[Federal Register Volume 60, Number 247 (Tuesday, December 26, 1995)]
[Notices]
[Pages 66812-66817]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31238]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21608; No. 812-9658]
Safeco Life Insurance Company et al.
December 19, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (``1940 Act'').
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APPLICANTS: Safeco Life Insurance Company (``Safeco''), Safeco Resource
Variable Account B (``Account B''), Safeco Separate Account C
(``Account C''), First Safeco National Life Insurance Company of New
York (``First Safeco''), Safeco Resource Series Trust (``Trust''),
Safeco Asset Management Company (``Asset Management'').
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(a)(2), 6e-2(b)(15), and 6e-3(T)(b)(15)
thereunder.
SUMMARY OF APPLICATION: Applicants seek exemptive relief to the extent
necessary to permit shares of the Trust and any other investment
company that is offered to fund variable insurance products and for
which Asset Management, or any of its affiliates, may serve as
investment advisor, administrator, manager, principal underwriter, or
sponsor to be sold to and held by the separate accounts (``Separate
Accounts'') funding variable annuity and variable life insurance
contracts (``Variable Contracts'') issued by Safeco, First Safeco, or
any existing or future affiliated or unaffiliated life insurance
company (``Participating Insurance Companies'') or to existing or
future qualified pension and retirement plans outside of the separate
account context (``Qualified Plans'' or ``Plans''). In addition,
Applicants seek exemptive relief to permit the assets of separate
accounts of Safeco and First Safeco to be derived from the sale of
scheduled premium variable life insurance contracts and flexible
premium variable life insurance contracts.
FILING DATE: The application was filed on July 10, 1995, and was
amended on November 20, 1995. Applicants have represented that they
will file an amendment during the notice period to make the
representations contained herein.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
person 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 January
15, 1996, 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: Bibb L. Strench, Esq., Safeco Asset Management
Company, Safeco Plaza, Seattle, Washington 98185.
FOR FURTHER INFORMATION CONTACT: Pamela K. Ellis, Senior Counsel, or
Wendy Finck Friedlander, Deputy Chief, both 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 Delaware business trust registered under the 1940
Act as an open-end management investment company.
2. The Trust currently consists of five separate series, each
series representing an interest in a separate investment portfolio
(``Portfolios''). The Board of Trust may establish additional series of
shares at any time, each with its own investment objective and
policies.
3. Asset Management serves as investment adviser to each Portfolio
of the Trust, and is registered with the Commission as an investment
adviser under the Investment Advisers Act of 1940. Asset Management is
a Washington corporation and a wholly-owned subsidiary of Safeco.
4. Safeco, also a Washington corporation, is a holding company
whose primary subsidiaries are engaged in the insurance and related
financial services businesses. Safeco is a wholly-owned subsidiary of
Safeco Corporation.
5. Account B and Account C are separate accounts of Safeco, and are
registered with the Commission as unit investment trusts under the 1940
Act.
6. First Safeco is a New York stock life insurance company and is a
wholly-owned subsidiary of Safeco Corporation.
7. The Portfolios currently are sold to Account B and Account C as
investment vehicles for variable annuity contracts issued by Safeco.
Applicants propose that the Portfolios serve as investment vehicles for
various types of Variable Contracts. Portfolio shares will be offered
to Separate Accounts of Participating Insurance Companies, including
Safeco and First Safeco, which enter into participation agreements with
the Trust. In addition, Applicants propose that the Trust offer and
sell shares in its Portfolios directly to Qualified Plans.
8. Applicants state that each Participating Insurance Company will
have the legal obligation of satisfying all applicable requirements
under state law and the federal securities laws in connection with any
Variable Contract issued by such company. Applicants further state that
the role of the Trust under this arrangement will consist of offering
its shares to the Separate Accounts and fulfilling any conditions the
Commission may impose upon granting the order requested in the
application.
