[Federal Register Volume 60, Number 74 (Tuesday, April 18, 1995)]
[Notices]
[Pages 19428-19436]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-9517]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21003; No. 812-9164]
Neuberger & Berman Advisers Management Trust, et al.
April 12, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (``1940 Act'').
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APPLICANTS: Neuberger & Berman Advisers Management Trust (``Trust''),
Advisers Managers Trust (`'Managers Trust''), Neuberger & Berman
Management Incorporated (``Investment Adviser''), and Certain Life
Insurance [[Page 19429]] Companies (``Participating Insurance
Companies'') and their Separate Accounts (``Separate Accounts'')
Investing in the Trust.
RELEVANT 1940 ACT SECTION: Order requested under Section 6(c) granting
exemptions 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.
SUMMARY OF APPLICATION: Applicants seek an order to permit shares of
the Trust (and/or any successor entity), beneficial interests of
Managers Trust, and beneficial interests or shares of any other
investment company that is designed to fund insurance products and for
which the Investment Adviser or its affiliates may serve now or in the
future as investment adviser, administrator, manager, principal
underwriter or sponsor, to be sold to and held by: (a) separate
accounts of both affiliated and unaffiliated Participating Life
Insurance Companies offering variable annuity contracts and variable
life insurance contracts; and (b) qualified pension and retirement
plans (``Qualified Plans'').
FILING DATE: The application was filed on August 16, 1994, and amended
on April 5, 1995 and April 10, 1995.
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 Commission'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 May 2, 1995, 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 requestor's
interest, the reason for the request, and the issues contested. Persons
may request notification of a hearing by writing to the Secretary of
the Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 5th
Street, N.W., Washington, D.C. 20549. Applicants, c/o Stanley Egener,
President, Neuberger & Berman Management Incorporated, 605 Third
Avenue, 2nd Floor, New York, New York 10158-0006.
FOR FURTHER INFORMATION CONTACT: Yvonne M. Hunold, Assistant Special
Counsel, or Wendy Friedlander, Deputy Chief, at (202) 942-0670, Office
of Insurance Products (Division of Investment Management).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application; the complete application is available for a fee from the
Commission's Public Reference Branch.
Applicants' Representations
1. The Trust is a series Massachusetts business trust that is
registered under the 1940 Act as a diversified, open-end management
investment company. The Trust currently consists of six portfolios
(``Trust Portfolios''). A seventh Trust Portfolio, the International
Portfolio, is scheduled to commence operations on May 1, 1995. As more
fully discussed below, reorganization of the Trust (``Successor
Trust'') is anticipated to take effect on May 1, 1995, with a
conversion date currently anticipated for April 28, 1995. After the
reorganization, the Successor Trust will become a ``feeder'' fund in a
``master-feeder'' fund structure\1\ by investing in Managers Trust
\1\A ``master feeder'' fund structure is a two-tiered
arrangement in which one or more investment companies (or other
collective investment vehicles) (``feeder funds'') pool their assets
by investing in a single investment company having the same
investment objective (``master fund''). This structure typically has
been used to customize distribution channels, fee structures and
marketing techniques while continuing to offer interests in the same
underlying investment portfolios.
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2. Managers Trust is a New York common law trust that offers shares
of its series of portfolios (``Series'') to insurance company separate
accounts and to Qualified Plans. Upon reorganization of the Trust,
Managers Trust will serve as a ``master fund'' in a master-feeder
structure in which the Successor Trust will be a ``feeder'' fund.
3. Investment Adviser currently manages and distributes shares of
each Trust Portfolio. Upon reorganization of the Trust, Investment
Adviser will serve as administrator of the Successor Trust's portfolios
and as administrator or manager of Managers Trust's Series. Investment
Adviser's voting stock is owned by general partners of Neuberger &
Berman, L.P. (``Neuberger & Berman''), the sub-adviser to the Trust
Portfolios. Investment Adviser is not affiliated with any of the
Participating Insurance Companies.
4. Participating Insurance Companies are both affiliated and
unaffiliated insurance companies that currently invest in the Trust
through either their general or Separate Accounts in connection with
the offering of both variable annuities and variable life insurance
contracts (``Contracts''). Separate Accounts of Participating Insurance
Companies are unit investment trusts (``UIT-Separate Accounts'') that
are either registered under the 1940 Act or exempt from registration
pursuant to Section 3(c)(11) of the 1940 Act. U T-Separate Accounts
invest directly in the Trust, resulting in a two-tier structure.
Participating Insurance Companies' Separate Accounts registered under
the 1940 Act as management investment companies (``Managed-Separate
Accounts'') currently do not invest in the Trust. Upon reorganization
of the Trust, UIT-Separate Accounts will invest in the Successor Trust,
which, in turn, will invest in Managers Trust, resulting in a three-
tier structure. Managed-Separate Accounts will invest directly in
Managers Trust, resulting in a two-tier structure.
5. Trust shares currently are offered pursuant to orders of the
Commission under Section 6(c) of the 1940 Act exempting the Trust and
Investment Adviser 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.\2\ The
purpose of this application is to extend the exemptive relief granted
to the Trust and Investment Adviser to the successor entities of the
Trust and to certain other investment companies (``Other Investment
Companies'') that may be used as underlying funds for both UIT-Separate
Accounts and Qualified Plans.
