[Federal Register Volume 63, Number 125 (Tuesday, June 30, 1998)]
[Notices]
[Pages 35625-35629]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17386]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23269; File No. 812-11092]
Variable Insurance Products Fund, et al.
June 24, 1998.
AGENCY: Securities and Exchange Commission (``SEC'' or the
``Commission'').
ACTION: Notice of application for an amended order under Section 6(c)
of the Investment Company Act of 1940 (the ``1940 Act'') for exemptions
from Sections 9(a), 13(a), 15(a) and 15(d) of the 1940 Act, and Rules
6e-2(b)(15) and 6e-3(T)(b)(15) thereunder.
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SUMMARY OF APPLICATION: Applicants seek an amended order to permit
shares of the Variable Insurance Products Fund, Variable Insurance
Products Fund II, and Variable Insurance Products Fund III (together,
the ``Funds''), as well as shares of any future funds for which
Fidelity Management & Research Company (``FMR'') or any affiliate of
FMR serves as the investment manager, advisor, principal underwriter,
or sponsor (``Future Funds'') to be issued to and held by qualified
pension and retirement plans outside the Separate account context
(``Qualified Plans'').
APPLICANTS: Variable Insurance Products Fund (``VIPF''), Variable
Insurance Products Fund II (``VIPF II''), and Variable Insurance
Products Fund III (``VIPF III'').
[[Page 35626]]
FILING DATE: The application was filed on March 24, 1998.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing on this application by writing to the
Secretary of the SEC and serving Applicants with a copy of the request,
in person or by mail. Hearing requests must be received by the
Commission by 5:30 p.m. on July 20, 1998, and accompanied by proof of
service on the Applicants in the form of an affidavit or, for lawyers,
a certificate of service. Hearing requests should state the nature of
the interest, the reason for the request and the issues contested.
Persons may request notification of the date of a hearing by writing to
the Secretary of the SEC.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, 82 Devonshire Street, N7A, Boston, MA 02109.
FOR FURTHER INFORMATION CONTACT: Michael B. Koffler, Attorney, or Mark
C. Amorosi, Branch Chief, Division of Investment Management, Office of
Insurance Products, at (202) 942-0670.
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the Public
Reference Branch of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549 (tel. (202) 942-8090).
Applicants' Representations
1. Each of the Funds is a Massachusetts business trust and is
registered under the 1940 Act as an open-end diversified management
investment company. VIPF and VIPF II presently consist of five
portfolios each, and VIPF III currently consists of three portfolios.
Additional portfolios may be added in the future. The Funds currently
serve as the underlying investment vehicle for separate accounts
supporting variable annuity contracts and variable life insurance
policies issued by various insurance companies.
2. FMR, an investment adviser registered under the Investment
Advisers Act of 1940, serves as the investment adviser for each of the
Funds.
3. The Commission previously granted exemptive relief (the
``Original Orders'') to the extent necessary to permit shares of the
Funds and Future Funds to be sold to and held by separate accounts of
both affiliated and unaffiliated life insurance companies in support of
variable annuity contracts, scheduled premium variable life insurance
contracts and flexible premium variable life insurance contracts
(collectively, ``Variable Contracts''). Separate accounts owning shares
of the Funds and their insurance company depositors are referred to
herein as ``Participating Separate Accounts'' and ``Participating
Insurance Companies,'' respectively.
4. The use of a common management investment company as the
underlying investment medium for both variable annuity and variable
life insurance separate accounts of a single insurance company (or of
two or more affiliated insurance companies) is referred to as ``mixed
funding.'' The use of a common management investment company as the
underlying investment medium for variable annuity and/or variable life
insurance separate accounts of unaffiliated insurance companies is
referred to as ``shared funding.''
5. The Original Orders do not expressly address the sale of shares
of the Funds or any Future Funds to Qualified Plans. Applicants propose
that the Funds and any Future Funds be permitted to offer and sell
shares of the Funds to Qualified Plans.
Applicants' Legal Analysis
1. Applicants request that the Commission issue an amended order
pursuant to Section 6(c) of the 1940 Act, exempting scheduled premium
variable life insurance separate accounts and flexible premium variable
life insurance separate accounts of Participating Insurance Companies
(and, to the extent necessary, any principal underwriter and depositor
of such an account) and the Applicants from Sections 9(a), 13(a), 15(a)
and 15(b) of the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15)
(and any comparable rule) thereunder, respectively, to the extent
necessary to permit shares of the Funds and any Future Funds to be sold
to and held by Qualified Plans.
