[Federal Register Volume 63, Number 69 (Friday, April 10, 1998)]
[Notices]
[Pages 17907-17913]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-9466]
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SECURITIES AND EXCHANGE COMMISSION
[Docket No. IC-23100; File No. 812-10816]
Salomon Brothers Variable Series Funds Inc, et al; Notice of
Application
April 3, 1998.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for an order under Section 6(c) of the
Investment Company Act of 1940 (``1940 Act'') granting relief from
Sections 9(a), 13(a), 15(a) and 15(b) and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) thereunder.
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Summary of Application
Appplicants seek an order of exemption to the extent necessary to
permit shares of the Fund to be sold to and held by: (i) variable
annuity and variable life insurance separate accounts (``Separate
Accounts'') of both affiliated and unaffiliated life insurance
companies (``Participating Insurance Companies''), and (ii) trustees of
certain qualified pension or retirement plans.
Applicants
Salomon Brothers Variable Series Funds Inc (the ``Fund'') and
Salomon Brothers Asset Management Inc (``SBAM'' or the ``Adviser'').
Filing Dates
The application was filed on October 16, 1997 and an amendment was
filed on February 9, 1998.
Hearing or Notification of Hearing
An order granting the application will be issued unless the
Commission orders a hearing. Interested persons may request a hearing
by writing to the Secretary of the SEC and serving Applicants with a
copy of the request, personally or by mail. Hearing request should be
received by the Commission by 5:30 p.m. on April 28, 1998, and should
be accompanied by proof of service on Applicants in the form of an
affidavit or, for lawyers, a certificate of service. Hearing requests
should state the nature of the writer's interest, the reason for the
request, and the issues contested. Persons who wish to be notified of a
hearing may request notification by writing to the Secretary of the
SEC.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Applicants, Gary S. Schpero,
Esq., Simpson Thacher & Barlett, 425 Lexington Avenue, New York, New
York 10017.
FOR FURTHER INFORMATION CONTACT:
Elisa Metzger, Senior Counsel, or Mark C. Amorosi, 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 Public Reference Branch of the SEC, 450 Fifth Street, N.W.
Washington, D.C. 20549 (tel. (202) 942-8090).
Applicants' Representations
1. The Fund is a Maryland corporation and is registered under the
1940 Act as an open-end management investment company. The Fund
consists of, and offers shares in, seven separate investment portfolios
(the ``Initial Portfolios''), each of which has its own investment
objective and policies. The Fund may in the future issue shares of
additional portfolios (together with the Initial Portfolios, the
``Portfolios'') and/or multiple classes of shares of each Portfolio.
2. SBAM serves as the investment adviser to each of the Portfolios.
SBAM is an investment adviser registered under the Investment Advisers
Act of 1940, as amended (the ``Advisers Act''). SBAM is a wholly-owned
subsidiary of Salomon Brothers Holding Company Inc, which is a wholly-
owned subsidiary of Salomon Smith Barney Holdings, Inc. which is, in
turn, wholly-owned by Travelers Group, Inc. SBAM serves as the overall
investment manager of the Portfolios, subject to the general direction
and supervision of the Fund's Board of Directors (the ``Board of
Directors''). SBAM has entered into a subadvisory agreement with
Salomon Brothers Asia Pacific Limited (``SBAM AP''), an affiliate of
SBAM and an investment adviser registered under the Advisers Act. SBAM
AP serves as the sub-adviser to one of the Portfolios, Salomon Brothers
Variable Asia Growth Fund. The Adviser also has entered into a
subadvisory consulting agreement with Salomon Brothers Asset Management
Limited (``SBAM Limited''), an affiliate of the Adviser and an
investment adviser registered under the Advisers Act. SBAM Limited
provides advisory services relating to
[[Page 17908]]
currency transactions and investments in non-dollar-denominated debt
securities for the benefit of one of the Portfolios, Salomon Brothers
Variable Strategic Bond Fund. SBAM AP and SBAM Limited are hereinafter
referred to as the ``Sub-Advisers.''
3. The Fund currently offers shares of certain of its Initial
Portfolios to Separate Accounts of Sun Life of Canada U.S. (``Sun
Life'') in order to serve as the investment vehicle for certain
variable annuity contracts. In the future, the Fund wishes to offer
shares of its Portfolios, to Separate Accounts of Sun Life and other
insurance companies in order to serve as the investment vehicle for
various types of insurance products, which may include variable annuity
contracts, single premium variable life insurance contracts, scheduled
premium variable life insurance contracts, and flexible premium
variable life insurance contracts (collectively referred to herein as
``Contracts''). Applicants represent that the Participating Insurance
Companies will establish their own Separate Accounts and design their
own Contracts.
