[Federal Register Volume 64, Number 28 (Thursday, February 11, 1999)]
[Notices]
[Pages 6922-6928]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3320]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23681; File No. 812-11280]
The Prudential Series Fund, Inc., et al.
February 4, 1999.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for an order pursuant to Section 6(c) of
the Investment Company Act of 1940 (``1940 Act'') 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) thereunder.
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[[Page 6923]]
SUMMARY OF APPLICATION: Applicants seek an order to permit shares of
any current or future series of Prudential Series Fund, Inc. (``Series
Fund'') and shares of any other investment company that is offered as a
funding medium for insurance products (the current and future series of
the Series Fund and such other investment companies are the ``Funds'')
and for which The Prudential Insurance Company of America
(`'Prudential''), or any of its affiliates, may serve, now or in the
future, as manager, investment adviser, administrator, principal
underwriter or sponsor, to be sold to and held by: (1) separate
accounts (``Separate Accounts'') funding variable annuity and variable
life insurance contracts of both affiliated and unaffiliated life
insurance companies (``Participating Insurance Companies''); and (2)
certain qualified pension and retirement plans (``Plans'').
APPLICANTS: Prudential Series Fund, Inc. and The Prudential Insurance
Company of America.
FILING DATE: The application was filed on August 27, 1998, and an
amended and restated application was filed on November 30, 1998.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC 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 Commission by 5:30 p.m on March 1,
1999, 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 by writing to the
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW, Washington, DC 20549.
Applicants, c/o Shea & Gardner, 11800 Massachusetts Avenue, NW,
Washington, DC 20036, Attention: Christopher E. Palmer, Esq.
FOR FURTHER INFORMATION CONTACT:
Laura A. Novack, Senior Counsel, or Kevin M. Kirchoff, Branch Chief,
Office of Insurance Products, Division of Investment Management, at
(202) 942-0670.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch, 450 Fifth Street, NW, Washington, DC
20549 ((202) 942-8090).
Applicant's Representations
1. The Series Fund is a Maryland corporation registered under the
1940 Act as an open-end management investment company. The Series Fund
currently consists of 15 separate investment portfolios
(``Portfolios''), each of which has its own investment objective and
policies. The Series Fund may issue shares of additional Portfolios,
and expects to issue new classes of shares of each Portfolio in the
future.
2. Prudential is an insurance company organized under the laws of
New Jersey, and is registered as an investment adviser under the
Investment Advisers Act of 1940. Prudential is the Series Fund's
investment adviser. Prudential has entered into a service agreement
with The Prudential Investment Corporation (``PIC''), its wholly-owned
subsidiary, to provide such services as Prudential may require in
connection with the performance of its obligations as investment
adviser of the Series Fund. Prudential also has entered into a
subadvisory agreement with Jennison Associates LLC (``Jennison'') which
handles the day-to-day management of the Jennison Portfolio, one of the
15 Portfolios of the Series Fund.
3. The Series Fund currently sells its shares to separate accounts
of Prudential, which are registered as unit investment trusts under the
1940 Act in connection with the issuance of variable contracts. The
Series Fund wishes to be able to offer shares of its existing and
future Portfolios to Separate Accounts of additional insurance
companies, including insurance companies that are not affiliated with
Prudential, to serve as the investment vehicle for various types of
insurance products, which may include variable annuity and flexible
premium variable life insurance contracts (``Contracts''). Prudential
also wishes to offer shares of any other current or future investment
company to serve as the investment vehicle for the Contracts.
4. Participating Insurance Companies will be those insurance
companies that purchase Fund shares to fund Contracts. The
Participating Insurance Companies will establish their own Separate
Accounts and design their own Contracts. Each Contract will have
certain features and probably will differ from other Contracts with
respect to insurance guarantees, premium structure, charges, options,
distribution method, marketing techniques, sales literature and other
aspects. Each Participating Insurance Company will have the legal
obligation of satisfying all requirements applicable to such insurance
company under the federal securities laws.
5. The Series Fund also wishes to offer shares to the trustees (or
custodians) of Plans. The Plans will be qualified pension or retirement
plans described in Treas. Reg. Sec. 1.817-5(f)(3)(iii), including Rev.
Ruling 94-62, adopted pursuant to Section 817(h) of the Internal
Revenue Code of 1986, as amended (``Code''). Prudential also wishes to
offer shares of any current or future investment company to Plans. Fund
shares sold to Plans will be held by the trustees or custodians of the
Plans as required by Section 403(a) of the Employee Retirement Income
Security Act (``ERISA'') or other applicable provisions of the Code.
