[Federal Register Volume 60, Number 12 (Thursday, January 19, 1995)]
[Notices]
[Pages 3904-3907]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-1233]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20830; No. 812-9306]
Offitbank Variable Insurance Fund, Inc., et al.
January 11, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (``1940 Act'').
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APPLICANTS: Offitbank Variable Insurance Fund, Inc. (``Fund'') and
Offitbank (collectively, ``Applicants'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act for exemptions from Sections 9(a), 13(a), and 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 exempting themselves
and certain affiliated and unaffiliated life insurance companies
(``Participating Insurance Companies'') and their separate accounts
(``Separate Accounts'') to the extent necessary to permit shares of any
current or future investment series of the Fund to be sold to and held
by Separate Accounts funding variable annuity and variable life
insurance contracts issued by Participating Insurance Companies.
FILING DATE: The application was filed on October 24, 1994.
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 by writing to the SEC's Secretary and
serving Applicants with a copy of the request, personally or by mail.
Hearing requests should be received by the SEC by 5:30 p.m. on February
6, 1995, and should be accompanied by proof of service on Applicants in
the form of an affidavit or, for lawyers, a certificate of service.
Hearing requests should state the nature of the requester's interest,
the reason for the request and the issues contested. Persons may
request notification of a hearing by writing to the Secretary of the
SEC.
ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C.
20549. Applicants: Stephen Brent Wells, Offitbank Variable Insurance
Fund, Inc., 237 Park Avenue, Suite 910, New York, New York 10017.
FOR FURTHER INFORMATION CONTACT: Pamela K. Ellis, Attorney, at (202)
942-0554, Office of Insurance Products (Division of Investment
Management).
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the SEC's Public
Reference Branch.
Applicants' Representations
1. The Fund is a Maryland corporation registered under the 1940 Act
as an open-end management investment company.
2. The Fund's common stock is divided into separate series, each
series representing an interest in a separate investment portfolio
(``Existing Portfolios''). The Board of Directors of the Fund is
authorized to classify or reclassify any unissued shares of the
portfolios (``New Portfolios'') (together with Existing Portfolios,
``Portfolios'').
3. The Portfolios will serve as investment vehicles for various
types of variable annuity and variable life insurance contracts
(``Variable Contracts''). Portfolio shares will be offered to Separate
Accounts of certain affiliated and unaffiliated Participating Insurance
Companies which enter into participation agreements (``Participation
Agreements'') with the Portfolios and the Fund.\1\
\1\Applicants represent that the Separate Accounts will be unit
investment trusts, and that, during the Notice Period, the
application will be amended to reflect this representation.
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4. Offitbank serves as investment adviser to each of the Existing
Portfolios. Offit Funds Distributor, Inc. (``Offit'') serves of the
distributor for the Existing Portfolios. Offitbank is a New York state
chartered trust company and is exempt from registration as an
investment advisor or as a broker dealer.\2\ Offit is a wholly-owned
subsidiary of Furman Selz Incorporated, an unaffiliated, privately-held
corporation.\3\
\2\Applicants represent that, during the Notice Period, the
application will be amended to reflect this representation.
\3\Applicants represent that, during the Notice Period, the
application will be amended to reflect this representation.
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Applicants' Legal Analysis
1. Applicants request that the Commission issue an order under
Section (6)(c) of the 1940 Act granting exemptive relief from 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). Exemptive relief is sought by Applicants and affiliated
and unaffiliated Participating Insurance Companies and their Separate
Accounts to the extent necessary to permit mixed and shared funding, as
defined below.
2. Rule 6e-2(b)(15) provides partial exemptive relief from Sections
9(a), 13(a), 15(a) and 15(b) of the 1940 Act to separate accounts
registered under the 1940 Act as unit investment trusts to the extent
necessary to offer and sell scheduled premium variable life insurance
contracts. The relief provided by the rule also extends to a separate
account's investment adviser, principal underwriter, and sponsor or
depositor.
3. The exemptions granted by Rule 6e-2(b)(15) are available only to
a management investment company underlying a separate account
(``underlying fund'') that offers its shares exclusively to variable
life insurance separate accounts of a life insurer, or of any other
affiliated life insurance company, issuing scheduled premium variable
life insurance contracts. The relief granted by Rule 6e-2(b)(15) is not
available to the separate account issuing scheduled premium variable
life insurance contracts if the underlying fund also offers its shares
to a separate account issuing variable annuity or flexible premium
variable life insurance contracts. The use of a common underlying fund
as an investment vehicle for both variable annuity contracts and
scheduled or flexible premium variable life insurance contracts is
referred to herein as ``mixed funding.''