\2\Investment Company Act Release Nos. 18573 (Feb. 26, 1992)
(Amended Order), 18506 (Jan. 29, 1992) (Notice), 16207 (Jan. 7,
1988) (Amended Order), 16165 (Dec. 9, 1987) (Notice), 15324 (Sept.
23, 1986) (Order), and 15274 (Aug. 25, 1986 (Notice).
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(The Trust (and/or any successor entity) and Other Investment
Companies hereinafter are referred to, collectively, as ``Insurance
Products Funds.'' Investment companies offering shares to Insurance
Products Funds, to Managed-Separate Accounts, and to Qualified Plans
are referred to, collectively, as ``Master Funds.'' The term ``Master
Funds'' does not include ``Insurance Products Funds.'' ``Participating
Insurance Companies'' refers to: (a) insurance companies, the assets of
which currently are invested in the Trust through either their general
or Separate Accounts, and which will be invested in the successor to
the Trust, and/or one or more other Insurance Products Funds, and/or
more Master Funds; and (b) insurance companies, the assets of which, in
the future, may be invested through either their general or Separate
Accounts in the Trust (and/or any successor entity) and/or one or more
other Insurance Products Funds, and/or one or more Master Funds.)\3\
\3\Any assets invested by the general accounts of Participating
Insurance Companies will be in the form of initial operating capital
commonly known as ``seed money.''
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6. As noted previously, the Trust will be reorganized into the
Successor Trust, [[Page 19430]] which will serve as a ``feeder'' fund
in a ``master-feeder'' fund structure. The proposal by the Investment
Adviser to reorganize the Trust was approved by the Board of Trustees
of the Trust and, on August 25, 1994, by shareholders of the Trust. The
Successor Trust will be a series Delaware business trust registered
under the 1940 Act as an open-end diversified management investment
company. The Successor Trust, which will retain the Trust's present
name, initially will consist of seven portfolios (``Successor
Portfolios''). Each Successor Portfolio will retain the same name and
have substantially the same investment objective and policies as its
current corresponding Trust Portfolio. Additional Successor Portfolios
may be added in the future.
7. Upon reorganization, each Trust Portfolio will transfer all of
its assets to the corresponding Successor Portfolio. In exchange, share
of each Successor Portfolio will be distributed to the shareholders of
the corresponding Trust Portfolio on the basis of one Successor
Portfolio share for one outstanding Trust Portfolio share, with the
Successor Portfolio assuming all of the liabilities of that
corresponding Trust Portfolio. Each Successor Portfolio, in turn, will
invest all of its assets in a corresponding Series of Managers Trust
and offer its shares to UIT-Separate Accounts of Participating
Insurance Companies and to Qualified Plans, resulting in a three-tier
structure. Each Series of Managers Trust will have the same investment
objectives and policies as the corresponding Successor Portfolio.
Thereafter, the only investment securities held by each Successor
Portfolio will be its interest in the corresponding Series of Managers
Trust. In the future, Managed-Separate Accounts of Participating
Insurance Companies will and certain Qualified Plans may invest
directly in the Master Funds, thus resulting in a two-tier structure
with respect to these arrangements.
8. Applicants assert that the primary objective of the Trust's
restructuring into a master-feeder fund structure is to retain and
increase assets in the Trust and, ultimately, lower Contract owner's
expenses. Applicants believe that economies of scale may be achieved
that would benefit all shareholders. Applicants state that, to the
extent that certain operating costs are relatively fixed and currently
are borne by a Trust Portfolio alone, these expenses instead would be
borne by the Series and shared by the corresponding Successor Portfolio
and any other investors pooling their assets through investment in the
Series.
9. Investment Adviser will serve as administrator of the Successor
Portfolios and as manager of the corresponding Series of Managers
Trust, except with respect to the International Series of Managers
Trust. BNP-N&B Global Asset Management L.P., an affiliate of Investment
Adviser, will act as investment adviser for the International Series,
for which Investment Adviser will serve as administrator. In addition,
Investment Adviser, or its affiliates, may serve now or in the future
as investment adviser, administrator, manager, principal underwriter or
sponsor with respect to the Insurance Products Funds and the Master
Funds. Investment Adviser may provide services to Managed-Separate
Accounts or to Qualified Plans that may, in the future, function as
``feeder'' funds by investing in the Master Funds. Investment Adviser
does not and will not act as investment adviser to Qualified Plans
which have purchased or will purchase shares of the Insurance Products
Funds, or beneficial interests in the Master Funds. Investment Adviser
is not affiliated with any of the Participating Insurance Companies.
10. Neuberger & Berman will be the sub-adviser for the Series of
Managers Trust and may act as investment adviser to Qualified Plans
investing in the Successor Trust, but is not permitted to advise such
Qualified Plans to invest in the Successor Trust. Independent
fiduciaries of such Qualified Plans for which Neuberger & Berman acts
as investment adviser may choose to invest in the Successor Trust.
11. Qualified Plans, in the future, may invest directly in the
Master Funds and may choose any Insurance Products Funds or Master
Funds as their sole investment or as one of several investments.
Qualified Plan participants may or may not be given an investment
choice depending on the terms of the Plan. Shares of any of the
Insurance Products Funds, or beneficial interests in the Master Funds,
sold to such Qualified Plans will be held by the trustees of said Plans
as mandated by Section 403(a) of the Employee Retirement Income
Security Act of 1974 (``ERISA''). There is no pass-through voting to
the participants of such Qualified Plans.