Some Plans may provide participants with the right to give voting
instructions. The trustee or custodian of each Plan will have the legal
obligation of satisfying all requirements applicable to such Plan under
the federal securities laws. A Fund's role with respect to the Separate
Accounts and the Plans will be limited to that of offering its shares
to the Separate Accounts and Plans and fulfilling any conditions the
Commission may impose upon granting the Order requested therein.
Applicants' Legal Analysis
1. Applicants request that the Commission issue an order pursuant
to Section 6(c) of the 1940 Act exempting scheduled and flexible
premium variable life insurance Separate Accounts of Participating
Insurance Companies (and, to the extent necessary, any investment
adviser, principal underwriter and depositor of such an account) and
the other Applicants from the provisions of Sections 9(a), 13(a), 15(a)
and 15(b) of the 1940 Act, and sub-paragraph (b)(15) of Rules 6e-2 and
6e-3(T) thereunder, to the extent necessary to permit shares of the
Funds to be offered and sold to, and held by: (a) variable annuity and
variable life insurance separate accounts of the same life insurance
company or of any affiliated life insurance company (``mixed
funding''); (b) separate accounts of unaffiliated life insurance
companies (funding both variable annuity and variable life insurance
separate accounts) (``shared funding''); and (c) Plans.
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 6e-2(b)(15)
provides partial exemptions from Sections 9(a), 13(a),
[[Page 6924]]
15(a) and 15(b) of the 1940 Act. The exemptions granted to a separate
account by Rule 6e-2(b) 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 offer their shares ``exclusively
to variable life insurance separate accounts of the life insurer or any
affiliated life insurance company.'' (emphasis added) Therefore, the
relief granted by Rule 6e-2(b)(15) is not available with respect to a
scheduled premium variable life insurance separate account that owns
shares of an investment company that also offers its shares to a
variable annuity separate account of the same company or any affiliated
or unaffiliated insurance company, or to trustees of a qualified plan.
3. The use of a common management investment company as the
underlying investment medium for both variable annuity and variable
life insurance separate accounts of a single insurance company (or of
two or more affiliated insurance companies) is referred to as ``mixed
funding.'' The use of a common investment company as the underlying
investment medium for variable annuity and/or variable life insurance
separate accounts of unaffiliated insurance companies is referred to as
``shared funding.'' The relief granted by Rule 6e-2(b)(15) is not
available if the scheduled premium variable life insurance separate
account owns shares of an underlying investment company that also
offers its shares to separate accounts funding variable contracts of
one or more unaffiliated life insurance companies. Moreover, the relief
under Rule 6e-2(b)(15) is not available if the scheduled premium
variable life insurance separate account owns shares of an underlying
investment company that also offers its shares to Plans.
4. In connection with 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 13(a), 15(a) and 15(b) of the 1940 Act. These
exemptions granted to a separate account 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 offer their
shares ``exclusively to separate accounts of the life insurer, or of
any affiliated life insurance company, offering either scheduled
premium variable life insurance contracts 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.'' (emphasis added). Thus, Rule 6e-
3(T) permits mixed funding, but precludes shared funding or selling
shares to Plans.
5. Applicants state that current tax law permits the Funds to
increase their asset base through the sale of shares to Plans.
Applicants state that Section 817(h) of the Code imposes certain
diversification standards on the underlying assets of the Contracts
invested in the Funds. The Code provides that the Contracts will not be
treated as annuity contracts or life insurance contracts for any period
during which the underlying assets are not adequately diversified in
accordance with regulations prescribed by the Treasury Department. The
regulations provide that to meet the diversification requirements, all
of the beneficial interests in the underlying investment company must
be held by the segregated asset accounts of one or more insurance
companies. Treas. Reg. Sec. 1.817-5. The regulations do, however,
contain certain exceptions to this requirement, one of which permits
shares of an investment company to be held by the trustee of a Plan
without adversely affecting the ability of the shares in the same
investment company also to be held by the separate accounts of
insurance companies in connection with their Contracts. Treas. Reg.
Sec. 1.817-5(f)(3)(iii).
6. Applicants state that the promulgation of Rules 6e-2 and 6e-3(T)
preceded the issuance of these Treasury regulations, and that the sale
of shares of the same investment company to both Separate Accounts and
Plans could not have been envisioned at the time of the adoption of
Rules 6e-2(b)(15) and 6e-3(T)(b)(15).