4. The Fund also may offer shares of the Fund to the trustees (or
custodians) of certain qualified pension or retirement plans (the
``Plans'') as permitted by Treasury Regulation Sec. 1.817-5(f)(3)(iii)
adopted pursuant to Sec. 817(h) of the Internal Revenue Code of 1986,
as amended (the ``Code'') and described in Revenue Ruling 94-62.
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, Rule 6e-2(b)(15) under
the 1940 Act provides partial exemptions from Sections 9(a), 13(a),
15(a) and 15(b) of the 1940 Act. The exemptions granted by Rule 6e-
2(b)(15) 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 of any
affiliated life insurance company.'' Therefore, the relief granted by
Rule 6e-2(b)(15) is not available if the scheduled premium variable
life insurance separate account owns shares of a management company
that also offers its shares to a variable annuity separate account of
the same insurance company or any other insurance company or to
trustees of a Plan. The use of a common management investment company
as the underlying investment medium for both variable annuity and
variable life insurance separate accounts of the same life insurance
company or of any affiliated life insurance company is referred to
herein as ``mixed funding.''
2. In addition, 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 management company that also
offers its shares to separate accounts funding variable contracts of
one or more unaffiliated life insurance companies. The use of a common
management company as the underlying investment medium for variable
annuity and/or variable life insurance separate accounts of one
insurance company and separate accounts funding variable contracts of
one or more unaffiliated life insurance companies is referred to herein
as ``shared funding.''
3. 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 management 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) under the 1940 Act
provides partial exemptions from Sections 9(a), 13(a), 15(a) and 15(b)
of the 1940 Act similar to those provided by Rule 6e-2. The exemptions
granted by Rule 6e-3(T)(b)(15) 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.'' Therefore, Rule 6e-3(T)(b)(15)
grants the exemptions if the underlying fund engages in mixed funding,
but not if it engages in shared funding or sells its shares to Plans.
5. Applicants state that the current tax law permits the Fund to
increase its asset base through the sale of shares to Plans. Section
817(h) of the Code imposes certain diversification requirements on the
underlying assets of the Contracts invested in the Fund. The Code
provides that such Contracts shall not be treated as an annuity
contract or life insurance contract for any period in which the
underlying assets are not adequately diversified as prescribed by
Treasury regulations. 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. Treas.
Reg. Sec. 1.817-5. The regulations do, however, contain certain
exceptions to this requirement, one of which allows shares in an
investment company to be held by the trustee of a Plan without
adversely affecting the ability of shares in the same investment
company also to be held by the separate accounts of insurance companies
in connection with their contracts. Treas. Reg. Sec. 1-817-
5(f)(3)(iii).
6. The promulgation of Rules 6e-2 and 6e-3(T) preceding the
issuance of these Treasury regulations. Applicants state that given the
then-current tax law, 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. Accordingly, Applicants hereby request an order of the
Commission exempting the variable life insurance Separate Accounts of
Participating Insurance Companies (and, to the extent necessary, any
principal underwriter and depositor of such a Separate Account) and the
Applicants 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) thereunder (and any permanent rule
comparable to Rule 6e-3(T)), to the extent necessary to permit shares
of the Fund to be offered and sold to, and held by: (1) both variable
annuity Separate Accounts and variable life insurance Separate Accounts
of the same life insurance company or of affiliated life insurance
companies (i.e., mixed funding); (2) Separate Accounts of unaffiliated
life insurance companies (including both variable annuity Separate
Accounts and variable life insurance Separate Accounts) (i.e., shared
funding); and (3) trustees of Plans.
Disqualification
8. Section 9(a)(3) of the 1940 Act provides that it is unlawful for
any company to serve as investment adviser or principal underwriter of
any registered open-end investment company if an affiliated person of
that company is subject to a disqualification enumerated in Section
9(a)(1) or (2). Rule 6e-2(b)(15)(i) and (ii) and Rule 6e-3(T)(b)(15)(i)
and (ii) provide partial exemptions from Section 9(a), subject to the
limitations on mixed and shared funding. These rules provide: (i) that
the eligibility restrictions of Section 9(a) shall not apply to persons
who are
[[Page 17909]]
officers, directors or employees of the life insurer or its affiliates
who do not participate directly in the management or administration of
the underlying fund; and (ii) that an insurer shall be ineligible to
serve as an investment advisor 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(b)(15) and 6e-3(T)(b)(15) from requirements of section 9, 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 Section 9 when the life insurer serves as investment
adviser to or principal underwriter for the underlying fund. Applicants
state 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 many individuals in a
typical insurance company complex, most of whom will have no
involvement in matters pertaining to underlying investment companies.
