[Federal Register Volume 60, Number 228 (Tuesday, November 28, 1995)]
[Notices]
[Pages 58710-58716]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28931]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21522; No. 812-9542]
Warburg, Pincus Trust; Notice of Application
November 20, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (the ``1940 Act'').
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APPLICANT: Warburg, Pincus Trust (``Trust'') and Warburg, Pincus
Counsellors, Inc. (``Counsellors'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act for exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of
the 1940 Act and sub-paragraph (b)(15) of Rules 6e-2 and 6e-3(T)
thereunder.
SUMMARY OF APPLICATION: Applicants seek an order to the extent
necessary to permit shares of the Trust and shares of any other
investment company or series thereof that is designed to fund insurance
products and for which Counsellors, or any of its affiliates, may serve
as investment adviser, administrator, manager, principal underwriter or
sponsor (collectively with the Trust, ``Funds'') to be sold to and held
by: (1) variable annuity and variable life insurance separate accounts
of both affiliated and unaffiliated life insurance companies; and (2)
qualified pension and retirement plans outside the separate account
content.
FILING DATE: The application was filed on March 17, 1995, and amended
on July 11, 1995 and November 17, 1995.
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 Secretary of the
Commission 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 December 15, 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: Warburg, Pincus Trust, 466 Lexington Avenue, New
York, New York 10017.
FOR FURTHER INFORMATION CONTACT: Yvonne M. Hunold, Assistant Special
Counsel, or Patrice M. Pitts, Special
[[Page 58711]]
Counsel, Office of Insurance Products (Division of Investment
Management), at (202) 942-0670.
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a free from the Public
Reference Branch of the Commission.
Applicants' Representations
1. The Trust is an open-end, management investment company
organized as a Massachusetts Business Trust. The Trust currently
consists of two portfolios, the International Equity Portfolio and the
Small Company Portfolio (collectively, ``Portfolios''). Additional
portfolios may be offered in the future (``Future Portfolios'').
Applicants incorporate by reference into the application the
registration statement (File No. 33-58125) on Form N-1A of the Trust,
which was declared effective on June 19, 1995.
2. Counsellors serves as investment adviser to the Portfolios and
is a registered investment adviser under the Investment Advisers Act of
1940. Counsellors' wholly owned subsidiary, Counsellors Securities,
Inc., serves as distributor for shares of the Portfolios. Counsellors
is a wholly owned subsidiary of Warburg, Pincus Counsellors G.P., a New
York general partnership and holding company. E.M. Warburg, Pincus &
Co., Inc. controls Counsellors through its ownership of a class of
voting preferred stock of Counsellors.
3. The Trust currently offers its shares to separate accounts,
registered with the Commission under the 1940 Act as unit investment
trusts, of life insurance company affiliates of Nationwide Insurance
Companies (``Nationwide Companies''). The Trust serves as the
investment vehicle for life and variable annuity contracts issued by
Nationwide Companies. Shares of the Trust also are held by a separate
account of Nationwide Companies, which is exempt from registration as
an investment company under the 1940 Act pursuant to Section 3(c)(1) of
the 1940 Act.
4. Applicants state that, upon the granting of the order requested
in this application, the Trust intends to offer shares of its
Portfolios and Future Portfolios to separate accounts \1\ of the
Nationwide Companies and of other unaffiliated insurance companies
(collectively, ``Participating Insurance Companies''),\2\ to serve as
an investment vehicle for various types of insurance products. These
insurance products may include variable annuity contracts, single
premium variable life insurance contracts, scheduled premium variable
life insurance contracts or flexible premium variable life insurance
contracts (collectively, ``Variable Contracts''). The Trust also
intends to sell shares of the Portfolios and Future Portfolios directly
to qualified pension and retirement plans (``Qualified Plans'') outside
of the separate account context.
\1\ These separate accounts may be registered as investment
companies under the 1940 Act or exempt from registration under the
1940 Act pursuant to Section 3(c)(1) (collectively, ``Separate
Accounts'').
\2\ Each Participating Insurance Company will enter into a fund
participation agreement (``Participating Agreement'') with the Trust
on behalf of the Fund in which the Participating Insurance Company
invests.