7. Section 9(a)(3) of the 1940 Act provides that it is unlawful for
any company to serve as an investment adviser to, or principal
underwriter for, any registered open-end investment company if an
affiliated person of that company is subject to a disqualification
enumerated in Section 9(a)(1) or (2).
8. Rules 6e-2(b)(15)(i) and (ii) and 6e-3(T)(b)(15)(i) and (ii)
provide partial exemptions from Section 9(a), subject to the
limitations discussed above on mixed and shared funding. These rules
provide that the eligibility restrictions of Section 9(a) shall not
apply to persons disqualified under Section 9(a) who are officers,
directors, or employees of the life insurer or its affiliates, so long
as that person does not participate directly in the management or
administration of the underlying investment company, and that an
insurer shall be ineligible to serve as an investment adviser or
principal underwriter of the underlying fund only if an affiliated
person of the life insurer who is disqualified by Section 9(a)
participates in the management or administration of the fund.
9. Applicants state that the partial relief granted in Rules 6e-2
and 6e-3(T) from the requirements of Section 9 of the 1940 Act, limits,
in effect, the amount of monitoring necessary to ensure compliance with
Section 9 to that which is appropriate in light of the policy and
purposes of that section, when the life insurer serves as investment
adviser to or principal underwriter for the underlying fund. Applicants
state that this relief parallels the relief granted by Rules 6e-2(b)(4)
and 6e-3(T)(b)(4) to the insurer in its role as depositor of the
separate account. Applicants state that those rules recognize that it
is not necessary to apply the provisions of Section 9(a) to the many
individuals who may be involved in a typical insurance company complex,
most of whom will have no involvement in matters pertaining to
underlying investment companies. Applicants assert, therefore, that
there is no regulatory purpose in denying the partial exemptions
because of mixed and shared funding and sales to Plans because sales to
Plans do not change the fact that the purposes of the 1940 Act are not
advanced by applying the prohibitions of Section 9(a) to persons in a
life insurance complex who have no involvement in the underlying fund.
10. Subparagraph (b)(15)(iii) of Rules 6e-2 and 6e-3(T) under the
1940 Act assumes that contract owners are entitled to pass-through
voting privileges with respect to investment company shares held by a
separate account. However, subparagraph (b)(15)(iii) of Rules 6e-2 and
6e-3(T) provides exemptions from the pass-through voting requirement
with respect to several significant matters, assuming the limitations
discussed above on mixed and shared funding are observed.
11. Subparagraph (b)(15)(iii) of Rules 6e-2 and 6e-3(T) provides
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 a fund and its investment adviser, when an
insurance regulatory authority so requires, subject to certain
requirements. In addition, an insurance company may disregard the
voting instructions of its contract owners if the contract owners
initiate any change in the investment company's investment policies,
principal underwriter, or investment adviser (provided that
disregarding such voting instructions is
[[Page 6925]]
reasonable and complies with the other provisions of Rules 6e-2 and 6e-
3(T)). Under the rules, voting instructions with respect to a change in
investment policies may be disregarded if the insurance company makes a
good-faith determination that such change would: (a) violate state law;
or (b) result in investments that either would not be consistent with
the investment objectives of the separate account; or would vary from
the general quality and nature of investments and investment techniques
used by other separate accounts of the company or of an affiliated life
insurance company with similar investment objectives. Voting
instructions with respect to a change in an investment adviser may be
disregarded if the insurance company makes a good-faith determination
that either: (a) the adviser's fees would exceed the maximum rate that
may be charged against the separate account's assets; or (b) the
proposed adviser may be expected to employ investment techniques that
vary from the general techniques used by the current adviser, or the
proposed adviser may be expected to manage the investments in a manner
that would be inconsistent with the investment objectives of the
separate account or in a manner that would result in investments that
vary from certain standards.
12. Applicants state that Rule 6e-2 recognizes that variable life
insurance contracts have important elements unique to insurance
contracts and are subject to extensive state regulation of insurance.
Applicants maintain that in adopting Rule 6e-2, the Commission
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.
