[Federal Register Volume 63, Number 225 (Monday, November 23, 1998)]
[Notices]
[Pages 64745-64750]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31227]
[[Page 64745]]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23536; No. 812-10694]
Variable Insurance Funds, et al.; Notice of Application
November 16, 1998.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for an Order pursuant to Section 6(c) of
the Investment Company Act of 1940 (``1940 Act'').
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SUMMARY OF APPLICATION: Applicants seek an amended order \1\ to permit
shares of each existing and future series of the Variable Insurance
Funds Trust and any other investment company that is designed to fund
variable insurance products and for which BISYS Fund Services, or any
of its affiliates, may serve as principal underwriter or administrator
to be sold to and held by: (a) separate accounts funding variable
annuity and variable life insurance contracts issued by both affiliated
and unaffiliated life insurance companies; (b) qualified pension and
retirement plans outside of the separate account context (``Qualified
Plans'' or ``Plans''); (c) the manager of a Fund or certain related
corporations (``Adviser''); and (d) the general account of any life
insurance company, or certain related corporations, whose separate
account holds, or will hold, shares of the Funds (``General
Accounts'').
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\1\ Applicants seek an amendment of a prior order issued by the
Commission in connection with File No. 812-9236 (``Original
Order''), which granted exemptive relief to certain of the
Applicants from the same provisions of the 1940 Act and rules
thereunder from which Applicants now seek exemptive relief.
Applicants: Variable Insurance Funds (``Trust''), BISYS Fund
Services (``BISYS''), Branch Banking and Trust Company (``BB&T''), and
AmSouth Bank (``AmSouth'').
FILING DATE: The application was filed on June 5, 1997, and amended on
June 2, 1998. Applicants have agreed to file another agreement, the
substance of which is incorporated in this notice, during the notice
period.
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 Commission 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 December 9, 1998, and should be
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 requester's interest, the reason for the
request and the issues contested. Persons who wish to be notified of a
hearing may request notification 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 BISYS, 3435
Stelzer Road, Columbus, Ohio 43219-3035.
FOR FURTHER INFORMATION CONTACT: Laura A. Novack, Senior 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, 450 Fifth Street, N.W.,
Washington, D.C. 20549 (202-942-8090).
Applicants' Representations
1. The Trust is a business trust organized under the laws of
Massachusetts on July 20, 1994. It is registered under the 1940 Act as
an open-end management investment company and currently consists of
four separate series, each with their own investment objectives and
policies. The Trust may in the future establish additional series.
2. BISYS, a division of BISYS Group, Inc., is a registered broker-
dealer and a member of the National Association of Securities Dealers,
Inc. BISYS serves as the administrator and the principal underwriter
for each series of the Trust. When the Commission granted the Original
Order, BISYS operated under its former name, The Winsbury Company.
3. BB&T, a bank in North Carolina, is the principal bank affiliate
of BB&T Corporation, a bank holding company whose headquarters are in
North Carolina. BB&T serves as Adviser to two series of the Trust.
4. AmSouth is the principal bank affiliate of AmSouth
Bancorporation, whose headquarters are in the mid-south region. AmSouth
serves as Adviser to two series of the Trust.
5. The Funds currently are offered to one or more separate accounts
of Hartford Life Insurance Company (``Hartford''), to serve as the
investment medium for variable annuity contracts issued by Hartford.
The Trust intends, however, to offer shares of its existing and future
series to separate accounts of other insurance companies, including
companies that are not affiliated with Hartford, to serve as the
investment vehicle for various types of insurance products, which may
include variable annuity contracts, scheduled premium variable life
insurance contracts, and flexible premium variable life insurance
contracts (collectively, ``variable contracts''). Insurance companies
whose separate account or accounts may in the future own shares of the
Trust or any other Fund are referred to herein as ``participating
insurance companies.''
6. Each participating insurance company will have the legal
obligation of satisfying all requirements applicable to it under the
federal securities laws in connection with any variable contract issued
by such company.
7. Fund shares also may be offered directly to Qualified Plans
described in Treasury Regulation Sec. 1.817-(f)(3)(iii).
