[Federal Register Volume 59, Number 215 (Tuesday, November 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27633]
[[Page Unknown]]
[Federal Register: November 8, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20677; No. 812-8910]
Lexington Emerging Markets Fund, Inc., et al.
November 1, 1994.
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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APPLICANTS: Lexington Emerging Markets Fund, Inc. (``Fund''), Lexington
Natural Resources Trust (``Trust''), and Lexington Management
Corporation (``LMC'') (collectively ``Applicants'').
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 Rules 6e-2(b)(15) and 6e-3(T)(b)(15).
SUMMARY OF APPLICATION: Applicants seek an order exempting themselves
and certain affiliated and unaffiliated life insurance companies
(``Participating Insurance Companies'') and their separate accounts
(``Separate Accounts'') to the extent necessary to permit series of
shares of any current or future investment series of the Trust and the
Fund to be sold to and held by Separate Accounts funding variable
annuity and variable life insurance contracts issued by the
Participating Insurance Companies.
FILING DATE: The application was filed on March 22, 1994, and amended
on September 30, 1994.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the SEC's Secretary and
serving Applicants with a copy of the request, personally or by mail.
Hearing requests should be received by the SEC by 5:30 p.m. on November
28, 1994, 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: Lawrence Kantor, Managing Director, Lexington Management
Corporation, Park 80 West--Plaza Two, Saddle Brook, New Jersey 07662.
FOR FURTHER INFORMATION CONTACT: Yvonne M. Hunold, Senior Counsel, at
(202) 942-0670, Office of Insurance Products (Division of Investment
Management).
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the SEC's Public
Reference Branch.
Applicants' Representations
1. The Trust is a Massachusetts Business Trust registered under the
1940 Act as an open-end management investment company (File No. 33-
26116). The Trust's capitalization consists of an unlimited number of
shares of beneficial interest, no par value, representing an interest
in one underlying portfolio of investments. The Trust is managed by its
Board of Trustees.
2. The Fund is registered under the 1940 Act as an open-end
management investment company (File No. 33-73520). The Fund's
capitalization consists of one billion shares of authorized common
stock, of which five hundred million are designated ``Lexington
Emerging Market Fund Series'' (``Existing Portfolio''), and five
hundred million are unissued and unclassified. The Board of Directors
of the Fund is authorized to classify or reclassify any unissued shares
of the Fund (``New Portfolios'') (together with Lexington Emerging
Market Fund Series, ``Portfolios'').
3. The Portfolios will serve as investment vehicles for various
types of variable annuity and variable life insurance contracts
(``Variable Contracts''). Portfolio shares will be offered to Separate
Accounts of certain affiliated and unaffiliated Participating Insurance
Companies which enter into Participation Agreements with the Portfolios
and LMC. The Applicants represent that Portfolio shares will be offered
only to individual Separate Accounts issuing variable annuity contracts
until the Commission issues its order granting the requested relief.
4. LMC serves as investment adviser to the Trust, the Fund and each
Existing Portfolio. Lexington Funds Distributor, Inc. (``LFD'') serves
as distributor for the Existing Portfolios. LMC is a registered
investment adviser under the Investment Advisers Act of 1940. LMC and
LFD are each a wholly-owned subsidiary of Piedmont Management Company,
Inc. (``Piedmont''), a publicly traded corporation.
Applicants' Legal Analysis
1. Applicants request that the Commission issue an order under
Section 6(c) of the 1940 Act granting exemptive relief from Sections
9(a), 13(a), 15(a) and 15(b) of the 1940 Act and Rules 6e-2(b)(15) and
6e-3(T)(b)(15). Exemptive relief is sought by applicants and affiliated
and unaffiliated Participating Insurance Companies and their Separate
Accounts to the extent necessary to permit mixed and shared funding.
2. Rule 6e-2(b)(15) provides partial exemptive relief from Sections
9(a), 13(a), 15(a) and 15(b) of the 1940 Act to separate accounts
registered under the 1940 Act as a unit investment trust to the extent
necessary to offer and sell scheduled premium variable life insurance
contracts. The relief provided by the rule also extends to a separate
account's investment adviser, principal underwriter, and sponsor or
depositor.
