[Federal Register Volume 59, Number 96 (Thursday, May 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12175]
[[Page Unknown]]
[Federal Register: May 19, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20293; 812-8524]
The Life Insurance Company of Virginia
May 12, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or the
``Commission'').
ACTION: Notice of Application for an order under the Investment Company
Act of 1940 (the ``1940 Act'').
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APPLICANTS: The Life Insurance Company of Virginia (``Life of
Virginia''), Life of Virginia Separate Account I, Life of Virginia
Separate Account II, Life of Virginia Separate Account III, Aon
Advisors, Inc. (``AAI''), and Aon Savings Plan (the ``Plan''). (The
three separate accounts shall be referred to collectively as the
``Accounts.'' The Accounts, Life of Virginia, AAI, and the Plan shall
be referred to collectively as the ``Applicants.'')
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act for exemptions from sections 9(a), 13(a), 15(a) and 15(b) of
the 1940 Act, and Rule 6e-3(T)(b)(15) thereunder; and an order
requested under section 17(b) of the 1940 Act for exemptions from
section 17(a) of the 1940 Act.
SUMMARY OF APPLICATION: The Accounts and Life of Virginia seek an order
exempting them and certain other separate accounts (the ``future
accounts'') established in the future by Life of Virginia, or any life
insurance company affiliate of Life of Virginia, from the provisions of
sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and Rule 6e-
3(T)(b)(15) thereunder, to permit the Accounts and the future accounts
to hold shares of Life of Virginia Series Fund, Inc. (the ``Fund'') at
the same time that the Fund offers its shares to the Plan or other
qualified pension or retirement plans. In addition, AAI and the Plan
seek an order exempting them from section 17(a) of the 1940 Act to the
extent necessary to permit the Plan to purchase certain classes of
shares of the Fund with investment securities of the Plan.
FILING DATES: The application was filed initially on August 5, 1993. An
amended and restated application was filed on March 17, 1994.
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 the Secretary of the
Commission, and serving the Applicants with copies of the request,
personally or by mail. Hearing requests should be received by the
Commission by 5:30 p.m. on June 6, 1994, and should be accompanied by
proof of service on the Applicants in the form of an affidavit or, for
lawyers, a certificate of service. Hearing requests should state the
nature of the writer'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, SEC, 450 5th Street NW., Washington, DC 20549.
Applicants, c/o William E. Daner, Jr., Esq., Counsel, The Life
Insurance Company of Virginia, 6610 West Broad Street, Richmond,
Virginia 23230, and c/o Maxine G. Bonn, Esq., Counsel, Aon Corporation,
123 N. Wacker Drive, Chicago, IL 60606-1770.
FOR FURTHER INFORMATION CONTACT:
Patrice M. Pitts, Attorney, or Michael V. Wible, Special Counsel,
Office of Insurance Products, Division of Investment Management, at
(202) 942-0670.
SUPPLEMENTARY INFORMATION: 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. Life of Virginia, a stock life insurance company organized under
the laws of the Commonwealth of Virginia on March 21, 1871, is a wholly
owned subsidiary of Combined Insurance Company of America, which is a
wholly owned subsidiary of Aon Corportion. Life of Virginia is the
depositor and sponsor of the Accounts.
2. Each of the Accounts is a separate account registered under the
1940 Act as a unit investment trust. The Accounts act as funding media
for variable life insurance policies issued by Life of Virginia. Life
of Virginia Separate Account I has four subdivisions; Life of Virginia
Account II and Life of Virginia Separate Account III each have nineteen
subdivisions. Four of the subdivisions of each of the Accounts invest
in one of the four investment portfolios of the Fund.
3. Life of Virginia and other life insurance companies directly or
indirectly owned by Aon Corporation may establish variable life
insurance separate accounts in the future that also would need to rely
on the exemptions requested herein by the Accounts and Life of
Virginia. Any such future separate accounts would be registered under
the 1940 Act as unit investment trusts.
4. AAI, a wholly owned subsidiary of Aon Corporation, in engaged
primarily in the business of providing investment management and advice
to pension plans, corporations, investment companies and other
organizations. AAI is registered under the Investment Advisers Act of
1940, is the investment adviser to the Fund, and manages certain Plan
assets.
5. The Plan was authorized by the board of directors of Aon
Corporation. Interests in the Plan are registered under the Securities
Act of 1933 (File No. 33-27984). The Plan currently offers participants
four investment options: Aon Corporation common stock, interest in a
pool of guaranteed investment contracts, interests in a money market
investment portfolio, and interest in a balanced investment portfolio.
6. Participation in the Plan is open to all eligible employees of
Aon Corporation and its subsidiaries--including Life of Virginia and
AAI--which have adopted the Plan. The Plan is intended to qualify under
section 401(a) and 501(a) of the Internal Revenue Code of 1986, as
amended (the ``Code''), and includes a cash or deferred arrangement
intended to quality under section 401(k) of the Code. The Plan is also
subject to the provisions of the Employee Retirement Income Security
Act of 1974 (``ERISA''), applicable to defined contribution profit
sharing plans.
