[Federal Register Volume 63, Number 230 (Tuesday, December 1, 1998)]
[Notices]
[Pages 66210-66215]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31891]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23545; File No. 812-11196]
Aetna Variable Fund, et al.; Notice of Application
November 23, 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 (the ``1940 Act'').
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SUMMARY OF APPLICATION: Applicants seek an order pursuant to Section
6(c) of the 1940 Act for exemptions from the provisions of 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) thereunder, to the extent necessary to permit shares of
any current or future series of each Fund and shares of any other
investment company that is offered as a funding medium for insurance
products and for which ALIAC, Aeltus, or any of their affiliates, may
now or in the future serve as investment adviser, principal underwriter
or administrator (each Fund and such other investment companies
referred to collectively as the ``Funds'') to be offered and sold to,
and held by (1) variable annuity and variable life insurance separate
accounts of both affiliated and unaffiliated life insurance companies
(``Participating Insurance Companies''), (2) qualified pension and
retirement plans held outside of the separate account context
(``Qualified Plans'' or ``Plans''), and (3) the investment adviser of
any Fund or any of the Adviser's affiliates (the ``Adviser'' and
collectively, the ``Advisers'').
APPLICANTS: Aetna Variable Fund, Aetna Income Shares, Aetna Variable
Encore Fund, Aetna Balanced VP, Inc., Aetna Generation Portfolios,
Inc., Aetna Variable Portfolios, Inc., Aetna Get Fund, Portfolio
Partners, Inc., Aetna Life Insurance and Annuity Company (``ALIAC'')
and Aeltus Investment Management, Inc. (``Aeltus'') (collectively, the
``Applicants'').
FILING DATE: The application was originally filed on June 25, 1998, and
an amended and restated application was filed on November 20, 1998.
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 SEC
and serving Applicants with a copy of the request, in person or by
mail. Hearing requests should be received by the SEC by 5:30 p.m. on
December 18, 1998, 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 writer's
interest, the reason for the request, and the issues contested. Persons
who wish to be notified of a hearing may request notification of a
hearing by writing to the Secretary of the SEC.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, c/o Amy R. Doberman, Aetna Life Insurance and
Annuity Company, 151 Farmington Avenue, Hartford, Connecticut 06156-
8962.
FOR FURTHER INFORMATION CONTACT: Megan L. Dunphy, Attorney, or Mark
Amorosi, Special Counsel, 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 SEC, 450 Fifth St., N.W., Washington,
D.C. 20549 (tel. (202) 942-8090).
Applicants' Representations
1. Each Fund is an open-end management investment company. Aetna
Variable Fund, Aetna Income Shares, Aetna Variable Encore Fund, and
Aetna Get Fund are each organized as a Massachusetts business trust.
Aetna Balanced V.P., Inc., Aetna Generation Portfolios, Inc., Aetna
Variable Portfolios, Inc., and Portfolio Partners, Inc., are each
organized as a Maryland Corporation. Certain of the Funds issue shares
in multiple series. Additional series of these Funds may be established
in the future.
2. ALIAC, a registered broker-dealer and member of the National
Association of Securities Dealers, Inc., serves as the investment
adviser and administrator for Portfolio Partners, Inc., and as the
principal underwriter for each Fund. Aeltus, which is registered with
the Commission as an investment adviser, serves as the investment
adviser and administrator for each Fund other than Portfolio Partners,
Inc. ALIAC and Aeltus are both indirect wholly-owned subsidiaries of
Aetna Inc.
3. Shares of each Fund are currently offered to separate accounts
of ALIAC and its affiliates to serve as the investment medium for
variable annuity contracts and variable life insurance policies issued
by ALIAC and its affiliates. The Funds also may in the future offer
shares of their existing and future series to separate accounts of
other insurance companies, including insurance companies that are not
affiliated with ALIAC, to serve as the investment vehicle for various
types of insurance products, which may include, among others, variable
annuity contracts, variable group life insurance contracts, scheduled
premium variable life insurance contracts, single premium and modified
single 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 Funds are referred to herein as
``Participating Insurance Companies.''