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5. In connection with any Contract issued by a Participating
Insurance Company, the application states that each such company will
have the legal obligation of satisfying all applicable requirements
under both state and federal law. Applicants further state that the
role of the Funds under this arrangement, insofar as the federal
securities laws are applicable, will consist of offering shares to the
Separate Accounts and fulfilling any conditions that the Commission may
impose upon granting the order requested in the application.
6. Applicants state that applicable tax law permits the Funds to
increase their asset base through the sale of Fund shares to Qualified
Plans without endangering the tax status of Variable Contracts issued
by Participating Insurance Companies. The Qualified Plans may choose
any of the Funds as the sole investment option under the Plan or as one
of several investment options. Participants may be given an investment
choice depending upon the Plan. Shares of any of the Funds sold to
Plans will be held by the trustees of the Plans as mandated by Section
403(a) of the Employee Retirement Income Security Act (``ERISA''). To
the extent permitted under applicable law, Counsellors may act as
investment adviser to Qualified Plans that will purchase shares of the
Funds. Applicants note that, pursuant to ERISA, pass-through voting is
not required to be provided to participants in the Qualified Plans.
Applicants' Legal Analysis
Mixed and Shared Funding and Sales to Qualified Plans
1. 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 (``Separate Account-
UIT''), Rule 6e-2(b)(15) provides partial exemptions from Sections
9(a), 13(a), 15(a) and 15(b) of the 1940 Act. The relief provided by
Rule 6e-2(b)(15) extends to a separate account's investment adviser,
principal underwriter, and sponsor or depositor. The exemptions granted
by Rule 6e-2(b)(15) are available, however, only where the management
investment company underlying the UIT offers its shares ``exclusively
to variable life insurance separate accounts of the life insurer, or of
any affiliated life insurance company.''
2. 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 insurance company (or of
two or more affiliated insurance companies) is referred to as ``mixed
funding.'' The use of a common management investment company as the
underlying investment medium for variable annuity and/or variable life
insurance separate accounts of unaffiliated insurance companies is
referred to as ``shared funding.'' ``Mixed and shared funding'' denotes
the use of a common management investment company to fund the variable
annuity and variable life insurance separate accounts of affiliated and
unaffiliated insurance companies. The relief granted by Rule 6e-
2(b)(15), thus, 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
separate account of the same company or of any other affiliated or
unaffiliated life insurance company.\3\ Rule 6e-2(b)(15), therefore,
precludes mixed and shared funding.
\3\ Applicants note that amendments to Rule 6e-2 have been
proposed by the Commission and, if adopted, would permit shares of
one underlying fund to be sold to separate accounts of the insurer,
or any affiliated life insurance company offering variable annuity
contracts or scheduled premium or flexible premium variable life
insurance. See Release No. IC-14421 (Mar. 15, 1985). The proposed
amendments, however, would not permit shares of one underlying fund
to be sold to separate accounts of unaffiliated companies.
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3. In connection with flexible premium variable life insurance
contracts issued through a Separate Account-UIT, 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 exemptive relief extends to a separate account's
investment adviser, principal underwriter, and sponsor or depositor.
The exemptions granted to a separate account by Rule 6e-3(T)(b)(15) are
[[Page 58712]]
available only where all the assets of the separate account consist of
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 contacts 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. . . . Rule 6e-3(T) thus
permits mixed funding with respect to a flexible premium variable life
insurance separate account, subject to certain conditions, but
precludes shared funding.
4. Applicants state that various factors have kept certain
insurance companies from offering variable annuity and variable life
insurance contracts. According to Applicants, these factor include: the
cost of organizing and operating an investment funding medium; the lack
of expertise with respect to investment management; the lack of name
recognition by the public of certain insurers as investment
professionals. Applicants argue that use of the Funds as common
investment media for the Variable Contracts would ease these concerns.
Participating Insurance Companies would benefit not only from the
investment and administrative expertise of the Funds' investment
advisor, but also from the cost efficiencies and investment flexibility
afforded by a large pool of funds. Applicants state that making the
Funds available for mixed and shared funding may encourage more
insurance companies to offer variable contracts such as the Variable
Contracts which may, in turn, increase competition with respect to both
the design and pricing of variable contracts. Applicants submit that
this can be expected to result in greater product variation and lower
charges. Applicants thus argue that Variable Contract owners would
benefit because mixed and shared funding will eliminate a significant
portion of the costs of establishing and administering separate funds.