2. Section 6(c) of the 1940 Act provides in part that the
Commission, by order upon application, may conditionally or
unconditionally exempt any person, security or transaction, or any
class or classes of persons, securities or transactions from any
provisions of the 1940 Act or the rules or regulations thereunder, if
and to the extent that such 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.
3. In connection with the funding of scheduled premium variable
life insurance contracts issued through a separate account registered
under the 1940 Act as a unit investment trust, Rule 6e-2(b)(15)
provides partial exemptions from Sections 9(a), 13(a), 15(a) and 15(b)
of the 1940 Act. These exemptions are available, however, only where
the management investment company underlying the separate account
(``underlying fund'') offers its shares exclusively to variable life
insurance separate accounts of the life insurer, or of any affiliated
life insurance company. Therefore, Rule 6e-2 does not permit either
mixed funding or shared funding because the relief granted by Rule 6e-
2(b)(15) is not available with respect to a scheduled premium variable
life insurance separate account that owns shares of an underlying fund
that also offers its shares to a variable annuity or a flexible premium
variable life insurance separate account of the same company or of any
affiliated life insurance company. Rule 6e-2(b)(15) also does not
permit the sale of shares of an underlying fund to Qualified Plans.
4. In connection with flexible premium variable life insurance
contracts issued through a separate account registered under the 1940
Act as a unit investment trust, Rule 6e-3(T)(b)(15) also provides
partial exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the
1940 Act. These exemptions, however, are available only where the
separate account's underlying fund offers its shares exclusively to
separate accounts of the life insurer, or of any affiliated life
insurance company, offering either scheduled contracts or flexible
contracts, or both; or which also offer their shares to variable
annuity separate accounts of the life insurer or of an affiliated life
insurance company. Therefore, Rule 6e-3(T) permits mixed funding but
does not permit shared funding and also does not permit the sale of
shares of an underlying fund to Qualified Plans.
5. Applicants note that if the Funds were to sell their shares only
to Qualified Plans, exemptive relief under Rule 6e-2 and Rule 6e-3(T)
would not be necessary. The relief provided for under Rule 6e-2(b)(15)
and Rule 6e-3(T)(b)(15) does not relate to qualified pension and
retirement plans or to a registered investment company's ability to
sell its shares to such plans.
6. Applicants state that changes in the federal tax law have
created the opportunity for each Fund to increase its asset base
through the sale of its shares to Qualified Plans. Section 817(h) of
the Internal Revenue Code of 1986, as amended (the ``Code''), imposes
certain diversification standards on the assets underlying variable
Contracts. Treasury Regulations provide that, to meet the
diversification requirements, all of the
[[Page 35627]]
beneficial interests in the underlying investment company must be held
by the segregated asset accounts of one or more life insurance
companies. Notwithstanding this, the Treasury Regulations also contain
an exception to this requirement that permits trustees of a Qualified
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 (Treas. Reg. 1.817-
5(f)(3)(iii)).
7. Applicants state that the promulgation of Rules 6e-2(b)(15) and
6e-3(T)(b)(15) under the 1940 Act preceded the issuance of these
Treasury Regulations. Thus, the sale of shares of the same investment
company to both separate accounts and Qualified Plans was not
contemplated at the time of the adoption of Rules 6e-2(b)(15) and 6e-
3(T)(b)(15).
8. Section 9(a) of the 1940 Act provides that it is unlawful for
any company to serve as investment adviser or principal underwriter of
any registered open-end investment company if an affiliated person of
that company is subject to a disqualification enumerated in Section
9(a)(1) or (2). Rules 6e-2(b)(15) and 6e-3(T)(b)(15) provide exemptions
from Section 9(a) under certain circumstances, subject to the
limitations on mixed and shared funding. These exemptions limit the
application of the eligibility restrictions to affiliated individuals
or companies that directly participate in the management of the
underlying portfolio investment company.
9. Applicants state that the relief granted in Rules 6e-2(b)(15)
and 6e-3(T)(b)(15) from the requirements of Section 9 limits, in
effect, the amount of 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 Section 9.
Applicants submit that those Rules recognize that it is not necessary
for the protection of investors or the purposes fairly intended by the
policy and provisions of the 1940 Act to apply the provisions of
Section 9(a) to many individuals involved in an insurance company
complex, most of whom typically will have no involvement in matters
pertaining to investment companies funding the separate accounts.