10. Applicants submit that there is no regulatory purpose in
denying the partial exemptions because of mixed and shared funding and
sales to Plans. Applicants further assert that sales to those entities
does 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.
Pass-Through Voting
11. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) assume the
existence of a pass-through voting requirement with respect to
management investment company shares held by a separate account.
Applicants state that pass-through voting privileges will be provided
with respect to all Contract owners so long as the Commission
interprets the 1940 Act to require pass-through voting privileges for
Contract owners.
12. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) provide
exemptions from the pass-through voting requirement with respect to
several significant matters, assuming the limitations on mixed and
shared funding are observed. Rules 6e-2(b)(15)(iii)(A) and 6e-
3(T)(b)(15)(iii)(A) provide that the 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 required to do so by an insurance
regulatory authority and subject to certain requirements. 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 contract owners if the
contract owners initiate any change in such insurance company's
investment policies, principal underwriter, or any investment adviser
(provided that disregarding such voting instructions is reasonable and
complies with the other provisions of Rules 6e-2 and 6e-3(T)).
13. Applicants state that Rule 6e-2 recognizes that a variable life
insurance contract has important elements unique to insurance
contracts, and is subject to extensive state regulation of insurance.
Applicants assert that in adopting Rules 6e-2(b)(15)(iii), the
Commission expressly recognized that state insurance regulators have
authority, pursuant to state insurance laws or regulations, to
disapprove or require changes in investment policies, investment
advisers, or principal underwriters. The Commission also expressly
recognized that state insurance regulators have authority to require an
insurer to draw from its general account to cover costs imposed upon
the insurer by a change approved by contract owners over the insurer's
objection. The Commission, therefore, deemed such exemptions necessary
to ``assure the solvency of the life insurer and performance of its
contractual obligations by enabling an insurance regulatory authority
or the life insurer to act when certain proposals reasonably could be
expected to increase the risks undertaken by the life insurer.''
Applicants state that in this respect, flexible premium variable life
insurance contracts are identical to scheduled premium variable life
insurance contracts; therefore, Applicants assert that the
corresponding provisions of Rule 6e-3(T) undoubtedly were adopted in
recognition of the same factors.
14. Applicants further represent that the offer and sale of shares
of the Fund to Plans will not have any impact on the relief requested
in this regard. Shares of the Fund sold to Plans would be held by the
trustees of the Plans as required by Section 403(a) of the Employee
Retirement Income Security Act of 1974, as amended (``ERISA''), or
applicable provisions of the Code. Section 403(a) of ERISA also
provides that trustee(s) must have exclusive authority and discretion
to manage and control the Plan investments with two exceptions: (a)
when the Plan expressly provides that the trustee(s) is (are) subject
to the direction of a named fiduciary who is not a trustee, in which
case the trustee(s) is (are) subject to proper directions of such
fiduciary which are 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 to the named fiduciary. In
any event, ERISA permits but does not require pass-through voting to
the participants in Plans. Accordingly, 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 because they are not entitled to pass-through voting
privileges.
15. Applicants explain that some Plans, however, may provide
participants with the right to give voting instructions. Applicants
note, however, that 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. Applicants submit that, therefore,
the purchase of the shares of the Fund by Plans that provide voting
rights to participants does not present any complications not otherwise
occasioned by mixed and shared funding.
Conflicts of Interest
16. Applicants submit 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 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. The fact that different insurers may be domiciled
in different states does not create a significantly different or
enlarged problem.
17. Applicants submit that shared funding, in this respect, is no
different than the use of the same investment company as the funding
vehicle for
[[Page 17910]]
affiliated insurers, which Rules 6e-2(b)(15) and 6e-3(T)(b)(15) permit.
Affiliated insurers may be domiciled in different states and be subject
to differing state law requirements. Applicants state that affiliation
does not reduce the potential, if any exists, for differences in state
regulatory requirements. In any event, the conditions proposed in the
application, which are adapted from the conditions included in Rule 6e-
3(T)(b)(15), 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
regulatory decision conflicts with the majority of other state
regulators, then the affected insurer will be required to withdraw its
Separate Account's investment in the Fund.
18. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) give the insurance company
the right to disregard the voting instructions of the contract owners
under certain circumstances. Applicants assert that this right does not
raise any issues different from those raised by the authority of state
insurance administrators over separate accounts. Applicants submit 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. The potential for disagreement is limited
by the requirements in Rule 6e-2 and 6e-3(T) that the insurance
company's disregard of voting instructions be reasonable and based on
specific good-faith determinations.
19. A particular insurer's disregard of voting instructions,
nevertheless, could conflict with the majority of contract owner voting
instructions. The insurer's action possibly could be different from the
determination of all or some of the other insurers (including
affiliated insurers) that the voting instructions of contract owners
should prevail, and either could preclude a majority vote approving the
change or could represent a minority view. If the insurer's judgment
represents a minority position or would preclude a majority vote, then
the insurer may be required, at the Fund's election, to withdraw its
Separate Account's investment in the Fund, with the result that no
charge or penalty would be imposed as a result of such withdrawal.
20. Applicants submit that investment by the Plans in any of the
Portfolios will similarly present no conflict. The likelihood that
voting instructions of insurance company Separate Account holders will
ever be disregarded or the possible withdrawal referred to immediately
above is extremely remote and this possibility will be known, through
prospectus disclosure, to any Plan choosing to invest in the Fund.
Moreover, Applicants state that even if a material irreconcilable
conflict involving Plans were to arise, the Plans may simply redeem
their shares and make alternative investments.
21. Applicants also submit that there is no reason why the
investment policies of the Portfolios would or should be materially
different from what these policies would or should be if the Portfolios
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--as long-term
investments--coincides with that of the Contracts and should not
increase the potential for conflicts. Applicants represent that each
Portfolio will be managed to attempt to achieve the investment
objective of the Portfolio and not to favor or disfavor any particular
Participating Insurance Company or type of insurance product.
22. Applicants note 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. A fund supporting even one type of
insurance product must accommodate these diverse factors in order to
attract and retain purchasers. Applicants submit that permitting mixed
and shared funding will provide economic support for the continuation
of the Fund. In addition, permitting mixed and shared funding also will
facilitate the establishment of additional Portfolios serving diverse
goals.
23. As noted above, Section 817(h) of the Code imposes certain
diversification standards on the underlying assets of variable annuity
contracts and variable life insurance contracts held in the portfolios
of management investment companies. Treasury Regulation 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 investment company. Therefore, neither the Code, nor the
Treasury regulations, nor the revenue rulings thereunder, recognize or
proscribe any inherent conflicts of interests if Plans, variable
annuity separate accounts, and variable life insurance separate
accounts all invest in the same management investment company.
24. While there may be differences in the manner in which
distributions are taxed for variable annuity contracts, variable life
insurance contracts and Plans, Applicants assert that the tax
consequences do not raise any conflicts of interest. When distributions
are to be made, and the Separate Account or the Plan cannot net
purchase payments to make the distributions, the Separate Account or
the Plan will redeem Shares of the Fund 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.
25. Applicants state that it is possible to provide an equitable
means of giving voting rights to Contract owners and to Plans.
Applicants represent that the Portfolios will inform each shareholder,
including each Separate Account and each Plan, of its respective share
of ownership in the respective Portfolio. Applicants further represent
that, at that time, each Participating Insurance Company will then
solicit voting instructions in accordance with the ``pass-through''
voting requirement.
26. Applicants assert that the ability of the Portfolios to sell
their respective shares directly to Plans does not create a ``senior
security,'' as that term is defined in Section 18(g) of the 1940 Act,
with respect to any Contract owner as opposed to a participant under a
Plan. As noted above, regardless of the rights and benefits of
participants under the Plans or Contract owners under the Contracts,
the Plans and the Separate Accounts have rights only with respect to
their respective shares of the Fund. They can only redeem such shares
at their net asset value. No shareholder of any of the Portfolios has
any preference over any other shareholder with respect to distribution
of assets or payment of dividends.
27. Applicants assert that there are no conflicts between the
Contract owners of the separate accounts and the participants under the
Plans with respect to state insurance Commissioners' veto powers over
investment objectives. A basic premise of shareholder voting is that
not all shareholders may agree with a particular proposal. The state
insurance commissioners have been given the veto power in recognition
of the fact that insurance companies cannot simply redeem their
separate accounts out of one fund and invest in another. Time-
[[Page 17911]]
consuming, complex transactions must be undertaken to accomplish such
redemptions and transfers. Applicants submit that, on the other hand,
trustees of Plans can make the decision quickly and implement the
redemption of their shares from a Portfolio and reinvest in another
funding vehicle without the same regulatory impediments or, as is the
case with most Plans, even hold cash pending suitable reinvestment.