4. Additionally, the relief granted by Rule 6e-2(b)(15) is not
available to separate accounts issuing scheduled premium variable life
insurance contracts if the underlying fund also offers its shares to
unaffiliated life insurance company separate accounts funding variable
contracts. The use of a common fund as an underlying investment vehicle
for separate accounts of unaffiliated insurance companies is referred
to herein as ``shared funding.''
5. Rule 6e-3(T)(b)(15) provides partial exemptions from Sections
9(a), 13(a), 15(a) and 15(b) of the 1940 Act to separate accounts
registered as unit investment trusts that offer flexible premium
variable life insurance contracts. The exemptive relief extends to a
separate account's investment
[[Page 3905]]
adviser, principal underwriter, and sponsor or depositor. These
exemptions are available only where the underlying fund of the separate
accounts offers its shares ``exclusively to separate accounts of the
life insurer, or of any affiliated life insurance company, offering
either scheduled contracts 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 * * *.''
Therefore, Rule 6e-3(T) permits mixed funding with respect to a
flexible premium variable life insurance separate accounts, subject to
certain conditions. However, Rule 6e-3(T) does not permit shared
funding because the relief granted by Rule 6e-3(T)(b)(15) is not
available to a flexible premium variable life insurance separate
account that owns shares of a management company that also offers its
shares to separate accounts (including variable annuity and flexible
premium and scheduled premium variable life insurance separate
accounts) of affiliated life insurance companies.
6. For these reasons, Applicants seek an order under Section 6(c)
of the 1940 Act. Section 6(c) authorizes the Commission to grant
exemptions from the provisions of the 1940 Act, and rules thereunder,
if and to the extent that an exemption is necessary or appropriate in
the pubic interest and consistent with the protection of investors and
the purposes fairly intended by the policy and provisions of the 1940
Act.
7. Section 9(a) of the 1940 Act makes it unlawful for any company
to serve as an investment adviser to, or principal underwriter for, any
registered open-ended investment company if an affiliated person of
that company is subject to any disqualification specified in Sections
9(a)(1) or 9(a)(2). Subparagraphs (b)(15)(i) and (ii) of Rules 6e-2 and
6e-3(T) provide exemptions from Section 9(a) under certain
circumstances, subject to limitations on mixed and shared funding. The
relief provided by subparagraphs (b)(15)(i) of Rules 6e-2 and 6e-3(T)
permits a person disqualified under Section 9(a) to serve as an
officer, director, or employee of the life insurer, or any of its
affiliates, so long as that person does not participate directly in the
management or administration of the underlying fund. The relief
provided by subparagraph (b)(15)(ii) of Rules 6e-2 and 6e-3(T) permits
the life insurer to serve as the underlying fund's investment adviser
or principal underwriter, provided that none of the insurer's personnel
who are ineligible pursuant to Section 9(a) are participating in the
management or administration of the fund.
8. Applicants state that the partial relief granted under
subparagraphs (b)(15) of Rules 6e-2 and 6e-3(T) from the requirements
of Section 9(a), in effect, limits the monitoring of an insurer's
personnel that would otherwise be necessary to ensure compliance with
Section 9 to that which is appropriate in light of the policy and
purposes of Section 9. Applicants submit that Rules 6e-2 and 6e-3(T)
recognize that it is not necessary for the protection of investors or
for the purposes of the 1940 Act to apply the provisions of Section
9(a) to the many individuals in an insurance company complex, most of
whom typically will have no involvement in matters pertaining to an
investment company in that organization. Applicants further submit that
there is no regulatory reason to apply the provisions of Section 9(a)
to the many individuals in various unaffiliated Participating Insurance
companies that may utilize the Portfolios as the funding medium for
variable contracts because of mixed and shared funding.
9. Subparagraph (b)(15)(iii) of Rules 6e-2 and 6e-3T provide
partial exemptions from Sections 13(a), 15(a) and 15(b) of the 1940 Act
to the extent that those sections have been deemed by the Commission to
require ``pass-through'' voting with respect to management investment
company shares held by a separate account, to permit the insurance
company to disregard the voting instructions of its contractowners in
certain limited circumstances.\4\
\4\Applicants request no relief for variable annuity separate
accounts from the disqualification or pass-through voting
provisions.
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10. Voting instructions may be disregarded under subparagraph
(b)(15)(iii)(A) of Rules 6e-2 and 6e-3(T) if they would cause the
underlying fund to make, or refrain from making, certain investments
which would result in changes to the subclassification or investment
objectives of the underlying fund, or to approve or disapprove any
contract between a fund and its investment advisers, when required to
do so by an insurance regulatory authority, subject to the provisions
of paragraphs (b)(15)(i) and (b)(7)(ii)(A) of each Rule.