7. The Plan trustees are appointed by Aon Corporation, and
currently are all employers of Aon Corporation subsidiaries. Under the
terms of the Plan, Aon Corporation retains the right to appoint other
individuals or corporations as trustees, including persons not
affiliated with Aon Corporation. The Plan is administered by a plan
committee consisting of various employees of Aon Corporation and its
subsidiaries.
8. The Fund was incorporated under the laws of the Commonwealth of
Virginia on May 14, 1984, and is registered under the 1940 Act as an
open-end diversified management investment company. The Fund consists
of four series: Common Stock Index Portfolio, Government Securities,
Money Market Portfolio and Total Return Portfolio.
9. To date, the Fund has offered its shares only to Life of
Virginia (as seed money investments), the Accounts, and Life of
Virginia Separate Account 4 (``Account 4''), a variable annuity
separate account. The Fund offers each series of shares to
corresponding subdivisions of each of the Accounts to support variable
life insurance contracts (``VLI contracts'') and to Account 4 to
support variable annuity contracts (``VA contracts''). (The VLI
contracts and the VA contracts shall be referred to collectively as the
``variable contracts.'')
10. In light of recent changes in the federal tax law which have
created the opportunity for the Fund to substantially increase its net
assets by selling shares to the Plan and to other qualified pension or
retirement plans, the Accounts and Life of Virginia propose that the
Fund be permitted to sell its shares directly to the Plan and to
unaffiliated pension or retirement plans subject to ERISA and Sections
401(a) and 501(a) of the Code (the ``unaffiliated plans''). For
purposes of the 1940 Act, the unaffiliated plans will not be affiliated
persons of the Fund or of the Applicants or affiliated persons of such
persons. Nor will the trustees and the other fiduciaries of the
unaffiliated plans be affiliated persons of the Fund or of the
Applicants or affiliated persons of such persons.
11. Applicants state that Section 817(h) of the Code imposes
certain diversification standards on the assets underlying variable
contracts held in the portfolios of the Fund. The Code provides that
variable contracts will not be treated as annuity contracts or life
insurance contracts, as the case may be, for any period for which the
underlying assets are not diversified in accordance with Treasury
Department regulations.
12. Treasury Regulation 1.817-5 establishes specific
diversification requirements for the investment portfolios underlying
variable contracts. The regulation generally provides that, in order to
meet these diversification requirements, all of the beneficial
interests in the investment company must be held by the segregated
assets account of one or more life insurance companies. However, the
regulation also contains an exception to this requirement that permits
trustees of a qualified pension or retirement plan to hold shares of an
investment company--the shares of which are also held by insurance
company segregated asset accounts--without adversely affecting the
status of the investment company as an adequately diversified
underlying investment for variable contracts issued through such
segregated asset accounts.
13. As a result of this exception to the general diversification
requirement, qualified pension and retirement plans (such as the Plan
or the unaffiliated plans) may select the Fund as an investment option
without endangering the tax status of Life of Virginia VLI contracts
issued through the Accounts or VA contracts issued through Account 4.
Fund shares sold to the Plan or to the unaffiliated plans would be held
by their respective trustees, as required by section 403(a) of ERISA.
The Plan trustees would generally vote Fund shares that they hold for
the Plan in accordance with instructions solicited from Plan
participants. The trustees or other fiduciaries of the unaffiliated
plans may vote Fund shares held by their plans in their own discretion
or, if the applicable plan so provides, in accordance with instructions
from participants in such plans.
14. Applicants also propose that, in one or more discrete
instances, the Plan be permitted to purchase Funds shares using
investment securities held in one of the investment portfolios
currently offered to Plan participants.
15. Applicants represent that the investment objectives of the
money market and balanced investment portfolios offered by the Plan are
very similar to the investment objective of the Fund's Money Market
Portfolio and Total Return Portfolio, respectively. Accordingly,
Applicants propose that, subject to the approval of the Fund's board of
directors and the judgment of the Plan trustees that the proposed
transactions do not violate the prohibited transaction and fiduciary
duty requirements of ERISA, the Plan be permitted to use the assets of
its money market portfolio to purchase shares of the Fund's Money
Market Portfolio and the assets of its balanced portfolio to purchase
shares of the Fund's Total Return Portfolio. If the proposed
consolidations were to occur, the Plan would initially acquire a
substantial majority of the outstanding shares of these two Fund
portfolios.