8. The Qualified Plans may choose any of the Funds as the sole
investment under the Plan or as one of several investments. Qualified
Plan participants may or may not be given the right to select among the
Funds, depending on the Qualified Plan itself. Fund shares sold to
Qualified Plans will be held by the trustees of such Qualified Plans as
required by Section 403(a) of the Employee Retirement Income Security
Act (``ERISA''). No Adviser will act as investment adviser to any of
the Qualified Plans that will purchase shares of a Fund advised by that
Adviser.
9. Fund shares also may be offered to General Accounts whose
separate account holds, or will hold shares of the Fund and to certain
related corporations, pursuant to Treasury Regulation Sec. 1.817-
5(f)(3)(i).
10. Fund shares may also be offered to Advisers and to certain
related corporations, pursuant to Treasury Regulation Sec. 1.817-
(f)(3)(ii).
11. Applicants anticipate that sales made pursuant to Treasury
Regulation Sec. 1.817(f)(3) (i) and (ii) generally will be made to
Advisers, and generally for the purpose of providing the capital
required under Section 14(a) of the 1940 Act.
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) thereof and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) thereunder, to the extent necessary to: (a) permit
``mixed'' and ``shared'' funding as defined below; and (b) allow shares
of the Funds to be sold to Qualified Plans, Advisers and General
Accounts. Applicants state that the
[[Page 64746]]
Commission previously granted the first element of the requested relief
in the Original Order.
2. Section 6(c) authorizes the Commission to exempt any person,
security or transaction, or any class or classes of persons,
securities, or transactions, from the provisions of the 1940 Act, or
the rules 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 (the ``Trust Account''),
Rule 6e-2(b)(15) provides partial exemptions from Sections 9(a), 13(a),
15(a), and 15(b) of the 1940 Act. The exemptions granted by Rule 6e-
2(b)(15) are available only where the management investment company
underlying the Trust Account offers its shares ``exclusively to
variable life insurance separate accounts of the life insurer or any
affiliated life insurance company * * *'' (emphasis added).
4. The use of a common management investment company as the
underlying investment medium for both variable annuity and variable
life insurance separate accounts of a single life insurance company (or
of two or more affiliated life insurance companies) is referred to as
``mixed funding.'' The use of a common management company as the
underlying investment medium for variable life insurance separate
accounts of one insurance company and separate accounts funding
variable contracts of one or more unaffiliated life insurance companies
is referred to as ``shared funding.'' The relief granted by Rule 6e-
2(b)(15) is not available with respect to a scheduled premium variable
life insurance separate account that owns shares of an underlying fund
that also offers its shares to a variable annuity or a flexible premium
variable life insurance separate account of the same company or of any
affiliated company. Therefore, Rule 6e-2(b)(15) precludes mixed and
shared funding.
5. Moreover, because the relief granted by Rule 6e-2(b)(15) is
available only where shares are offered exclusively to separate
accounts, additional exemptive relief may be necessary if the shares of
the Funds are also to be sold to Plans, General Accounts or Advisers.
6. In connection with the funding of flexible premium variable life
insurance contracts issued through a Trust Account, Rule 6e-3(T)(b)(15)
provides partial exemptions from Sections 9(a), 13(a), 15(a), and 15(b)
of the 1940 Act. The exemptions granted by Rule 6e-3(T)(b)(15) are
available only where the underlying fund 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, or which offer their shares to any
such life insurance company in consideration solely for advances made
by the life insurer in connection with the operation of the separate
account * * *'' (emphasis added). Thus while Rule 6e-3(T)(b)(15)
permits mixed funding with respect to a flexible premium variable life
insurance separate account, it does not permit shared funding because
the relief granted by Rule 6e-3(T)(b)(15) is not available with respect
to a flexible premium variable life insurance separate account that
owns shares of an underlying fund that also offers its shares to
separate accounts of unaffiliated life insurance companies. Moreover,
because the relief under Rule 6e-3(T) is available only where shares
are offered exclusively to separate accounts, or to life insurers in
connection with the operation of a separate account, additional
exemptive relief may be necessary if the shares of the Funds are also
to be sold to Plans or Advisers or General Accounts.