11. Under subparagraph (b)(15)(iii)(B) of Rule 6e-2 and
subparagraph (b)(15)(iii)(A)(2) of Rule 6e-3(T), an insurance company
may disregard contractowners' voting instructions if the contractowners
initiate any change in the underlying fund's investment objectives,
principal underwriter or investment adviser, provided that disregarding
such voting instructions is reasonable and subject to the other
provisions of paragraph (b)(15)(ii) and (b)(7)(ii)(B) and (C) of each
Rule.
12. Applicants submit that shared funding by affiliated life
insurance does not present any issues that do not already exist where a
single insurance company is licensed to do business in several or all
states. In this regard, Applicants state 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 insurer may be domiciled in different states does not create
a significantly different or enlarged problem.
13. Applicants state further that, under paragraph (b)(15) of Rules
6e-2 and 6e-3(T), the right of an insurance company to disregard
contractowners' voting instructions does not raise any issues different
from those raised by the authority of state insurance administrators
over separate accounts, and that affiliation does not eliminate the
potential, if any, for divergent judgments as to the advisability or
legality of a change in investment policies, principal underwriter, or
investment adviser. Applicants state that the potential for
disagreement is limited by the requirements in Rules 6e-2 and 6e-3(T)
that the insurance company's disregard of voting instructions be
reasonable and based on specific good faith determinations.
14. Applicants submit that mixed and shared funding should benefit
variable contractowners by: (a) eliminating a significant portion of
the costs of establishing and administering separate funds; (b)
permitting the expansion of the variety of funding options available
under existing variable contracts; and (c) encouraging more insurance
companies to offer variable contracts, resulting in increased
competition with respect to both variable contract design and pricing,
which can be expected to result in more product variation and lower
charges.
15. Applicants assert that there is no significant legal impediment
to permitting mixed and shared funding. Applicants state that each of
the Portfolios will be managed to attempt to achieve its investment
objective and not to favor or disfavor any particular Participating
Insurance Company, separate account, or type of insurance product.
Separate accounts organized as unit investment trusts have historically
been employed to accumulate shares of
[[Page 3906]]
mutual funds which have not been affiliated with the depositor or
sponsor of the separate account. Applicants also believe that mixed and
shared funding will have no adverse federal income tax consequences.
Applicants' Conditions
The Applicants have consented to the following conditions:
1. A majority of the Board of the Fund shall consist of persons who
are not ``interested persons'' of the Fund as defined by Section
2(a)(19) of the 1940 Act and Rules thereunder, and as modified by any
applicable orders of the Commission, except that, if this condition is
not met by reason of death, disqualification, or bona fide resignation
of any Director(s), then the operation of this conditions shall be
suspended: (i) for a period of 45 days, if the vacancy or vacancies may
be filled by the Board; (ii) for a period of 60 days, if a vote of
shareholders is required to fill the vacancy or vacancies; or (iii) for
such longer period as the Commission may prescribe by order upon
application.
2. The Board of the Fund will monitor the Portfolios for the
existence of any material irreconcilable conflict between the interests
of the contractowners of all separate accounts investing in any of the
Portfolios. A material irreconcilable conflict may arise for a variety
of reasons, including:
(a) State insurance regulatory authority action;
(b) A change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretive 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 investments of a Portfolio are being
managed;
(e) A difference among voting instructions given by a variable
annuity and variable life insurance contractowners; or
(f) A decision by a Participating Insurance Company to disregard
contractowners' voting instructions.
3. Participating Insurance Companies and Offitbank will report any
potential or existing conflicts, of which they become aware, to the
Board of the Fund. Participating Insurance Companies and Offitbank will
be obligated to assist the Board in carrying out its responsibilities
under these conditions by providing the Board with all information
reasonably necessary for it 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
contractowner voting instructions are disregarded. The responsibility
to report such information and conflicts and to assist the Board will
be a contractual obligation of all Participating Insurance Companies
investing in a Portfolio under their Participation Agreements, and
those Participation Agreements shall provide that such responsibilities
will be carried out with a view only to the interests of the
contractowners.
4. If a majority of the Board of the Fund, or a majority of the
Independent Directors, determine that a material irreconcilable
conflict exists, the relevant Participating Insurance Companies shall,
at their expense and to the extent reasonably practicable (as
determined by a majority of Independent Directors), take whatever steps
are necessary to remedy or eliminate the irreconcilable material
conflict, up to and including: (a) Withdrawing the assets allocable to
some or all of the Separate Accounts from the Portfolios and
reinvesting those assets in a different investment medium (including
another Applicant, if any) or submitting the question whether such
segregation should be implemented to a vote of all affected
contractowners and, as appropriate, segregating the assets of any
appropriate group (i.e., annuity contractowners, life insurance
contractowners, or variable contractowners of one or more Participating
Insurance Companies that votes in favor of such segregation), or
offering to the affected contractowners the option of making such a
change; and (b) establishing a new registered management investment
company or managed separate account. If a material irreconcilable
conflict arises because of a Participating Insurance Company's decision
to disregard contractowner voting instructions, and that decision
represents a minority position or would preclude a majority vote, the
Participating Insurance Company may be required, at the election of
Offitbank (on behalf of one or more of the Portfolios), to withdraw its
Separate Account's investment therein, 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 determination by the Board of the
Fund that an irreconcilable material conflict exists and to bear the
cost of such remedial action shall be a contractual obligation of all
Participating Insurance Companies under their Participation Agreements,
and these responsibilities will be carried out with a view only to the
interests of the contractowners.