12. Section 817(h) of the Internal Revenue Code of 1986, as
amended, (``Code'') imposes certain diversification standards on the
underlying assets of variable annuity and variable life insurance
contracts.\4\ The Successor Trust and Managers Trust, on behalf of each
Successor Portfolio and Series, have applied to the Internal Revenue
Service (``IRS'') for a private letter ruling with respect to certain
tax issues arising out of the proposed restructuring of the Trust. The
Successor Trust and Managers Trust have requested that the IRS rule,
among other things, that the ``look-through'' rule of Section 817 of
the Code will be available for the variable insurance contract
diversification test. In the event that the requested IRS ruling is not
received by the conversion date, the Investment Adviser expects to
receive a favorable opinion of counsel with respect to the Section 817
and other relevant tax issues, prepared solely for its use in
connection with the creation of the master-feeder fund.
\4\Insurance Products Funds selling their shares to Qualified
Plans must meet certain diversification requirements with respect to
the portfolios underlying their variable contracts. According to
Applicants, diversification requirements are satisfied where all
beneficial interests in an investment company (master fund) are held
by Separate Accounts (feeders) of one or more insurers. Under
regulations prescribed by the Treasury Department establishing
diversification requirements for investment portfolios underlying
variable contracts, the ability of these Separate Accounts to hold
shares in the same investment company is not adversely affected if
such shares are held by the trustee of a Qualified Plan.
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Applicants' Legal Analysis
1. Section 6(c) authorizes the Commission to grant exemptions from
the provisions of the 1940 Act, and rules thereunder, if and to the
extent that an exemption is necessary or appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940 Act.
A. Rule 6e-2--Scheduled Premium Variable Life Insurance Contracts
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 UIT Rule 6e-2(b)(15) provides partial relief
from Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act. The
exemptions granted to a separate account 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
(``Underlying Funds'') offering their shares ``exclusively'' to
variable life insurance separate accounts of the life insurer, or of
any affiliated life insurance company, funding such variable contracts.
The relief provided by Rule 6e-2 also is available to a
[[Page 19431]] separate account's investment adviser, principal
underwriter and sponsor or depositor. The relief granted by Rule 6e-
2(b)(15), however, is not available with respect to a scheduled premium
variable life insurance separate account that owns shares of an
underlying fund that also offers its shares to a variable annuity
separate account of the same company or of any other affiliated or
unaffiliated life insurance company. The use of a common underlying
fund as the investment vehicle for both variable annuity contracts and
scheduled or flexible premium variable life insurance contracts is
referred to as ``mixed funding.'' The use of a common underlying fund
as the underlying investment vehicle for separate accounts of
unaffiliated insurance companies is referred to as ``shared funding.''
Rule 6e-2(b)(15), thus, precludes both mixed funding and shared
funding.
3. Moreover, because the relief under Rule 6e-2(b)(15) is available
only where shares are offered exclusively to separate accounts,
additional exemptive relief is necessary if shares of an underlying
fund also are offered to Qualified Plans.\5\ Applicants assert that the
appropriateness of granting relief under this provision is not affected
by the purchase of Insurance Products Funds' shares by Qualified Plans.
\5\Applicants state that the sale of shares of the same
investment company to separate accounts and to Qualified Plans was
not contemplated at the time of the adoption of Rules 6e-2 and 6e-
3(T), given the then-current tax laws. Further, the promulgation of
paragraph (b)(15) of Rules 6e-2 and 6e-3(T) preceded the issuance of
the Treasury Regulations permitting the trustee of a Qualified Plan
to hold shares of an investment company without adversely affecting
the ability of insurance company separate accounts to hold shares of
the same investment company.
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4. Rule 6e-2(b)(15) also does not exempt Managed-Separate Accounts
of Participating Insurance Companies functioning as ``feeders'' by
virtue of the acquisition of beneficial interests in a Master Fund
because such a Managed-Separate Account would not be registered as a
UIT. Because under certain circumstances the Master Funds will solicit
votes of their interest holders with respect to items relating solely
to their operations, Applicants assert that the exemptive relief
granted by Rule 6e-2(b)(15) should be extended to such Managed-Separate
Accounts to the extent that they are required to vote on issues
affecting the Master Funds. Applicants further assert that the
extension of this relief to Managed-Separate Accounts of Participating
Insurance Companies is consistent with the purpose and intent of Rule
6e-2. Applicants submit that the relief granted by Rule 6e-2 also is in
no way affected by the purchase of shares of the Master Fund by
Qualified Plans.
B. Rule 6e-3(T)--Flexible Premium Variable Life Insurance Contracts
5. In connection with flexible premium variable life insurance
contracts issued through a separate account registered under the 1940
Act 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 by Rule 6e-3(T)(b)(15) also are available to a separate
account's investment adviser, principal underwriter and sponsor or
depositor. Rule 6e-3(T)(b)(15) exemptions are available, however, only
if all of the assets of the separate account consist of shares of one
or more underlying funds which offer their shares exclusively to such
separate accounts of the life insurer, or its affiliated life insurance
companies, offering either scheduled premium 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. Rule 6e-3(T) therefore permits
``mixed funding'' for flexible premium variable life insurance separate
accounts, subject to certain conditions, but does not permit ``shared
funding.'' Moreover, because Rule 6e-3(T) relief is available only
where underlying fund shares are offered exclusively to separate
accounts, additional exemptive relief is necessary because shares of
the Insurance Products Funds also are sold to Qualified Plans.