9. In addition, Applicants state that the Trust desires to avail
itself of the opportunity to increase its asset base through the sale
of its shares to Qualified Plans, consistent with applicable tax law.
The Qualified Plans may choose any of the Portfolios as the sole
investment option under the Qualified Plan or as one of several
investment options. Qualified Plan participants may or may not be given
an investment choice among available alternatives depending on the
Qualified Plan itself. Shares of any Portfolio sold to such Qualified
Plans would be held by the trustee(s) of such Qualified Plan as
mandated by Section 403(a) of the Employee Retirement Income Security
Act (``ERISA''). Asset Manager will not act as investment adviser to
any of the Qualified Plans that will purchase shares of the Trust.
Applicants' Legal Analysis
1. Applicants request that the Commission issue an order under
Section 6(c) of the 1940 Act exempting them 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) to the extent necessary to permit mixed and shared funding,
as defined below. In addition, Applicants seek exemption from Rule 6e-
2(a)(2) to the extent necessary to permit the assets of the separate
[[Page 66813]]
accounts of Safeco Life and First Safeco to be derived from the sale of
both scheduled premium and flexible premium variable life insurance
contracts.
Rule 6e-2: 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 unit investment trusts 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 other
affiliated life insurance company, issuing scheduled premium variable
life insurance contracts. The relief granted by Rule 6e-2(b)(15) is not
available to a 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.'' Moreover, because the relief granted
by Rule 6e-2(b)(15) is available only where shares of the Underlying
Fund are offered exclusively to Separate Accounts of insurance
companies, additional exemptive relief is necessary if the shares of
the Trust also are to be sold to Qualified Plans.
Relief for Separate Accounts
5. Applicants also state that a separate account is eligible for
the relief granted by Rule 6e-2(b)(15) only if it meets the conditions
of Rule 6e-2(a)(2), which required the assets of the separate account
to be derived solely from the sale of variable life insurance contracts
and advances made by the life insurer in connection with the operation
of such separate account. ``Variable life insurance contracts'' as
defined by the Rule 6e-2(c)(1) includes ``scheduled premium'' variable
life insurance contracts, but not ``flexible premium'' life insurance
contracts. Consequently, a separate account that funds single premium
and scheduled premium variable life insurance contracts and flexible
premium life insurance contracts would not be deemed to have its assets
derived solely from the sale of ``variable life insurance contracts.''
Therefore, the relief granted by Rule 6e-2(b)(15) is not available for
a separate account the assets of which are derived from the sale of
both scheduled premium variable life insurance contracts and flexible
premium variable life insurance contracts. Accordingly, Applicants
request exemptive relief in order that the separate accounts of Safeco,
and First Safeco may be derived from the sale of both scheduled premium
and flexible premium variable life insurance contracts.
Rule 6e-3(T)
6. Regarding the funding of flexible premium variable life
insurance contracts issued through a separate account, Rule 6e-
3(T)(b)(15) provides partial exemptions from Sections 9(a), 13(a),
15(a), and 15(b) of the 1940 Act. This 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 of unaffiliated life
insurance companies. Moreover, because the relief afforded by Rule 6e-
3(T) is available only where shares of the Underlying Fund are offered
exclusively to separate accounts of insurance companies, additional
relief is necessary if shares of the Trust also are to be sold to
Qualified Plans.
Sale to Qualified Plans
7. Applicants state that changes in the tax law have created the
opportunity for the Portolios to increase their asset base through the
sale of Portfolio shares to Qualified Plans. Applicants state that
Section 817(h) of the Internal Revenue Code of 1986, as amended
(``Code''), imposes certain diversification standards on the assets
underlying Variable Contracts, such as those in each Portfolio of the
Trust. The Code provides that a variable contract shall not be treated
as an annuity contract or life insurance contract for any period for
which the underlying assets are not, in accordance with regulations
prescribed by the Treasury Department, adequately diversified. These
diversification requirements are applied by taking into account the
assets of the underlying fund if all the beneficial interests in the
Underlying Fund are held by certain designated persons. On March 2,
1989, the Treasury Department issued regulations that adopted
diversification requirements for underlying funds. Treas. Reg.