For purposes of this condition, a majority of Independent Directors
shall determine whether or not any proposed action adequately remedies
any irreconcilable material conflict, but in no event will the Fund or
Offitbank be required to establish a new funding medium for any
variable contract. No Participating Insurance Company shall be required
by this condition to establish a new funding medium for any variable
contract if an offer to do so has been declined by a vote of a majority
of contractowners materially affected by the irreconcilable material
conflict.
5. The determination by the Board of the Fund of the existence of
an irreconcilable material conflict and its implications shall be made
known promptly in writing to all Participating Insurance Companies in
the Portfolios.
6. Participating Insurance Companies will provide pass-through
voting privileges to all variable contractowners so long as the
Commission continues to interpret the 1940 Act as requiring pass-
through voting privileges for variable contractowners. Accordingly,
Participating Insurance Companies will vote shares of a Portfolio held
in their Separate Accounts in a manner consistent with timely voting
instructions received from contractowners. Each Participating Insurance
Company also will vote shares of a Portfolio held in its Separate
Accounts for which no timely voting instructions from contractowners
are received, as well as shares it owns, in the same proportion as
those shares for which voting instructions are received. Participating
Insurance Companies shall be responsible for assuring that each of
their Separate Accounts participating in a Portfolio 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 investing in a Portfolio
shall be a contractual obligation of all Participating Insurance
Companies under their Participation Agreements.
7. Each Portfolio will notify all Participating Insurance Companies
that prospectus disclosure regarding potential risks of mixed and
shared funding may be appropriate. Each Portfolio shall disclose in its
Prospectus that:
(a) Its shares may be offered to insurance company separate
accounts that fund annuity and life insurance contracts of
Participating Insurance Companies that may or may not be affiliated
with one another;
(b) Because of differences of tax treatment or other
considerations, the
[[Page 3907]]
interests of various contractowners might at some time be in conflict;
and
(c) The Board of the Fund will monitor for any material conflicts
and determine what action, if any, should be taken.
8. All reports received by the Board regarding potential or
existing conflicts, and all action of the Board with respect to
determining the existence of a conflict, notifying Participating
Insurance Companies of a conflict, and determining whether any proposed
action adequately remedies a conflict, will be properly recorded in the
minutes or other appropriate records, and such minutes or other records
shall be made available to the Commission upon request.
9. If and to the extent Rule 6e-2 or Rule 6e-3(T) are amended, or
Rule 6e-3 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, then the Portfolios and/or
the Participating Insurance Companies, as appropriate, shall take such
steps as may be necessary to comply with Rule 6e-2 and Rule 6e-3(T), as
amended, and Rule 6e-3, as adopted, to the extent such rules are
applicable.
10. The Portfolios will comply with all provisions of the 1940 Act
requiring voting by shareholders (which, for these purposes, shall be
the persons having a voting interest in the shares of the Portfolios),
and, in particular, each Portfolio either will provide for annual
meetings (except insofar as the Commission may interpret Section 16 of
the 1940 Act not to require such meetings) or, as each Portfolio
currently intends, comply with Section 16(c) of the 1940 Act (although
the Portfolios are not trusts described in this section) as well as
with Section 16(a) and, if and when applicable, Section 16(b).\5\
Further, each Portfolio 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 adopt with respect thereto.
\5\Applicants represent that, during the Notice Period, the
application will be amended to reflect this representation.
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11. The Participating Insurance Companies and/or Offitbank shall,
at least annually, submit to the Board of the Fund such reports,
materials or data as the Board may reasonably request so that the Board
may fully carry out the obligations imposed upon it by these stated
conditions, and said reports, materials, and data shall be submitted
more frequently if deemed appropriate by the Board. The obligations of
the Participating Insurance Companies to provide these reports,
materials, and data upon reasonable request of the Board shall be a
contractual obligation of all Participating Insurance Companies under
their Participation Agreements.
Conclusion
For the reasons stated above, Applicants assert that the requested
exemptions, in accordance with the standards of Section 6(c), 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. 95-1233 Filed 1-18-95; 8:45 am]
BILLING CODE 8010-01-M