6. Rule 6e-3(T)(b)(15) also does not exempt Managed-Separate
Accounts of Participating Insurance Companies functioning as
``feeders'' by virtue of the acquisition of beneficial interests in a
Master Fund, because such Managed-Separate Account would not be
registered as a UIT. Applicants assert that the exemptive relief
granted by Rule 6e-3(T)(b)(15) should be extended to Managed-Separate
Accounts of Participating Insurance Companies to the extent they are
required to vote on issues affecting the Master Funds, which will
solicit votes of their interest holders under certain circumstances.
Applicants further assert that the extension of this relief to the
Managed-Separate Accounts is consistent with the purpose and intent of
Rule 6e-3(T). Applicants submit that the relief granted by Rule 6e-3(T)
also is in no way affected by the purchase of shares of the Insurance
Products Funds by Qualified Plans, or by the possible future purchase
of Master Funds shares by Qualified Plans.
C. Request for Class Relief
7. Applicants request that the Commission grant exemptive relief to
a class or classes of persons and transactions, consisting of: (i)
Insurers and separate accounts (organized as UITs) of Participating
Insurance Companies investing in Insurance Products Funds; (ii)
insurers and separate accounts (organized as managed separate accounts)
of Participating Insurance Companies investing in Master Funds; and
(iii) with respect to (i) and (ii) above, each of their investment
advisers, principal underwriters and depositors.
8. Applicants state that the requested class relief is appropriate
in the public interest. Such relief will promote competitiveness in the
market by eliminating the need to file redundant exemptive
applications, therefore, reducing administrative expenses and
maximizing the efficient use of resources. Applicants assert that the
delay and expense involved in having to seek exemptive relief
repeatedly would impair their ability to take advantage effectively of
business opportunities as they arise. Applicants submit that the
requested relief is consistent with the purposes of the 1940 Act and
the protection of investors for the same reasons. Finally, Applicants
state that were they required to seek repeated exemptive relief with
respect to the issues addressed in the application, no additional
benefit or protection would be provided to investors through the
redundant filings. Applicants submit that they are not aware of any
facts or circumstances which would prevent the extension of the relief
requested to the class of Managed-Separate Accounts of Participating
Insurance Companies investing directly in the Master Funds.
D. Disqualification
9. Section 9(a) prohibits any company from serving 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 specified in subparagraph (1) or (2) of that
section.\6\ Paragraphs (b)(15)(i) and (ii) of Rules 6e-2 and 6e-3(T)
provide partial exemptions from Section 9(a) under certain
circumstances, subject to limitations on mixed and shared funding.
These partial exemptions only are available to UIT-Separate Accounts
and limit the disqualification to affiliated individuals or companies
directly participating in the [[Page 19432]] management or
administration of the underlying fund.
\6\Applicants state that no relief from Section 9(a) is
necessary with respect to the Qualified Plans which are not
investment companies.
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10. Applicants state that the partial relief granted in paragraph
(b)(15) of Rules 6e-2 and 6e-3(T) from the requirements of Section
9(a), in effect, limits the monitoring of an insurer's personnel that
would otherwise be necessary to ensure compliance with Section 9 to
that which is appropriate in light of the policy and purposes of that
Section. Applicants further state that Rules 6e-2 and 6e-3(T) recognize
that it is not necessary for the protection of investors or for the
purposes of the 1940 Act to apply the provisions of Section 9(a) to the
many individuals in an insurance company complex, most of whom
typically will have no involvement in matters pertaining to an
investment company in that organization. Applicants represent that
Participating Insurance Companies are not expected to play any role in
the management or administration of the Trust (and/or any successor to
the trust) or of Managers Trust. Applicants therefore submit that
applying the restrictions of Section 9(a) serves no regulatory purpose.
E. Pass-Through Voting
11. Subparagraph (b)(15)(iii) of Rules 6e-2 and 6e-3(T) assume the
existence of a pass-through voting requirement with respect to
underlying fund shares held by a separate account funding variable
insurance contracts. These provisions are applicable to UIT-Separate
Accounts. The application states that Participating Insurance Companies
will provide pass-through voting privileges to all Contract owners so
long as the Commission interprets the 1940 Act to require such
privileges.
12. Subparagraph (b)(15)(iii)(A) of Rules 6e-2 and 6e-3(T) provides
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. Subparagraph (b)(15)(iii)(A) of Rules 6e-2 and 6e-3(T)
provide that an insurance company may disregard the voting instructions
of its contract owners with respect to the investments of an underlying
investment company or any contract between an investment company and
its adviser when required to do so by an insurance regulatory authority
under certain specified circumstances.
13. Subparagraph (b)(15)(iii)(B) of Rules 6e-2 and 6e-3(T) provides
that the insurance company may disregard contract owners' voting
instructions with regard to changes initiated by the contract holders
in the investment company's investment policies, principal underwriter
or investment adviser, provided that disregarding such voting
instructions is reasonable and subject to the other provisions of
paragraphs (b)(15)(iii) and (b)(7)(ii)(B) and (C) of each rule.
14. Applicants state that Rules 6e-2 and 6e-3(T) were adopted by
the Commission before the ``master-feeder'' structure was developed.