Sec. 1.817-5 (1989). These regulations provide that, in order 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. The regulations do, however, contain
certain exceptions to this requirement, one of which permits trustee(s)
of a qualified plan to hold shares of an investment company, the shares
of which also are held by Separate Accounts of insurance companies,
without adversely affecting the status of the investment company as an
adequately diversified underlying investment vehicle for Variable
Contracts issued through such segregated asset accounts. Teas. Reg.
Sec. 1.817-5(f)(3)(iii).
8. Applicants state that the promulgation of Rules 6e-2(b)(15) and
6e-3(T)(b)(15) preceded the issuance of the Treasury regulations which
made it possible for shares of an investment company to be held by the
trustee(s) of qualified plans without adversely affecting the ability
of shares in the same investment company also to be held by separate
accounts of insurance companies in connection with their variable
contracts. Thus, the sale of shares of the same investment company to
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) given
the then current tax law.
[[Page 66814]]
9. Moreover, Applicants assert that if the Trust were to sell its
shares only to Qualified Plans, no exemptive relief would be necessary.
Applicants state that none of the relief provided for in Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) relates to qualified plans or to underlying
fund's ability to sell its shares to such plans. It is only because the
Separate Accounts investing in the Trust are themselves investment
companies which are relying upon Rules 6e-2 and 6e-3(T) and which
propose to have the relief continue in place that the Applicants are
applying for the requested relief.
Grounds for Relief
10. Accordingly, 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.
11. 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-ended 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.
12. 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.
13. Subparagraphs (b)(15)(iii) of Rules 6e-2 and 6e-3(T) provide
partial exemptions from Section 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 Variable Contract owners in certain limited circumstances.\1\
\1\ Applicants request no relief for variable annuity separate
accounts from the disqualification or pass-through voting
provisions.
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14. Voting instructions may be disregarded under subparagraphs
(b)(15)(iii)(A) of Rules 6e-2 and 6e-3(T) 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.
15. Under subparagraph (b)(15)(iii)(B) of Rule 6e-2 and
subparagraph (b)(15)(iii)(A)(2) of Rule 6e-3(T), an insurance company
may disregard Variable Contract owners' voting instructions if the
Variable Contract owners initiate any change in the Underlying 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.
16. Applicants further assert that the proposed sale of shares of
the Trust to Qualified Plans does not impact of the relief requested.
As previously noted, Rules 6e-2(b)(15)(iii) and 6-3(T)(15)(iii) permit
an insurer to disregard Variable Contract owner voting instructions in
certain circumstances. Offering shares of the Trust to Qualified Plans
would not affect the circumstances and conditions under which any veto
right would be exercised by a Participating Insurance Company.
Furthermore, as stated above, shares of the Trust would be sold only to
Qualified Plans for which such shares would be held by the trustee(s)
of such plans as mandated by Section 403(a) of ERISA. Section 403(a)
provides that the trustee(s) must have exclusive authority and
discretion to manage and control the Qualified Plan with two
exceptions: (1) when the Qualified Plan expressly provides that the
trustee(s) are subject to the direction of a named fiduciary who is not
a trustee, in which case the trustee(s) are subject to proper
directions of such fiduciary made in accordance with the terms of the
Qualified Plan and not contrary to ERISA; and (2) when the authority to
manage, acquire, or dispose of assets of the Qualified Plans is
delegated to one or more investment managers under Section 402(c)(3) of
ERISA. Unless one of the two exceptions stated in Section 403(a)
applies, Qualified Plan trustee(s) have the exclusive authority and
responsibility for voting proxies. When 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 trustee(s) or the named fiduciary. In any event, Applicants
assert that pass-through voting to the participants in such Qualified
Plans is not required under ERISA or the securities laws. 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 Qualified Plans.