Applicants' Legal Analysis and Conclusions
A. Request for Exemptions Under Sections 6(c)
(i) General Grounds for Relief
1. Life of Virginia and the accounts request that the Commission
issue an order pursuant to section 6(c) of the 1940 Act, exempting them
as well as any future accounts from the provisions of sections 9(a),
13(a), 15(a) and 15(b) of the 1940 Act and Rule 6e-3(T)(b)(15)
thereunder to the extent necessary for the Accounts and any future
accounts to hold shares of the Fund at the same time that the Plan and
the unaffiliated plans hold shares of the Fund. Life of Virginia and
the Accounts submit that the requested exemptions are appropriate in
the public interest and consistent with the protection of investors and
the purposes fairly intended by the policy and provisions of the 1940
Act.
2. Life of Virginia and the Accounts currently rely on the
exemptions provided by Rule 6e-3(T)(b)(15) under the 1940 Act, which
provides partial exemptions from sections 9(a), 13(a), and 15(b) of the
1940 Act for certain VLI contracts. However, the exemptions granted by
the Rule are available only where: (i) The Fund offers its shares
exclusively to separate accounts of Life of Virginia or any life
insurance company affiliate of Life of Virginia offering either
scheduled premium variable life insurance contracts or flexible premium
variable life insurance contracts, or both; or (ii) the Fund offers its
shares to variable annuity separate accounts of Life of Virginia or of
any life insurance company affiliate of Life of Virginia. The Rule 6e-
(T)(b)(15) exemptions would not be available to Life of Virginia, the
Accounts, or any future accounts if the Fund were to sell its shares to
the Plan or to unaffiliated plans.
3. In general, section 9(a) of the 1940 Act disqualifies any person
convicted of certain offenses, and any company affiliated with that
person, from acting or serving in various capacities with respect to a
registered investment company. Section 9(a)(3) provides that it is
unlawful for any company to serve as investment adviser or principal
underwriter for any registered open-end investment company if an
affiliated person of that company is subject to a disqualification
enumerated in sections 9(a) (1) or (2). However, Rule 6e-3(T)(b)(15)
(i) and (ii) provides exemptions from section 9(a), under certain
circumstances and subject to certain conditions that limit the
application of the eligibility restrictions of section 9(a) to
affiliated individuals or companies that directly participate in the
management of the Fund.
4. Life of Virginia and the Accounts assert that the partial relief
provided by Rule 6e-3(T)(b)(15) effectively limits the amount of
monitoring of personnel that Life of Virginia and its affiliates would
have to conduct to ensure compliance with section 9 to that which is
appropriate in light of the policy and purposes of section 9. Life of
Virginia and the Accounts further assert that the Rule recognizes that
it is not necessary for the protection of investors or the purposes
fairly intended by the policy and provisions of the 1940 Act to apply
the provisions of section 9(a) to the many hundreds of individuals in a
large insurance company complex, most of whom typically have no
involvement in matters pertaining to investment companies affiliated
with that organization.
5. Rule 6e-3(T)(b)(15)(iii) also provides partial exemptions from
sections 13(a), 15(a) and 15(b) of the 1940 Act to the extent that,
under certain limited circumstances, the Rule permits Life of Virginia
and any life insurance company affiliates thereof that establish future
accounts: (i) to disregard the voting instructions of VLI contract
owners if following such instructions would cause Life of Virginia to
make (or refrain from making) certain investments that would result in
changes in the subclassification or investment objectives of the Fund;
or (ii) (subject to the provisions of paragraphs (b)(5)(i) and
(b)(7)(ii)(A) of Rule 6e-3(T)) to approve or disapprove any contract
between the Fund and AAI, when such action is mandated by insurance
regulatory authority.
6. Life of Virginia and the Accounts assert that historically, the
exclusivity provision in Rule 6e-3(T)(b)(15) evolved from the
Commission's concern about possible divergent interests between or
among different classes of investors (e.g., variable contract owners)
in mutual funds supporting variable life insurance separate accounts.
The unit investment trust structure for supporting VLI contracts
created the opportunity for a mutual fund underlying a trust also to
offer its shares to a variable annuity separate account (hereinafter,
``mixed funding''). Rule 6e-3(T)(b)(15) was designed to permit a
separate account supporting both flexible and scheduled premium VLI
contracts to share the same underlying fund and engage in mixed
funding.
7. Life of Virginia and the Accounts maintain that the proposed
Plan and unaffiliated plan investments in the Fund should not increase
the likelihood of material irreconcilable conflicts, and should benefit
VA and VLI contracts owners.
8. Life of Virginia and the Accounts maintain that qualified
retirement plan investors in the Fund would have substantially the same
interests as current variable contract owners. Like variable contract
owners, qualified retirement plan investors are long-term investors.
Therefore, most can be expected not to withdraw their assets from the
Plan or the unaffiliated plans. In addition, since neither variable
contract owners nor Plan and unaffiliated plan investors would be taxed
on the investment return of their respective investments in the Fund,
they would be taxed on the investment return of their respective
investments in the Fund, they would share a strong interest in the Fund
operating in a manner that preserves its tax status. For these reasons,
Life of Virginia and the Accounts represent that material conflicts
between these two groups of investors regarding capital transactions
are unlikely. Life of Virginia and the Accounts also note that ERISA
imposes general diversification requirements on qualified pension and
retirement plan investments that are consistent with the
diversification requirements applicable to the Fund under section
817(h) of the Code.