4. Each Fund may offer its shares directly to Qualified Plans
described in Treasury Regulation Sec. 1.817-5(f)(3)(iii). Fund shares
sold to Qualified Plans would be held by the trustee(s) of the Plan. No
Adviser will act as investment adviser to any Qualified Plan which
purchases shares of a Fund advised by that investment adviser, unless
permitted under the Employment Retirement Income Security Act
(``ERISA'').
5. Shares of each Fund may also be offered to an Adviser or any of
its affiliates for purposes of providing necessary capital required by
Section 14(a) of the 1940 Act. Any shares in a Fund purchased by an
Adviser or its affiliate will be automatically redeemed if and when the
Adviser's investment advisory agreement with that Fund terminates.
Applicants' Legal Analysis
1. Applicants request that the Commission issue an order pursuant
to Section 6(c) of the 1940 Act exempting the Applicants and the
Participating Insurance Companies and their separate accounts (and, to
the extent necessary, any investment adviser, principal underwriter,
sponsor, or depositor for such accounts) from the provisions of
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 permit shares
of each Fund to be offered and sold to, and held by
[[Page 66211]]
(1) variable annuity and variable life insurance separate accounts of
the same life insurance company or of any affiliated life insurance
company (``mixed funding''); (2) separate accounts of unaffiliated life
insurance companies (including both variable annuity and variable life
separate accounts) (``shared funding''); (3) Qualified Plans; and (4)
any Adviser or its affiliates.
2. In connection with the funding of scheduled premium variable
life insurance contracts issued through a separate account registered
under the 1940 Act as a unit investment trust, Rule 6-2(b)(15) provides
partial exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the
1940 Act. These exemptions are available only where all of the assets
of the separate account consist of the shares of one or more management
investment companies which offer their shares exclusively to variable
life insurance separate accounts of the life insurer or any affiliated
life insurance company. Therefore, the relief granted by Rule 6-
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 an
affiliated life insurance company. The relief granted by Rule 6e-
2(b)(15) also is not available if the variable life insurance separate
account owns shares of an underlying fund that also offers its shares
to separate accounts of unaffiliated life insurance companies,
Qualified Plans, and Advisers or their affiliates.
3. In connection with the funding of flexible premium variable life
insurance contracts issued through a separate account registered under
the 1940 Act as a unit investment trust, Rule 6e-3(T)(b)(15) provides
partial exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the
1940 Act. These exemptions are available only where all of the assets
of the separate account consist of the shares of one or more registered
management investment companies which offers their shares exclusively
to separate accounts of the life insurer, or of any affiliated life
insurance company, offering either scheduled or flexible premium
variable life insurance 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, the exemptions
provided by Rule 6e-3(T)(b)(15) are available if the underlying fund is
engaged in mixed funding, but are not available if the underlying fund
is engaged in shared funding or sells its shares to Qualified Plans or
Advisers and their affiliates.
4. Applicants state that the current tax law permits the Funds to
increase their asset base through the sale of shares to Plans. Section
817(h) of the Internal Revenue Code of 1986, as amended (the ``Code''),
imposes certain diversification standards on the underlying assets of
separate accounts funding variable contracts. The Code provides that
such contracts shall not be treated as an annuity contract or life
insurance contract for any period in which the underlying assets are
not adequately diversified as prescribed by the Treasury Department. 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 contain certain
exceptions to this requirements, however, one of which permits shares
of an investment company to be held by the trustee of a qualified
pension or retirement plan without adversely affecting the ability of
shares in the same investment company also to be held by the separate
accounts of insurance companies in connection with their variable
annuity and variable life insurance contracts (Treas. Reg. Sec. 1.817-
5(f)(3)(iii)).
5. Applicants state that the promulgation of Rules 6e-2 and 6e-3(T)
preceded the issuance of these Treasury regulations. Applicants assert
that, given the then current tax law, the sale of shares of the same
underlying investment company to separate accounts and to 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).
6. Applicants request relief for a class or classes of persons and
transactions consisting of Participating Insurance Companies and their
separate accounts (and Investment advisers, principal underwriters, and
sponsors or depositors of such separate accounts) investing in any of
the Funds.
7. Section 6(c) of the 1940 Act 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. Applicants assert that the requested exemptions are appropriate in
the public interest and consistent with the protection of investors and
the purposes fairly intended by the policy and provisions of the 1940
Act.
