[Federal Register Volume 64, Number 23 (Thursday, February 4, 1999)]
[Notices]
[Pages 5685-5690]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2603]
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SECURITIES AND EXCHANGE COMMISSION
[Rel No. IC-23671; File No. 812-11344]
Rydex Variable Trust, et al.
January 29, 1999.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the
``Commission'').
ACTION: Notice of application for an order under Section 6(c) of the
Investment Company Act of 1940 (the ``1940 Act'') granting exemptive
relief from Sections 9(a), 13(a), 15(a), and 15(b) of the 1940 Act and
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder.
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Summary of Application: Applicants seek an order to the extent
necessary to permit shares of the Rydex Variable Trust and shares of
any other investment company that is designed to fund insurance
products and for which PADCO Advisors II, Inc. (``PADCO''), or any of
its affiliates, may serve as investment advisor, administrator,
manager, principal underwriter, or sponsor (collectively, the
``Trust'') to be sold to and held by: (a) Variable annuity and variable
life insurance separate accounts of both affiliated and unaffiliated
life insurance companies (the ``Participating Insurance Companies'');
and (b) qualified pension and retirement plans outside the separate
account context (the ``Qualified Plans'').
Applicants: Rydex Variable Trust and PADCO Advisors II, Inc.
Filing Date: The application was filed on October 7, 1998, amended
and restated on December 17, 1998, and amended and restated on January
28, 1999.
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 on this application by writing
to the Secretary of the SEC and serving Applicants with a copy of the
request, personally or by mail. Hearing requests must be received by
the Commission by 5:30 p.m. on February 24, 1999, and accompanied by
proof of service on the Applicants in the form of an affidavit or, for
lawyers, a certificate of service. Hearing requests should state the
nature of the interest, the reason for the request and the issues
contested. Persons may request notification of the date of a hearing by
writing to the Secretary of the Commission.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, c/o Morgan, Lewis & Bockius LLP, Attention: John H.
Grady, Jr., Esq., and C. Ronald Rubley, Esq., One Logan Square,
Philadelphia, PA 19103-6993.
FOR FURTHER INFORMATION CONTACT: Martha Peterson, Attorney, or Susan
Olson, 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 is available for a fee from the
Public Reference Branch of the SEC, 450 Fifth Street, NW, Washington,
DC (tel. (202) 942-8090).
Applicants' Representations
1. Rydex Variable Trust, a Delaware business trust, currently
consists of 22 separate series, each for a separate portfolio (such
portfolios, and additional portfolios that may be added in the future,
are referred to herein individually as a ``Portfolio'' and collectively
as ``Portfolios'').
2. PADCO serves as the investment advisor to Rydex Variable Trust
and is registered as an investment advisor under the Investment
Advisers Act of 1940.
3. Applicants state that shares of Portfolios of the Trust may be
offered to variable annuity separate accounts and variable life
insurance separate accounts established by Participating Insurance
Companies that may or may not be affiliated with one another, and to
Qualified Plans.
4. The Participating Insurance Companies will establish their own
separate accounts (the ``Separate Accounts'') and design their own
variable annuity and variable life insurance contracts (``Variable
Contracts''). Applicants state that the role of the Trust under this
arrangement will consist of offering shares to the Separate Accounts
and fulfilling any conditions that the Commission may impose upon
granting the order requested in the application.
5. Applicants state that the Trust can increase its asset base
through the sale of shares of the Trust to the Qualified Plans. The
Qualified Plans may choose the Trust as the sole investment option
under a Plan or as one of several investment options. Participants in
the Qualified Plans may be given an investment choice depending upon
the Qualified Plan. Shares of the Trust sold to a Qualified Plan will
be held by the trustees of the Qualified Plans as mandated by Section
403(a) of the Employee Retirement Income Security Act (``ERISA'').