Based on the foregoing, Applicants maintain that even if there should
arise issues where the interests of Contract owners and the interests
of participants in Plans are in conflict, the issues can be resolved
almost immediately because the trustees of the Plans can, on their own,
redeem the shares out of the Portfolio.
28. Applicants state that various factors have kept more insurance
companies from offering variable annuity and variable life insurance
contracts than currently offer such contracts. According to the
Applicants, 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 with whom the public feels comfortable
entrusting their investment dollars. Applicants submit that the use of
the Fund as a common investment medium for variable contracts would
reduce or eliminate these concerns. Applicants argue, in addition, that
mixed and shared funding should provide several 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 the Adviser and the Sub-Advisers, but also from the cost
efficiencies and investment flexibility afforded by a larger pool of
asserts. Mixed and shared funding also would permit a greater amount of
assets available for investment by the Fund, thereby promoting
economies of scale, by permitting increased safety through greater
diversification, and by making the addition of new Portfolios more
feasible. Applicants assert that, therefore, making the Fund available
for mixed and shared funding will encourage more insurance companies to
offer variable contracts, and this should result in increased
competition with respect to both variable contract design and pricing,
which can be expected to result in more product variation and lower
changes to investors. Applicants further note that the sale of shares
of the Fund to Plans can also be expected to increase the amount of
assets available for investment by the Fund and thus promote economies
of scale and greater diversification.
29. Applicants assert that there is no significant legal impediment
to permitting mixed and shared funding. Separate accounts organized as
unit investment trusts historically have been employed to accumulate
shares of mutual funds which have not been affiliated with the
depositor or sponsor of the separate account. Applicants do not believe
that mixed and shared funding, and sales to Plans, will have any
adverse federal income tax consequences.
Applicants' Conditions
Applicants have consented to the following conditions if the order
requested in the application is granted.
1. A majority of the Board of Directors shall consist of persons
who are not ``interested persons'' of the Fund, as defined by Section
2(a)(19) of the 1940 Act, and the rules thereunder and as modified by
any applicable orders of the Commission, except that if this condition
is not met by reason of the death, disqualification, or bona fide
resignation of any 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 of vacancies; or (c) for such longer period as the Commission
may prescribe by order upon application.
2. The Board of Directors will monitor the Fund for the existence
of any material irreconcilable conflict between the interests of the
Contract owners of all Separate Accounts investing in the Fund and of
the Plan participants investing in the Fund. 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
Portfolio 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, a decision by a Plan to disregard voting instructions of
Plan participants.
3. Participating Insurance Companies, the Adviser or any other
investment adviser who may serve as the adviser to any Portfolio in the
future, and any Plan that executes a fund participation agreement upon
becoming an owner of 10 percent or more of the assets of the Fund
(collectively, the ``Participants'') will report any potential or
existing conflicts of interest to the Board of Directors. Participants
will be responsible for assisting the Board of Directors in carrying
out its responsibilities under these conditions by providing the Board
of Directors with all information reasonably necessary for the Board of
Directors to consider any issues raised. This responsibility includes,
but is not limited to, an obligation by each Participating Insurance
Company to inform the Board of Directors whenever voting instructions
of Contract owners are disregarded and, if pass-through voting is
applicable, an obligation by each Plan to inform the Board of Directors
whenever it has determined to disregard Plan participant voting
instructions. The responsibility to report such information and
conflicts and to assist the Board of Directors will be contractual
obligations of all Participating Insurance Companies and Plans with
participation agreements, and such agreements shall provide that these
responsibilities will be carried out with a view only to the interests
of the Plan participants or Contract owners, as appropriate.
4. If it is determined by a majority of the Board of Directors, or
by a majority of the disinterested Directors, that a material
irreconcilable conflict exists, the relevant Participating Insurance
Companies and Plans will, at their own expense and to 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, which steps could
include: (a) withdrawing the assets allocable to some or all of the
Separate Accounts from the Fund or any Portfolio and reinvesting such
assets in a different investment medium, including another Portfolio of
the Fund, 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 17912]]
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 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 that insurer may be required, at the Fund's
election, to withdraw the insurer's Separate Account investment in the
Fund or relevant Portfolio(s) 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 or relevant Portfolio(s) and no charge or penalty will be imposed
as a result of such withdrawal. The responsibility to take remedial
action in the event of a determination by the Board of Directors of a
material irreconcilable conflict and to bear 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 Plan participants.
