plans. Applicants represent that the Portfolios
will inform each shareholder, including each Separate Account and Plan,
of its respective share of ownership in the respective Portfolio. Each
Participating Insurance Company will then solicit voting instructions
in accordance with the ``pass-through'' voting requirement.
19. Applicants argue that the ability of the Portfolios to sell
their respective shares directly to Plans does not create a ``senior
security'', as that term is defined under Section 18(g) of the 1940
Act, with respect to any contract owner as opposed to a participant
under a Plan. Regardless of the rights and benefits of participants and
Contract owners under the respective Plans and Contracts, the Plans and
the Separate Accounts have rights only with respect to their shares of
the Trust. Such shares may be redeemed only at net asset value. No
shareholders of any of the Portfolios has any preference over any other
shareholder with respect to distribution of assets or payment of
dividends.
20. Finally, Applicants state that there are no conflicts between
Contract owners and participants under the Plans with respect to the
state insurance commissioners' veto powers over investment objectives.
The basis premise of shareholder voting is that not all shareholders
may agree with a particular proposal. The state insurance
[[Page 2407]]
commissioners have been given the veto power in recognition of the fact
that insurance companies cannot simply redeem shares of one underlying
fund held by their Separate Accounts and invest the proceeds in another
underlying fund. Complex and time-consuming transactions must be
undertaken to accomplish such redemptions and transfers. Conversely,
trustees of Plans can decide to and actually redeem shares of an
investment vehicle, and reinvest the proceeds in another investment
vehicle without the same regulatory impediments; most Plans may even
hold cash pending suitable investment. Based on the foregoing,
Applicants represent that should issues arise where the interests of
Contract owners and the interests of Plans conflict, the issues can be
resolved almost immediately because trustees of the Plans can redeem
shares out of the Trust independently.
21. Applicants assert that the requested relief is appropriate and
in the public interest because the relief will promote competitiveness
in the variable insurance product market. Applicants submit that
various factors have kept more insurance companies from offering
variable annuity and variable life insurance contracts that currently
offers such contracts. These factors include: the cost of organizing
and operating an investment funding medium; the lack of expertise with
respect to investment management (particularly with respect to stock
and money market investments); and the lack of name recognition by the
public of certain insurers as investment professionals. Applicants
argue that use of the Trust as a common investment medium for the
Contracts would alleviate these concerns because Participating
Insurance Companies would benefit not only from the investment and
administrative expertise of PAI and the Portfolio Managers, but also
from the cost efficiencies and investment flexibility afforded by a
large pool of assets. Applicants state that making the Trust available
for mixed and shared funding may encourage more insurance companies to
offer variable contracts such as the Contracts and, accordingly, may
increase competition with respect to both the design and the pricing of
variable contracts; this can be expected to result in greater product
variation and lower charges. Applicants submit that mixed and shared
funding will benefit Contract owners by eliminating a significant
portion of the costs of establishing and administering separate funds.
Moreover, Applicants assert that sales of shares of the Trust to Plans
should increase the amount of assets available for investment by the
Trust. This should, in turn, promote economies of scale, permit
increased safety of investments through greater diversification, and
make the addition of new portfolios more feasible.
Applicant's Conditions
Applicants have consented to the following conditions:
1. A majority of the Board of Trustees or Directors of the Trust
(the ``Board'') shall consist of persons who are not ``interested
persons'' of the Trust, as defined by Section 2(a)(19) of the 1940 Act
and the rules thereunder and as modified by any applicable orders of
the Commission, except that, if this condition is not met by reason of
the death, disqualification, or bona fide resignation of any trustee or
director, then the operation of this condition shall be suspended: (a)
for a period of 45 days, if the vacancy or vacancies may be filled by
the remaining trustees; (b) for a period of 60 days, if a vote of
shareholders is required to fill the vacancy or vacancies; or (c) for
such longer period as the Commission may prescribe by order upon
application.