Applicants' Legal Analysis
1. In connection with the funding of scheduled premium variable
life insurance contracts issued through a Separate Account registered
under the 1940 Act as a unit investment trust (``UIT''), Rule 6e-
2(b)(15) provides partial exemptions from Sections 9(a), 13(a), 15(a)
and 15(b) of the 1940 Act. The exemptions provided under Rule 6e-
2(b)(15) are available only where the management investment company
underlying the UIT offers its shares ``exclusively to variable life
insurance separate accounts of the life insurer, or of any affiliated
life insurance company.'' The use of a common management investment
company as the underlying investment medium for both variable annuity
and variable life insurance separate accounts is referred to as `mixed
funding,'' The use of a common investment company as the underlying
investment medium for separate accounts of unaffiliated insurance
companies is referred to as ``shared funding.'' The relief provided
under Rule 6e-2(b)(15) is not applicable to a scheduled premium
variable life insurance separate account that owns shares of an
underlying fund where the underlying fund offers its shares to a
variable annuity separate account of the same company or of any other
affiliated or unaffiliated insurance company. Therefore, Rule 6e-
2(b)(15) does not provide exemptive relief for either mixed funding or
shared funding.
2. Applicants state that with respect to Rule 6e-2, exemptive
relief is also necessary if shares of the Trust are to be sold to
Qualified Plans since the relief under Rule 6e-2 is available only
where shares are offered exclusively to separate accounts of insurance
companies.
3. In connection with flexible premium variable life insurance
contracts issued through a separate account registered under the 1940
Act
[[Page 5686]]
as a UIT, Rule 6e-3(T)(b)(15) provides partial exemptions from Sections
9(a), 13(a), 15(a), and 15(b) of the 1940 Act. The exemptions provided
under Rule 6e-3(T)(b)(15) are available only where all 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 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, but does not
permit shared funding.
4. Applicants state that with respect to Rule 6e-3(T), exemptive
relief is also necessary if shares of the Trust are to be sold to
Qualified Plans since the relief under Rule 6e-3(T) is available only
where shares are offered exclusively to separate accounts of insurance
companies.
5. Applicants state that changes in the tax law have created the
opportunity for the Trust to increase its asset base through the sale
of Trust shares to the Qualified Plans. Applicants state that Section
817(h) of the Internal Revenue Code of 1986, as amended (the ``Code''),
imposes certain diversification standards on fund investments
underlying variable contracts. Specifically, the Code provides that a
variable contract shall not be treated as an annuity contract or life
insurance contract for any period (and any subsequent period) for which
the investments, in accordance with regulations prescribed by the
Treasury Department, are not adequately diversified. On March ,m 1989,
the Treasury Department issued regulations which established
diversification requirements for the investment portfolios underlying
variable contracts (Treas. Reg. Sec. 1.817-5(1989)). The regulations
provide in pertinent part, an insurance company separate account may
look through to the investments of a regulated investment company in
which it invests in order to meet the diversification requirements, if
all of the beneficial interests in the regulated investment company are
held by separate accounts of one or more insurance companies. The
regulations, however, contain certain exceptions to this requirement,
one of which allows shares in an investment company to be held by the
trustee of a qualified pension or retirement plan without adversely
affecting the ability of life insurance companies to hold shares in the
same investment company in their separate accounts (Treas. Reg.
Sec. 1.817-5(f)(3)(iii)).
6. Applicants state that the promulgation of Rules 6e-2 and 6e-3(T)
under the 1940 Act preceded the issuance of these Treasury regulations.
Applicants assert that, in all probability, the sale of shares of the
same investment company to both separate accounts and Qualified Plans
was not envisioned at the time of the adoption of Rules 6e-2(b)(15) and
6e-3(T)(15).
7. Applicants therefore request 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, to the extent necessary to permit shares of the
Trust to be offered and sold to, and held by, Qualified Plans, as well
as separate accounts.
8. Section 9(a) of the 1940 Act provides that it is unlawful for
any company to serve as investment advisor 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). Rules 6e-2(b) and 6e-3(T)(b)(15) provide exemptions
from Section 9(a) under certain circumstances, subject to the
limitations on mixed and shared funding. The relief provided by Rules
6e-2(b)(15)(i) and 6e-3(T)(b)(15)(i) 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 Rules 6e-2(b)(15)(ii) and 6e-
3(T)(b)(15)(ii) permits the life insurer to serve as the underlying
fund's investment advisor or principal underwriter, provided that none
of the insurer's personnel who are ineligible pursuant to Section 9(a)
participate in the management or administration of the fund.