10. Applicants maintain that the relief previously granted from
Section 9(a) in the Original Orders will in no way be affected by the
proposed sale of shares of the Funds to Qualified Plans. Those
individuals who participate in the management or administration of the
Funds will remain the same regardless of which Qualified Plans use such
Funds. Applicants maintain that applying the requirements of Section
9(a) because of investment by Qualified Plans would not serve any
regulatory purpose. Moreover, Qualified Plans, unlike separate
accounts, are not themselves investment companies, and therefore are
not subject to Section 9 of the 1940 Act.
11. Applicants state that Rules 6e-2(b)(15)(iii) and 6e-
3(T)(b)(15)(iii) provide exemptions from the pass-through voting
requirement with respect to several significant matters, assuming the
limitations on mixed and shared funding are observed. Rules 6e-
2(b)(15)(iii)(A) and 6e-3(T)(b)(15)(iii)(A) provide that the insurance
company may disregard the voting instructions of its contractowners
with respect to the investments of an underlying fund or any contract
between a fund and its investment adviser, when required to do so by an
insurance regulatory authority (subject to the provisions of paragraphs
(b)(5)(i) and (b)(7)(ii)(A) of the Rules). Rules 6e-2(b)(15)(iii)(B)
and 6e-3(T)(b)(15)(iii)(A)(2) provide that the insurance company may
disregard contractowners' voting instructions if the contractowners
initiate any change in such company's investment policies, principal
underwriter or any investment adviser (provided that disregarding such
voting instructions is reasonable and subject to the other provisions
of paragraphs (b)(5)(ii) and (b)(7)(ii)(B) and (C) of the Rules).
12. Applicants assert that Qualified Plans, which are not
registered as investment companies under the 1940 Act, have no
requirement to pass through the voting rights to plan participants.
Applicable law expressly reserves voting rights to certain specified
persons. Under Section 403(a) of the Employment Retirement Income
Security Act (``ERISA''), shares of a fund sold to a Qualified Plan
must be held by the trustees of the Qualified Plan. Section 403(a) also
provides that the trustee(s) must have exclusive authority and
discretion to manage and control the Qualified Plan with two
exceptions: (1) when the Qualified 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
investment managers pursuant to Section 402(c)(3) of ERISA. Unless one
of the two above exceptions stated in Section 403(a) applies, Qualified
Plan trustees have the exclusive authority and responsibility for
voting proxies. Where a named fudiciary to a Qualified Plan appoints an
investment manager, the investment manager has the responsibility to
vote the shares held unless the right to vote such shares is reserved
to the trustees or the named fiduciary. Where a Qualified Plan does not
provide participants with the right to give voting instructions,
Applicants do not see any potential for material irreconcilable
conflicts of interest between or among variable contract holders and
Qualified Plan investors with respect to voting of the respective
Fund's shares. Accordingly, Applicants state that, unlike the case with
insurance company separate accounts, the issue of the resolution of
material irreconcilable conflicts with respect to voting is not present
with respect to such Qualified Plans since the Qualified Plans are not
entitled to pass through voting privileges.
13. Even if a Qualified Plan were to hold a controlling interest in
one of the Funds, Applicants believe that such control would not
disadvantage other investors in such Fund to any greater extent than is
the case when any institutional shareholder holds a majority of the
voting securities of any open-end management investment company. In
this regard, Applicants submit that investment in a Fund by a Qualified
Plan will not create any of the voting complications occasioned by
mixed funding or share funding. Unlike mixed or shared funding,
Qualified Plan investor voting rights cannot be frustrated by veto
rights of insurers or state regulators.
14. Applicants state that some of the Qualified 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. Where a Qualified Plan provides
participants with the right to give voting instructions, Applicants see
no reason to believe that participants in Qualified Plans generally or
those in a particular Qualified Plan, either as a single group or in
combination with participants in other Qualified Plans, would vote in a
manner that would disadvantage Variable Contract holders. Applicants
maintain that the purchase of shares of the Funds by Qualified Plans
that provide voting right does not present any complications not
otherwise occasioned by mixed or shared funding.