Applicants assert that a Separate Account's acquisition of Successor
Trust shares or of beneficial interests of the Master Funds should not
change the purpose and intent of Rules 6e-2 and 6e-3(T). Accordingly,
Applicants further assert that, because Master Funds from time-to-time
solicit votes from their interest holders with respect to certain
issues relating to their operations, the exemption from pass-through
voting requirements of Rules 6e-2 and 6e-3(T) should be extended to the
Managed-Separate Accounts of Participating Insurance Companies
investing directly in the Master Funds.
15. Applicants represent that the sale of Insurance Products Funds'
shares to Qualified Plans will not have any impact on the relief
requested. As noted previously by Applicants, shares of the Insurance
Products Funds sold to Qualified Plans will be held by their trustees
as mandated by Section 403(a) of ERISA. Section 403(a) also provides
that the trustees must have exclusive authority and discretion to
manage and control the Qualified Plan with two exceptions: (1) 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 Qualified Plan and not contrary to ERISA, and (2) when the
authority to manage, acquire or dispose of assets of the Qualified Plan
is delegated to one or more 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. 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, there is no
pass-through voting to the participants of such Qualified Plans and,
thus, the issue of the resolution of irreconcilable conflicts with
respect to voting is not present with Qualified Plans.
F. No Increased Conflicts of Interests
16. Applicants assert that no increased conflicts of interest would
be present if the Commission grants the relief requested. Applicants
further 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 states. Applicants note that when different
Participating Insurance Companies are domiciled in different states,
state insurance regulators in one state could require action that is
inconsistent with the requirements of insurance regulators in one or
more other states. That possibility, however, is no different and no
greater than that which exists when a single insurer and its affiliates
offer their insurance products in several states, as currently is
permitted.
17. Applicants argue that affiliations do not reduce the potential,
if any exists, for differences in state regulatory requirements. The
conditions stated below are adapted from the conditions included in
Rule 6e-3(T)(b)(15) and are designed to safeguard against any adverse
effects that differences among state regulatory requirements may
produce. If a particular state insurance regulator's policy conflicts
with the policies of a majority of other state regulators, the affected
insurer may be required to withdraw its Separate Account's investments
in the relevant Insurance Products Fund or Master Fund.
18. Applicants also argue that affiliation does not eliminate the
potential, if any, for divergent judgments as to when a Participating
Insurance Company could disregard variable contract owner voting
instructions. Applicants assert that the potential for disagreement is
limited by the requirement that a decision to disregard voting
instructions be reasonable and based on specified good faith
determinations. If, however, a Participating Insurance Company's
decision to disregard Contract owner voting instructions represents a
minority position, or would preclude a majority vote approving a
particular change, Applicants represent that such Participating
Insurance Company may be required, at the election of the relevant
Insurance Products Fund or Master Fund, to withdraw its Separate
Account's investment in that Fund and no charge or penalty will be
imposed as a result of such withdrawal.
19. Applicants assert that there is no reason why the investment
policies of an Insurance Products Fund or Master Fund with mixed
funding would or [[Page 19433]] should be materially different from
what they would or should be if such investment company or series
thereof funded only variable annuity or variable life insurance
contracts. Applicants represent that Insurance Products Funds or Master
Funds will not be managed to favor or disfavor any particular insurer
or type of Contract.
20. Applicants state that no one investment strategy can be
identified as appropriate to a particular insurance product because
each pool of variable contract owners is composed of individuals of
diverse financial status, age, insurance and investment goals. These
diversities are of greater significance than any differences in
insurance products. An underlying fund supporting even one type of
insurance product must accommodate those diverse factors.
21. Applicants note that Section 817(h) of the Code imposes certain
diversification standards on the underlying assets of variable annuity
and variable life contracts held in the portfolios of underlying funds.
Treasury Regulation 1.817-5(f)(3)(iii), which established
diversification requirements for such portfolios, specifically permits,
among other things, ``qualified pension or retirement plans'' and
separate accounts to share the same underlying fund. Therefore,
Applicants have concluded that neither the Code, the Treasury
Regulations nor Revenue Rulings thereunder recognize any inherent
conflicts of interest if Qualified Plans and variable annuity and
variable life separate accounts all invest in the same Underlying Fund.
22. Applicants also note that there are differences in the manner
in which distributions are taxed for variable annuities, variable life
insurance contracts and Qualified Plans. Applicants assert, however,
that the differences in tax consequences do not raise any conflicts of
interest. When distributions are to be made, and the Separate Account
or the Qualified Plan cannot net purchase payments to make the
distributions, each will redeem shares of the Trust (and/or any
successor entity to the Trust) at their net asset value. The Qualified
Plan will then make distributions in accordance with its terms and the
life insurance company will make distributions in accordance with the
terms of the variable contract.
23. With respect to voting rights, Applicants contend that it is
possible to provide an equitable means of giving such voting rights to
Contract owners and to Qualified Plans. Applicants represent that the
transfer agent for the Insurance Products Fund will inform each
Participating Insurance Company of its Separate Accounts' share
ownership and the trustees of each Qualified Plan of their respective
holdings in the Fund. Each Participating Insurance Company then will
solicit voting instructions in accordance with Rules 6e-2 and 6e-3(T).
The transfer agent for the Master Funds will inform each Insurance
Products Fund and each Participating Insurance Company with a Managed-
Separate Account invested in a Master Fund, as well as the trustees of
any Qualified Plan so invested, of its beneficial interest.