Disqualification
8. 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 of
any registered open-end investment company if an affiliated person of
that company is subject to a disqualification enumerated in Section
9(a)(1) or (2). Rules 6e-2(b)(15)(i) and (ii), and 6e-3(T)(b)(15)(i)
and (ii) provide partial exemptions from Section 9(a) under certain
circumstances, subject to the limitations on mixed and shared funding.
These exemptions limit the application of the eligibility restrictions
to affiliated individuals or companies that directly participate in the
management or administration of the underlying investment company.
9. Applicants state that the 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 Sections 9.
Applicants assert that it is not necessary for the protection of
investors of the purposes fairly intended by the policy and provisions
of the 1940 Act to apply the provisions of Section 9(a) to many
individuals in a large insurance company complex, most of whom will
have no involvement in matters pertaining to investment companies
managed, administered, or invested in by that organization. Applicants
also assert that it is unnecessary to apply the restrictions of Section
9(a) to individuals in various unaffiliated insurance companies (or
affiliated companies of Participating Insurance Companies) that may
utilize the Funds as the funding medium for variable contracts.
10. Applications maintain that there is no regulatory purpose in
extending the monitoring requirements because of mixed or shared
funding and sales to Qualified Plans. Applicants do not expect the
Participating Insurance Companies and Qualified Plans to play any role
in the management or administration of the Funds. Those individuals who
participate in the management or administration of the Funds will
remain the same regardless of which separate accounts, insurance
companies or Qualified Plans use the Funds. The increased monitoring
costs would reduce the net rates of return realized by contract owners
and Plan participants. In addition, since the Plans are not investment
companies and will not be deemed affiliated by virtue of
[[Page 66212]]
their shareholdings, no additional relief is required with respect to
Qualified Plans.
11. Applicants further state that no regulatory purpose is served
by extending the Section 9(a) monitoring requirements in the context of
the Funds selling shares to an Adviser or its affiliate. Rules 6e-2 and
6e-3(T) provide relief from the eligibility restrictions of Section
9(a) only for officers, directors or employees of Participating
Insurance Companies or their affiliates. The eligibility restrictions
of Section 9(a) will still apply to any officers, directors or
employees of the Adviser or an affiliate who participate in the
management or administration of the Fund. Applicants maintain that the
monitoring requirement should not extend to all officers, directors,
and employees of the Participating Insurance Companies and their
affiliates simply because the Funds sell certain shares to an Adviser
or its affiliate. This monitoring would not benefit contract owners and
Plan participants and would only increase costs, thereby reducing net
rates of return.
Pass-Through Voting
12. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) assume the
existence of a ``pass-through voting' requirement with respect to
management investment company shares held by a separate account. Rules
6e-2(b)(15)(iii)(A) and 6e-3(T)(b)(15)(iii)(A) provide that an
insurance company may disregard the voting instructions of its contract
owners with respect to the investments of an underlying fund or any
contract between an investment company and its investment adviser, when
required to do so by an insurance regulatory authority, subject to
certain conditions. In addition, Rules 6e-2(b)(15)(iii)(B) and 6e-
3(T)(b)(15)(iii)(A)(2) provide that an insurance company may disregard
voting instructions of contract owners in favor of any change in the
investment company's investment policies, principal underwriter or
investment adviser, provided that such disregard of voting instructions
is reasonable and complies with the other provisions of Rules 6e-2 and
6e-3(T).
13. Rule 6e-2 recognizes that a variable life insurance contract
has important elements unique to insurance contracts; and is subject to
extensive state regulations. applicants assert that in adopting Rule
6e-2(b)(15)(iii), the Commission expressly recognized that state
insurance regulators have authority, pursuant to state insurance laws
or regulations, to disapprove or require changes in investment
policies, investment advisers, or principal underwriters. The
Commission also expressly recognized that state insurance regulators
have authority to require an insurer to draw from its general account
to cover costs imposed upon the insurer by a change approved by
contract owners over the insurer's objection. The Commission therefore
deemed such exemptions necessary ``to assure the solvency of the life
insurer and performance of its contractual obligations by enabling an
insurance regulatory authority or the life insurer to act when certain
proposals reasonably could be expected to increase the risks undertaken
by the life insurer.'' Applicants state that, in this respect, flexible
premium variable life insurance contracts are identical to scheduled
premium variable life insurance contracts; therefore, the corresponding
provisions of Rule 6e-3(T) were adopted in recognition of the same
factors.
