[Federal Register Volume 62, Number 15 (Thursday, January 23, 1997)]
[Notices]
[Pages 3541-3546]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1558]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22472; File No. 812-10402]
American Odyssey Funds, Inc., et al.
January 15, 1997.
AGENCY: The Securities and Exchange Commission (the ``Commission'').
ACTION: Notice of application for an exemption pursuant to the
Investment Company Act of 1940 (the ``1940 Act'').
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Applicant: American Odyssey Funds, Inc. (``AOF''), American Odyssey
Funds Management, Inc. (``AOFMI''), and certain life insurance
companies and their separate accounts investing now or in the future in
AOF.
Relevant 1940 Act Sections: Order requested pursuant to Section
6(c) of the 1940 Act for 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.
Summary of Application: Applicants seek exemptive relief to the
extent necessary to permit shares of AOF to be sold to and held by
separate accounts (``Separate Accounts'') funding variable annuity and
variable life insurance contracts issued by both affiliated and
unaffiliated life insurance companies (``Participating Insurance
Companies'') or qualified pension and retirement plans outside the
separate account context (``Plans'').
Filing Date: The application was filed on October 16, 1996.
Hearing and 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 Secretary of
the Commission and serving Applicants with a copy of the request,
personally or by mail. Hearing requests must be received by the
Commission by 5:30 p.m. or February 10, 1997, and must 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 writer'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 Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Applicants, c/o Christopher E.
Palmer, Esq., Shea & Gardner, 1800 Massachusetts Avenue, N.W.,
Washington, D.C. 20036.
FOR FURTHER INFORMATION CONTACT: Michael Koffler, Staff Attorney, or
Kevin M. Kirchoff, Branch Chief, Office of Insurance Products, Division
of Investment Management, at (202) 942-0670.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application; the complete application is available for a fee from the
Public Reference Branch of the Commission.
Applicant's Representations
1. AOF is a Maryland corporation registered pursuant to the 1940
Act as an open-end, management investment company. AOF currently
consists of six separate investment portfolios and may in the future
issue shares of additional portfolios and/or multiple classes of shares
of each portfolios (such existing and future portfolios and/or classes
of shares of each, ``Funds'').
2. AOFMI, the investment adviser for AOF, is a corporation
organized pursuant to the laws of New Jersey and is registered as an
investment adviser pursuant to the Investment Advisers Act of 1940. AOF
has entered into agreements with subadviers who handle the day-to-day
management of each individual Fund (the ``Subadvisers'').
3. Shares of the Funds are currently sold to separate accounts of
The Travelers Insurance Company, which are registered as unit
investment trusts pursuant to the 1940 Act in connection with the
issuance of variable contracts.
4. AOF may offer shares of its existing and future Funds to
Separate Accounts of additional insurance companies, including
insurance companies that are not affiliated with Travelers Group Inc.
in order to serve as the investment vehicle for various types of
insurance products, which may include variable annuity contracts,
single premium variable life insurance contracts, scheduled premium
variable life insurance contracts, and flexible premium variable life
insurance contracts (``Contracts'').
5. The Participating Insurance Companies will establish their own
Separate Accounts and design their own Contracts. Each Participating
Insurance Company will have the legal obligation of satisfying all
applicable requirements
[[Page 3542]]
under the federal securities laws. The role of AOF with respect to the
Separate Accounts and the Plans will be limited to that of offering its
shares to the Separate Accounts and the Plans and fulfilling the
conditions provided in the application.
6. AOF also offers shares to the trustees (or custodians) of Plans.
The trustee or custodian of each Plan will have the legal obligation of
satisfying all requirements applicable to such Plan under the federal
securities laws.
7. AOFMI will not act as an investment adviser to any of the Plans
which will purchase shares of AOF. It is possible that any one of the
Subadvisers may act as an investment adviser to the Plans which may
invest in AOF. However, Applicants represent that none of the assets of
any Plan advisory account managed by a Subadviser will be invested in
AOF. The Subadvisers are not permitted to advise such Plans to invest
in AOF.
Applicants' Legal Analysis
1. Section 6(c) authorizes the Commission to grant exemptions from
the provisions of the 1940 Act, and miles thereunder, if and to the
extent that an 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.