Moreover, Applicants assert that sales of shares of the Funds to
Qualified Plans should increase the amount of assets available for
investment by the Funds. This should, in turn, promote economies of
scale, permit increased safety of investments through greater
diversification, and make the addition of new portfolios more feasible.
5. Applicants state that, because relief under paragraph (b)(15) of
Rules 6e-2 and 6e-3(T) is available only where shares are offered
exclusively to separate accounts of insurance companies, additional
exemptive relief is necessary if shares of the Funds also are to be
sold to Qualified Plans. Applicants assert that the relief granted by
paragraph (b)(15) of Rules 6e-2 and 6e-3(T) should not be affected by
the proposed sale of Fund shares to Qualified Plans because such sales
may allow for the development of larger pools of assets resulting in
the potential for greater investment and diversification opportunities,
and for decreased expenses at higher asset levels resulting in greater
cost efficiencies. Applicants further assert that they are not aware of
any stated rationale for the exclusion of separate accounts and
investment companies engaged in shared funding from the exemptive
relief provided under paragraph (b)(15) of Rules 6e-2 and 6e-3(T), or
for the exclusion of separate accounts and investment companies engaged
in mixed funding from the exemptive relief provided under (b)(15) of
Rules 6e-2 and 6e-3(T), or for the exclusion of separate accounts and
investment companies engaged in mixed funding from the exemptive relief
provided under Rule 6e-2(b)(15). Similarly, Applicants are not aware of
any stated rationale for excluding Participating Insurance Companies
from the exemptive relief requested because the Funds also may sell
their respective shares only to qualified pension and retirement plans.
6. Applicants state that current tax law permits Funds to increase
their asset base through the sale of Fund shares to Qualified Plans.
Applicants state that Section 817(h) of the Internal Revenue Code of
1986, as amended (``Code''), imposes certain diversification
requirements on the underlying assets of Variable Contracts invested in
the Funds. The Code provides that such Variable 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 Department 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, subject to certain exceptions. Treas. Reg.
Sec. 1.817-5 (1989). For example, shares in an investment company may
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 the variable contracts. Treas.
Reg. Sec. 1.817-5(b)(3)(iii).
7. Applicants state that the promulgation of Rules 6e-2 and 6e-3(T)
under the 1940 Act preceded the issuance of these Treasury regulations,
and that the sale of shares of the same investment company to both
separate accounts and Qualified Plans could not have been envisioned at
the time of the adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15).
8. Applicants therefore request relief from Sections 9(a), 13(a),
15(a) and 15(b) of the 1940 Act, and paragraph (b)(15) of Rules 6e-2
and 6e-3(T) thereunder to the extent necessary to permit shares of the
Funds to be offered and sold now and in the future to Separate Accounts
of Participating Insurance Companies in Connection with both mixed and
shared funding, and to be sold directly to Qualified Plans. Relief is
requested for a class or classes of persons and transactions consisting
of Participating Insurance Companies and their schedule premium
variable life insurance Separate Accounts and flexible premium variable
life insurance Separate Accounts (and, to the extent necessary, any
investment adviser, principal underwriter and depositor of such
Separate Accounts) investing in any of the Funds.
Disqualification
9. 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-end investment company if an affiliated person of that
company is subject to a disqualification specified in Sections 9(a)(1)
or 9(a)(2).
10. Rules 6e-2(b) and 6e-3(T)(b)(15) provide exemptions from
Section 9(a) under certain circumstances, subject to the 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.
11. Applicants state that the partial relief from Section 9(a)
found in subparagraph (b)(15) of Rules 6e-2 and 6e-3(T), in effect,
limits the monitoring
[[Page 58713]]
necessary to ensure compliance with Section 9 to that which is
appropriate in light of the policy and purposes of the Section.
Applicants state that those 1940 Act rules recognize that it is not
necessary for the protection of investors or for 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 will have no involvement in matters
pertaining to investment companies within that organization. Applicants
note that the Participating Insurance Companies are not expected to
play any role in the management or administration of the Funds.