9. Applicants state that the partial relief from Section 9(a) found
in 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 the
Section. Applicants state that those 1940 Act rules recognize that it
is not necessary for the protection of investors or the purposes fairly
intended by the policy and provisions of the 1940 Act to apply the
provisions of Section 9(a) to the many individuals in a large insurance
company complex, most of whom will have no involvement in matters
pertaining to investment companies within the organization. Applicants
note that the Participating Insurance Companies are not expected to
play any role in the management or administration of the Funds.
Therefore, Applicants assert, applying the restrictions of Section 9(a)
serves no regulatory purpose. The application states that the relief
requested should not be affected by the proposed sale of shares of the
Trust to Qualified Plans because the Plans are not investment companies
and are not, therefore, subject to Section 9(a).
10. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15(iii) under the 1940
Act assume the existence of a pass-through voting requirement with
respect to management investment company shares held by a separate
account. Applicants state that the Participating Insurance Companies
will provide pass-through voting privileges to all Variable Contract
owners so long as the Commission interprets the 1940 Act to require
such privileges.
11. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) under the 1940
Act provide exemptions from the pass-through voting requirement with
respect to several significant matters, assuming observance of the
limitations on mixed and shared funding imposed by the 1940 Act and the
rules thereunder. Rules 6e-2(b)(15)(iii)(A) and 6e-3(T)(b)(15)(iii)(A)
provide that the insurance company may disregard voting instructions of
its contract owners with respect to the investments of an underlying
fund, or any contract between a fund and its investment advisor, when
required to do so by an insurance regulatory authority. Rules 6e-
2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(B) provide that the insurance
company may disregard voting instructions of its contract owners if the
contract owners initiate any change in the company's investment
policies, principal underwriter, or any investment advisor, provided
that disregarding such voting instructions is reasonable and subject to
the other provisions of paragraphs (b)(15)(ii) and (b)(7)(ii)(B) and
(C) of each rule.
12. Applicants further represent that the sale of Trust shares to
Qualified Plans does not impact the relief requested in this regard.
Applicants note that shares of the Trust sold to Qualified Plans would
be held by the trustees of such Qualified Plans as required 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: (a) When the Qualified Plan expressly
provides that the trustee(s) is subject to the direction of a named
fiduciary who
[[Page 5687]]
is not a trustee, in which case the trustee(s) is subject to proper
directions made in accordance with the terms of the Qualified Plan and
not contrary to ERISA; and (b) when the authority to manage, acquire or
dispose of assets of the Qualified Plan is delegated to one or more
investment managers pursuant to Section 402(c)(3) of ERISA. Unless one
of the two exceptions stated in Section 403(a) applies, Qualified Plan
trustees have the exclusive authority and responsibility for voting
proxies. Some Qualified Plans, however, may provide for the trustee, an
investment advisor, or another named fiduciary to vote shares in
accordance with instructions from plan participants. With respect to
Qualified Plans whose governing documents do not provide plan
participants with pass through voting, the issue of resolving any
irreconcilable conflict with respect to voting is not present. With
respect to Qualified Plans whose governing documents do provide plan
participants with pass through voting privileges, Applicants state
there is no reason to believe that plan participants will vote in a
manner that would disadvantage Variable Contract owners.
13. Applicants state that no increased conflicts of interest would
be presented by the granting of the requested relief. Applicants assert
that shared funding does not present any issues that do not already
exist where a single insurance company is licensed to do business in
several, or all, states. Applicants note that where insurers are
domiciled in different states, it is possible that the state insurance
regulatory body in a state in which one insurance company is domiciled
could require action that is inconsistent with the requirements of
insurance regulators in one or more other states in which other
insurance companies are domiciled. Applicants submit that this
possibility is no different and no greater than exists where a single
insurer and its affiliates offer their insurance products in several
states.
14. Applicants further submit that affiliation does not reduce the
potential, if any exists, for differences among state regulatory
requirements. In any event, Applicants state that 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 these differences 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 relevant
portfolio or fund.
15. Applicants also state 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 advisor initiated by contract owners.
Potential disagreement is limited by the requirement that the
Participating Insurance Company's disregard of voting instructions be
both reasonable and based on specified good faith determinations.
However, if a Participating Insurance Company's decision to disregard
contract owner instructions represents a minority position or would
preclude a majority vote approving a particular change, such
Participating Insurance Company may be required, at the election of the
Trust, to withdraw its investment in the Trust. No charge or penalty
will be imposed as a result of such withdrawal.