14. Applicants further represent that the offer and sale of the
fund shares to Qualified Plans and Advisers and their affiliates will
not have any impact on the relief requested in this regard. Shares of
the funds sold to Qualified Plans would be held by the trustees of such
Plans. The exercise of voting rights by Qualified Plans, whether by the
trustees, by participants, or by investment managers engaged by the
Plans, does not present the type of issues respecting the disregard of
voting rights that are presented by variable life separate accounts. In
this respect, the voting rights to be exercised by the qualified Plans
will be no different than the exercise of voting rights with respect to
``retail'' mutual funds that are available to the public. Similarly,
the exercise of voting rights by Advisers and their affiliates do not
present the type of issues respecting the disregard of voting rights
that are presented by variable life separate accounts. Accordingly,
Applicants note that, unlike the case with insurance company separate
accounts, the issue of the resolution of material irreconcilable
conflicts with respect to voting is not present with respect to
Qualified Plans or Advisers and their affiliates.
Conflicts of Interest
15. Applicants state that the prohibitions on mixed and shared
funding may reflect some concern with possible divergent interests
among different classes of investors. Applicants submit 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 states.
In this regard, 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. Accordingly, the Applicants submit that the fact that
different Participating Insurance Companies may be domiciled in
different states does not create a significantly different or enlarged
problem.
16. Applicants submit that shared funding by unaffiliated
Participating Insurance Companies, in this respect, is no different
than the use of the same investment company as the funding vehicle for
affiliated insurers, which Rules 6e-2(b)(15) and 6e-3(T)(15) permit.
Affiliated Participating Insurance Companies may be domiciled in
different states and be subject to differing state law requirements.
Applicants state that affiliation does not reduce the potential, if any
exists, for differences in state regulatory requirements. In any event,
the conditions set forth in the application and later in this notice
are designed to safeguard against, and provide procedures for
resolving, and adverse effects that differences among state regulatory
requirements may produce.
17. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) give the insurance company
the right to disregard the voting instructions of the contract owners.
This right does not raise any issues different from those raised by the
authority of state insurance administrators over separate accounts.
Affiliation does not eliminate the potential for divergent judgments as
to the advisability or legality of a change in investment policies,
principal underwriter, or investment adviser initiated by contract
owners. The potential for disagreement is limited by the requirements
in Rules 6e-2 and 6e-3(T) that the insurance company's disregard of
voting instructions be reasonable and based on specified good faith
determinations.
18. A particular Participating Insurance Company's disregard of
voting instructions nevertheless could conflict with the majority of
contract owner voting instructions. If the Participating Insurance
Company's judgment represents a minority position or would preclude a
majority vote, then the Participating Insurance Company may be
required, at the election of a Fund, to withdraw its separate account's
investment in the Fund, and no charge or penalty would be imposed as a
result of such withdrawal.
19. Applicants believe that it is possible to provide an equitable
means of giving such voting rights to contract owners and to Qualified
Plans. Applicants represent that the transfer agent for the Funds will
inform each
[[Page 66213]]
shareholder including each variable contract and each Qualified Plan,
of its respective share of ownership in the respective Fund. Each
Participating Insurance Company will then solicit voting instructions
in accordance with the ``pass-through'' voting requirement.
20. Applicants submit that investment by the Plans in any of the
Portfolios will present no conflict. Applicants assert that the
likelihood that voting instructions of insurance company separate
account holders will be disregarded or the possible withdrawal referred
to immediately above is extremely remote and this possibility will be
known, through prospectus disclosure to any Qualified Plan choosing to
invest in a Fund. Moreover, Applicants state that even if a material
irreconcilable conflict involving Qualified Plans arises, the Plans may
simply redeem their shares and make alternative investments.
21. Applicants submit that investments by the Adviser or an
affiliate will similarly present no conflict. Applicants state that
each Adviser or its affiliate, as applicable, will agree to vote its
shares of Fund in the same proportion as all contract owners having
voting rights with respect to that fund for in such other manner as may
be required by the Commission or its staff.