Applicants also state that the Commission expressly recognized that
state insurance regulators have authority to require an insurance
company to draw from its general account to cover costs imposed upon
the insurance company by a change approved by contract owners over the
insurance company's objection. Therefore, the Commission deemed
exemptions from pass-through voting requirements necessary ``to assure
the solvency of the life insurer and the performance of its contractual
obligations by enabling an insurance regulatory authority or the life
insurer to act when certain proposals reasonably could be expected to
increase the risks undertaken by the life insurer.'' Applicants assert
that in this respect, flexible premium variable life insurance
contracts are identical to scheduled premium variable life insurance
contracts; and that therefore the corresponding provisions of Rule 6e-
3(T) undoubtedly were adopted in recognition of the same factors.
13. Applicants submit that state insurance regulators have much the
same authority with respect to variable annuity separate accounts as
they have with respect to variable life insurance separate accounts,
and that variable annuity contracts pose some of the same kinds of
risks to insurers as variable life insurance contracts. Applicants
submit that while the Commission staff has not been called upon to
address the general issue of state insurance regulators' authority in
the context of variable annuity contracts, the Commission staff
apparently recommended the exclusivity requirement of Rule 6e-2 in
order to reserve the widest possible latitude in regulating what was
then a new and unfamiliar product.
14. Applicants further state that the offer and sale of Fund shares
to Plans will not have any impact on the relief requested in this
regard. As previously noted, shares of the Funds will be held by the
trustees or custodians of the Plans as required by Section 403(a) of
ERISA or other applicable provisions of the Code. Section 403(a) also
provides that the trustees must have exclusive authority and discretion
to manage and control the Plan investments with two exceptions: (a)
when the Plan expressly provides that the trustees are subject to the
direction of a named fiduciary who is not a trustee, in which case the
trustees are subject to proper directions made in accordance with the
terms of the Plan and not contrary to ERISA; and (b) when the authority
to manage, acquire or dispose of assets of the Plan is delegated to one
or more investment managers pursuant to Section 402(c)(3) of ERISA.
Unless one of the two exceptions stated in Section 403(a) applies, Plan
trustees have the exclusive authority and responsibility for voting
proxies. Where a named fiduciary appoints an investment manager, the
investment manager has the responsibility to vote the shares held
unless the right to vote such shares is reserved to the trustees or the
named fiduciary. In any event, ERISA permits, but does not require,
pass-through voting to the participants in Plans. Accordingly,
Applicants submit 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 Plans
since Plans are not entitled to pass-through voting privileges.
15. Applicants submit that while some Plans may provide
participants with the right to give voting instructions, there is no
reason to believe that participants in Plans generally, or those in a
particular Plan, either as a single group or in combination with other
Plans, would vote in a manner that would disadvantage Contract owners.
In this regard, Applicants submit that the purchase of Fund shares by
Plans that provide voting rights to participants does not present any
complications not otherwise occasioned by mixed and shared funding.
16. Applicants state that no increased conflicts of interest would
be presented by the granting of the requested relief. Applicants assert
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. Applicants
note that where an insurer is domiciled in different states, it is
possible that a particular state insurance regulatory body could
require action that is inconsistent with the requirements of other
states in which the insurance company offers its policies. Applicants
submit that this possibility is no different or greater than exists
where different insurers may be domiciled in different states.
17. Applicants further submit that affiliation does not reduce the
potential, if any exists, for differences in state regulatory
requirements. Affiliated insurers may be domiciled in different states
and be subject to differing state law requirements. In any event, the
conditions (adapted from the conditions included in Rule 6e-
3(T)(b)(15)) discussed below are designed to safeguard against, and
provide procedures for resolving, any adverse effects that differences
among state regulatory requirements may produce. If a particular state
insurance regulator's decision conflicts with the majority of other
state regulators, the affected insurer may be required to withdraw its
separate account's investment in the Fund.
18. Applicants also argue that affiliation does not eliminate the
potential, if any exists, for divergent judgments as to the
advisability or legality of a change in investment policies, principal
underwriter, or investment adviser initiated by contract owners.
Potential disagreement is limited by the requirement that disregarding
voting instructions be reasonable and based on specified good faith
determinations. However, if an insurer's decision to disregard contract
[[Page 6926]]
owner voting instructions represents a minority position or would
preclude a majority vote approving a particular change, such insurer
may be required, at the Fund's election, to withdraw its separate
account's investment in the Fund. No charge or penalty will be imposed
as a result of such a withdrawal. Applicants submit, however, that the
likelihood that voting instructions of insurance company separate
account holders will ever be disregarded or that withdrawal will occur
is extremely remote, and that this possibility will be known through
prospectus disclosure.