9. Life of Virginia and the Accounts represent that the Accounts
and the Plan are governed in similar ways. Plan trustees have a
fiduciary duty to participants that is similar to the obligations that
Life of Virginia (or any life insurance company affiliate thereof) has
to look after the interests of variable contract owners.
10. Life of Virginia and the Accounts assert that, because Plan and
unaffiliated plan investors would have beneficial interests similar to
those of current investors, the addition of the Plan and unaffiliated
plans as shareholders of the Fund, and the addition of Plan and
unaffiliated Plan participants as persons having beneficial interests
in the Fund, should not increase the risk of material irreconcilable
conflicts among investors. Life of Virginia and the Accounts further
assert that even if a material irreconcilable conflict involving the
Plan or the unaffiliated plans or their respective participants arose,
the trustees of the Plan and the unaffiliated plans, may, if their
fidiciary duty to the participants requires it, redeem the shares of
the Fund held by the Plan or the unaffiliated plans and make
alternative investments without obtaining prior regulatory approval.
Similarly, the Plan and most if not all of the unaffiliated plans, may
hold cash or other liquid assets pending their reinvestment in a
suitable alternative investment.
11. Life of Virginia and the Accounts maintain that variable
contract owners would benefit from the expected increase in net assets
of the Fund's portfolios resulting from additional investments by Plan
and unaffiliated plan participants. Such additional investments also
should lower the costs of investing for variable contract owners,
promote economies of scale, permit increased safety through greater
portfolio diversification, provide the Fund's investment adviser with
greater flexibility because of a larger portfolio, and make more
feasible the addition of new portfolios in the future.
12. The Applicants note that when the Commission last revised Rule
6e-3(T) in 1987, the Treasury Department had not issued Treasury
Regulation 1.817-5 which permits the Fund to sell shares to qualified
pension or retirement plans without adversely affecting the tax status
of Life of Virginia's variable contracts. Life of Virginia and the
Accounts submit that, although proposed regulations had been published,
the Commission did not envision this possibility when it last examined
Rule 6e-3(T)(b)(15), and might well have broadened the exclusivity
provision of the Rule at that time to include plans such as the Plan
(or the unaffiliated plans) had this possibility been apparent.
Applicants further note that the Commission recently issued an order
under Section 6(c) granting the exemptions requested herein to
applicants in very similar circumstances.
(ii) Voting Rights
13. Life of Virginia and the Accounts do not see any inherent
conflicts arising between or among the interests of variable contract
owners, or Plan participants because of the potential for the Plan to
hold a controlling interest in a portfolio of the Fund. If the
exemptions requested herein are granted to Life of Virginia and the
Accounts, the Plan trustees generally would vote shares of the Fund
held by them on behalf of the Plan pursuant to instructions from Plan
participants. Thus, Plan participants' interests will be represented in
the Fund in substantially the same manner as are those of Life of
Virginia's variable contract owners.
14. Life of Virginia and the Accounts assert that it is unlikely
that Plan participants as a group vote in a manner that would
disadvantage variable contract owners. Moreover, the trustees and other
affiliated persons of the Plan will not be in a position to exercise
undue influence over the Fund or any of its portfolios.
15. Also, with regard to resolving or remedying possible conflicts
of interest related to voting, the Plan's investment in the Fund does
not present any complications not otherwise occasioned by traditional
mixed funding as permitted by Rule 6e-3(T)(b)(15). Life of Virginia and
the Accounts submit that just because the interests and opinions of
Fund investors may differ does not mean that inherent conflicts of
interest exist between or among such investors.
16. Section 403(a) of ERISA provides that, with few exceptions,
trustees of the unaffiliated plans would have the exclusive authority
and responsibility for exercising voting rights attributable to their
respective plan's investment securities. Where a named fiduciary
appoints an investment adviser, the adviser has the authority and
responsibility to exercise such voting rights unless the authority and
responsibility is reserved to the trustee(s) or a non-trustee
fiduciary.
17. Life of Virginia and the Accounts generally expect many of the
unaffiliated plans to have their trustees or other fiduciaries
exercise, in their discretion, voting rights attributable to investment
securities held by the unaffiliated plans. Some of the unaffiliated
plans, however, may provide for the trustee(s), an investment adviser
(or advisers), or another named fiduciary to exercise voting rights in
accordance with instructions from participants.