3. The exemptions granted by Rule 6e-2(b)(15) are available only to
a management investment company underlying a separate account
(``underlying fund'') that offers its shares exclusively to variable
life insurance separate accounts of a life insurer, or of any
affiliated life insurance company, issuing scheduled premium variable
life insurance contracts. The relief granted by Rule 6e-2(b)(15) is not
available to the separate account issuing scheduled premium variable
life insurance contracts if the underlying fund also offers its shares
to a separate account issuing variable annuity or flexible premium
variable life insurance contracts. The use of a common underlying fund
as an investment vehicle for both variable annuity contracts and
scheduled or flexible premium variable life insurance contracts is
referred to herein as ``mixed funding.''
4. Additionally, the relief granted by Rule 6e-2(b)(15) is not
available to separate accounts issuing scheduled premium variable life
insurance contracts if the underlying fund also offers its shares to
unaffiliated life insurance company separate accounts funding variable
contracts. The use of a common fund as an underlying investment vehicle
for separate accounts of unaffiliated insurance companies is referred
to herein as ``shared funding.''
5. Rule 6e-3(T)(b)(15) provides partial exemptions from Sections
9(a), 13(a), 15(a), and 15(b) of the 1940 Act to separate accounts
registered as a unit investment trust that is offering flexible premium
variable life insurance contracts. The exemptive relief extends to a
separate account's investment adviser, principal underwriter, and
sponsor or depositor. These exemptions are available only where the
underlying fund of the separate account offers its shares ``exclusively
to separate accounts of the life insurer, or of any affiliated life
insurance company, offering either scheduled contracts or flexible
contracts, or both; or which also offer their shares to variable
annuity separate accounts of the life insurer or of an affiliated life
insurance company * * *.'' Therefore, Rule 6e-3(T) permits mixed
funding with respect to a flexible premium variable life insurance
separate account, subject to certain conditions. However, Rule 6e-3(T)
does not permit shared funding because the relief granted by Rule 6e-
3(T)(b)(15) is not available to a flexible premium variable life
insurance separate account that owns shares of a management company
that also offers its shares to separate accounts (including variable
annuity and flexible premium and scheduled premium variable life
insurance separate accounts) of unaffiliated life insurance companies.
6. For these reasons, Applicants seek an order under section 6(c)
of the 1940 Act. Section 6(c) authorizes the Commission to grant
exemptions from the provisions of the 1940 Act, and rules thereunder,
if and to the extent that an exemption is necessary or appropriate in
the public interest and consistent with the protection of investors and
the purposes fairly intended by the policy and provisions of the 1940
Act.
7. Section 9(a) of the 1940 Act makes it unlawful for any company
to serve as an investment adviser to, or principal underwriter for, any
registered open-end investment company if an affiliated person of that
company is subject to any disqualification specified in Sections
9(a)(1) or 9(a)(2). Subparagraphs (b)(15)(i) and (ii) of Rules 6e-2 and
6e-3(T) provide exemptions from Section 9(a) under certain
circumstances, subject to limitations on mixed and shared funding. The
relief provided by subparagraphs (b)(15)(i) of Rules 6e-2 and 6e-3(T)
permits a person disqualified under Section 9(a) to serve as an
officer, director, or employee of the life insurer, or any of its
affiliates, so long as that person does not participate directly in the
management or administration of the underlying fund. The relief
provided by subparagraph (b)(15(ii) of Rules 6e-2 and 6e-3(T) permits
the life insurer to serve as the underlying fund's investment adviser
or principal underwriter, provided that none of the insurer's personnel
who are ineligible pursuant to Section 9(a) are participating in the
management or administration of the fund.