7. Applicants state that the current tax law permits the Funds to
increase their asset base through the sale of shares to Qualified
Plans. Section 817(h) of the Internal Revenue Code of 1986, as amended
(the ``Code''), imposes certain diversification standards on the
underlying assets of the variable contracts. The Code provides that
such contracts shall not be treated as an annuity contract or life
insurance contract for any period during which the investments are not
adequately diversified in accordance with regulations prescribed by the
Treasury Department. Treasury regulations provide that, to meet the
diversification requirements, all of the beneficial interests in an
investment company must be held by the segregated asset accounts of one
or more insurance companies. The regulations do contain certain
exceptions to this requirement, however, one of which permits shares of
an investment company to be held by the trustee of a Qualified 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 variable contracts (Treas.
Reg. Sec. 1.817-5(f)(3)(iii)).
8. Applicants also state that the current tax law permits the Funds
to sell shares to Advisers and General Accounts. Treasury regulations
permit such sales as long as the return on shares held by a General
Account or Adviser is computed in the same manner as for shares held by
a separate account, and the General Account or Adviser does not intend
to sell Fund shares held by it to the public. As to Advisers, Treasury
regulations also require that the Advisers may only hold the shares in
connection with the creation or management of the Fund.
9. Applicants state that the promulgation of Rules 6e-2(b)(15) and
6e-3(T)(b)(15) preceded the issuance of these Treasury regulations
which made it possible for shares of a Fund to be held by the trustee
of a Qualified Plan, an Adviser, or General Account without adversely
affecting the ability of shares of the Fund to also be held by the
separate accounts of insurance companies in connection with their
variable life insurance contracts. Thus, Applicants assert that the
sale of shares of a Fund to separate accounts through which variable
life insurance contracts are issued and Qualified Plans, its Adviser or
General Accounts could not have been envisioned at the time of the
adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15), given the then-
current tax law.
10. Applicants assert that if the Funds were to sell shares only to
Qualified Plans, Advisers and General Accounts, or to separate accounts
funding variable annuity contracts, no exemptive relief would be
necessary. Applicants state that none of the relief provided under
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) relates to Qualified Plans,
Advisers or General Accounts, or to a registered investment company's
ability to sell its shares to such purchasers. Exemptive relief is
required in the application only because some of the separate accounts
that will invest in the Funds may themselves be investment companies
that rely on Rules 6e-2 and 6e-3(T) and that desire to have the relief
continue in place.
11. Section 9(a)(3) of the 1940 Act provides that it is unlawful
for any company to act 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 Sections 9(a) (1) or (2). Rules 6e-2(b)(15) (i) and (ii),
and 6e-3(T)(b)(15) (i) and (ii) provide partial
[[Page 64747]]
exemptions from Section 9(a) under certain circumstances, subject to
the limitations on mixed and shared funding. These exemptions limit the
application of eligibility restrictions to affiliated individuals or
companies that directly participate in the management of the underlying
management investment company.
12. Applicants state that the relief provided by Rules 6e-2(b)(15)
and 6e-3(T)(b)(15) 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.
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 assert 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 an insurance company complex, most of whom typically
will have no involvement in matters pertaining to investment companies
in that organization. Applicants assert that it also is unnecessary to
apply the restrictions of Section 9(a) to the many individuals in
various unaffiliated insurance companies (or affiliated companies of
participating insurance companies) that may utilize the Funds as a
funding medium for variable contracts.
13. Applicants further state that there is no regulatory purpose in
extending the monitoring requirements to embrace a full application of
Section 9(a)'s eligibility restrictions because of mixed or shared
funding. Applicants maintain that the relief previously granted in the
Original Order and requested herein will in no way be affected by the
proposed sale of shares of the Funds to Qualified Plans, Advisers or
General Accounts. Applicants state that the insulation of the Funds
from those individuals who are disqualified under the 1940 Act remains
in place, and that since Qualified Plans, Advisers, and General
Accounts are not investment companies and will not be deemed to be
affiliates solely by virtue of their shareholdings, no additional
relief is necessary.
14. Applicants submit that Sections 13(a), 15(a) and 15(b) of the
1940 Act 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
holders in certain limited circumstances. For example, Applicants state
that subparagraph (b)(15)(iii)(B) of Rules 6e-2 and 6e-3(T) under the
1940 Act provide that the insurance company may disregard contract
owners' voting instructions if the contract owners initiate any changes
in the investment company's investment policies, 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).