2. The Board will monitor the Trust for the existence of any
material irreconcilable conflict among the interests of the Contract
owners of all of the Separate Accounts investing in the Trust and of
the Plan participant investing in the Trust. A material irreconcilable
conflict may arise for a variety of reasons, including: (a) an action
by any state insurance regulatory authority; (b) a change in applicable
federal or state insurances, tax, or securities laws or regulations, or
a public ruling, private letter ruling, no-action or interpretative
letter, or any similar action by insurance, tax, or securities
regulatory authorities; (c) an administrative or judicial decision in
any relevant proceeding; (d) the manner in which the investments of any
Portfolio are being managed; (e) a difference in voting instructions
given by owners of variable annuity contracts and those given by owners
of variable life insurance contracts; (f) a decision by a Participating
Insurance Company to disregard the voting instructions of Contract
owners; or (g) if applicable, a decision by a Plan to disregard voting
instructions of Plan participants.
3. The Participating Insurance Companies, PAI (or any other
investment adviser of the Portfolios), and any Plan that executes a
fund participation agreement upon becoming an owner of 10% or more of
the assets of a Trust (collectively, ``Participants'') will report any
potential or existing conflicts to the Board. Participants will be
responsible for assisting the Board in carrying out its
responsibilities under these conditions by providing the Board with all
information reasonable necessary for the Board to consider any issues
raised. This responsibility includes, but is not limited to, an
obligation by each Participating Insurance Company to inform the Board
whenever Contract owner voting instructions are disregarded and, if
pass-through voting is applicable, an obligation by PAI and each Plan
to inform the Board whenever it is determined to disregard Plan
participant voting instructions. The responsibility to report such
information and conflicts to and to assist the Board will be a
contractual obligation of all Participating Insurance Companies and
Plans investing in the Trust under their agreements governing
participating in the Trust, and such agreements shall provide that
these responsibilities will be carried out with a view only to the
interests of Contract owners or, as appropriate, Plan participants.
4. If the Board or a majority of its disinterested members
determines that a material irreconcilable conflict exists, the relevant
Participating Insurance Companies and Plans shall, at their expense and
to the extent reasonably practicable (as determined by a majority of
the disinterested members), take any steps necessary to remedy or
eliminate the material irreconcilable conflict, including: (a)
withdrawing the assets allocate to some or all of the Separate Accounts
from the Trust or any Portfolio and reinvesting such assets in a
different investment medium including another Portfolio of the Trust;
(b) submitting the question of whether such segregation should be
implemented to a vote of all affected variable insurance contract
owners and, as appropriate, segregating the assets of any appropriate
group (i.e., variable annuity Contract owners or variable life
insurance Contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the
affected variable contract owners the option of making such a change;
and (c) establishing a new registered management investment company or
managed separate account. If a material irreconcilable conflict arise
because of a Participating Insurance Company's decision to disregard
Contract Owner voting instructions, and that decision represents a
minority position or would preclude a majority vote, the insurer may be
required, at the Trust's election, to withdraw its
[[Page 2408]]
Separate Account's investment in the Trust, and no charge or penalty
will be imposed as a result of such withdrawal. If a material
irreconcilable conflict arises because of a Plan's decision to
disregard Plan voting instructions, if applicable, and that decision
represents a minority position or would preclude a majority vote, the
Plan may be required, at the Trust's election, to withdraw its
investment in the Trust and no charge or penalty will be imposed as a
result of such withdrawal. The responsibility to take remedial action
in the event of a Board determination of a material irreconcilable
conflict and to bear the cost of such remedial action shall be a
contractual obligation of all Participating Insurance Companies and
Plans under their agreements governing their participation in the
Trust. The responsibility to take such remedial action shall be carried
out with a view only to the interests of Contract owners and
Participants in the Plan.
5. For purposes of condition 4, a majority of the disinterested
trustees will determine whether any proposed action adequately remedies
any material irreconcilable conflict, but in no event will the Trust or
PAI (or any other investment adviser of the Portfolios) be required to
establish a new funding medium for any Contract. Further, no
Participating Insurance Company shall be required by condition 4 to
establish a new funding medium for any Contract if any offer to do so
has been declined by a vote of a majority of the Contract owners
materially affected by the material irreconcilable conflict. Further,
no Plan shall be required by condition 4 to establish a new funding
medium for such Plan if (a) a majority of Plan participants materially
and adversely affected by the material irreconcilable conflict vote to
decline such offer, or (b) pursuant to governing Plan documents and
applicable law, the Plan makes such decision without a vote by Plan
participants.
6. The Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known in writing
promptly to all Participants.