2. Applicants request that the Commission issue and order pursuant
to Section 6(c) of the 1940 Act exemption them from Sections 9(a),
15(a), and 15(b) thereof and Rules 6e-2(b)(15) and 63-3T(b)(15)
thereunder to the extent necessary to permit shares of AOF to be
offered and sold to, and held by: (1) Both variable annuity separate
accounts and variable life insurance separate accounts of the same life
insurance company or of affiliated life insurance companies (``mixed
funding''); (2) separate accounts of unaffiliated life insurance
separate accounts) ``shared funding''); and (3) trustees of Plans
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, Rule 63-2(b)(15) under
the 1940 Act provides partial exemptions from Section 9(a), 13(a), and
15(b) of the 1940 Act. The exemptions granted by Rule 63-2(b)(15) and
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 their shares ``exclusively to variable life insurance
separate accounts of the life insurer, or of any affiliated life
insurance company'' (emphasis added). Therefore, the relief granted by
Rule 6e-2(b)(15) is not available if the scheduled premium variable
life insurance separate account owns shares of a management investment
company that also offers its shares to a variable annuity separate
account of the same insurance company or an affiliated or unaffiliated
life insurance company. Also, the relief granted by Rule 6e-2(b)(15) is
not available if the scheduled premium variable life insurance separate
account owns shares of an underlying management company that also
offers its shares to Plans.
4. In addition, the relief granted by Rule 6e-2(b)(15) is not
available if the scheduled premium variable life insurance separate
account owns shares of an underlying management investment company that
also offers its shares to separate accounts funding variable contracts
of one or more unaffiliated life insurance companies.
5. In connection with flexible premium variable life insurance
contracts issued through a separate account registered under the 1940
Act as a unit investment trust, Rule 6e-3(T)(b)(15) under the 1940 Act
provides partial exemptions from Sections 13(a), 15(a), and 15(b) of
the 1940 Act. The exemptions granted Rule 6e-3(T)(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 their shares ``exclusively to separate accounts of the life
insurer, or of any affiliated life insurance company offering either
scheduled premium variable life insurance contracts of flexible premium
variable life insurance contracts, or both; or which also offer their
share to variable annuity separate accounts of the life insurer of of
an affiliated life insurance company'' (emphasis added). Thus, Rule 6e-
(T)(b)(15) grants an exemption if the underlying management investment
company engages in mixed funding, but not if it engages in share
funding or sells its shares to Plans.
6. Applicants state that the current tax law permits AOF to
increase its asset base through the sale of shares to Plans. Section
817(h) of the Internal Revenue Code (``Code'') imposes certain
diversification requirements on the underlying assets of the Contracts
invested in AOF. The Code provides that such Contracts shall not be
treated as an annuity contract or life insurance contract for any
period in which the underlying assets are not adequately diversified as
prescribed by Treasury regulations. To meet the diversification
requirements, all of the beneficial interests in the investment company
must be held by the segregated asset accounts of one or more insurance
companies. Treas. Reg. Sec. 1.817-5. The regulations do, however,
contain certain exceptions to this requirements, one of which allows
shares in an investment company to be held by the trustee of a
qualified pension or retirement plan without adversely affecting the
ability of shares in the same investment company also to be held by the
separate accounts of insurance companies in connection with their
Contracts. Tres. Reg. Sec. 1-817-5(f)(3)9iii).
7. The promulgation of Rules 63-2 and 63-3(T) preceded the issuance
of these treasury regulations. Applicants state that, given the ten-
current tax law, the sale of shares of the same investment company to
both Separate Accounts and Plans could not have been envisioned at the
time of the adoption of Rules 6e-3(b)(15) and 6e-3(T)(b)(15).
Disqualification
8. Section 9(a)(3) of the 1940 Act provides that it is unlawful for
any company to serve as investment adviser or principal underwriter of
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). Rule 6e-2(b)(15) (i) and (ii) and Rule 6e-3(T)(b)(15)
(i) and (ii) provide partial exemptions from Section 9(a), subject to
the limitations discussed above on mixed and shared funding. These
rules provide: (1) That the eligibility restrictions of Section 9(a)
shall not apply to persons who are officers, directors or employees of
the life insurer or its affiliates who do not participate directly in
the management or administration of the underlying fund; and (2) that
an insurer shall be ineligible to serve as an investment adviser or
principal underwriter of the underlying fund only if an affiliated
person of the life insurer who is disqualified by Section 9(a)
participates in the management or administration of the fund.