16. Applicants state that there is no reason why the investment
policies of the Trust would or should be materially different from what
those policies would or should be if such investment company or series
thereof funded only variable annuity or variable life insurance
contracts. Applicants therefore argue that there is no reason to
believe that conflicts of interest would result from mixed funding.
Applicants represent that the Trust will not be managed to favor or
disfavor any particular Participating Insurance Company or type of
insurance product.
17. Section 817(h) imposes certain diversification standards on the
underlying assets of variable annuity contracts and variable life
insurance contracts held in the portfolios of management investment
companies. Treasury Regulation 1.817-5(f)(3)(iii), which established
diversification requirements for such portfolios, specifically permits
``qualified pension or retirement plans'' and 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 Qualified Plans, variable annuity separate
accounts and variable life insurance separate accounts all invest in
the same management investment company.
18. Applicants state that while there are differences in the manner
in which distributions are taxed for variable annuity contracts,
variable life insurance contracts and Qualified Plans, these tax
consequences do not raise any conflicts of interest with respect to the
use of the Trust. 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 request
redemption of shares of the Trust at their respective net asset value
in conformity with Rule 22c-1 under the 1940 Act. The Qualified Plan
will then make distributions in accordance with the terms of the
Qualified Plan and the Participating Insurance Company will make
distributions in accordance with the terms of the Variable Contract.
19. With respect to voting rights, Applicants state that it is
possible to provide an equitable means of giving such voting rights to
contract owners and to the trustees of Qualified Plans. Applicants
represent that the transfer agent for the Trust will inform each
Participating Insurance Company of its share ownership in each Separate
Account, and will inform the trustees of Qualified Plans of their
holdings. Each Participating Insurance Company will then solicit voting
instructions in accordance with the ``pass-through'' voting requirement
of Rules 6e-2 and 6e-3(T).
20. Applicants contend that the ability of the Trust to sell its
shares directly to Qualified Plans does not create a ``senior
security,'' as such term is defined under Section 18(g) of the 1940
Act, in favor of any contract owner or any participant under a
Qualified Plan. Regardless of the rights and benefits of participants
and contract owners under the respective Qualified Plans and Variable
Contracts, the Qualified Plans and the Separate Accounts have rights
only with respect to their shares of the Trust. Such shares may be
redeemed only at net asset value. No shareholder of the Trust has any
preference over any other shareholder with respect to distribution of
assets or payment of dividends.
21. Finally, Applicants state that there are no conflicts between
contract owners and participants under the Qualified Plans with respect
to the state insurance commissioners' veto powers (direct with respect
to variable life insurance and indirect with respect to variable
annuities) over investment objectives. The basic premise of shareholder
voting is that not all shareholders may agree that there are inherent
conflicts of interest between shareholders. The state insurance
commissioners have been given the veto power in recognition that
insurance companies usually are unable simply to request redemption out
of one fund and invest those moneys in another fund. Generally, to
accomplish such redemptions and transfers, complex and
[[Page 5688]]
time consuming transactions must be undertaken. Conversely, trustees of
Qualified Plans can make the decision quickly and implement redemption
of shares from a Trust and reinvest the moneys in another funding
vehicle without the same regulatory impediments or, as is the case with
most Qualified Plans, even hold cash pending suitable investment. Based
on the foregoing, Applicants represent that even should there arise
issues where the interests of contract owners and the interests of
Qualified Plans conflict, the issues can be almost immediately resolved
because the trustees of the Qualified Plans can, on their own, redeem
shares out of the Trusts.
22. Applicants state that various factors have kept certain
insurance companies from offering variable annuity and variable life
insurance contracts. According to Applicants, these factors include:
The cost of organizing and operating an investment funding 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
professionals. Applicants contend that use of the Trust as common
investment media for the Variable Contracts would reduce these
concerns. Participating Insurance Companies would benefit not only from
the investment and administrative expertise of the responsible advisors
and their affiliates, but also from the cost efficiencies and
investment flexibility afforded by a large pool of funds. Applicants
state that making the Trust available for mixed and shared funding may
encourage more insurance companies to offer variable contracts such as
the Variable Contracts which may then increase competition with respect
to both the design and the pricing of variable contracts. Applicants
submit that this can be expected to result in greater product variation
and lower charges. Thus, Applicants represent that contract owners
would benefit because mixed and shared funding will eliminate a
significant portion of the costs of establishing and administering
separate funds. Moreover, Applicants assert that sales of shares of the
Trust to Qualified Plans should increase the amount of assets available
for investment by the Trust, thereby promoting economies of scale and
increased safety through greater diversification.