22. Applicants state that there is no reason why the investment
policies of a Fund would or should be materially different from what
those policies would or should be if such Fund funded only variable
annuity contracts or variable life insurance policies, whether flexible
premium or scheduled premium contracts. In this regard, Applicants note
that each type of insurance product is designed as a long-term
investment program. Moreover, Applicants submit that each Fund will be
managed to achieve its investment objective, and not to favor or
disfavor any particular Participating Insurance Company or type of
insurance product or other investor. Applicants note that the success
of all variable insurance products depends, in part, on satisfactory
investment performance, which provides an incentive for the
participating insurance company to seek optimal investment performance.
23. Applicants submit that no one investment strategy can be
identified as appropriate to a particular insurance product. Each pool
of variable annuity and variable life insurance contract owners is
composed of individuals of diverse financial status, age, insurance and
investment goals. A fund supporting even one type of insurance product
must accommodate these diverse factors in order to attract and retain
purchasers.
24. Applicants submit that permitting mixed and shared funding will
provide economic justification for the growth of the Funds. In
addition, permitting mixed and shared funding will facilitate the
establishment of additional series of Funds serving diverse goals,
since a broader base of contract owners can be expected to provide
economic justification for the creation of additional Funds with a
greater variety of investment objectives and policies.
25. Applicants further note that Section 817(h) of the Code imposes
certain diversification standards on the underlying assets of variable
annuity contracts and variable life insurance contracts held in the
portfolios of management investment companies. Treasury Regulation
Sec. 1.817-5(f)(3)(iii) specifically permits ``qualified pension or
retirement plans'' and insurance company separate accounts to share the
same underlying management 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 Plans, variable annuity separate accounts, and variable
life separate accounts all invest in the same management investment
company.
26. Applicants note that while there are differences in the manner
in which distribution for variable annuity contracts, variable life
insurance contracts and Qualified Plans are taxed, these differences do
not raise any conflicts of interest. When distributions are to be made,
and a separate account or 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 Qualified 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.
27. Applicants submit that the ability of the Funds to sell their
shares directly to Qualified Plans and Advisers and their affiliates
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 Plan or an Adviser or its affiliate.
Regardless of the rights and benefits of participants under the Plans,
or contract owners under their variable contracts, the Plans, Advisers
and their affiliates, and the separate accounts 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 any of the Funds
has any preference over any other shareholder with respect to
distribution of assets or payments of dividends.
28. Finally, Applicants state that there are no conflicts between
contract owners and the participants under Plans with respect to the
state insurance commissioner's powers over investment objectives. The
basic premise of shareholder voting is that not all shareholders may
agree with a particular proposal. The state insurance commissioners
have been given the veto power in recognition of the fact that
insurance companies cannot simply redeem their separate accounts out of
one fund and invest in another. Complex and time-consuming transactions
must be undertaken to accomplish such redemption and transfers.
Conversely, trustees of Plans may redeem shares from a Fund, and
reinvest in another funding vehicle without the same regulatory
impediments; most Plans may even hold cash pending suitable investment.
Based on the foregoing, Applicants represent that should issues arise
where the interests of variable contract owners and the interests of
Plans are in conflict, the issues can be almost immediately resolved
because the trustees of the Plans can, on their own, redeem shares out
of the Fund.
29. Applicants submit that mixed and shared funding should provide
benefits to contract owners by eliminating a significant portion of the
costs of establishing and administering separate funds. Participating
Insurance Companies and Qualified Plans will benefit not only from the
investment and administrative expertise available through the Funds,
but also from the cost efficiencies and investment flexibility afforded
by a larger pool of assets. Mixed and shared funding also would permit
a greater amount of assets available for investment, thereby promoting
economies of scale, permitting greater diversification, and making the
addition of new portfolios more feasible. Additionally, making the
Funds available for mixed and shared funding and permitting the
purchase of Fund shares by Qualified Plans may encourage more insurance
companies to offer variable contracts, and this should result in
increased competition with respect to both variable contract design and
pricing, which can be expected to result in more product variation and
lower charges.