Therefore, Applicants assert, applying the restrictions of Section 9(a)
serves no regulatory purpose. The application states that the relief
requested should not be affected by the proposed sale of shares of the
Funds to the Qualified Plans. Qualified Plans are not investment
companies and are not, therefore, subject to Section 9(a).
Pass-Through Voting
12. Subparagraph (b)(15)(iii) of Rules 6e-2 and 6e-3(T) assumes the
existence of a pass-through voting requirement with respect to
management investment company shares held by a separate account.
Applicants represent that the Participating Insurance Companies will
provide pass-through voting privileges to all Variable Contract owners
so long as the Commission interprets the 1940 Act to require such
privileges, and that Participating Insurance Companies will vote all
shares as to which no response from Variable Contract owners is timely
received, as well as shares owned by them, in the same proportion as
shares for which voting instructions are received.
13. Subparagraph (b)(15)(iii) of Rules 6e-2 and 6e-3(T) provides
partial exemptions from the pass-through voting requirement with
respect to several significant matters, assuming observance of the
limitations on mixed and shared funding. Subparagraph (b)(15)(iii)(A)
of Rules 6e-2 and 6e-3(T) provides that the insurance company may
disregard voting instructions of its contract owners with respect to
the subclassification or investment objectives of a fund or any
contract between a fund and its investment advisor, when required to do
so by an insurance regulatory authority.
14. Subparagraph (b)(15)(iii)(B) of Rule 6e-2 and subparagraph
(b)(15)(iii)(A)(2) of Rule 6e-3(T) provides that the insurance company
may disregard voting instructions of its contract owners if the
contract owners initiate any change in the company's investment
objectives, principal underwriter or investment advisor, provided that
disregarding such voting instructions is reasonable and subject to the
other provisions of paragraph (b)(5)(ii) and (b)(7)(ii)(B) and (C) of
each rule.
15. Applicants represent that the Funds' sale of shares to
Qualified Plans does not affect the relief requested in this regard. As
previously noted, shares of the Funds sold to Qualified Plans would be
held by the trustees of such Plans as required by Section 403(a) of
ERISA. Section 403(a) also provides that the trustee(s) must have
exclusive authority and discretion to manage and control the Plan with
two exceptions: (a) when the Qualified Plan expressly provides that the
trustee(s) are subject to the direction of the 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 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.
16. Unless one of the two exceptions stated in Section 403(a)
applies, Qualified 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, there is no
pass-through voting to the participants in such Qualified Plans.
Accordingly, Applicants assert 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
Qualified Plans because the Plans are not entitled to pass-through
voting privileges. Applicants further assert that investment in the
Funds by Qualified Plans will not create any of the voting
complications occasioned by mixed and shared funding because Qualified
Plan investor voting rights cannot be frustrated by veto rights of
insurers or state regulators.
17. Applicants state that some Qualified Plans may provide
participants with the right to give voting instructions. Applicants
submit that there is no reason to believe that participants in
Qualified Plans generally, or those in a particular Plan, either as a
single group or in combination with other Qualified Plans, would vote
in a manner that would disadvantage Variable Contract owners.
Accordingly, Applicants assert that the purchase of Fund shares by
Qualified Plans that provide voting rights to participants does not
present any complications not otherwise occasioned by mixed and shared
funding.
Conflicts of Interest
18. Applicants state that no increased conflicts of interest would
be present by the granting of the requested relief. Applicants assert
that shared funding does not present any issues that do not already
exist where a single insurance company is licensed to do business in
several, or all, states. Applicants note that where insurers are
domiciled in different states, it is possible that the state insurance
regulatory body in a state in which one insurance company is domiciled
could require action that is inconsistent with the requirements of
insurance regulators in one or more other states in which other
insurance companies are domiciled. Applicants submit that this
possibility is no different and no greater than exists where a single
insurer and its affiliates offer their insurance products in several
states.
19. Applicants further submit that affiliation does not reduce the
potential, if any exists, for differences among state regulatory
requirements. In any event, the conditions (adapted from the conditions
included in Rule 6e-3(T)(b)(15)) discussed below are designed to
safeguard against any adverse effects that these differences may
produce. If a particular state insurance regulator's decision conflicts
with the decisions of a majority of other state regulators, the
affected insurer may be required to withdraw its separate account's
investment in the relevant Funds.