17. Applicants state that no increased conflicts of interest would
be present by the granting of the requested relief. 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 assert 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 Variable
Contracts. Accordingly, Applicants submit that the fact that different
insurers may be domiciled in
[[Page 66815]]
different states does not create a significantly different or enlarged
problem.
18. Applicants state further that, under paragraph (b)(15) of Rules
6e-2 and 6e-3(T), the right of an insurance company to disregard
Variable Contract owners' 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 6e-
3(T) that the insurance company's disregard of voting instructions be
reasonable and based on specific good faith determinations. If a
Participating Insurance Company's decision to disregard Variable
Contract owners' instructions represents a minority position or would
preclude a majority vote approving a particular change, however, such
Participating Insurance Company may be required, at the election of the
relevant Portfolio, to withdraw its investment in that Portfolio. No
charge or penalty will be imposed as result of such withdrawal.
19. Applicants submit that mixed and shared funding should benefit
Variable Contract owners by: (a) eliminating a significant portion of
the costs of establishing and administering separate funds; (b)
permitting the expansion of the variety of funding options available
under existing Variable Contracts; 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 tower
charges.
20. Applicants state that there is no reason why the investment
policies of the Portfolios with mixed funding would or should be
materially different from what they would or should be if the
Portfolios funded only variable annuity contracts or variable life
insurance policies. Each type of insurance product is designed as a
long-term investment program. Moreover, Applicants assert that the
Portfolios will continue to be managed in an attempt to achieve their
investment objectives, and not to favor any particular Participating
Insurance Company or type of insurance product. Applicants therefore
argue that there is no reason to believe that conflicts of interest
would result from mixed funding.
21. In addition, Applicants assert that the sale of shares of the
Trust to Qualified Plans will not increase the potential for material,
irreconcilable conflicts of interest between or among different types
of investors. Section 817 is the only section in the Code where
separate accounts are discussed. Section 817(h) of the Code imposes
certain diversification standards on Underlying Funds of Variable
Contracts. Treasury regulation 1.817-5(f)(3)(iii) specifically permits
``qualified pension or retirement plans'' and Separate Accounts to
share the same Underlying Fund. Applicants, therefore, have concluded
that neither the Code, nor the Treasury regulations or revenue rulings
thereunder, present any inherent conflicts of interest between or among
Qualified Plan participants and Variable Contract owners if Qualified
Plans and the Separate Accounts of Variable Contracts all invest in the
same Underlying Fund.
22. Applicants assert that while there are differences in the
manner in which distributions are taxed for Variable Contracts and
Qualified Plans, these tax consequences do not raise any conflicts of
interest. When distributions are 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 Portfolios at their respective net asset value. The
Qualified Plan then will make distributions in accordance with the
terms of the Variable Contract.
23. With respect to voting rights, Applicants state that it is
possible to provide an equitable means of giving rights to Variable
Contract owners and participants in the Qualified Plans. In connection
with any meeting of shareholders, the Trust will inform each
shareholder, including each Separate Account and Qualified Plan, of the
information necessary for the meeting, including their respective share
of ownership in the respective portfolios of the Trust. A Participating
Insurance Company will solicit voting instructions in accordance with
the ``pass-through'' voting requirement. Qualified Plans and Separate
Accounts will each have the opportunity to exercise voting rights with
respect to their shares in the Portfolios of the Trust, although only
the Separate Accounts are required to pass through their vote to
Contract owners. The voting rights provided to Qualified Plans with
respect to shares of the Trust would be no different from the voting
rights that are provided to Qualified Plans with respect to shares of
mutual funds sold to the general public.