18. Where unaffiliated plans do not provide participants with the
right to give voting instructions, Life of Virginia and the Accounts do
not see any potential for material irreconcilable conflicts of
interests between variable contract owners and unaffiliated plan
investors with respect to voting of Fund shares. Life of Virginia and
the Accounts note that there is very little likelihood that any
particular unaffiliated plan will hold a controlling interest in a
portfolio of the Fund. However, even if an unaffiliated plan were to
hold such a controlling interest, Life of Virginia and the Accounts do
not believe that such control would disadvantage other investors in the
Fund to any greater extent than would be the case were an institutional
shareholder to hold a controlling interest. Life of Virginia and the
Accounts submit that investment in the Fund by the unaffiliated plans
will not create any of the voting complications occasioned by
traditional mixed and shared funding, or by the Plan's proposed
investment in the Fund.
19. Where unaffiliated plans provide participants with the right to
give voting instructions, Life of Virginia and the Accounts do not
believe that participants in unaffiliated plans--acting as a single
group or in combination with participants in other unaffiliated plans--
would vote in a manner that would disadvantage variable contract
owners. As is the case with the Plan's proposed investment in the Fund,
the purchase of Fund shares by the unaffiliated plans that provide
voting rights does not present any complications not otherwise
occasioned by traditional mixed and shared\1\ funding.
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\1\As used herein, the term ``shared funding'' shall refer to
the use of a common management investment company as the underlying
investment medium for separate accounts of unaffiliated life
insurance companies.
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20. In light of Treasury Regulation 1.817-5(f)(3)(iii) which
specifically permits ``qualified pension or retirement plans'' and
separate accounts to share the same underlying management investment
company, Life of Virginia and the Accounts have concluded that neither
the Code, nor other Treasury Regulations or revenue rulings thereunder,
would create any inherent conflicts of interest between or among
participants, VLI and variable contract owners.
(iii) Tax Treatment of Distributions
21. Although there are differences in the manner in which
distribution from the Plan or the unaffiliated plans and distributions
from variable contracts are taxed, Life of Virginia and the Accounts
maintain that these differences will have no impact on the Fund. The
Accounts, Account 4, the future accounts, the Plan, and the
Unaffiliated plans each will purchase and redeem such shares at net
asset value in conformity with Rule 22c-1 under the 1940 Act without
the imposition of any sales charges.
(iv) Potential Future Conflicts Arising From Tax Law Changes
22. Life of Virginia and the Accounts do not see any greater
potential for material irreconcilable conflicts arising between the
interests of plan investors and other Fund investors from possible
future changes in the federal tax laws than that which already exists
with regard to such conflicts arising between variable contract owners.
(v) Conditions for Relief
23. Life of Virginia and the Accounts represent and agree that if
the exemptions requested herein pursuant to Section 6(c) of the 1940
Act are granted, they will rely on such exemptions to purchase and hold
Fund shares only if the following conditions are met:
(a) The board of directors of the Fund, including a majority of
those directors who are not interested persons of the Fund or
interested persons of such persons, shall: (i) adopt a resolution
approving the sale of Fund shares to the Plan and the unaffiliated
plans; and (ii) monitor the Fund for the existence of any material
irreconcilable conflicts between or among the interests of variable
contract owners, and qualified pension and retirement plan
investors.
(b) Life of Virginia will monitor its operations and those of
the Fund for the purpose of identifying any material conflicts or
potential material conflicts between or among the interests of
qualified retirement and pension plan investors and variable
contract owners.
(c) Life of Virginia will report any such conflicts or potential
conflicts to the Fund's board of directors and will provide the
board with all information reasonably necessary for the board to
consider any issues raised by such existing or potential conflicts.
Life of Virginia will also assist the board in carrying out this
obligation by, among other things, informing the board whenever it
disregards voting instructions from variable contract owners.
(d) Life of Virginia will provide ``pass-through'' voting
privileges to variable contract owners as long as the Commission
interprets the 1940 Act to require such privileges. Life of Virginia
will vote Fund shares held by it that are not attributable to
variable contract reserves in the same proportion as instructions
received in a timely fashion from variable contract owners, and
shall be responsible for ensuring that the Accounts and Account 4
each calculate ``pass-through'' votes in a consistent manner.
(e) In the event that a conflict of interest arises between
variable contract owners, and/or qualified retirement or pension
plan investors, Life of Virginia will, at its own expense, take
whatever action is necessary to remedy such conflict (as it
adversely affects variable contract owners), up to and including:
(1) establishing a new-registered management investment company; and
(2) withdrawing assets attributable to reserves for the variable
contracts subject to the conflict from the Fund and (A) reinvesting
such assets in a different investment medium (including another
portfolio of the Fund), or (B) submitting the question of whether
such segregation should be implemented to a vote of all affected
variable contract owners, and, as appropriate, segregating the
assets supporting the contracts of any group of such owners that
votes in favor of such segregation, or offering to such owners the
option of making such a change. Notwithstanding the foregoing, Life
of Virginia will not be obligated to establish a new funding medium
for any group of variable contracts if an offer to do so has been
declined by a vote of a majority of the variable contract owners
adversely affected by the conflict.