30. Applicants assert that there is no significant legal impediment
to permitting mixed and shared funding and sales of Fund shares to
Qualified
[[Page 66214]]
Plans and an Adviser or its affiliates. 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 do not believe
that mixed and shared funding, and sales to Qualified Plans or an
Adviser or its affiliates will have any adverse federal income tax
consequences.
Applicants' Conditions
Applicants have consented to the following conditions:
1. A majority of each the Board of Trustees or Board of Directors
(the ``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 the death, disqualification, or bona fide resignation of any
trustee or director, 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 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 the Fund for the existence of any
material irreconcilable conflict among and between the interests of the
contract owners of all separate accounts and of Plan participants
investing in the 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: (i) an action by any
state insurance regulatory authority; (ii) a change in applicable
federal or state insurance, tax, or securities laws or regulations, or
a pubic ruling, private letter ruling, no-action or interpretive
letter, or any similar action by insurance, tax, or securities
regulatory authorities; (iii) an administrative or judicial decision in
any relevant proceeding; (iv) the manner in which the investments of
any Fund or series are being managed; (v) a difference in voting
instructions given by variable annuity contract owners, variable life
insurance contract owners, and Plan trustees; (vi) a decision by a
Participating Insurance Company to disregard the voting instructions of
contract owners; or (vii) if applicable, a decision by a Qualified Plan
to disregard the voting instructions of Plan participants.
3. The Participating Insurance Companies, the Adviser or an
affiliate, and any Qualified Plan that executes a fund participation
agreement upon becoming an owner of 10% or more of the assets of a Fund
(collectively, ``Participants'') will report any potential or existing
conflicts to the Board. Participants and the Adviser 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 includes, but is not limited to, an obligation by each
Participating Insurance Company to inform the Board whenever contract
owner voting instructions are disregarded and, if pass-through voting
is applicable, an obligation by each Qualified Plan that is a
Participant to inform the Board whenever it has determined to disregard
Plan participant voting instructions. The responsibility to report such
information and conflicts and to assist the Board will be a contractual
obligation of all Participating Insurance Companies and Qualified Plans
investing in a Fund under their agreements governing participation in
the Fund, and such agreements shall provide that such responsibilities
will be carried out with a view only to the interests of the contract
owners and, if applicable, Plan participants.
4. If it is determined by a majority of the Board of the Fund, or a
majority of its disinterested trustees or directors, that a material
irreconcilable conflict exists, the relevant Participating Insurance
Companies, and Qualified Plans, shall, at their expense and to the
extent reasonably practicable (as determined by a majority of the
disinterested trustees or directors), take whatever steps are necessary
to remedy or eliminate the material irreconcilable conflict, up to and
including: (i) withdrawing the assets allocable to some or all the
separate accounts from the relevant Fund or any series therein and
reinvesting such assets in a different investment medium (including
another series, if any, of such Fund); (ii) in the case of
Participating Insurance Companies, submitting the question of whether
such segregation should be implemented to a vote of all affected
contract owners and, as appropriate, segregating the assets of any
appropriate group (i.e., variable annuity contract owners or variable
life insurance contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the
affected contract owners the option of making such a change; and (iii)
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 contract
owner voting instructions and that decision represents a minority
position or would preclude a majority vote, the participating insurance
company may be required, at the Fund's election, to withdraw its
separate account's investment in the Fund, and no charge or penalty
will be imposed as a result of such withdrawal. If a material
irreconcilable conflict arises because of a Qualified Plan's decision
to disregard Plan participant voting instructions, if applicable, and
that decision represents a minority position or would preclude a
majority vote, the Qualified Plan may be required, at the election of
the Fund, to withdraw its 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 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 Qualified Plans under their
agreements governing participation in the Fund, and these
responsibilities will be carried out with a view only to the interests
of the contract owners and, as applicable, Plan participants.
For purposes of Condition 4, a majority of the disinterested
members of the Board shall determine whether or not any proposed action
adequately remedies any material irreconcilable conflict, but in no
event will the Fund or the Adviser 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 contract owners materially and
adversely affected by the material irreconcilable. No Qualified Plan
shall be required by Condition 4 to establish a new funding medium for
such Qualified Plan if (a) a majority of Plan participants materially
and adversely affected by the material irreconcilable conflict vote to
decline such offer or (b) pursuant to governing Plan documents and
applicable law, the Plan makes such decision without Plan participant
vote.