8. Applicants state that the partial relief granted under
subparagraphs (b)(15) of Rules 6e-2 and 6e-3(T) from the requirements
of Section 9(a), in effect, limits the monitoring of an insurer's
personnel that would otherwise be necessary to ensure compliance with
Section 9 to that which is appropriate in light of the policy and
purposes of Section 9. Applicants submit that Rules 6e-2 and 6e-3(T)
recognize that it is not necessary for the protection of investors or
for the purposes of the 1940 Act to apply the provisions of Section
9(a) to the many individuals in an insurance company complex, most of
whom typically will have no involvement in matters pertaining to an
investment company in that organization. Applicants further submit that
there is no regulatory reason to apply the provisions of Section 9(a)
to the many individuals in various unaffiliated Participating Insurance
Companies that may utilize the Portfolios as the funding medium for
variable contracts because of mixed and shared funding.
9. Subparagraph (b)(15)(iii) of Rules 6e-2 and 6e-3(T) provide
partial exemptions from Sections 13(a), 15(a), and 15(b) of the 1940
Act to the extent that those sections have been deemed by the
Commission to require ``pass-through'' voting with respect to
management investment company shares held by a separate account, to
permit the insurance company to disregard the voting instructions of
its contractowners in certain limited circumstances.\1\
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\1\Applicants request no relief for variable annuity separate
accounts from the disqualification or pass-through voting
provisions.
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10. Under subparagraph (b)(15)(iii)(A) of Rules 6e-2 and 6e-3(T),
the insurance company may disregard voting instructions of its
contractowners in connection with the voting of shares of an underlying
fund under certain limited circumstances. Voting instructions may be
disregarded if they would cause the underlying fund to make, or refrain
from making, certain investments which would result in changes to the
subclassification or investment objectives of the underlying fund, or
to approve or disapprove any contract between a fund and its investment
advisers, when required to do so by an insurance regulatory authority,
subject to the provisions of paragraphs (b)(5)(i) and (b)(7)(ii)(A) of
each Rule.
11. Under subparagraph (b)(15)(iii)(B) of Rules 6e-2 and 6e-3(T),
an insurance company may disregard contractowners' voting instructions
if the contractowners initiate any change in the underly8ng fund's
investment objectives, principal underwriter or investment adviser,
provided that disregarding such voting instructions is reasonable and
subject to the other provisions of paragraphs (b)(5)(ii) and
(b)(7)(ii)(B) and (C) of each Rule.
12. Applicants submit 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. In this regard, Applicants state that a particular state
insurance regulatory body could require action that is inconsistent
with the requirements of other states in which the insurance company
offers its policies. Accordingly, Applicants submit that the fact that
different insurers may be domiciled in different states does not create
a significantly different or enlarged problem.
13. Applicants state further that, under paragraph (b)(15) of Rules
6e-2 and 6e-3(T), the right of an insurance company to disregard
contractowners' voting instructions does not raise any issues different
from those raised by the authority of state insurance administrators
over separate accounts, and that affiliation does not eliminate the
potential, if any, for divergent judgments as to the advisability or
legality of a change in investment policies, principal underwriter, or
investment adviser. Applicants state that the potential for
disagreement is limited by the requirements in Rules 6e-2 and 63-3(T)
that the insurance company's disregard of voting instructions be
reasonable and based on specific good faith determinations.
14. Applicants submit that mixed funding and shared funding should
benefit variable contractowners by: (a) Eliminating a significant
portion of the costs of establishing and administering separate funds;
(b) allowing for a greater amount of assets available for investment by
the Portfolios and the Trust, thereby promoting economies of scale,
permitting increased safety through greater diversification, and/or
making the addition of new portfolios more feasible; and (c)
encouraging more insurance companies to offer variable contracts,
resulting in increased competition with respect to both variable
contract design and pricing, which can be expected to result in more
product variation and lower charges. Each Portfolio will be managed to
attempt to achieve its investment objectives and not to favor or
disfavor any particular Participating Insurance Company or type of
insurance product.
15. Applicants assert that there is no significant legal impediment
to permitting mixed and shared funding. Applicants state that each of
the Portfolios will be managed to attempt to achieve its investment
objective and not to favor or disfavor any particular Participating
Insurance Company, separate account, or type of insurance product.
Separate accounts organized as unit investment trusts have historically
been employed to accumulate shares of mutual funds which have not been
affiliated with the depositor or sponsor of the separate account.