24. As with the Insurance Products Funds, there will be certain
issues on which a shareholder vote is required that relate solely to
the operations of the Managed-Separate Accounts for which such Separate
Account will solicit votes of its contract owners. As to those issues
on which a vote is required that relates to the operations of the
Master Funds, Applicants state that the Master Funds will solicit votes
of their interest holders, which would include both the Insurance
Products Funds, the Managed-Separate Accounts of Participating
Insurance Companies and the trustees of any Qualified Plan. Insurance
Products Funds, in turn, will solicit their shareholders, the UIT-
Separate Accounts of Participating Insurance Companies, which will
solicit voting instructions from their contract owners, as noted above.
The Managed-Separate Accounts will solicit proxies from their Contract
owners.
25. Applicants assert that the ability of Insurance Products Funds
or Master Funds to sell their respective shares or beneficial interests
directly to Qualified Plans does not create a ``senior security,'' as
defined under Section 18(g) of the 1940 Act, with respect to any
contract owner as compared to a participant under a Qualified Plan.
Regardless of the rights and benefits of participants under Qualified
Plans, or contract owners under variable contracts, Qualified Plans and
Separate Accounts have rights only with respect to their respective
Insurance Products Fund shares, which they can redeem only at net asset
value. No shareholder of any of the Insurance Products Funds, and no
interest holder of any Master Fund, has any preference over any other
shareholder or interest holder with respect to distribution of assets
or payment of dividends.
26. Applicants further assert that there are no conflicts between
the Contract owners and Qualified Plan participants with respect to
state insurance commissioners' veto powers over the Insurance Products
Funds' or Master Funds' investment objectives. The basic premise of
shareholder voting is that not all shareholders may agree that there
are any inherent conflicts of interest between shareholders. The state
insurance commissioners have been given veto power in recognition of
the fact that insurance companies cannot redeem their Separate Accounts
out of one underlying fund and invest in another fund but must
undertake time-consuming, complex transactions to accomplish such
redemptions and transfers. Trustees of Qualified Plans can redeem their
shares in an Insurance Products Fund, or beneficial interests in a
Master Fund, and reinvest in another fund quickly and implement their
decisions without the same regulatory impediments or, as is the case
with most Qualified Plans, even hold cash pending reinvestment.
Applicants assert that, based on the foregoing, even if there should
arise issues where the interests of contract owners and the interests
of Qualified Plans conflict, these issues can be almost immediately
resolved because trustees of Qualified Plans can, on their own, redeem
the shares out of the Insurance Products Funds or the beneficial
interests out of the Master Fund.
27. Applicants further assert that the potential for conflict is
not increased by allowing Managed-Separate Accounts to invest directly
in the Master Funds at the same time as UIT-Separate Accounts are
invested in the Insurance Products Funds. Because both types of
Separate Accounts are subject to the same state insurance regulatory
authority and the same concerns with respect to funding their
contracts, one type of separate account investing directly and the
other investing indirectly in the same portfolio of securities does not
increase the potential for conflict with respect to state insurance
regulation and divergent judgments as to when a Participating Insurance
Company can disregard variable contract voting instructions. The
potential for conflict also is not increased by the possible investment
in the Master Funds by Qualified Plans. As noted above, in the event of
a conflict, Trustees of Qualified Plans can, on their own, redeem their
beneficial interests out of the Master Funds.
G. General Grounds for Relief
28. Applicants assert that various factors have kept certain
insurance companies from offering variable annuity and variable life
insurance contracts. According to Applicants, these factors include:
the costs of organizing and operating a funding medium; a lack of
expertise with respect to investment management, principally with
respect to stock and money market [[Page 19434]] investments; and the
lack of public name recognition as investment experts. Applicants argue
that use of Insurance Products Funds and Master Funds as common
investment media for variable contracts would ease those concerns.
Participating Insurance Companies would benefit from the investment
advisory and administrative expertise of the Investment Adviser and
also from the cost efficiencies and investment flexibility afforded by
a larger pool of funds. Applicants state that making Insurance Products
Funds and Master Funds available for mixed and shared funding will
encourage more insurance companies to offer variable contracts, such as
the Contracts, which may then increase competition with respect to both
the design and pricing of variable insurance contracts. Applicants
submit that this can be expected to result in greater product variation
and lower charges. Thus, Applicants argue that Contract owners would
benefit because mixed and shared funding will eliminate a significant
portion of the costs of establishing and administering separate funds
and that these savings may be passed on to customers.
29. Moreover, Applicants assert that the sale of Insurance Products
Funds' shares to Qualified Plans should increase the amount of assets
available for investment by such Funds. This, in turn, should promote
economies of scale, permit increased safety through greater
diversification, and make the addition of new Series to Insurance
Products Funds more feasible.
30. Applicants state that they are not aware of any facts or
circumstances which would prevent the extension of the requested relief
to master-feeder arrangements that include the class of Managed-
Separate Accounts investing directly in the Master Funds.
31. Applicants also state that they are not aware of any rationale
for excluding Participating Insurance Companies from the exemptive
relief requested because Insurance Products Funds also may sell their
respective shares, and Master Funds may sell their beneficial shares,
to Qualified Plans. Applicants submit that the relief provided under
paragraph (b)(15) of Rules 6e-2 and 6e-3(T) does not relate to
Qualified Plans or to a registered investment company's ability to sell
its shares to such Plans. Applicants state that they request exemptive
relief because the Separate Accounts investing in Insurance Products
Funds are themselves investment companies seeking relief under Rules
6e-2 and 6e-3(T), and Applicants do not wish to be denied such relief
if Insurance Products Funds sell shares, or Master Funds sell
beneficial interests, to Qualified Plans.