9. Applicants assert that the partial relief granted in Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) from the requirements of Section 9, 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, when the life insurer serves as investment
adviser to or principal underwriter for the underlying fund. Applicants
assert that it is not necessary for the protection of investors or the
purposes fairly intended by the policy and provisions of the 1940
[[Page 3543]]
Act to apply the provisions of Section 9(a) to many individuals in a
typical insurance company complex, most of whom will have no
involvement in matters pertaining to underlying investment companies
10. Applicants submit that there is no regulatory purpose in
denying the partial exemptions because of mixed and share funding and
sales to Plans. Applicants submit that sales to those entities do not
change the fact that the purposes of the 1940 Act are not advanced by
applying the prohibitions of Section 9(a) to persons in a life
insurance complex who have not involvement in the underlying fund.
Pass-Through Voting
11. 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 pass-through voting privileges will be provided
with respect to all Contract owners so long as the Commission
interprets the 1940 Act to require pass-through voting privileges for
Contract owners.
12. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) provide partial
exemptions from Sections 13(a), 15(a), and (15(b) of the 1940 Act to
the extent that these 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 contract owners in
certain circumstances. Rules 6e-2(b)(15)(iii)(A) and 6e-
3(T)(15)(b)(iii)(A) provide that an insurance company may disregard the
voting instructions of its contract owners with respect to the
investments of an underlying investment company, or any contract
between an investment company and its investment adviser, when required
to do so by an insurance regulatory authority. Rules 6e-
2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(B) provide that the insurance
may disregard the voting instructions of contract owners if the
contract owners initiate any change is such insurance company's
investment objectives, principal underwriter, or investment adviser
provided that disregarding such voting instructions is reasonable and
complies with the other provisions of Rules 6e-2 and 6e-3(T).
13. Rule 6e-2 recognizes that a variable life insurance contract
has important elements unique to insurance contracts, and is subject to
extensive state regulation. Applicants assert that in adopting Rule 6e-
2(b)(15)(iii), the Commission expressly recognized that state insurance
regulators have authority, pursuant to state insurance laws or
regulations, to disapprove or require changes in investment policies,
investment adviser or principal underwriters. The Commission also
expressly recognized that state insurance regulators have authority to
require an insurer to draw from its general account to cover costs
imposed upon the insurer by a change approved by contract owners over
the insurer's objection. The Commission, therefore, deemed such
exemption necessary ``to assure the solvency of the life insurer and
performance of its contractual obligations by enabling an insurance
regulatory authority or the life insurer to act when certain proposals
reasonably could be expected to increase the risks undertaken by the
life insurer.'' Applicants state that, in this respect, flexible
premium variable life insurance contracts are identical to scheduled
premium variable life insurance contracts; therefore, the corresponding
provisions of Rule 6e-3(T) were adopted in recognition of the same
factors.
14. Applicants further represent that the offer and sale of AOF
shares to Plans will not have any impact on the relief requested in
this regard. Shares of AOF sold to Plans will be held by the trustee(s)
or custodian(s) of the Plans as required by Section 403(a) of the
Employee Retirement Income Security Act of 1974 (``ERISA'') or
applicable provisions of the Code. Section 403(a) also provides that
the trustee(s) must have exclusive authority and discretion to manage
and control the Plan investments 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 state 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 permits
but 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
respect to Plans because they are not entitled to pass-through voting
privileges.
15. Some Plans, however may provide participants with the right to
give voting instructions. However, Applicants note that there is no
reason to believe that participants in Plans generally, or those in 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, Applicants submit that the purchase of AOF shares by Plans
that provide voting rights to participants does not present any
complications not otherwise occasioned by mixed and shared funding.
Conflicts of Interest
16. Applicants state that no increased conflicts of interest would
be presented by the granting of the requested relief. Applicants assert
that shared funding by unaffiliated insurance companies 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. 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. The fact that different insurers
may be domiciled in different states does not create a significantly
different or greater problem.
17. Applicants submit that shared funding by unaffiliated insurers,
in this respect, is not different than the use of the same investment
company as the funding vehicle for affiliated insurers, which Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) permit. Affiliated insurers may be
domiciled in different states and be subject to differing state law
requirements. Applicants state that affiliation does not reduce the
potential, if any exists, for difference in state regulatory
requirements. In any event, the conditions proposed below (which are
adapted from the conditions included in Rule 6e-3(T)(b)(15)) are
designed to safeguard against, and provide procedures for resolving,
any adverse effects that differences among state regulatory
requirements may produce. If a particular state insurance regulatory
decision conflicts with the majority of other state regulators, then
the affected insurer will be required to withdraw its separate
account's investment in AOF. This requirement will be provided for in
agreements that
[[Page 3544]]
will be entered into by Participating Insurance Companies with respect
to their participation in AOF.
18. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) give the insurance company
the right to disregard the voting instructions of the contract owners.
This right does not raise any issues different from those raised by the
authority of state insurance administrators over separate accounts.
Affiliation does not eliminate the potential for divergent judgments as
to the advisability or legality of a change in investment policies,
principal underwriter, or investment adviser initiated by contract
owners. 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.
19. A particular insurer's disregard of voting instructions,
nevertheless, could conflict with the majority of contract owner voting
instructions. If the insurer's judgment represents a minority position
or would preclude a majority vote, then the insurer may be required, at
the election of the relevant Fund, to withdraw its separate account's
investment in that Fund and no charge or penalty will be imposed as a
result of such withdrawal.
20. Applicants submit that investment by the Plans in any of the
Funds similarly will not increase the chance of conflict. Applicants
assert that the likelihood that voting instructions of insurance
company separate account holders will be disregarded or the possible
withdrawal referred to immediately above is extremely remote and this
possibility will be known, through prospectus disclosure, to any Plan
choosing to invest in the Funds. Moreover, Applicants state that even
if a material irreconcilable conflict involving Plans arises, the Plans
may simply redeem their shares and make alternative investments.
21. Applicants state that there is no reason why the investment
policies of the Funds would or should be materially different from what
these policies would or should be if the Funds funded only variable
annuity contracts or variable life insurance contracts, whether
flexible premium or scheduled premium contracts. Each type of insurance
product is designed as a long-term investment program. Similarly, the
investment objectives of Plans, long-term investment, coincides with
that of the Contracts and should not increase the potential for
conflicts. Applicants state that each Fund will be managed to attempt
to achieve the investment objective of the Fund, and not to favor or
disfavor any particular Participating Insurance Company or type of
Contract.
22. Applicants note that no one investment strategy can be
identified as appropriate to a particular insurance product or to a
Plan. Each pool of variable annuity and variable life insurance
contract owners is composed of individuals of diverse financial status,
age, insurance, and investment goals. A fund supporting even one type
of insurance product must accommodate these diverse factors in order to
attract and retain purchasers. Applicants submit that permitting mixed
and shared funding will provide economic support for the continuation
of AOF. In addition, permitting mixed and shared funding also will
facilitate the establishment of additional Funds serving diverse goals.
23. As noted above, Section 817(h) of the Code 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 insurance company separate accounts to share the same
underlying investment company. Applicants assert that, therefore,
neither the Code, nor the Treasury Regulations, nor the revenue rulings
thereunder recognize any inherent conflicts of interests if Plans,
variable annuity separate accounts, and variable life insurance
separate accounts all invest in the same management investment company.
24. While there may be differences in the manner in which
distributions are taxed for variable annuity contracts, variable life
insurance contracts and Plans, Applicants state that the tax
consequences do not raise any conflicts of interest. When distributions
are to be made, and the Separate Account or the Plan cannot net
purchase payments to make the distributions, the Separate Account or
the Plan will redeem share of AOF at their net asset value. The Plan
will then make distributions in accordance with the terms of the Plan
and the Participating Insurance Company will make distributions in
accordance with the terms of the Contract.
25. Applicants state that it is possible to provide an equitable
means of giving voting rights to Contract owners and to Plans.
Applicants represent that The Funds will inform each shareholder,
including each Separate Account and each Plan, of its respective share
of ownership in the respective Fund. Each Participating Insurance
Company will then solicit voting instructions in accordance with the
``pass-through'' voting requirement.
26. Applicants submit that the ability of the Funds to sell their
respective share 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. As noted above, regardless of the rights and benefits of
participants under the Plans, or Contract owners under Contracts, the
Plans and the Separate Accounts have rights only with respect to their
respective share of AOF. They can redeem such shares only at their net
asset value. No shareholder of any of the Funds has any preference over
any other shareholder with respect to distribution of assets or payment
of dividends.
27. Applicants assert that there are no conflicts between the
Contract owners of the Separate Accounts and the participants under the
Plans with respect to the state insurance commissioner's veto powers
over investment objectives. The basic premise of shareholder voting is
that not all shareholders may agree with a particular proposal. The
state insurance commissioners have been given the veto power in
recognition of the fact that insurance companies cannot simply redeem
their Separate Accounts out of one fund and invest in another. Time-
consuming, complex transactions must be undertaken to accomplish such
redemptions and transfers. On the other hand, trustees of Plans can
make the decision quickly and implement the redemption of their shares
from a Fund and reinvest in another funding vehicle without the same
regulatory impediments or, as is the case with most Plans, even hold
cash pending suitable investment. Based on the foregoing, Applicants
maintain that even if there should arise issues where the interests of
Contract owners and the interests of Plans are in conflict, the issues
can be almost immediately resolved because the trustees of the Plans
can, on their own, redeem shares out of the Fund.