20. Applicants also argue that affiliation does not eliminate the
potential, if any, for divergent judgments as to when a Participating
Insurance Company could disregard Variable Contract owner voting
instructions. Potential disagreement is limited by the requirement that
the Participating Insurance Company's disregard of voting instructions
be both reasonable and based on specific good faith determinations.
However, if a Participating Insurance Company's decision to disregard
Variable Contract owner instructions represents a minority position or
would preclude a majority vote approving a particular change, such
Participating Insurance Company may be required, at the election of the
relevant Fund, to withdraw its investment in that Fund.
[[Page 58714]]
No charge or penalty will be imposed as a result of such withdrawal.
21. Applicants state that there is no reason why the investment
policies of a Fund with mixed funding would or should be materially
different from what those policies would or should be if such
investment company or series thereof funded only variable annuity or
variable life insurance contracts. Applicants therefore argue that
there is no reason to believe that conflicts or interest would result
from mixed funding. Moreover, Applicants represent that the Funds will
not be managed to favor or disfavor any particular insurance company or
type of Variable Contract.
22. Applicants note that Section 817(h) imposes certain
diversification standards on the underlying assets of variable annuity
contracts and variable life insurance contracts held in the portfolios
of management investment companies. Treasury Regulation 1.817-
5(f)(3)(iii), which established diversification requirements for such
portfolios, specifically permits ``qualified pension or retirement
plans'' and insurance company separate accounts to share the same
underlying investment company. Therefore, Applicants have concluded
that neither the Code, nor the Treasury regulations, nor the revenue
rulings thereunder, present any inherent conflicts of interest if
Qualified Plans, variable annuity separate accounts and variable life
insurance separate accounts all invest in the same management
investment company.
23. 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, these tax
consequences do not raise any conflicts of interest. When distributions
are to be made, and the Separate Account or the Qualified Plan is
unable to net purchase payments to make the distributions, the Separate
Account or the Qualified Plan will redeem shares of the Funds at their
respective net asset value. The Qualified Plan will then make
distributions in accordance with the terms of the Plan. A Participating
Insurance Company will surrender values from the separate account into
the general account to make distributions in accordance with the terms
of the Variable Contract.
24. Applicants state that they do not see any greater potential for
material irreconcilable conflicts arising between the interests of
participants under the Qualified Plans and owners of the Variable
Contracts issued by the Separate Accounts from possible future changes
in the federal tax laws than that which already exists between variable
annuity contract owners and variable life insurance contract owners.
25. With respect to voting rights, Applicants state that it is
possible to provide an equitable means of giving such voting rights to
Variable Contract owners and to Qualified Plans. Applicants represent
that a Fund will inform each shareholder, including each Separate
Account and Qualified Plan, of information necessary for the meeting,
including their respective share ownership in the respective Funds. A
Participating Insurance Company will then solicit voting instruction in
accordance with the ``pass-through'' voting requirements of Rules 6e-2
and 6e-e(T).
26. Applicants argue that the ability of the Funds to sell their
respective shares directly to Qualified Plans does not create a
``senior security,'' as such term is defined under Section 18(g) of the
1940 Act, with respect to any Variable Contract owner as opposed to a
participant under a Qualified Plan. Regardless of the rights and
benefits of participants and Variable Contract owners under their
respective Qualified Plans and Variable Contracts, Qualified Plans and
Separate Account have rights only with respect to their respective
shares of the Funds. Such shares may be redeemed only at net asset
value. No shareholder of the Funds has any preference over any other
shareholder with respect to distribution of assets or payment of
dividends.