32. Applicants assert that, for the reasons stated below, 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.
33. Applicants represent that, under the Trust's current structure,
each Trust Portfolio pays a fee to the Investment Adviser for both
investment advisory and administrative services. Under the master-
feeder fund structure, the Investment Adviser would be paid an
administration fee by each Successor Portfolio and a management fee by
each Series (with the exception of the International Portfolio and the
corresponding International Series which have not commenced investment
operations, have different advisory arrangements, and have a different
fee structure). The combined management and administration fees paid
under the master-feeder fund structure would be higher than the current
investment advisory fee by 0.15% of average daily net assets annually
paid by the Trust. Applicants represent that the Trust's Board of
Trustees, after review of the fees, expenses and profitability of the
Adviser, determined to approve the increase in fees and concluded that
higher management and administration fees were justified, even absent
the conversion to the master-feeder fund structure. At the Special
Meeting of shareholders of the Trust, shareholders approved the fee
increase as part of their approval of the conversion of the Trust to
the master-feeder fund structure. Under the new master-feeder fund
structure, all of the Series would have management fees that decline
with increasing assets. At present, only three Trust Portfolios have
such fee structures. Applicants assert that the introduction of such
``breakpoints'' for all Series could ultimately benefit shareholders by
reducing the rate of management fees over time as assets grow.
34. Applicants further assert that upon conversion to the master-
feeder fund structure, the Trust's Distribution Plan, adopted pursuant
to Rule 12b-1 under the 1940 Act, will be eliminated. The Distribution
Plan currently permits each Trust Portfolio to pay up to 0.25% of its
average daily net assets for certain items relating to the sale of each
Trust Portfolio's share.\7\ Applicants maintain that the termination of
the current Distribution Plan and the adoption of a new non-fee
Distribution Plan, approved by the shareholders of the Trust at the
Special Meeting, will eliminate any separate payment for distribution
expenses.
\7\Actual expenses under the Distribution Plan for the Trust
Portfolio for the year ended December 31, 1994, ranged from 0.01% to
0.07% of average daily net assets per Trust Portfolio.
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Applicants' Conditions
The Applicants have consented to the following conditions:
1. A majority of the Trustees or Board of Directors (each a
``Board'' and collectively, ``Boards'') of each Insurance Products
Funds and Master Fund 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
death, disqualification, or bona fide resignation of any trustee or
director, 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 Boards will monitor their respective Insurance Products
Funds and Master Funds for the existence of any material irreconcilable
conflict between the interests of the Contract owners of all Separate
Accounts investing in the Insurance Products Funds and Master Funds. A
material irreconcilable conflict may arise for a variety of reasons,
including: (a) State insurance regulatory authority action; (b) a
change in applicable federal or state insurance, tax, or securities
laws or regulations, or a public ruling, private letter ruling, 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 the Insurance Products Funds
and Master Funds are being managed; (e) a difference in voting
instructions given by variable annuity and variable life insurance
Contract owners or by Contract owners of different Participating
Insurance Companies; or (f) a decision by a Participating Insurance
Company to disregard voting instructions of contract owners.
3. Participating Insurance Companies, Investment Adviser (or any
other investment advisor of the Insurance Products Funds and/or Master
Funds), and any Qualified Plan that executes a fund participation
agreement upon [[Page 19435]] becoming an owner of 10% or more of the
assets of an Insurance Products Fund or Master Funds (collectively,
``Participants'') will report any potential or existing conflicts to
the Boards. Participants will be responsible for assisting the
appropriate Board in carrying out its responsibilities under these
conditions by providing the Board with all information reasonably
necessary for it to consider any issues raised. This responsibility
includes, but is not limited to, an obligation by each Participant to
inform the Board whenever variable contract owner voting instructions
are disregarded. The responsibility to report such information and
conflicts and to assist the Board will be a contractual obligation of
all Participants investing in Insurance Products Funds and Master Funds
under their agreements governing participation in such Funds, and such
agreements shall provide that these responsibilities will be carried
out with a view only to the interests of the Contract owners.
4. If a majority of the Board of an Insurance Products Fund or
Master Fund, or majority of its disinterested trustees or directors,
determine that a material irreconcilable conflict exists, the relevant
Participant, at its expense and to the extent reasonably practicable
(as determined by a majority of disinterested trustees or directors),
will take any steps necessary to remedy or eliminate the irreconcilable
material conflict, including: (a) Withdrawing the assets allocable to
some or all of the Separate Accounts from an Insurance Products Fund or
Master Fund or any Series thereof and reinvesting those assets in a
different investment medium, which may include another series of an
Insurance Products Fund or Master Fund, or another Insurance Products
Fund or Master Fund, or submitting the question as to whether such
segregation should be implemented to a vote of all affected variable
Contract owners and, as appropriate, segregating the assets of any
appropriate group (i.e., variable annuity or variable annuity Contract
owners of one or more Participants) that votes in favor of such
segregation, or offering to the affected variable 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 Participant's
decision to disregard Contract owner voting instructions, and that
decision represents a minority position or would preclude a majority
vote, the Participant may be required, at the election of the relevant
Insurance Products Fund or Master Fund, to withdraw its separate
account's investment in such Fund, and no charge or penalty will be
imposed as a result of such withdrawal.