15. Applicants state that Rule 6e-2 recognizes that a variable life
insurance contract has important elements unique to insurance contracts
and is subject to extensive state regulation of insurance. Applicants
assert that in adopting Rule 6e-2(b)(15)(iii), the Commission expressly
recognized that state insurance regulators have authority to disapprove
or require changes in investment policies, investment advisers, or
principal underwriters. Applicants also maintain that the Commission
has 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. Applicants state that the Commission deemed
such exemptions necessary to assure the solvency of the life insurer
and the 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 further state that in this respect,
flexible premium variable life insurance contracts are identical to
scheduled premium variable life insurance contracts, and that therefore
corresponding provisions of Rule 6e-3(T) were adopted in recognition of
the same considerations as the Commission applied in adopting Rule 6e-
2.
16. Applicants further represent that the sale of Fund shares to
Qualified Plans, Advisers, or General Accounts does not affect the
relief previously granted by the Commission in the Original Order and
requested herein in this regard. Shares of the Funds sold to Plans
would be held by the trustees of such Plans as mandated by Section
403(a) of ERISA. Section 403(a) also provides that the trustees must
have exclusive authority and discretion to manage and control the
Qualified Plan with two exceptions: (a) When the Qualified Plan
expressly provides that the trustees are subject to the direction of a
named fiduciary who is not a trustee, in which case the trustees are
subject to proper directions made in accordance with the terms of the
Qualified Plan and not contrary to ERISA; and (b) when the authority to
manage, acquire or dispose of assets of the Qualified 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, the Plan trustees have 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 the named fiduciary. In any event, there is no pass-through
voting to the participants in such Plans. Similarly, Advisers and
General Accounts are not subject to any pass-through voting
requirements. Accordingly, Applicants assert that, unlike the case with
the insurance company separate accounts, the issue of the resolution of
material irreconcilable conflicts with respect to voting is not present
with Qualified Plans, Advisers or General Accounts.
17. Applicants note that Section 817(h) of the Code in effect
requires that the investments made by variable annuity and variable
life insurance separate accounts be ``adequately diversified.''
Applicants state that if a separate account is organized as a unit
investment trust that invests in a single fund or series, the separate
account will not be diversified. In this situation, however, Applicants
state that Section 817(h) provides, in effect, that the diversification
test will be applied at the underlying fund level rather than the
separate account level, but only if ``all of the beneficial interests''
in the underlying fund ``are held by one or more insurance companies
(or affiliated companies) in their general account or in segregated
asset accounts * * * .'' Applicants state that Treasury Regulation
1.817-5, which established diversification requirements for such funds,
specifically permits, among other things, investment company managers,
insurance company general accounts, ``qualified pension or retirement
plans'' and separate accounts to share the same underlying investment
company. Therefore, Applicants have concluded that neither the Code,
the Treasury regulations nor revenue rulings thereunder present any
inherent conflicts of interest if Advisers, General
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Accounts, Qualified Plans, variable annuity separate accounts and
variable life separate accounts all invest in the same management
investment company.
18. Applicants state that while there are differences in the manner
in which distributions are taxed for variable annuity contracts,
variable life insurance contracts and Qualified Plans, the tax
consequences do not raise any conflicts of interest. When distributions
are to be made, and the separate account or the Qualified Plan cannot
net purchase payments to make the distributions, the separate account
or the Plan will redeem shares of the Funds at their net asset value.
The Plan will then make distributions in accordance with the terms of
the Plan and the insurance company will make distributions in
accordance with the terms of the variable contract.
19. Applicants state that there are no conflicts of interest
between the contract owners of the separate accounts and the
participants under the Qualified Plans with respect to the state
insurance commissioners' veto powers over investment objectives. 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. To
accomplish such redemptions and transfers, complex and time consuming
transactions must be undertaken. Conversely, trustees of Qualified
Plans can make the decision quickly and implement redemption of shares
from a Fund and reinvest the moneys 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 represent that even should the interests of contract owners
and the interests of Qualified Plans conflict, the conflicts can be
almost immediately resolved because the trustees of the Qualified Plans
can, independently, redeem shares out of the Funds.