5. For purposes of Condition 4, a majority of the disinterested
Directors will determine whether or not any proposed action adequately
remedies any material irreconcilable conflict, but in no event will the
Fund or the Adviser be required to establish a new funding medium for
any Contract. No Participating Insurance Company shall be required by
Condition 4 to establish a new funding medium for any Contract if any
offer to do so has been declined by vote of a majority of the Contract
owners materially and adversely affected by the material irreconcilable
conflict. Further, 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 irreconcilable
material 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 determination of the Board of Directors 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 as requiring pass-through voting
privileges for Contract owners. Accordingly, Participating Insurance
Companies will vote shares of the Fund held in their Separate Accounts
in a manner consistent with voting instructions timely-received from
Contract owners. Each Participating Insurance Company will also vote
shares of the Fund held in its Separate Accounts for which no voting
instructions from Contract owners are timely-received, as well as
shares of the Fund which the Participating Insurance Company itself
owns, in the same proportion as those shares of the Fund for which
voting instructions from Contract owners are timely-received.
Participating Insurance Companies will be responsible for assuring that
each of their Separate Accounts participating in the Fund calculates
voting privileges in a manner consistent with other Participating
Companies. The obligation to calculate voting privileges in a manner
consistent with all other Separate Accounts investing in the Fund will
be a contractual obligation of all Participating Insurance Companies
under their agreements governing their participation in the Fund. Each
Plan will vote as required by applicable law and governing Plan
documents.
8. All reports of potential or existing conflicts received by the
Board of Directors, and all action by the Board of Directors with
regard to determining the existence of a conflict, notifying
Participants of a conflict, and determining whether any proposed action
adequately remedies a conflict, will be properly recorded in the
minutes of the meetings of the Board of Directors or other appropriate
records, and such minutes or other records shall be made available to
the Commission upon request.
9. The Fund will notify all Participating Insurance Companies that
separate account disclosure in their respective Separate Account
prospectuses may be appropriate to advise accounts regarding the
potential risk of mixed and shared funding. The 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 Plans; (b) due to 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 of Directors 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.
10. The Fund will comply with all provisions of the 1940 Act that
require voting by shareholders (which, for these purposes, will be the
persons having a voting interest in the shares of the Fund), and, in
particular, the Fund will provide for annual shareholder meetings
(except insofar as the Commission may interpret Section 16 of the 1940
Act not to require such meetings) and comply with Section 16(a) of the
1940 Act and, if and when applicable, Section 16(b) of the 1940 Act.
Further, the Fund will act in accordance with the Commission's
interpretation of the requirements of Section 16(a) with respect to
periodic election of Directors and with whatever rules the Commission
may promulgate with respect thereto.
11. If and to the extent that Rule 6e-2 or 6e-3(T) under the 1940
Act is amended, or proposed 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 the application, then the Fund and/or
Participating Insurance Companies, as appropriate, shall take such
steps as may be necessary to comply with such Rules 6e-2 and 6e-3(T),
as amended, or proposed Rule 6e-3 as adopted, to the extent that such
rules are applicable.
12. The Participants, at least annually, will submit to the Board
of Directors such reports, materials, or data as the Board of Directors
may reasonably request so that the Board of Directors may fully carry
out the obligations imposed upon it by the conditions contained in the
application. Such reports, materials, and data will be submitted more
frequently if deemed appropriate by the Board of Directors. The
obligations of the Participants to provide these reports, materials,
and data to the Board of Directors, when the Board of Directors so
reasonably requests, shall be a contractual obligation of all
Participants under their agreements governing participation in the
Fund.
13. If a plan should ever become a holder of ten percent or more of
the assets of the Fund, such Plan will execute a participation
agreement with the Fund that includes conditions set
[[Page 17913]]
forth herein to the extent applicable. A Plan will execute an
application containing an acknowledgment of this condition upon such
Plan's initial purchase of the shares of the Fund.
Conclusion
For the reasons set forth above, Applicants assert that the
requested exemptions are appropriate in the public interest and
consistent with the protection of investors and purposes fairly
intended by the policy and provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-9466 Filed 4-9-98; 8:45 am]
BILLING CODE 8010-01-M