23. Applicants believe that there is no significant legal
impediment to permitting mixed and shared funding. Additionally,
Applicants note the previous issuance of orders permitting mixed and
shared funding where shares of a fund were sold directly to qualified
plans such as the Qualified Plans.
Applicants' Conditions
Applicants have consented to the following conditions:
1. A majority of the Trust's 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 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 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 Board; (b) for a period of 60
days if a vote of shareholders is required to fill the vacancy or
vacancies; or (c) for such longer period as the Commission may
prescribe, by order, upon application.
2. The Board will monitor the Trust for the existence of any
material irreconcilable conflict between and among the interests of the
variable annuity and variable life insurance contract owners investing
in the Separate Accounts and in Portfolios of the Trust, and all other
persons investing in the Portfolios, including Qualified Plans, 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 interpretative 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 series are being managed; (e) a
difference in voting instructions given by variable annuity contract
owners, variable life insurance contract owners and the trustees of a
Qualified Plan that does not provide voting rights to its investors (or
Qualified Plan participants if they have the right to give instructions
under the Qualified Plan governing documents); (f) a decision by a
Participating Insurance Company to disregard the voting instructions of
contract owners and (g) if applicable, a decision by a Qualified Plan
to disregard the voting instructions of plan participants.
3. In the event that a Qualified Plan ever should become an owner
of 10 percent or more of the assets of a Portfolio of the Trust,
Applicants will require the Qualified Plan to execute a participation
agreement with the Trust that provides appropriate protection
consistent with the representations in the Application. In connection
with the initial purchase of Trust shares, the Qualified Plan
shareholder will be required to acknowledge this condition in its
application to purchase the shares.
4. Participating Insurance Companies, the responsible advisors, and
any Qualified Plan that executes a Trust participation agreement upon
becoming an owner of 10% or more of the assets of a Portfolio of the
Trust (collectively, the ``Participating Entities'') will report any
potential or existing conflicts to the Board. Participating Entities
will be responsible for assisting the board in carrying out its
responsibilities 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 Participating Entity to inform the Board whenever
Plan Participant voting instructions are disregarded. The
responsibility to report such information and any conflicts to the
Board and to assist the Board will be a contractual obligation of all
Participating Insurance Companies and Qualified Plans investing in the
Trust; those responsibilities will be carried out with a view only to
the interests of the contract owners and participants under the
Qualified Plans.
5. If it is determined by a majority of the Board, or a majority of
the disinterested members of the Board, that a material irreconcilable
conflict exists, then the relevant Participating Insurance Companies
and Qualified Plans, at their expense and to the extent reasonably
practicable (as determined by a majority of the disinterested
directors, as the case may be), shall take whatever steps are necessary
to remedy or eliminate the material irreconcilable conflict, up to and
including: (a) Withdrawing the assets allocable to some or all of the
Separate Accounts from the affected Portfolio of the Trust and
reinvesting such assets in a different investment medium, including
another Portfolio, or submitting the question as to whether such
segregation should be implemented to a vote of all affected contract
owners and, as appropriate, segregating the assets of any appropriate
group (i.e., variable annuity contract owners or variable life
insurance contract owners of one or
[[Page 5689]]
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; (b) withdrawing the assets allocable to some or
all of the Qualified Plans from the affected Portfolio of the Trust and
reinvesting such assets in a different investment medium, including
another Portfolio of the Trust; and (c) establishing a new registered
management investment company or managed separate account. If a
material irreconcilable conflict arises because of a decision by a
Participating Insurance Company to disregard contract owner voting
instructions, and that decision represents a minority position or would
preclude a majority vote, then the Participating Insurance Company may
be required, at the Trust's election, to withdraw the Participating
Insurance Company's Separate Account's investment in the Trust 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 all Qualified Plans under their
agreements governing participation in the Trust and those
responsibilities will be carried out with a view only to the interests
of contract owners and participants in the Qualified Plans.