(f) The board meeting minutes of the Fund or other appropriate
records shall record: (1) all reports sent by Life of Virginia,
depositors of the future accounts, the Plan, or the unaffiliated
plans to be the board of directors of the Fund; (2) notices sent by
the Fund's board of directors to Life of Virginia, the depositors of
the future accounts, the Plan, or the unaffiliated plans, notifying
the recipient of the existence of or potential for a material
conflict between the interests of variable contract owners and
qualified retirement and pension plan investors; and (3) board
deliberations regarding conflicts or potential conflicts. Such board
meeting minutes or other records shall be made available to the
Commission upon request.
(g) The Fund's prospectus shall disclose that: (1) Fund shares
are offered in connection with mixed funding and to 401(a) plans;
(2) both mixed funding and investment by 401(a) plans in the Fund
may present certain conflicts of interest between variable contract
owners and qualified retirement and pension plan investors; and (3)
the Fund's board of directors will monitor for the existence of any
material conflict of interest. The Fund also shall notify the Plan
and Life of Virginia that similar prospectus disclosure may be
appropriate in separate account prospectuses or the Plan prospectus.
(h) Life of Virginia and the Accounts will continue to rely on
Rule 6e-3(T)(b)(15) and to comply with all of its conditions.
(i) To the extent permitted or required by ERISA, the Plan is
amended to provide ``pass-through'' voting privileges to Plan
participants.
24. Life of Virginia and the Accounts represent that the future
accounts and their life insurance company depositors will rely on the
exemptions from section 6(c) of the 1940 Act requested herein to
purchase and hold Fund shares only if such life insurance company
depositors comply with conditions (b), (c), (d), (e) and (h) above as
those conditions relate to such life insurance company depositors and
to the owners of variable annuity contracts and variable life insurance
contracts issued by those life insurance company depositors.
B. Request for Exemptions Under Section 17(b)
25. AAI and the Plan request that the Commission issue an order
pursuant to section 17(b) of the 1940 Act, exempting them from the
provisions of section 17(a) of the 1940 Act to the extent necessary to
permit the Plan to purchase shares of the Fund with investment
securities of the Plan. AAI and the Plan represent that the terms of
the proposed transactions as set forth herein, including the
consideration to be paid and received: (i) Are reasonable and fair to
the Fund, to its Money Market Portfolio and its Total Return Portfolio,
to shareholders, and to variable contract owners invested in each of
the Money Market Portfolio and the Total Return Portfolio; and (ii) do
not involve overreaching on the part of any person concerned.
Furthermore, AAI and the Plan represent that the proposed transactions
will be consistent with the general purposes of the 1940 Act and, more
specifically, the policies of the Fund, its Money Market Portfolio, and
its Total Return Portfolio.
26. AAI and the Plan also assert that the proposed transactions, in
addition to meeting the standards of section 17(b) vis-a-vis the Fund,
are fair and reasonable to the Plan and are in the best interests of
the Plan participants as determined by the Plan trustees. In
particular, AAI and the Plan submit that the proposed transactions are
consistent with the policy and purpose of the Plan as recited in its
current registration statement, and are consistent with the provisions
of ERISA (applicable to defined contribution plans) regarding reporting
and disclosure, participation and vesting, funding, fiduciary
responsibility, administration and enforcement.
27. Section 17(a)(1) of the 1940 Act, in relevant part, prohibits
any affiliated person of a registered investment company, or any
affiliated person of such person, acting as principal, from knowingly
selling any security or other property to that company. Section
17(a)(2) of the 1940 Act generally prohibits the persons described
above, acting as principals, from knowingly purchasing any security or
other property from the registered investment company.
28. Section 2(a)(3) of the 1940 Act defines the term ``affiliated
person of another person'' in relevant part as: ``(A) any person
directly or indirectly owning, controlling, or holding with power to
vote, 5 per centum or more of the outstanding voting securities of such
other person; (B) any person 5 per centum or more of whose outstanding
voting securities are directly or indirectly owned, controlled, or held
with power to vote, by such person; (C) any person directly or
indirectly controlling, controlled by, or under common control with,
such other person. * * *''
29. AAI and the Plan assert that because Life of Virginia's general
account owns directly more than 25% of the outstanding voting
securities of the Common Stock Index Portfolio and the Government
Securities Portfolio of the Fund, and because section 2(a)(9) of the
1940 Act establishes a presumption that a person owning 25% or more of
another person's outstanding voting securities controls the latter
person, the Common Stock Index Portfolio and the Government Securities
Portfolio are controlled by Life of Virginia and, consequently, by Aon
Corporation. Although the variable contract owners are considered the
beneficial owners of many Fund shares, AAI and the Plan submit that the
Fund and each of its portfolios (arguably) is under the control of Life
of Virginia (and Aon Corporation), since Life of Virginia owns of
record all of the shares of the Fund. AAI and the Plan further submit
that, because they, too, are controlled by Aon Corporation, AAI, the
Plan, the Fund, and the Fund's portfolios can be deemed under the
common control of Aon Corporation.