24. Applicants argue that the ability of the Portfolios to sell
their shares directly to Qualified Plans does not create a ``senior
security'' as defined by Section 18(g) of the 1940 Act. As noted above,
regardless of the rights and benefits of participants under Qualified
Plans, or Variable Contract owners under Variable Contracts, the
Qualified Plans and the Separate Accounts have rights only with respect
to their respective shares of the Portfolio. They can only redeem such
shares at their net asset value. No shareholder of the Portfolios has
any preference over any other shareholder with respect to distribution
of assets or payment of dividends. Applicants state that in absence of
an exemption form Section 18(f), all shares of the Trust that will be
sold to Separate Accounts or Qualified Plans will be of the same class
of shares.
25. Applicants have determined that no conflicts of interest exist
between the Variable Contract owners of the Separate Accounts and
Qualified Plan participants with respect to the state insurance
commissioners' veto powers over investment objectives. The basic
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
the insurance companies usually cannot simply redeem their separate
accounts out of one fund and invest in another fund. Generally, time-
consuming, complex transactions must be undertaken to accomplish such
redemptions and transfers. Conversely, the trustee(s) of Qualified
Plans or the participants in participant-directed Qualified Plans could
make the decision quickly and could implement the redemption of their
shares from the Portfolios and reinvest in another funding vehicle
without the same regulatory impediments or, as is the case with most
Qualified Plans, even hold cash pending suitable investment.
26. 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 Variable Contract owners of
the Separate Accounts from possible future changes in the federal tax
laws than that which already exists between Variable Contract owners.
27. Applicants assert that no policy reasons justify prohibiting a
separate account funding scheduled and flexible variable life insurance
contracts form relying on rule 6e-2. The interests of scheduled premium
variable life Contract owners and flexible premium Variable Contract
owners and the regulatory frameworks of rules 6e-2 and 6e-3(T) are
sufficiently parallel that the
[[Page 66816]]
use of the same separate account to fund both types of contracts should
not prejudice the owners of any contracts.
28. Applicants also assert that the requested relief is appropriate
and in the public interest because the relief will promote
competitiveness in the variable life insurance market. Various factors
have limited the number of insurance companies that offer Variable
Contracts. These factors include the costs of organizing and operating
a funding medium, the lack of expertise with respect to investment
management, and the lack of name recognition by the public of certain
insurers as investment experts to whom the public feels comfortable
entrusting their investment dollars. Applicants argue that use of
Portfolios as common investment vehicles for Variable Contracts helps
to alleviate these concerns because Participating Insurance Companies
benefit not only from the investment and administrative expertise of
the Trust's investment adviser, but also from the cost efficiencies and
investment flexibility afforded by a large pool of funds. Making the
Portfolios available for mixed and shared funding may encourage more
insurance companies to offer Variable Contracts and, accordingly, could
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. Mixed and shared funding also would
benefit Variable Contract owners by eliminating a significant portion
of the costs of establishing and administering separate mutual funds.
Furthermore, Applicants assert that the sale of shares of the Trust to
Qualified Plans, in addition to Separate Accounts of Participating
Insurance Companies, would result in an increased amount of assets
available for investment by the Trust. This may benefit Variable
Contract owners by promoting economies of scale, by permitting increase
safety of investments through greater diversification, and by making
the addition of new Portfolios more feasible.
Applicants' Conditions
The Applicants have consented to the following conditions:
1. A majority of the Board of the Trust (``Board'') shall consist
of persons who are not ``interested persons'' of the Trust 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), 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 will monitor the Portfolios for the existence of any
material irreconcilable conflict between the interests of the Variable
Contract owners of all Separate Accounts investing in any 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 Contract owners;
or (f) a decision by a Participating Insurance Company to disregard
Variable Contract owners' voting instructions.
3. Participating Insurance Companies and Asset Manager (or any
other investment manager of the Trust) and any Qualified Plan that
executes a fund participation agreement upon becoming an owner of 10%
or more of the assets of any underlying Portfolio of the Trust
(``Participants'') will report any potential or existing conflicts, of
which they become aware, to the Board. Participants will be obligated
to assist the 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 Participant to
inform the Board whenever Variable Contract owners' or Plan
participants' voting instructions are disregarded. The responsibility
to report such information and conflicts and to assist the Board will
be a contractual obligation of all Participants investing in a
Portfolio under their participation agreements, and those participation
agreements shall provide that such responsibilities will be carried out
with a view only to the interests of the Variable Contract owners or
Plan participants.