The responsibility to take remedial action in the event of a Board
determination of an irreconcilable material conflict and to bear the
cost of such remedial action shall be a contractual obligation of all
Participants under their agreements governing their participation in
the Insurance Products Funds and Master Funds. The responsibility to
take such remedial action shall be carried out with a view only to the
interests of the Contract owners.
For the purposes of condition (4), a majority of the disinterested
members of the applicable Board shall determine whether or not any
proposed action adequately remedies any irreconcilable material
conflict, but in no event will the relevant Insurance Products Fund or
Master Fund or the Investment Adviser (or any other investment adviser
of the Insurance Products Funds and/or Master Funds) be required to
establish a new funding medium for any variable contract. Further, no
Participant shall be required by this condition (4) to establish a new
funding medium for any variable contract if any offer to do so has been
declined by a vote of a majority of Contract owners materially affected
by the irreconcilable material conflict.
5. Any Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known promptly and
in writing to all Participants.
6. Participants 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 variable
Contract owners. This condition will apply to UIT-Separate Accounts
investing in Insurance Products Funds and to Managed-Separate Accounts
investing in Master Funds to the extent a vote is required with respect
to matters relating to the Master Funds. Accordingly, the Participants,
where applicable, will vote shares of an Insurance Products Fund or
Master Fund held in their separate accounts in a manner consistent with
voting instructions timely received from variable contract owners.
Participants will be responsible for assuring that each of their
Separate Accounts that participates in the Insurance Products Funds and
Master Funds calculates voting privileges in a manner consistent with
other Participants. The obligation to calculate voting privileges in a
manner consistent with all other Separate Accounts investing in the
Insurance Products Fund and Master Fund will be a contractual
obligation of all Participants under the agreements governing
participation in the Insurance Products Funds or Master Fund. Each
Participant will vote shares for which it has not received timely
voting instructions, as well as shares it owns, in the same proportion
as it votes those shares for which it has received voting instructions.
7. All reports received by the Board of potential or existing
conflicts, and all Board action 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 appropriate
Board or other appropriate records, such minutes or other records shall
be made available to the Commission, upon request.
8. Each Insurance Products Fund and Master Fund will notify all
Participants that Separate Accounts prospectus disclosure (contained in
Form N-4 with respect to UIT-Separate Accounts investing in Insurance
Products Funds, and in Form N-3 with respect to Managed-Separate
Accounts investing in Master Funds) regarding potential risks of mixed
and shared funding may be appropriate. Each Insurance Products Fund
shall disclose in its prospectus that: (a) shares of the Fund may be
offered to insurance company separate accounts of both annuity and life
insurance variable contracts, and to qualified plans; (b) due to
differences of tax treatment and other considerations, the interests of
various contract owners participating in the Funds and the interests of
Qualified Plans investing in the Funds may conflict; and (c) the Board
will monitor the Funds for any material conflicts and determine what
action, if any, should be taken.
9. Each Insurance Products Fund and Master 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 Insurance Products Fund or Master Fund), and in
particular each such fund either will either provide for annual
meetings (except insofar as the Commission may interpret Section 16 of
the 1940 Act not to require such meetings) or comply with Section 16(c)
(although the funds are not one of the trusts described in this
section), as well as with Section 16(a) and, if applicable, Section
16(b). Further, each Insurance Products Fund and Master Fund will act
in accordance with the Commission's interpretation of the requirements
of [[Page 19436]] Section 16(a) with respect to periodic elections of
directors (or trustees) and with whatever rules the Commission may
adopt with respect thereto.
10. If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of
the 1940 Act or the rules thereunder with respect to mixed and shared
funding on terms and conditions materially different from any
exemptions granted in the order requested, then the Insurance Products
Fund, Master Funds and/or the Participants, as appropriate, shall take
such steps as may be necessary to comply with Rule 6e-2 and Rule 6e-
3(T), as amended, and Rule 6e-3, as adopted, to the extent such Rules
are applicable.
11. No less than annually, the Participants shall submit to the
Boards such reports, materials or data as such Boards may reasonably
request so that the Boards may fully carry out the obligations imposed
upon them by these conditions. Such reports, materials, and data shall
be submitted more frequently if deemed appropriate by the applicable
Boards. The obligations of the Participants to provide these reports,
materials, and data to the Boards, when the appropriate Board so
reasonably requests, shall be a contractual obligation of all
Participants under the agreements governing their participation in the
Insurance Products Funds and Master Funds.
12. If a Qualified Plan becomes an owner of 10% or more of the
assets of an Insurance Products Fund (or Master Fund), such Qualified
Plan shareholder will execute a participation agreement with the
applicable Fund. A Qualified Plan shareholder will execute an
application containing an acknowledgment of this condition upon such
Qualified Plan's initial purchase of shares of the Insurance Products
Fund, or beneficial interests of a Master Fund.
Conclusion
For the reasons stated above, Applicants assert that the requested
exemptions pursuant to Section 6(c) and 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, are appropriate in the public interest and consistent with
the protection of investors and the purposes fairly intended by the
policy and provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-9517 Filed 4-17-95; 8:45 am]
BILLING CODE 8010-01-M