For purposes of this Condition 5, 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 Trust or its investment advisor be required to
establish a new funding medium for any Variable Contract. No
Participating Insurance Company shall be required by this Condition 5
to establish a new funding medium for any Variable Contract if any
offer to do so has been declined by vote of a majority of the contract
owners materially adversely affected by the material irreconcilable
conflict. No Qualified Plan will be required by this Condition 5 to
establish a new funding medium for such Qualified Plan if (a) an offer
to do so has been declined by vote of a majority of plan participants
materially and adversely affected by the irreconcilable material
conflict or (b) pursuant to governing Qualified Plan documents and
applicable law, the Qualified Plan makes such decision without a plan
participant vote.
6. A Board's determination of the existence of a material
irreconcilable conflict and its implications shall be made known in
writing promptly to all Participating Entities.
7. Participating Insurance Companies will provide pass-through
voting privileges to all owners of Variable Contracts so long as the
Commission continues to interpret the 1940 Act as requiring pass-
through voting privileges for variable annuity and variable life
insurance owners. As to variable annuity and variable life insurance
contracts that participate in a Portfolio through unregistered separate
accounts, pass-through voting privileges will be extended to the owners
of such contracts to the extent granted by the issuing insurance
company. Participating Insurance Companies will be responsible for
assuring that each of their registered Separate Accounts participating
in a Portfolio calculate 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 will be a contractual obligation of
Participating Insurance Companies under their agreements governing
participation in a Portfolio. Each Participating Insurance Company will
vote Trust shares held by a Separate Account for which it has not
received voting instructions, as well as shares attributable to it, in
the same proportion as it votes shares for which it has received voting
instructions. Each Qualified Plan will vote in accordance with
applicable law and governing plan documents.
8. 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 Trust) and, in particular,
the Trust will either provide for annual meetings (except to the extent
that the Commission may interpret Section 16 of the 1940 Act not to
require such meetings) or comply with Section 16(c) of the 1940 Act
(although the Trust is not one of the trusts described in the 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,
the Trust 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.
9. The Trust will disclose in its prospectus that (a) the Trust is
intended to be a funding vehicle for all types of variable annuity and
variable life insurance contracts offered by various insurance
companies and for certain qualified pension and retirement plans, (b)
material irreconcilable conflicts possibly could arise, and (c) the
Trust's 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 in response to any such conflict. The Trust will
notify all Participating Insurance Companies and Qualified Plans that
similar disclosure may be appropriate in Separate Account prospectuses
and Qualified Plan disclosure documents.
10. If, and to the extent that, Rule 6e-2 and Rule 6e-3(T) under
the 1940 Act are amended, or Rule 6e-3 under the 1940 Act is adopted,
to provide exemptive relief from any provision of the 1940 Act, or the
rules promulgated thereunder, with respect to mixed or shared funding,
on terms and conditions materially different from any exemptions
granted in the Order requested in this Application, then the Trust and/
or the Participating Entities, as appropriate, shall take such steps as
may be necessary to comply with Rules 6e-2 and 6e-3(T), as may be
amended, and Rule 6e-3, as may be adopted, to the extent such rules are
applicable.
11. All reports of potential or existing conflicts received by the
Board, and all Board action with regard to (a) determining the
existence of a conflict, (b) notifying Participation Entities of a
conflict, and (c) 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.
12. Each Participating Insurance Company will maintain at its home
office available to the Commission a list of its officers, directors
and employees who participate directly in the management and
administration of any separate account organized as a Unit Investment
Trust of any Fund. These individuals will continue to be subject to the
automatic disqualification provisions of Section 9(a).
13. No less often than annually, each Participating Insurance
Company, Qualified Plan, and/or the investment advisor will submit to
the Boards such reports, materials or data as each Board may reasonably
request so that the Boards may carry out fully the obligations imposed
upon them by the conditions contained in the application. These
reports, materials, and data will be submitted more frequently if
deemed appropriate by the relevant Board. The obligations of a
Participating Insurance Company, Qualified Plan, and/or
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investment advisor to provide these reports, materials and data to the
Boards will be contractual obligations of each Participating Insurance
Company, Qualified Plan, and investment advisor under the participation
agreements.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-2603 Filed 2-3-99; 8:45 am]
BILLING CODE 8010-01-M