Applicants also believe that mixed and shared funding will have no
adverse federal income tax consequences.
Applicants' Conditions:
The Applicants have consented to the following conditions:
1. A majority of the Board of each of the Fund and the Trust shall
consist of persons who are not ``interested persons'' of either the
Fund or the Trust, respectively, as defined by Section 2(a)(19) of the
1940 Act and Rules thereunder and as modified by any applicable orders
of the Commission, except that, if this condition is not met by reason
of death, disqualification, or bona fide resignation of any Director(s)
or Trustee(s) then the operation of this conditions shall be suspended:
(i) For a period of 45 days, if the vacancy or vacancies may be filled
by the Board; (ii) for a period of 60 days, if a vote of shareholders
is required to fill the vacancy or vacancies; or (iii) for such longer
period as the Commission may prescribe by order upon application.
2. The Board of each of the Fund and the Trust will monitor the
Fund and the Trust for the existence of any material irreconcilable
conflict between the interests of the contractowners of all separate
accounts investing in either of the Portfolios. A material
irreconcilable conflict may arise for a variety of reasons, including:
(a) State insurance regulatory authority action; (b) a change in
applicable federal or state insurance, tax, or securities laws or
regulations, or a public ruling, private letter ruling, no-action or
interpretive letter, or any similar action by insurance, tax, or
securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the
investments of a Portfolio are being managed; (e) a difference among
voting instructions given by variable annuity and variable life
insurance contractowners; or (f) a decision by a Participating
Insurance Company to disregard contractowners' voting instructions.
3. Participating Insurance Companies and LMC will report any
potential or existing conflicts, of which they become aware, to the
Board of either the Fund or the Trust, as appropriate. Participating
Insurance Companies and LMC will be obligated to assist the relevant
Board in carrying out its responsibilities under these conditions by
providing the relevant Board with all information reasonably necessary
for it to consider any issues raised. This responsibility includes, but
is not limited to, an obligation by each Participating Insurance
Company to inform the relevant Board whenever contractowner voting
instructions are disregarded. The responsibility to report such
information and conflicts and to assist the relevant Board will be a
contractual obligations of all Participating Insurance Companies
investing in a Portfolio under their Participation Agreements, and
those Agreements shall provide that such responsibilities will be
carried out with a view only to the interests of the contractowners.
4. If a majority of the Board of the Fund or the Trust, or a
majority of the Independent Directors or Trustees, determine that a
material irreconcilable conflict exists, the relevant Participating
Insurance Companies shall, at their expense and to the extent
reasonably practicable (as determined by a majority of Independent
Directors or Trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including:
(a) Withdrawing the assets allocable to some or all of the Separate
Accounts from the Portfolios and reinvesting those assets in a
different investment medium (including another Applicant, if any) or
submitting the question whether such segregation should be implemented
to a vote of all affected contractowners and, as appropriate,
segregating the assets of any appropriate group (i.e., annuity
contractowners, life insurance contractowners, or variable
contractowners of one or more Participating Insurance Companies that
votes in favor of such segregation), or offering to the affected
contractowners the option of making such a change; and (b) establishing
a new registered management investment company or managed separate
account. If a material irreconcilable conflict arises because of a
Participating Insurance Company's decision to disregard contractowner
voting instructions, and that decision represents a minority position
or would preclude a majority vote, the Participating Insurance Company
may be required, at the election of LMC (on behalf of one or more of
the Portfolios), to withdraw its Separate Account's investment therein,
and no charge or penalty will be imposed as a result of such
withdrawal. The responsibility to take remedial action in the event of
a determination by the Board of the Fund or the Trust that an
irreconcilable material conflict exists and to bear the cost of such
remedial action shall be a contractual obligation of all Participating
Insurance Companies under their Participation Agreements, and these
responsibilities will be carried out with a view only to the interests
of the contractowners.
For purposes of condition ``4.'', a majority of Independent
Directors or Trustees shall determine whether or not any proposed
action adequately remedies any irreconcilable material conflict, but in
no event will the Portfolios or LMC be required to establish a new
funding medium for any variable contract. No Participating Insurance
Company 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 contractowners materially affected
by the irreconcilable material conflict.