28. Applicants submit that mixed and shared funding should provide
benefits to Contract owners by eliminating a significant portion of the
costs of establishing and administering separate funds. Participating
Insurance Companies will benefit not only from the investment and
administrative expertise of AOFMI and the Subadvisers, but also from
the cost efficiencies and investment flexibility afforded by a larger
pool of assets. Mixed and shared funding also would permit a greater
amount of assets
[[Page 3545]]
available for investment by AOF, thereby promoting economies of scale,
by permitting increased safety through greater diversification or by
making the addition of new Funds more feasible. Therefore, making AOF
available for mixed and shared funding will encourage more insurance
companies to offer variable contracts, and this should result 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.
29. Applicants assert that there is no significant legal impediment
to permitting mixed and shared funding. Separate accounts organized as
unit investment trusts historically have been employed to accumulate
shares of mutual funds which have not been affiliated with the
depositor or sponsor of the separate account. Applicants do not believe
that mixed and shared funding, and sales to qualified Plans, will have
any adverse federal income tax consequences.
Applicants' Conditions
Applicants have consented to the following conditions:
1. A majority of the Board of Directors (``Board'') of the Funds
shall consist of persons who are not ``interested persons'' thereof, 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 director or directors, then the
operation of this condition shall be suspended for: (a) A period of 45
days if the vacancy or vacancies may be filled by the remaining
directors on the Board; (b) a period of 60 days if a vote of
shareholders is required to fill the vacancy or vacancies; or (c) such
longer period as the Commission may prescribe by order upon
application.
2. Each Board will monitor its respective Fund for the existence of
any material irreconcilable conflict between the interests of the
Contract owners of all the Separate Accounts investing in the Funds and
the Plan participants investing in the Funds. 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 insurance, 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
Fund are being managed; (e) a difference in voting instructions given
by variable annuity Contract owners, variable life insurance Contract
owners and trustees of Plans; (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 the
voting instructions of Plan participants.
3. Participating Insurance Companies, AOFMI (or any other
investment adviser of the Funds), and any Plan that executes a fund
participation agreement upon becoming an owner of 10 percent or more of
the assets of a Fund (collectively, the ``Participants'') will report
any potential or existing conflicts to the relevant Board. Participants
will be responsible for assisting the Board in carrying out its
responsibilities under these conditions by providing the Board with all
information reasonably 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 voting instructions of Contract owners are disregarded and, if
pass-through voting is applicable, an obligation by each Plan to inform
the Board whenever it has determined to disregard Plan participant
voting instructions. The responsibility to report such information and
conflicts and to assist the Board will be contractual obligations of
all Participating Insurance Companies investing in the Funds under
their agreements governing participation therein, and such agreements
shall provide that these responsibilities will be carried out with a
view only to the interests of the Contract owners. The responsibility
to report such information and conflicts and to assist the Board will
be contractual obligations of all Plans with participation agreements,
and such agreements shall provide that these responsibilities will be
carried out with a view only to the interests of the Plan participants.
4. If it is determined by a majority of the Board of a Fund, or by
a majority of the disinterested directors of such Board, that a
material irreconcilable conflict exists, the relevant Participating
Insurance Companies and Plans will, at their own expense and to the
extent reasonably practicable (as determined by a majority of the
disinterested directors), take whatever steps are necessary to remedy
or eliminate the material irreconcilable conflict, which steps could
include: (a) Withdrawing the assets allocable to some or all of the
Separate Accounts from AOF or any Fund and reinvesting such assets in a
different investment medium, which may include another Fund; (b)
submitting the question as to whether such segregation should be
implemented to a vote of all affected 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 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 arises because a decision by a
Participating Insurance Company to disregard contract owner voting
instructions and that decision represents a minority position or would
preclude a majority vote, then that Participating Insurance Company may
be required, at the election of the relevant Fund, to withdraw its
separate account's investment therein, 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
participant voting instructions, if applicable, and that decision
represents a minority position or would preclude a majority vote, the
Plan may be required, at the election of the relevant Fund, to withdraw
its investment in such Fund, 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 that a material
irreconcilable conflict exists and to bear the cost of such remedial
action will be a contractual obligation of all Participating Insurance
Companies and Plans under their agreements governing their
participation in the Funds, and these responsibilities will be carried
out with a view only to the interests of Contract owners and Plan
participants. For purposes of this Condition 4, a majority of the
disinterested directors of the applicable Board will determine whether
or not any proposed action adequately remedies any material
irreconcilable conflict, but in no event will the relevant Fund or
AOFMI be required to establish a new funding medium for any Contract.