19. Applicants submit that investment by Plans in any of the Funds
will similarly present no conflict. While votes cast by the Plan
trustees cannot be disregarded and must be counted and given effect, if
a material irreconcilable conflict involving Plans arises, the Plans
may simply redeem their shares and make alternative investments.
20. Applicants submit that there is no reason why the investment
policies of the Funds would or should be materially different from what
these policies would or should be if the Funds funded only variable
annuity contracts or variable life insurance contracts, whether
flexible premium or scheduled premium contracts. Each type of insurance
product is designed as a long-term investment program. Similarly, the
investment objectives of Plans are long-term. Moreover, Applicants
represent that each Fund will be managed to attempt to achieve its
investment objective, and not to favor or disfavor any particular
Participating Insurance Company insurer or type of insurance product.
21. As noted above, Section 817(h) of the Code imposes certain
diversification standards on the assets underlying 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), which established diversification requirements for such
portfolios, specifically permits ``qualified pension or retirement
plans'' and insurance company separate accounts to share the same
underlying management investment company. Therefore, Applicants assert
that neither the Code, nor the Treasury regulations, nor the revenue
rulings thereunder, recognize any inherent conflicts of interest if
Plans and variable life insurance separate accounts all invest in the
same management investment company.
22. Applicants note that while there may be differences in the
manner in which distributions from variable annuity contracts, variable
life insurance contracts and Plans are taxed, the tax consequences do
not raise any conflicts of interest. When distributions are to be made,
and the Separate Account or Plan cannot net purchase payments to make
the distributions, the Separate Account or Plan will redeem Fund shares
at their net asset value. The Plan will then make distributions in
accordance with the terms of the Plan, and the Participating Insurance
Company will make distributions in accordance with the terms of the
Contract.
23. Applicants also state that it is possible to provide an
equitable means of giving voting rights to Contract owners and to
Plans. Each Fund will inform each shareholder, including each Separate
Account and each Plan, of its respective share of ownership in the
Fund. Each Participating Insurance Company will then solicit voting
instructions in accordance with the ``pass-through'' voting
requirement.
24. Applicants submit that the ability of the Funds to sell their
respective shares directly to qualified plan 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. Regardless of the rights and benefits of participants
under the Plans or Contract owners under the Contracts, the Plans and
the Separate Accounts only have rights with respect to their respective
shares of the Funds. They can only redeem such shares at their net
asset value. No shareholder of any of the Funds has any preference over
any other shareholder with respect to distribution of assets or
payments of dividends.
25. Applicants state that there are no conflicts between the
Contract owners of Separate Accounts and participants under the Plans
with respect to the state insurance commissioners' veto powers over
investment objectives. The basic premise of shareholder voting is that
not all shareholders may all agree with a particular proposal. The
state insurance commissioners have been given the veto power in
recognition of the fact that insurance companies usually 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 redemptions and transfers. Conversely, trustees of
Plans can make the decision quickly and redeem their shares from a Fund
and reinvest in another funding vehicle without the same regulatory
impediments faced by separate accounts, or, as is the case with most
Plans, even hold cash pending a suitable investment. Based on the
Foregoing, Applicants represent that even should the interests of
Contract owners and Plans conflict, thru conflicts can be resolved
almost immediately because the trustees of the Plans can,
independently, redeem shares out of the Fund.
26. Applicants state that no one investment strategy can be
identified as appropriate to a particular insurance product or to a
Plan. Each pool of variable annuity and variable life insurance
contract owners is composed of individuals of diverse financial status,
age, insurance and investment goals. Applicants further state that a
Fund supporting even one type of insurance product must accommodate
these diverse factors in order to attract and retain purchasers.
Applicants also state that permitting mixed and shared funding will
provide economic support for the continuation of the Funds. In
addition, Applicants assert that permitting mixed and shared funding
will facilitate the establishment of additional Funds serving diverse
goals.
27. Applicants assert that various factors have kept more insurance
companies from offering variable annuity and variable life insurance
contracts. Applicants state that these factors include the costs of
organizing and operating a fund medium, the lack of expertise with
respect to investment management (principally with respect to stock and
money market investments), and the lack of name recognition by the
public of certain insurers as investment experts. Applicants assert
that use of the Funds as common investment mediums for variable
contracts would reduce or eliminate these concerns.