30. AAI and the Plan asset that since a person under common control
with a registered investment company is an affiliated person of that
investment company, AAI and the Plan are affiliated persons of the Fund
and its Money Market Portfolio and Total Return Portfolio. The Plan's
proposal to purchase Fund shares with investment securities would
entail the sale of such securities by the Plan (or by AAI and the
Plan), acting as principal, to the Fund and therefore would contravene
section 17(a).
31. Section 17(b) of the 1940 Act provides that the Commission may,
upon application, grant an order exempting any transaction from the
prohibitions of Section 17(a) if the evidence establishes that:
(a) The terms of the proposed transaction, including the
consideration to be paid or received, are reasonable and fair and do
not involve overreaching on the part of any person concerned;
(b) The proposed transaction is consistent with the policy of each
registered investment company concerned, as recited in its registration
statement and reports filed under the 1940 Act; and
(c) The proposed transaction is consistent with the general
purposes of the 1940 Act.
32. Subject to certain enumerated conditions, Rule 17a-7 under the
1940 Act exempts from the prohibitions of section 17(a) a purchase or
sale transaction between: (i) Registered investment companies or
separate series of registered investment companies, which are
affiliated persons, or affiliated persons of affiliated persons, of
each other; (ii) between separate series of a registered investment
company; or (iii) between a registered investment company or a separate
series of a registered investment company and a person which is an
affiliated person of such registered investment company (or affiliated
person of such person) solely by reason of having a common investment
adviser or investment advisers which are affiliated persons of each
other, common directors, and/or common officers.
33. AAI and the Plan submit that they cannot rely on Rule 17a-7
because they are not affiliated persons of the Fund or the Money Market
Portfolio or the Total Return Portfolio solely by reason of having a
common investment adviser or affiliated investment advisers, common
directors, and/or common officers. AAI and the Plan also note that
since the proposed purchase of Fund shares by the Plan involves the
purchase and sale of securities for securities, the proposed
transaction does not meet the condition of Rule 17a-7 that the
transaction be a purchase or a sale for no consideration other than
cash payment against prompt delivery of a security for which market
quotations are readily available.
34. AAI and the Plan assert that where, as here, an investment
company would comply in substance with, but cannot literally meet all
of the conditions of, Rule 17a-7, the Commission should consider the
extent to which the investment company meets the Rule 17a-7 or other
similar conditions, and issue an order if the protections of Rule 17a-7
would be provided in substance. AAI and the Plan maintain that although
the transactions will conform in all material respects with the
substance of all but one of the conditions enumerated in Rule 17a-7,
the terms of the proposed transactions--including the consideration to
be received by the Fund--are reasonable, fair, and do not involve
overreaching by investment company affiliates.
35. AAI and the Plan submit that the proposed transactions would
offer to the Fund the same degree of protection from overreaching that
Rule 17a-7 offers to investment companies involved in purchase or sale
transactions with their affiliates. For example, the Plan could not
``dump'' undesirable securities on the Fund, transfer investment
securities from the Fund, or effect the proposed transactions at a
price that is disadvantageous to the Fund. In addition, although the
transactions will not be for cash, each will be effected based upon (i)
the independent market price of the Plan's investment securities valued
as specified in Rule 17a-7(b), and (ii) the net asset value per share
of the Money Market Portfolio or the Total Return Portfolio, valued in
accordance with the procedures disclosed in the Fund's registration
statement and as required by Rule 22c-1 under the 1940 Act. AAI and the
Plan represent that no brokerage commission, fee, or other remuneration
will be paid to any party in connection with the proposed transactions.
In addition, although the board of directors of the Fund will not adopt
specific procedures to govern the proposed transactions, it will
scrutinize and specifically approve by resolution each such
transaction, including the price to be paid for the Fund's shares and
the nature and quality of the securities offered in payment for such
shares.
36. AAI and the Plan represent that the proposed sale of additional
shares is consistent with the investment policy of both the Money
Market Portfolio and the Total Return Portfolio of the Fund, as recited
in the Fund's registration statement, and the sale of shares for
investment securities, as contemplated by the proposed transactions, is
also consistent with these investment policies provided that (i) the
shares are sold at net asset value, and (ii) the securities are of the
type and quality that each portfolio would have acquired with the sale
proceeds had the shares been sold for cash. As recited in the
conditions listed below, the Fund's board of directors will examine the
portfolios of the Plan's money market and balanced portfolios and only
approve the proposed transactions if they, including a majority of
those directors who are not interested persons of the Fund, or
interested persons of such persons, determine that (i) and (ii) would
be met.