27. Applicants state that there are no conflicts between Variable
Contract owners and participants under Qualified Plans with respect to
the state insurance commissioners' veto powers (direct with respect to
variable life insurance and indirect with respect to variable
annuities) over investment objectives. The basis premise of corporate
democracy and 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 can not simply redeem their separate accounts out of one fund
and invest those assets in another fund. Generally, to accomplish such
redemptions and transfers, complex and time consuming transactions must
be undertaken. Conversely, trustees of (or participants in) Qualified
Plans can redeem shares of the Funds held by them and reinvest in
another Fund without the same regulatory impediments or, as is the case
with most Qualified Plans, even hold cash or other liquid assets
pending suitable alternative investment. Based on the foregoing,
Applicants represent that even should there arise issues where the
interests of Variable Contract owners and the interest of the Qualified
Plans conflict, the issues can be almost immediately resolved in that
trustees of the Qualified Plans can, independently, redeem shares out
of the Funds.
28. Applicants have concluded that the addition of Qualified Plans
as eligible shareholders should not increase the risk of material
irreconcilable conflicts among shareholders. However, Applicants assert
further that, even if a material irreconcilable conflict involving
Qualified Plans arose, the trustees of (or participants in) the
Qualified Plans, unlike the Separate Accounts, can redeem their shares
and make alternative investments. Applicants thus submit that allowing
Qualified Plans to invest directly in shares of the Funds should not
increase the opportunity for conflicts of interest.
29. Further, Applicants state that, regardless of the types of Fund
shareholders, Counsellors is legally obligated to manage the Funds in
accordance with each Fund's investment objectives, policies and
restrictions as well as any guidelines established by the relevant
Board of Directors or Trustees of the Funds. Applicants assert that
Counsellors works with a pool of money without consideration for the
identity of shareholders, and, thus, manage the Funds in the same
manner as any other mutual fund.
30. Applicants believe that there is no significant legal
impediment to permitting mixed and shared funding. Additionally,
Applicants note the previous issuance of orders permitting mixed and
shared funding where shares of a fund were sold directly to qualified
plans, such as the Qualified Plans. Applicants note further that there
is ample precedent for extending exemptive relief to members of a class
or classes or persons, not currently identified, that may be similarly
situated in the future. Such class relief has been granted in various
contexts and from a wide variety of the 1940 Act's provisions including
class exemption in the context of mixed and shared funding.
Applicants' Conditions
The Applicants have consented to the following conditions if the
order requested in the application is granted:
1. A majority of the Board of Trustees or Board of Directors (each
a ``Board'') of each Fund shall consist of persons who are not
``interested persons'' of the
[[Page 58715]]
Funds, 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 or Trustee,
then the operation of this condition shall be suspended: (i) for a
period of 45 days, if the vacancy or vacancies may be filled by the
appropriate 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. Each Board will monitor its respective Funds for the existence
of any material irreconcilable conflict among the interests of the
Variable Contract owners of all the Separate Accounts and of
participants of Qualified Plans investing in the respective Funds, and
determine what action, if any, should be taken in response to such
conflicts. 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 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 the investments of the Funds are managed; (e) a
difference in voting instructions given by the owners of variable
annuity and variable life insurance contracts; or (f) a decision by a
Participating Insurance Company to disregard voting instructions of
Variable Contract owners.
3. Participating Insurance Companies, Counsellors (or any other
investment manager of a Fund), and any Qualified Plan that executes a
Participation Agreement upon becoming an owner of 10% or more of the
assets of a Fund (collectively, ``Participants'') shall report any
potential or existing conflicts to the relevant Board. Participants
will be responsible for assisting the appropriate 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 insurance company Participant to inform the Board
whenever it has determined to disregard contract holders' voting
instructions. The responsibility to report such information and
conflicts and to assist the Board will be a contractual obligation of
all Participants under their Participation Agreements and such
Agreements, in the case of insurance company Participants, shall
provide that these responsibilities will be carried out with a view
only to the interests of the Variable Contract owners.
4. If it is determined by a majority of the Board of a Fund, or by
a majority of its disinterested members, that a material irreconcilable
conflict exists, the relevant Participant shall, at its expense and to
the extent reasonably practicable (as determined by a majority of
disinterested members of the Board), 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 a Fund or its portfolio and reinvesting such
assets in a different investment medium (including another portfolio of
the relevant Fund, if any), or, in the case of insurance company
participants, 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, life insurance contract owners, or
variable contract owners of one or more Participants) that votes in
favor of such segregation, or offering to the affected contract owners
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 an insurance
company Participant's decision to disregard contract owner voting
instructions, and that decision represents a minority position or would
preclude a majority vote, such Participant may be required, at the
election of the relevant Fund, to withdraw its Separate Account's
investment in the 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 an irreconcilable material conflict exists, and to
bear the cost of such remedial action, shall be a contractual
obligation of all Participants under their Participation Agreements,
and this responsibility, in the case of insurance company Participants
shall be carried out with a view only to the interests of the Variable
Contract owners.