20. Applicants submit that shared funding by unaffiliated insurance
companies does not present any conflict of interest issues that do not
already exist where a single insurance company is licensed to do
business in several or all states. Applicants note 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. Applicants state that if a
particular state insurance regulator's decision conflicts with a
majority of other insurance regulators, the affected insurer may be
required to withdraw its separate account's investment in a Fund.
Applicants submit that the fact that different insurers may be
domiciled in different states does not create a significantly different
or enlarged problem.
21. Applicants further submit that affiliation does not reduce the
potential, if any exists, for differences in state regulatory
requirements. In any event, the conditions discussed below are designed
to safeguard against, and provide procedures for resolving, any adverse
effects that these differences may produce.
22. Applicants also argue that affiliation does not eliminate the
potential, if any exists, for divergent judgments as to when an
insurance company can disregard contract owners' voting instructions.
Potential disagreement is limited by the requirements that the
insurance company's disregard of voting instructions be reasonable and
based on specific good faith determinations. However, if a particular
insurance company's decision to disregard voting instructions
represents a minority position or would preclude a majority vote, the
insurance company may be required, at a Fund's election, to withdraw
its separate account's investment in that Fund. No charge or penalty
will be imposed as a result of such a withdrawal.
23. Applicants submit that there is no reason why the investment
policies of a Fund, or a series thereof, would or should be materially
different from what they would or should be if such Fund or series
funded only variable annuity contracts or variable life insurance
policies, whether flexible premium or scheduled premium policies.
Applicants state that each type of insurance product is designed as a
long-term investment program, and Applicants represent that each Fund,
or series thereof, will be managed to attempt to achieve its investment
objective, and not to favor or disfavor any particular participating
insurer or type of insurance product.
24. Applicants argue that the ability of the Funds to sell their
respective shares directly to Qualified Plans, Advisers, and General
Accounts does not create a ``senior security'' as such term is defined
under Section 18(g) of the 1940 Act, with respect to any contract owner
as opposed to a participant under a Qualified Plan, an Adviser, or an
insurer. Regardless of the rights and benefits of participants under
the Qualified Plans or contract owners, the Qualified Plans, Advisers,
General Accounts and the separate accounts have rights only with
respect to their respective shares of the Funds. They only can redeem
such shares 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.
25. Applicants assert that with respect to voting rights, it is
possible to provide an equitable means of giving such voting rights to
contract owners and to Qualified Plans, Advisers, and General Accounts.
The transfer agent will inform each participating insurance company of
its share ownership in each separate account, as well as inform the
trustees of Qualified Plans, Advisers and insurers of their holdings.
The participating insurance company will then solicit voting
instructions in accordance with Rules 6e-2 and 6e-3(T).
26. Applicants assert that permitting a Fund to sell its shares to
its Adviser(s) or to the general account of a participating insurance
company in compliance with Treasury Regulation Sec. 1.817-5 will
enhance Fund management without raising significant concerns regarding
material irreconcilable conflicts. Applicants state that unlike the
circumstances of many investment companies that serve as underlying
investment media for variable insurance products, the Trust may be
deemed to lack an insurance company ``promoter'' for purposes of Rule
14a-2 under the 1940 Act. Applicants state that they anticipate that
many other Funds may lack an insurance company promoter. Accordingly,
Applicants state that such Funds will be subject to the requirements of
Section 14(a) of the 1940 Act, which generally requires that an
investment company have a net worth of $100,000 upon making a public
offering of its shares.
27. Applicants assert that given the conditions of Treas. Reg.
Sec. 1.817-5(f)(3) and the ``harmony of interest'' between a Fund and
its Adviser or a participating insurance company, little incentive for
overreaching exists. Applicants also argue that such investments should
not implicate the concerns discussed above regarding the creation of
material irreconcilable conflicts. Instead, Applicants represent that
permitting investment by Advisers or General Accounts will permit the
orderly and efficient creation and operation of Funds, or series
thereof, and reduce the expense and uncertainty of using outside
parties at the early stages of Fund operations.