[[Page 35628]]
15. Applicants state that they do not believe that the sale of the
shares of the Funds to Qualified Plans will increase the potential for
material irreconcilable conflicts of interest between or among
different types of investors. In particular, Applicants state that
there is very little potential for such conflicts beyond that which
would otherwise exist between variable annuity and variable life
insurance contractowners. Applicants note that the Treasury Regulations
specifically permit qualified pension or retirement plans and separate
accounts to invest in the same underlying fund. For this reason,
Applicants have concluded that neither the Code, nor the Treasury
Regulations or revenue rulings thereunder, present any inherent
conflicts of interest.
16. Applicants not that while there are differences in the manner
in which distributions from Variable Contracts and Qualified Plans are
taxed, these differences will have no impact on the Funds. When
distributions are to be made, and a Separate Account or Qualified Plan
is unable to net purchase payments to make the distributions, the
Separate Account and Qualified Plan will redeem shares of the Funds at
their respective net asset value in conformity with Rule 22c-1 under
the 1940 Act (without the imposition of any sales charge) to provide
proceeds to meet distribution needs. A Qualified Plan will make
distributions in accordance with the terms of the Qualified Plan.
17. Applicants maintain that it is possible to provide an equitable
means of giving voting rights to Participating Separate Account
contractowners and to Qualified Plans. In connection with any meeting
of shareholders, the Funds will inform each shareholder, including each
Participating Insurance Company and Qualified Plan, of information
necessary for the meeting, including their respective share of
ownership in the relevant Fund. Each Participating Insurance Company
will then solicit voting instructions in accordance with Rules 6e-2 and
6e-3(T), as applicable, and its participation agreement with the
relevant Fund. Shares held by Qualified Plans will be voted in
accordance with applicable law. The voting rights provided to Qualified
Plans with respect to shares of the Funds would be no different from
the voting rights that are provided to Qualified Plans with respect to
shares of funds sold to the general public.
18. Applicants have concluded that even if there should arise
issues with respect to a state insurance commissioner's veto powers
over investment objectives where the interests of contractowners and
the interests of Qualified Plans are in conflict, the issues can be
almost immediately resolved since the trustees of (or participants in)
the Qualified Plans can, on their own, redeem the shares out of the
Funds. Applicants note that state insurance commissioners have been
given the veto power in recognition of the fact that insurance
companies usually cannot simply redeem their separate accounts out of
one fund and invest in another. Generally, time-consuming, complex
transactions must be undertaken to accomplish such redemptions and
transfers. Conversely, the trustees of Qualified Plans or the
participants in participant-directed Qualified Plans can make the
decision quickly and redeem their interest in the Funds and reinvest in
another funding vehicle without the same regulatory impediments faced
by separate accounts or, as is the case with most Qualified Plans, even
hold cash pending suitable investment.
19. Applicants also state that they do not see any greater
potential for material irreconcilable conflicts arising between the
interests of participants under Qualified Plans and contractowners of
Participating Separate Accounts from possible future changes in the
federal tax laws than that which already exist between variable annuity
contractowners and variable life insurance contractowners.
20. Applicants state that the sale of shares of the Funds to
Qualified Plans in addition to separate accounts of Participating
Insurance Companies will result in an increased amount of assets
available for investment by the Funds. This may benefit variable
contractowners by promoting economies of scale, by permitting safety of
investments through greater diversification, and by making the addition
of new portfolios more feasible.
21. Applicants assert that, regardless of the type of shareholder
in each Fund, FMR is or would be contractually and otherwise obligated
to manage each Fund solely and exclusively in accordance with that
Fund's investment objectives, policies and restrictions as well as any
guidelines established by the Board of Directors of such Fund (the
``Board''). FMR works with a pool of money and (except in a few
instances where this may be required in order to comply with state
insurance laws) does not take into account the identity of the
shareholders. Thus, each Fund will be managed in the same manner as any
other mutual fund. Applicants therefore see no significant legal
impediment to permitting the sale of shares of the Funds to Qualified
Plans.
Conditions for Relief
Applicants consent to the following conditions:
1. Any Qualified Plan that executes a fund participation agreement
upon becoming an owner of 10% or more of the assets of a portfolio (or
class thereof) of a Fund (a ``Participant'') shall report any potential
or existing conflicts to the applicable Board. A Participant will be
responsible for assisting the Board in carrying out its
responsibilities under these conditions by providing the Board with all
information reasonably necessary for the Board to consider any issues
raised. If pass-through voting is applicable, this includes, but is not
limited to, an obligation by each Particpant to inform the Board
whenever it has determined to disregard the voting instructions of its
participants. The responsibility to report such conflicts and
information, and to assist the Board will be the contractual
obligations of the Participant under its agreement governing
participation in the Fund and such agreement shall provide that such
responsibilities will be carried out with a view only to the interests
of participants in such Qualified Plan.