For the purposes of this Condition ``4.,'' a majority of
disinterested members of the applicable Board shall determine whether
any proposed action adequately remedies any irreconcilable material
conflict, but in no event will the relevant Fund or Counselors (or any
other investment advisor to the Funds) be required to establish a new
funding medium for any Variable Contract. Further, no insurance company
President shall be required by this Condition ``4.'' 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 Variable Contract owners materially
affected by the irreconcilable material conflict.
5. The Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known promptly in
writing to all Participants.
6. Insurance company Participants will provide pass-through voting
privileges to all Variable Contract owners so long as the Commission
continues to interpret the 1940 Act as requiring pass-through voting
privileges for Variable Contract owners. Accordingly, such
Participants, where applicable, will vote shares of the Fund held in
its Separate Accounts in a manner consistent with voting instructions
timely received from Variable Contract owners. Also, each insurance
company Participant will vote shares of a Fund 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. Insurance
company Participants will be responsible for assuring that each of
their Separate Accounts investing in a Fund calculates voting
privileges in a manner consistent with other Participants. The
obligation to vote a Fund's shares and calculate voting privileges in a
manner consistent with all other Separate Accounts will be a
contractual obligation on all Participants under their Participation
Agreements.
7. All reports received by the Board of potential or existing
conflicts, 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 appropriate
Board or other appropriate records. Such minutes or other records shall
be made available to the Commission upon request.
8. Each Fund will notify all Participants that Separate Account
prospectus disclosure regarding potential risks of mixed and shared
funding may be appropriate. Each Fund
[[Page 58716]]
shall disclose in its prospectus that: (a) its shares may be offered to
insurance company separate accounts that fund both variable annuity and
variable life insurance contracts, as well as to Qualified Plans; (b)
differences in tax treatment or other considerations may cause the
interests of various Variable Contract owners participating in the
Funds and the interests of Qualified Plans investing in the Funds to
conflict; and (c) each Fund's Board will monitor the Funds for any
material conflicts and determine what action, if any, should be taken.
9. Each Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders (for these purposes, the persons
having a voting interest in the shares of the Funds). In particular,
each Fund will either provide for annual meetings (except to the extent
that the Commission may interpret Section 16 of the 1940 Act not to
require such meetings) or comply with Section 16(c) of the 1940 Act
(although none of the Funds shall be one of the trusts described in
Section 16(c) of the 1940 Act, as well as with Section 16(a) and, if
applicable, Section 16(b) of the 1940 Act. Further, 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.
10. If and to the extent Rule 6e-2 or Rule 6e-3(T) is amended, or
Rule 6e-3(T) 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 Funds and/or the
Participants, as appropriate, shall take such steps as may be necessary
to comply with Rule 6e-2 or Rule 6e-3(T), as amended, and Rule 6e-3, as
adopted, to the extent such rules are applicable.
11. No less than annually, the Participants shall submit to each
Board such reports, materials or data as each Board may reasonably
request so that such Boards may fully carry out the obligations imposed
upon them by the conditions stated in the application. Such reports,
materials, and data shall be submitted more frequently if deemed
appropriate by the Boards. The obligations of the Participants to
provide these reports, materials, and data upon reasonable request of a
Board shall be a contractual obligation of all Participants under their
Participation Agreement.
12. None of the Funds will accept a purchase order from a Qualified
Plan shareholder if such purchase would make the Qualified Plan
shareholder an owner of 10% or more of the assets of a Fund unless such
Qualified Plan executes a fund participation agreement with the
applicable Fund. A Qualified Plan shareholder 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 stated above, Applicants assert that the requested
exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act
and Rules 6e-2 and 6e-3(T) thereunder are appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-28931 Filed 11-27-95; 8:45 am]
BILLING CODE 8010-01-M