4. If a majority of the Board, or a majority of the independent
trustees of the Board (``Independent Trustees''), determine 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 Independent 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 or Plans, as appropriate, 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 Variable Contract owners or Plan participants and, as
appropriate, segregating the assets of any appropriate group (i.e.,
annuity contract owners, life insurance contract owners, Variable
Contract owners, or Plan participants) that votes in favor of such
segregation, or offering to the affected Variable Contract owners or
Plan participants, as appropriate 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 Participant's decision to disregard Variable Contract
owners' or Plan participants' voting instructions, and that decision
represents a minority position or would preclude a majority vote, the
Participant may be required, at the election of the relevant Portfolio,
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 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 governing
participation in the Portfolios and these responsibilities will be
carried out with a view only to the interests of the Variable Contract
owners or Plan participants.
For purposes of this condition, a majority of Independent Trustees
shall determine whether or not any proposed action adequately remedies
any irreconcilable material conflict, but in no event will the Trust or
Asset Manager be required to establish a new funding medium for any
Variable Contract or Plan investment. No Participant shall be required
by this condition to establish a new funding medium for any Variable
Contract or Plan investment if an offer to do so has been declined by a
vote of a majority of Variable Contract owners materially
[[Page 66817]]
affected by the irreconcilable material conflict.
5. The determination by the Board of the existence of an
irreconcilable material conflict and its implications shall be made
known promptly in writing to all Participants.
6. Participating Insurance Companies 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,
Participating Insurance Companies will vote shares of a Portfolio held
in their Separate Accounts in a manner consistent with timely voting
instructions received from Variable Contract owners. Each Participating
Insurance Company also will vote share of a Portfolio held in its
Separate Accounts for which no timely voting instructions from Variable
Contract owners 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 participation agreements.
7. The Trust will notify all Participants that prospectus
disclosure regarding potential risks of mixed and shared funding may be
appropriate. The Trust shall disclose in its Prospectus that: (a) its
shares may be offered to insurance company Separate Accounts that fund
Variable Contracts of Participating Insurance Companies that may or may
not be affiliated with one another, and to Qualified Plans; (b) because
of differences of tax treatment or other considerations, the interests
of various Variable Contract owners and Qualified Plan participants
might at some time be in conflict; and (c) the Board will monitor for
any material conflicts and determine what action, if any, should be
taken.
8. All reports received by the Board regarding potential or
existing conflicts, and all action of the Board with respect to
determining the existence of a conflict, notifying Participants of a
conflict, and determining any proposed action adequately remedies a
conflict, will be properly recorded in the minutes or other appropriate
records, and such minutes or other records shall be made available to
the Commission upon request.
9. If and to the extent Rule 6e-2 or Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provided 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 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 extend such rules are applicable.
10. The Trust 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 Trust), and,
in particular, the Trust will provide for meetings as required by
applicable State law or the Act, including Section 16(c) of the 1940
Act (although the Trust is not one of the trusts described in that
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 Participants shall, at least annually, submit to the Board
such reports, materials or data as the Board may reasonably request so
that the 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 the Board. The
obligations of the Participants to provide these reports, materials,
and data upon reasonable request of the Board shall be a contractual
obligation of all Participants under their participation agreements.
12. If a Qualified Plan becomes an owner of ten percent or more of
the assets of a Portfolio, such Qualified Plan will execute a fund
participation agreement with the Trust on the behalf of such Portfolio.
A Qualified Plan shall execute an application containing an
acknowledgement of this condition upon such Qualified Plan's initial
purchase of the shares of any Portfolio.
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. 95-31238 Filed 12-22-95; 8:45 am]
BILLING CODE 8010-01-M