7. Participating Insurance Companies will provide pass-through
voting privileges to all Contract owners so long as the Commission
continues to interpret the 1940 Act as requiring pass-through voting
privileges for variable contract owners. Accordingly, the Participating
Insurance Companies will vote shares of the Trust held in their
Separate Accounts in a manner consistent with voting instructions
timely received from Contract owners. Each Participating Insurance
Company also will vote shares of the Trust held in the Participating
Insurance Company's Separate Account(s) for which no voting
instructions from the Contract owners are timely received, as well as
shares it owns, in the same proportion as those shares for which voting
instructions are received. Participating Insurance Companies will be
responsible for assuring that each of their Separate Accounts investing
in the Trust calculates voting privileges in a manner consistent with
other Participating Insurance Companies. The obligation to calculate
voting privileges in a manner consistent with all other Separate
Accounts will be a contractual obligation of all Participating
Insurance Companies under the agreements governing their participation
in the Trust. Each Plan will vote as required by applicable law and
governing Plan documents.
8. As long as the Commission continues to interpret the 1940 Act as
requiring pass-through voting privileges for variable contract owners,
each Portfolio Manager will vote its shares of the Portfolio in the
same proportion as all contract owners having voting rights with
respect to that Portfolio; provided, however, that the Portfolio
Manager shall vote its shares in such other manner as may be required
by the Commission or its staff.
9. All reports received by the Board regarding potential or
existing conflicts, and all Board action with regard to determining the
existence of a conflict, notifying Participants of a conflict, and
determining whether any proposed action adequately remedies a conflict,
will be properly recorded in the minutes of the Board or other
appropriate records. Such minutes or other records shall be made
available to the Commission upon request.
10. The Trust will notify all Participating Insurance Companies
that Separate Account prospectus disclosure regarding potential risks
of mixed and shared funding may be appropriate. The Trust will disclose
in its prospectus that: (a) the Trust is intended to be a funding
vehicle for variable annuity and variable life insurance contracts
offered by various insurance companies and certain qualified pension
and retirement plans; (b) because of differences in tax treatment and
other considerations, the interests of Contract owners investing in the
Trust and the interests of Plans investing in the Trust may conflict;
and (c) the Board will monitor events to identify the existence of any
material irreconcilable conflicts and to determine what action, if any,
should be taken in response to any such conflict.
11. The Trust will comply with all provisions of the 1940 Act
requiring voting by shareholders (which, for these purposes, will be
the persons having a voting interest in the shares of the Trust) and,
in particular, the Trust will either provide for annual meetings
(except to the extent that the Commission may interpret Section 16 of
the 1940 Act not to require such meetings) or comply with Section 16(c)
of the 1940 Act (although the Trust is not one of the trust described
in Section 16(c) of the 1940 Act), as well as with Section 16(a) and,
if applicable, Section 16(b) of the 1940 Act. Further, the Trust will
act in accordance with the Commission's interpretation of the
requirements of Section 16(a) with respect to periodic elections of
directors and with whatever rules the Commission may promulgate with
respect thereto.
12. If and to the extent that Rules 6e-2 and 6e-3(T) are amended
(or if Rule 6e-3 under the 1940 Act is adopted) to provide exemptive
relief from any provision of the 1940 Act or the rules thereunder with
respect to mixed and shared funding on terms and conditions materially
different from any exemptions granted in the order requested by
Applicants, then the Trust and/or the Participating Insurance
Companies, as appropriate, will take such steps as may be necessary to
comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as
adopted, to the extent such rules are applicable.
13. No less than annually, the Participants shall submit to the
Board such reports, materials, or data as the Board reasonably may
request so that the Board may carry out fully the obligations imposed
upon it by the conditions contained in the application. Such reports,
materials, and data shall be submitted more frequently if deemed
appropriate by the Board. The obligations of the Participants to
provide these reports, materials, and data to the Board, when the Board
so reasonably requests, shall be a contractual obligation of all
Participants under the agreements governing their participation in the
Trust.
14. If a Plan becomes an owner of 10% or more of the assets of a
Trust, such Plan will execute a participation agreement with the Trust.
A Plan will execute an application containing an acknowledgement of
this condition upon such Plan's initial purchase of the shares of any
Portfolio.
Conclusion
For the reasons stated above, Applicants assert that the requested
exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act
and
[[Page 2409]]
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder are appropriate in the
public interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-1035 Filed 1-15-97; 8:45 am]
BILLING CODE 8010-01-M