No Participating Insurance Company shall be required by this 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 and
[[Page 3546]]
adversely affected by the material irreconcilable conflict. Further, no
Plan shall be required by this Condition 4 to establish a new funding
medium for such Plan if: (a) A majority of Plan participants materially
and adversely affected by the irreconcilable material conflict vote to
decline such offer, or (b) pursuant to governing Plan documents and
applicable law, the Plan makes such decision without Plan participant
vote.
5. The determination by any Board of the existence of a material
irreconcilable conflict and its implications will be made known in
writing promptly to all Participants.
6. 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 Contract owners. Accordingly, Participating Insurance
Companies will vote shares of a Fund held in their separate accounts in
a manner consistent with voting instructions timely received from
contract owners. Each Participating Insurance Company will also vote
shares for which it has not received timely voting instructions from
contract owners as well as shares which the Participating Insurance
Company itself owns, in the same proportion as those shares for which
voting instructions from contract owners are timely-received.
Participating Insurance Companies will be responsible for assuring that
each of their separate accounts participating in the Funds 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 the
Funds will be a contractual obligation of all Participating Insurance
Companies under their agreements governing their participation in the
Funds. Each Plan will vote as required by applicable law and governing
Plan documents.
7. All reports of potential or existing conflicts received by a
Board, and all Board action with regard to determining the existence of
a conflict of interest, notifying Participants of a conflict, and
determining whether any proposed action adequately remedies a conflict,
will be properly recorded in the minutes of the meetings of the
appropriate Board or other appropriate records, and such minutes or
other records shall be made available to the Commission upon request.
8. Each Fund will notify all Participating Insurance Companies that
separate account prospectus disclosure regarding potential risks of
mixed and shared funding may be appropriate. Each Fund will disclose in
its prospectus that: (a) AOF is intended to be a funding vehicle for
variable annuity and variable life insurance contracts offered by
various insurance companies and for qualified pension and retirement
plans; (b) due to differences of tax treatment and other
considerations, the interests of various Contract owners participating
in AOF and the interests of Plans investing in AOF may conflict; and
(c) the Board will monitor events in order to identify the existence of
any material irreconcilable conflicts of interest and to determine what
action, if any, should be taken in response to any such conflict.
9. Each Fund 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 Fund) and, in
particular, each Fund will either provide for annual shareholder
meetings (except insofar as 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 Funds are not one of the trusts described
in the Section 16(c) of the 1940 Act), as well as with Section 16(a) of
the 1940 Act and, if and when applicable, Section 16(b) of the 1940
Act. Further, each Fund 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.
10. If and to the extent that Rule 6e-2 or Rule 6e-3(T) under the
1940 Act are amended, or Rule 6e-3 under the 1940 Act is adopted, to
provide exemptive relief from any provision of the 1940 Act or the
rules promulgated thereunder, with respect to mixed or shared funding,
on terms and conditions materially different from any exemptions
granted in the order requested by the application summarized in this
notice, then the Funds and/or Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with
Rules 6e-2 and 6e-3(T), as amended, or Rule 6e-3, as adopted, to the
extent that such rules are applicable.
11. The Participants, at least annually, will submit to the Boards
such reports, materials, or data as the Boards may reasonably request
so that the Boards may fully carry out the obligations imposed upon
them by the conditions contained in this Application. Such reports,
materials, and data will be submitted more frequently if deemed
appropriate by the applicable Boards. The obligations of the
Participants to provide these reports, materials, and data upon the
reasonable request of the Boards, shall be a contractual obligation of
all Participants under their agreements governing their participation
in the Funds.
12. If a Plan should ever become a holder of ten percent or more of
the assets of a Fund, such Plan will execute a participation agreement
with the applicable Fund. A Plan will execute an application containing
an acknowledgment of this condition upon such Plan's initial purchase
of the shares of any Fund.
Conclusion
For the reasons summarized above, Applicants assert that the
requested exemptions 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. 97-1558 Filed 1-22-97; 8:45 am]
BILLING CODE 8010-01-M