37. The proposed transactions, as described herein, are consistent
with the general purposes of the 1940 Act as stated in the Findings and
Declaration of Policy in Section 1 of the 1940 Act. The proposed
transactions do not present any of the conditions or abuses that the
1940 Act was designed to prevent.
38. AAI and the Plan maintain that the terms of the proposed
transactions are fair and reasonable to the Plan as well as to the
Fund, and protect the Plan and the Fund from overreaching by their
respective affiliates.
39. AAI and the Plan represent that the Plan trustees have
determined that the proposed transactions are in the best interests of
Plan participants, and are consistent with the policies and purpose of
the Plan as recited in various Plan documents, including its
registration statement. In this regard, AAI and the Plan represent that
the Plan trustees have determined that the Fund's Money Market
Portfolio has substantially the same investment objectives as the
Plan's money market investment portfolio and, likewise, that the Fund's
Total Return Portfolio has substantially the same investment objectives
as the Plan's balanced portfolio.
40. AAI and the Plan represent that Plan participants will benefit
from the fact that the expense of liquidating Plan assets, purchasing
Fund shares with cash, and reinvesting the cash in substantially the
same assets, would be avoided. AAI and the Plan further represent that,
to the extent that the Plan trustees have determined that the Fund's
Money Market Portfolio and Total Return Portfolio should replace the
Plan's current money market portfolio and balanced portfolio,
respectively, the proposed transactions would greatly diminish the
expense of this replacement to Plan participants.
41. AAI and the Plan represent that the proposed transactions are
consistent with the provisions of ERISA regarding reporting and
disclosure, participation and vesting, funding, fiduciary
responsibility, administration and enforcement that are applicable to
defined contribution plans.
42. AAI and the Plan represent and agree that if the exemptions
requested herein pursuant to section 17(b) of the 1940 Act are granted,
the Plan will purchase shares of the Fund with investment securities
only if the following conditions are met:
(a) Shares of the Money Market Portfolio or the Total Return
Portfolio of the Fund will be purchased with investment securities
of the Plan's money market portfolio or balanced portfolio.
(b) The transactions will be effected at the ``independent
current market price'' of the investment securities (as that term is
defined in Rule 17a-7 under the 1940 Act), and at the net asset
value of appropriate Fund share next computed after the closing of
the transaction.
(c) No brokerage commission, fee (except for customary transfer
fees), or other remuneration will be paid in connection with the
transactions.
(d) The Fund's board of directors, including a majority of those
directors who are not interested persons of the Fund, or interested
persons of such persons shall: (i) review the terms of the
transactions, the composition of the investment portfolios of the
Plan to be used as the purchase price in the transactions, and the
value (and the valuation method) of the investment securities
comprising the purchase price in the transactions; and (ii) adopt a
resolution determining separately for each transaction, that the
transaction is reasonable and fair to the existing investors in the
appropriate Fund portfolio, that the transaction would not subject
the Fund to overreaching, and that the investment securities offered
by the Trustees on behalf of the Plan in that transaction are
consistent with the investment objective, policies and restrictions
of the related Fund portfolio.
(e) The Fund agrees in writing that it will maintain and
preserve for a period of not less than six years from the end of the
fiscal year in which the transaction occurs--and for the first two
years in a readily accessible place--a written record of each such
transaction setting forth: (i) a description of the investment
securities used as the purchase price for Fund shares; (ii) the
terms of such transaction; and (iii) the information and materials
upon which the determinations described in condition (d) above were
made.
Conclusion
1. AAI and the Plan request an order of the Commission pursuant to
section 17(b) of the 1940 Act exempting them from section 17(a) of the
1940 Act to the extent necessary to permit the Plan to purchase certain
classes of shares of the Fund with investment securities of the Plan.
AAI and the Plan submit that, for the reasons stated above, the terms
of the proposed transactions--including the consideration to be paid
and received: (i) Are reasonable and fair to the Fund, its Money Market
Portfolio, its Total Return Portfolio, its shareholders, and the
variable contract owners invested in the Money Market Portfolio and the
Total Return Portfolio; and (ii) do not involve overreaching on the
part of any person concerned. Furthermore, the proposed transactions
will be consistent with the general purposes of the 1940 Act and the
policies of the Fund, its Money Market Portfolio, and its Total Return
Portfolio.
2. In addition, Life of Virginia and the Accounts request an order
pursuant to section 6(c) of the 1940 Act, exempting them as well as any
future accounts from the provisions of sections 9(a), 13(a), 15(a), and
15(b) of the 1940 Act, and Rule 6e-3(T)(b)(15) thereunder, to the
extent necessary to permit the Accounts and any future accounts to hold
shares of the Fund at the same time that the Plan and other qualified
retirement and pension plans hold shares of the Fund.
3. For the reasons stated above, Applicants submit that the
proposed transactions do not present any of the conditions or abuses
that the 1940 Act was designed to prevent, and that the requested
exemptions are appropriate in the public interest and consistent with
the protection of investors and the purposes fairly intended by the
policy and provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-12175 Filed 5-18-94; 8:45 am]
BILLING CODE 8010-01-M