28. Applicants state that various factors have limited the number
of insurance companies that offer variable contracts. These factors
include the cost
[[Page 64749]]
of organizing and operating a funding medium, the lack of expertise
with respect to investment management (principally with respect to
stock and money market investments) and the lack of name recognition by
the public of certain insurers as investment experts. In particular, a
number of smaller life insurance companies may not find it economically
feasible, or within their investment or administrative expertise, to
enter the variable contract business on their own. Applicants state
that use of the Funds as a common investment medium for variable
contracts and Qualified Plans would help alleviate these concerns for
smaller life insurance companies because participating insurance
companies and Qualified Plans will benefit not only from the investment
and administrative expertise of BB&T, AmSouth, any other Adviser and
BISYS, but also from the cost efficiencies and investment flexibility
afforded by a large pool of funds. Therefore, making the Funds
available for mixed and shared funding and permitting the purchase of
fund shares by Qualified Plans may encourage more life insurance
companies to offer variable contracts. Applicants submit that 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 mixed and shared funding also should
benefit variable contract owners by eliminating a significant portion
of the costs of establishing and administering separate funds.
Furthermore, granting the requested relief should result in an
increased amount of assets available for investment by the Funds.
Applicants assert that this also may benefit variable contract owners
by promoting economies of scale, by permitting increased safety through
greater diversification, or by making the addition of new portfolios
more feasible.
30. Applicants believe that mixed and shared funding and sales of
Fund shares to Qualified Plans, Advisers, and General Accounts will
have no adverse federal income tax consequences.
Applicants' Conditions
Applicants have consented to the following conditions:
1. A majority of the Board of Trustees or Directors (``Board'') of
each 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 the
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 trustee or
director, then the operator of this condition shall be suspended: (a)
for a period of 45 days if the vacancy or vacancies may be filled by
the Board; (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. Each Fund's Board will monitor the Fund for the existence of any
material irreconcilable conflict among the interests of the contract
owners of all separate accounts investing in the Fund and of Plan
participants investing in the Fund. 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 or series are being managed; (e) a difference in voting
instructions given by owners of variable annuity contract owners and
variable life insurance contract owners; (f) a decision by an insurer
to disregard the voting instructions of contract owners; or (g) if
applicable, a decision by a Qualified Plan to disregard the voting
instructions of Plan participants.
3. In the event that a Qualified Plan shareholder should become an
owner of 10% or more of the assets of a Fund selling its shares in
reliance on the requested exemptive relief, such Qualified Plan
shareholder will execute a fund participation agreement providing for
the conditions of this Application (to the extent applicable) with such
Fund. A Qualified Plan shareholder will execute an application
containing an acknowledgment of this condition at the time of its
initial purchase of shares of a Fund.
4. Participating insurance companies (on their own behalf as well
as by virtue of any investment of general account assets in a Fund),
BISYS, the Adviser, and any Qualified Plan that executes a fund
participation agreement (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 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 contract owner voting instructions are disregarded. The
responsibility to report such information and conflicts and to assist
the Board will be a contractual obligation of all insurers investing in
a Fund under their agreements governing participation in the Fund, as
well as a contractual obligation of any Qualified Plan that executes
such a participation agreement, and such agreements shall provide that
such responsibilities will be carried out with a view only to the
interests of the contract owners or, as appropriate, Qualified Plan
participants.
5. If a majority of the Board, or a majority of its disinterested
trustees or directors, determine that a material irreconcilable
conflict exists, the relevant participating insurance companies and
Qualified Plans, at their expense and to the extent reasonably
practicable (as determined by a majority of the disinterested trustees
or directors), shall take whatever steps are necessary to remedy or
eliminate the material irreconcilable conflict. Such steps could
include: (a) withdrawing the assets allocable to some or all of the
separate accounts from the Fund or any series thereof and reinvesting
such assets in a different investment medium, which may include another
series of the 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., annuity or life insurance contract owners or variable
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 charge; and (c)
establishing a new registered management investment company or managed
separate account. If a material irreconcilable conflict arises because
of an insurer'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 election
of the Fund, to withdraw its separate account's investment in such
Fund, and no charge or penalty will be imposed as a result of such
withdrawal.
The reponsibility 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 that have executed
participation agreements under their agreements
[[Page 64750]]
governing participation in the Fund. These responsibilities shall be
carried out with a view only to the interests of contract owners and
Plan participants, as appropriate.