28. Applicants also 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 will benefit not only from the
investment and administrative expertise of Prudential, PIC, and
Jennison, 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 by the Funds, thereby promoting economies of scale, by
permitting increased safety through greater diversification and by
making the addition of new series more feasible. Therefore, making the
Funds available for mixed and shared funding will encourage more
insurance companies to offer variable contracts, and this should result
in increased competition with
[[Page 6927]]
respect to both variable contract design and pricing, which can be
expected to result in more product variation and lower charges.
Applicants assert that the sale of Fund shares to Plans also can be
expected to increase the amount of assets available for investment by
the Funds and thus promote economies of scale and greater
diversification.
29. Applicants assert that they do not believe that mixed and
shared funding and sales to qualified Plans will have any adverse
federal income tax consequences.
Applicants' Conditions
Applicants have consented to the following conditions:
1. A majority of the Board of Directors of each Fund (``Board'')
will consist of persons who are not ``interested persons'' thereof, 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 the death, disqualification, or
bona fide resignation of any director or directors, then the operation
of this condition shall be suspended: (a) for a period of 45 days, if
the vacancy or vacancies may be filled by the remaining directors; (b)
for a period of 60 days, if a vote of shareholders is required to fill
the vacancy or vacancies; or (c) of such longer period as the
Commission may prescribe by order upon application.
2. Each Board will monitor its respective Fund for the existence of
any material irreconcilable conflict between the interests of the
Contract owners of all Separate Accounts and of the Plan participants
investing in the Fund and determine what action, if any, should be
taken in response to such conflicts. A material irreconcilable conflict
may arise for a variety of reasons, including: (a) an action by any
state insurance regulatory authority; (b) a change in applicable
federal or state insurance, tax, or securities laws or regulations, or
a public ruling, private letter ruling, no-action or interpretive
letter, or any similar action by insurance, tax, or securities
regulatory authorities; (c) an administrative or judicial decision in
any relevant proceeding; (d) the manner in which the investments of any
Fund are being managed; (e) a difference in voting instructions given
by variable annuity Contract owners, variable life insurance Contract
owners and trustees of Plans; (f) a decision by an insurer to disregard
the voting instructions of Contract owners; or (g) if applicable,
decision by a Plan to disregard voting instructions of Plan
participants.
3. Participating Insurance Companies, Prudential (or any other
investment adviser of the Fund), and any Plan that executes a fund
participation agreement upon becoming an owner of 10% or more of the
assets of the Fund (collectively, the ``Participants'') will report any
potential or existing conflicts to the Board. Participants will be
responsible for assisting the Board in carrying out its
responsibilities under these conditions by providing the Board with all
information reasonably necessary for the Board to consider any issues
raised. This responsibility includes, but is not limited to, an
obligation by each Participating Insurance Company to inform the Board
whenever Contract owner voting instructions are disregarded, and if
pass-through voting is applicable, an obligation of each Plan to inform
the Board whenever it is determined to disregard Plan participants'
voting instructions. The responsibility to report such information and
conflicts and to assist the Board will be contractual obligations of
all Participating Insurance Companies investing in the Fund under their
agreements governing participation in the Fund, and Plans under their
participation agreements, and such agreements shall provide that these
responsibilities will be carried out with a view only to the interests
of Contract owners and, if applicable, Plan participants.
4. If a majority of the Board, or a majority of its disinterested
directors, determine that a material irreconcilable conflict exists
with respect to a Fund, the relevant Participating Insurance Companies
and Plans will, at their own expense and the extent reasonably
practicable (as determined by a majority of the disinterested
directors), take whatever steps are necessary to remedy or eliminate
the material irreconcilable conflict. Such steps could include: (a)
Withdrawing the assets allocable to some or all of the Separate
Accounts from the Fund, and reinvesting such assets in a different
investment medium, which may include another Fund, or 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 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 (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 contract
owners' voting instructions, and that decision represents a minority
position or would preclude a majority vote, then that insurer 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 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 Plan may be required,
at the Fund's election, to withdraw its investment in the Fund, and no
charge or penalty will be imposed as a result of such withdrawal. The
responsibility of taking remedial action in the event of a Board
determination of material irreconcilable conflict and bearing the cost
of such remedial action will be a contractual obligation of all
Participating Insurance Companies and Plans under their agreements
governing participation in the Fund, and these responsibilities will be
carried out with a view only to the interests of Contract owners and,
if applicable, Plan participants.