5. The determination by the Board of the Fund or the Trust of the
existence of an irreconcilable material conflict and its implications
shall be made known promptly in writing to all Participating Insurance
Companies in the Fund or the Trust, respectively.
6. Participating Insurance Companies will provide pass-through
voting privileges to all variable contractowners so long as the
Commission continues to interpret the 1940 Act as requiring pass-
through voting privileges for variable contractowners. Accordingly,
Participating Insurance Companies will vote shares of a Portfolio held
in their Separate Accounts in a manner consistent with timely voting
instructions received from contractowners. Each Participating Insurance
Company also will vote shares of a Portfolio held in its Separate
Accounts for which no timely voting instructions from contractowners
are received, as well as shares it owns, in the same proportion as
those shares for which voting instructions are received. Participating
Insurance Companies shall be responsible for assuring that each of
their Separate Accounts participating in a Portfolio calculates voting
privileges in a manner consistent with other Participating Insurance
Companies. The obligation to calculate voting privileges in a manner
consistent with all other Separate Accounts investing in a Portfolio
shall be a contractual obligation of all Participating Insurance
Companies under their Participating Agreements.
7. Each Portfolio will notify all Participating Insurance Companies
that prospectus disclosure regarding potential risks of mixed and
shared funding may be appropriate. Each Portfolio shall disclose in its
Prospectus that: (a) Its shares may be offered to insurance company
separate accounts that fund annuity and life insurance contracts of
Participating Insurance Companies that may or may not be affiliated
with one another; (b) because of differences of tax treatment or other
considerations, the interests of various contractowners might at some
time be in conflict; and (c) a Board of the Fund or the Trust, as
appropriate, will monitor for any material conflicts and determine what
action, if any, should be taken.
8. All reports received by the Board of the Fund or the Trust
regarding potential or existing conflicts, and all action of a Board
with respect to determining the existence of a conflict, notifying
Participating Insurance Companies of a conflict, and determining
whether any proposed action adequately remedies a conflict, will be
properly recorded in the minutes of other appropriate records of the
relevant Board, and such minutes or other records shall be made
available to the Commission upon request.
9. If and to the extent Rule 6e-2 and Rule 6e-3(T) are 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 Portfolios and/or
the Participating Insurance Companies, as appropriate, shall take such
steps as may be necessary to comply with Rule 6e-2 and Rule 6e-3(T), as
amended, and Rule 6e-3, as adopted, to the extent such rules are
applicable.
10. The Portfolios will comply with all provisions of the 1940 Act
requiring voting by shareholders (which, for these purposes, shall be
the persons having a voting interest in the shares of the Portfolios),
and in particular each Portfolio either will provide for annual
meetings (except insofar as the Commission may interpret Section 16 of
the 1940 Act not to require such meetings) or, as each Portfolio
currently intends, comply with Section 16(c) (although neither the Fund
nor the Trust are trusts described in this section) as well as with
Section 16(a) and, if and when applicable, Section 16(b). Further, each
Portfolio will act in accordance with the Commission's interpretation
of the requirements of Section 16(a) with respect to periodic elections
of directors and with whatever rules the Commission may adopt with
respect thereto.
11. The Participating Insurance Companies and/or LMC, shall at
least annually submit to the Board of the Fund and the Trust such
reports, materials or data as each Board may reasonably request so that
such Board may fully carry out the obligations imposed upon it by these
stated conditions, and said reports, materials, and data shall be
submitted more frequently if deemed appropriate by a Board. The
obligation of the Participating Insurance Companies to provide these
reports, materials, and data upon reasonable request of a Board shall
be a contractual obligation of all Participating Insurance Companies
under their Participation Agreements.
Conclusion
For the reasons stated above, Applicants assert that the requested
exemptions, in accordance with the standards of Section 6(c), are
appropriate in the public interest and consistent with the protection
of investors and the purposes fairly intended by the policy and
provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-27633 Filed 11-7-94; 8:45 am]
BILLING CODE 8010-01-M