6. For purposes of Condition 5, a majority of the disinterested
members of the Board shall determine whether any proposed action
adequately remedies any material irreconcilable conflict. In no event
will the Fund be required to establish a new funding medium for any
variable contract. No participating insurance company shall be required
by Condition 5 to establish a new funding medium for any variable
contract if a majority of variable contract owners materially and
adversely affected by the material irreconcilable conflict, vote to
decline such offer.
7. Participants will be informed promptly in writing of a Board's
determination of the existence of a material irreconcilable conflict
and its implications.
8. Participating insurance companies will provide pass-through
voting privileges to all variable contract owners whose contracts are
funded through a registered separate account so long as the Commission
continues to interpret the 1940 Act as requiring pass-through voting
privileges for variable contract owners. Accordingly, such
participating insurance companies will vote shares of each Fund or
series thereof held in its registered separate accounts in a manner
consistent with voting instructions timely received from contract
owners. In addition, each participating insurance company will vote
shares of each Fund, or series thereof, held in its registered separate
accounts for which it has not received timely voting instructions, as
well as shares it owns, in the same proportion as those shares for
which it has received voting instructions. Participating insurance
companies will be responsible for assuring that each of their
registered separate accounts participating in a Fund 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 registered separate accounts investing in a
Fund shall be a contractual obligation of all participating insurance
companies under the agreements governing their participation in the
Fund. Each Qualified Plan will vote as required by applicable law and
governing Plan documents.
9. Each Fund will notify all participating insurance companies that
prospectus disclosure regarding potential risks of mixed and shared
funding may be appropriate. Each Fund shall disclose in its prospectus
that: (a) its shares are offered to insurance company separate accounts
that fund both annuity and life insurance contracts; (b) differences in
tax treatment or other considerations may cause the interests of
various contract owners participating in the Fund to conflict; and (c)
the Board will monitor for any material conflicts and determine what
action, if any, should be taken.
10. All reports of potential or existing conflicts of interest
received by a Board, and all Board action with regard to: (a)
determining the existence of a conflict; (b) notifying Participants of
a conflict; and (c) determining whether any proposed action adequately
remedies a conflict, will be properly recorded in the minutes of the
relevant Board or other appropriate records. Such minutes or other
records shall be made available to the Commission upon request.
11. If and to the extent Rule 6e-2 and Rule 6e-3(T) 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 thereunder with respect
to mixed or shared funding on terms and conditions materially different
from any exemptions granted in the order requested by Applicants, then
each Fund and/or 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.
12. Each Fund will comply with all the provisions of the 1940 Act
requiring voting by shareholders (for these purposes, the persons
having a voting interest in the shares of the Fund). In particular,
each Fund either will 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 Funds are not one of the trusts described in Section
16(c) of the 1940 Act) as well as with Section 16(a) 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 (or
trustees) and with whatever rules the Commission may promulgate with
respect thereto.
13. As long as the Commission continues to interpret the 1940 Act
as requiring pass-through voting privileges for variable contract
owners, each Adviser and insurance company general account will vote
its shares in the same proportion as all contract owners having voting
rights with respect to that Fund, provided, however, that the Adviser
or insurance company general account shall vote its shares in such
other manner as many be required by the Commission or its staff.
14. No less than annually, the Participants shall submit to a Board
such reports, materials or data as the Board may reasonably request so
that such Board may carry out fully the obligations imposed upon it by
the conditions contained in this application. Such reports, materials
and data shall be submitted more frequently if deemed appropriate by
the Board. The obligations of the participating insurance companies and
Plans to provide these reports, materials and data upon reasonable
request of a Board shall be a contractual obligation of all
participating insurance companies and any Qualified Plan that has
executed a participation agreement under the agreements governing their
participation in each Fund.
15. A participating insurance company, or any affiliate, will
maintain at its home office, available to the Commission, (a) a list of
its officers, directors and employees who participate directly in the
management or administration of the Funds or any variable annuity or
variable life insurance separate account, organized as a unit
investment trust, that invests in the Funds and/or (b) a list of its
agents who, as registered representatives, offer and sell the variable
annuity and variable life contracts funded through such a separate
account. These individuals will continue to be subject to the automatic
disqualification provisions of Section 9(a).
Conclusion
For the reasons summarized above, Applicants represent that the
exemptions requested are necessary and 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. 98-31227 Filed 11-20-98; 8:45 am]
BILLING CODE 8010-01-M