5. For purposes of Condition 4, a majority of the disinterested
directors of the Board will determine whether or not any proposed
action adequately remedies any material irreconcilable conflict, but in
no event will the Fund or Prudential (or any other investment adviser
of a Fund) be required to establish a new funding medium for any
Contract. No Participating Insurance Company shall be required by
Condition 4 to establish a new funding medium for any Contract if a
majority of Contract owners materially and adversely affected by the
material irreconcilable conflict vote to decline such offer. No Plan
shall be required by Condition 4 to establish a new funding medium for
such 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.
6. The Board's determination of the existence of a material
irreconcilable conflict and its implications will be made known in
writing promptly to all Participants.
7. Participating Insurance Companies will provide pass-through
voting privileges to all Contract owners so long as the Commission
continues to interpret the 1940 Act to require pass-through voting for
Contract owners.
[[Page 6928]]
Accordingly, Participating Insurance Companies will vote shares of the
Funds held in their separate accounts in a manner consistent with
voting instructions timely received from Contract owners. In addition,
each Participating Insurance Company will vote shares of the Fund held
in its separate accounts for which it has not received timely voting
instructions as well as shares of the Funds which the Participating
Insurance Company itself owns, in the same proportion as those shares
for which voting instructions from Contract owners are timely received.
Participating Insurance Companies will be responsible for assuring that
each of their separate accounts investing in each Fund calculates
voting privileges in a manner consistent with other Participating
Insurance Companies investing in that Fund. The obligation to calculate
voting privileges in a manner consistent with all other separate
accounts investing in each Fund will be a contractual obligation of all
Participating Insurance Companies under the agreements governing their
participation in that Fund.
8. Each Plan will vote as required by applicable law and governing
Plan documents.
9. All reports of potential or existing conflicts received by a
Board, and all Board actions with regard to: (a) determining the
existence of a conflict; (b) notifying Participants of a conflict; and
(c) determining whether any proposed action adequately remedies a
conflict, will be properly recorded in the minutes of the meetings of
the Board or other appropriate records. Such minutes or other records
shall be made available to the Commission upon request.
10. Each Fund will notify all Participants in that Fund that
disclosure in separate account prospectuses regarding potential risks
of mixed and shared funding may be appropriate. Each Fund shall
disclose in its prospectus that: (a) the Fund is intended to be a
funding vehicle for variable annuity and variable life insurance
contracts offered by various insurance companies and for qualified
pension and retirement plans; (b) because of differences of tax
treatment and other considerations, the interests of various Contract
owners participating in the Fund and the interests of Plans investing
in the Fund may conflict; and (c) the Board will monitor events in
order to identify the existence of any material irreconcilable
conflicts and to determine what action, if any, should be taken.
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). In
particular, each Fund either will provide for annual meetings (except
to the extent that the Commission may interpret Section 16 of the 1940
Act not to require such meetings) or comply with Section 16(c) of the
1940 Act (although the Funds are not one of the trusts described in
Section 16(c)), as well as Section 16(a) of the 1940 Act and, if
applicable, Section 16(b) of the 1940 Act. Further, each Fund will act
in accordance with the Commission's interpretation of the requirements
of Section 16(a) with respect to periodic elections of directors and
with whatever rules the Commission may promulgate with respect thereto.
12. If and to the extent that Rules 6e-2, 6e-3(T) under the 1940
Act are amended, or if Rule 6e-3 under the 1940 Act is adopted, to
provide exemptive relief from any provision of the 1940 Act, or the
rules thereunder, with respect to mixed or shared funding on terms and
conditions materially different from any exemptions granted in the
order requested by Applicants, then the Funds and/or Participating
Insurance Companies, as appropriate, shall take such steps as may be
necessary to comply with Rules 6e-2 and 6e-3(T), as amended, or Rule
6e-3, as adopted, to the extent applicable.
13. The Participants no less than annually, shall submit to the
Board such reports, materials or data as the Board may reasonably
request so that the Board may carry out fully the obligations imposed
upon it by the conditions contained in the Application. Such 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 to the Board when it so
reasonably requests, shall be a contractual obligation of all
Participants under the agreements governing their participation in the
Fund.
14. If a Plan should become a holder of 10% or more of the assets
of a Fund, such Plan will execute a participation agreement with the
Fund which will include the conditions set forth herein, to the extent
applicable. A Plan will execute an application containing an
acknowledgment of this condition at the time of its initial purchase of
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. 99-3320 Filed 2-10-99; 8:45 am]
BILLING CODE 8010-01-M