5. The Board's determination of the existence of a material
irreconcilable conflict and its implications shall be
[[Page 66215]]
made known promptly in writing to all Participants.
6. Participating Insurance Companies will provide pass-through
voting privileges to all variable contract owners whose contracts are
funded through a registered separate account for 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 their registered separate accounts in a manner
consistent with timely voting instructions received from such contract
owners. Each Participating Insurance Company will vote shares of each
Fund or series held in its registered separate accounts for which no
timely voting instructions 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 investing in a Fund
calculates voting privileges in a manner consistent with all other
Participating Insurance Companies. The obligation to vote a Fund's
shares and 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
their agreements governing participation in the Fund. Each Plan will
vote as required by applicable law and governing Plan documents.
7. As long as the Commission continues to interpret the Act as
requiring pass-through voting privileges for contract owners whose
contracts are funded through a registered separate account, the
Adviser, or, if applicable, any of its affiliates, will vote shares of
any Fund or series thereof in the same proportion as all variable
contract owners having voting rights with respect to that Fund or
series thereof; provided, however, that the Adviser or any such
affiliates shall vote its shares in such other manner as may be
required by the Commission or its staff.
8. A Fund will notify all Participating Insurance Companies that
separate account prospectus disclosure regarding potential risks of
mixed and shared funding may be appropriate. Each Fund shall disclose
in its prospectus that (1) shares of the Fund are offered to insurance
company separate accounts which fund both annuity and life insurance
contracts, and to Qualified Plans, (2) due to differences of tax
treatment or other considerations, the interests of various contract
owners participating in the Fund and the interests of Qualified Plans
investing in the Fund might at some time be in conflict, and (3) the
Board will monitor the Fund for any material conflicts and determine
what action, if any should be taken.
9. All reports received by the Board of potential or existing
conflicts, and all Board action with regard to determining the
existence of a conflict, notifying Participants of a conflict, and
determining whether any proposed action adequately remedies a conflict,
will be properly recorded in the minutes of the Board or other
appropriate records, and such minutes or other records shall be made
available to the Commission upon request.
10. If and to the extent Rule 6e-2 and Rule 6e-3(T) under the 1940
Act are amended, or Rule 6e-3 is adopted, to provide exemptive relief
from any provision of the 1940 Act or the rules thereunder with respect
to mixed and shared funding on terms and conditions materially
different from any exemptions granted in the order requested in the
application, then each Fund and/or the Participants, 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.
11. Each Fund 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 Fund), and in
particular each Fund will either provide for annual meetings (except
insofar as the Commission may interpret Section 16(c) of the 1940 Act
not to require such meetings) or comply with Section 16(c) of the 1940
Act (although the Fund is not one of the trusts described in Section
16(c) of the 1940 Act), as well as with Section 16(a) of the 1940 Act
and, if and when applicable, Section 16(b) of the 1940 Act. Further,
each Fund will act in accordance with the Commission's interpretation
of the requirements of Section 16(a) with respect to periodic elections
of directors (or trustees) and with whatever rules the Commission may
promulgate with respect thereto.
12. The Participants shall at least annually submit to the Board of
a Fund such reports, materials or data as the Board may reasonably
request so that it may fully carry out the obligations imposed upon it
by the conditions contained in the application and said reports,
material and data shall be submitted more frequently if deemed
appropriate by the Board. The obligations of a Participant (not
including an Adviser or affiliate) to provide these reports, materials,
and data to the Board of the Fund when it so reasonably requests, shall
be a contractual obligation of all Participants under their agreements
governing participation in each Fund.
13. If a Qualified Plan should become an owner of 10% or more of
the assets of a Fund, such Plan will execute a participation agreement
with such Fund which includes the conditions set forth in the
application to the extent applicable. A Qualified Plan will execute an
application containing an acknowledgment of this condition upon such
Plan's initial purchase of the shares of any Fund.
Conclusion
For the reasons summarized above, Applicants assert that the
requested exemptions are appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-31891 Filed 11-30-98; 8:45 am]
BILLING CODE 8010-01-M