2. Each Board will monitor its respective Fund for the existence of
any material irreconcilable conflict among the interests of the
contractowners of all the separate accounts investing in the Fund and
participants in Qualified Plans investing in the Funds. A material
irreconcilable conflict may arise for a variety of reasons, including:
(a) an action by any state insurance regulatory authority; (b) a change
in applicable federal or state insurance, tax or securities laws or
regulations, or a public ruling, private letter ruling, private letter
ruling, no-action or interpretive letter, or any similar action by
insurance, tax or securities regulatory authorities; (c) an
administrative or judicial decision in any relevant proceeding; (d) the
manner in which the investments of the Fund are being managed; (e) a
difference in voting instructions given by variable life insurance
contractowners; (f) a decision by a Participating Insurance Company to
disregard the voting instructions of contractowners; or (g) if
applicable, a decision by a Qualified Plan to disregard the voting
instructions of its participants.
3. If it is determined by a majority of a Board of a Fund, or by a
majority of its disinterested trustees or directors, that a material
irreconcilable conflict exists, the relevant Qualified Plans shall, at
their expense and to the extent reasonably practicable (as determined
[[Page 35629]]
by a majority of the disinterested trustees or directors), take
whatever steps are necessary to remedy or eliminate the material
irreconcilable conflict. Such steps could include: (a) withdrawing the
assets allocable to some or all of the Qualified Plans from the Fund or
any portfolio thereof and reinvesting such assets in a different
investment medium, which may include another portfolio of a Fund; and
(b) establishing a new registered management investment company or
managed separate account.
4. If a material irreconcilable conflict arises because of a
Qualified Plan's decision to disregard its participants' voting
instructions, if applicable, and that decision represents a minority
position or would preclude a majority vote, the Qualified Plan may be
required, at the election of the Fund, to withdraw its investment in
such Fund, and no charge or penalty will be imposed as a result of such
withdrawal. To the extent permitted by applicable law, the
responsibility of taking remedial action in the event of a Board
determination of a material irreconcilable conflict and bearing the
cost of such remedial action, will be a contractual obligation of all
Participants under their agreements governing participation in the
Fund, and these responsibilities will be carried out with a view only
to the interests of participants in such Qualified Plans. For purposes
of this condition, a majority of the disinterested members of the
applicable Board will determine whether or not any proposed action
adequately remedies any material irreconcilable conflict, but in no
event will the relevant Fund, or FMR be required to establish a new
funding medium for any Variable Contract. Further, no Qualified Plan
shall be required by this condition to establish a new funding medium
for any Qualified Plan if: (a) a majority of its participants
materially and adversely affected by the irreconcilable material
conflict vote to decline such offer, or (b) pursuant to governing
Qualified Plan documents and applicable law, the Qualified Plan mades
such decision without a vote of its participants.
5. Any Board's determination of the existence of a material
irreconcilable conflict and its implications will be make known
promptly and in writing to all Qualified Plans.
6. Each Qualified Plan will vote as required by applicable law and
governing Qualified Plan documents.
7. All reports of potential or existing conflicts received by a
Board and all Board actions with regard to determining the existence of
a conflict of interest, notifying Qualified Plans of a conflict, and
determining whether any proposed action adequately remedies a conflict,
will be properly recorded in the minutes of the appropriate Board or
other appropriate records, and such minutes or other records shall be
made available to the Commission upon request.
8. Each Fund will disclose in its prospectus that: (a) shares of
the Fund may be offered to insurance company separate accounts on a
mixed and shared basis and to Qualified Plans; (b) material
irreconcilable conflicts may arise between the interests of various
contractowners participating in the Fund and the interests of Qualified
Plans investing in the Fund; and (c) the Board of such Fund will
monitor events in order to identify the existence of any material
conflict and determine what action, if any, should be taken in response
to such material irreconcilable conflict.
9. No less than annually, the Participants shall submit to each
Board such reports, materials or data as the Board may reasonably
request so that the Board may carry out fully the obligations imposed
upon it by the conditions contained in the application. Such reports,
materials and data shall be submitted more frequently if deemed
appropriate by the Board. The obligations of the Participants to
provide these reports, materials and data shall be a contractual
obligation of all Participants under the agreements governing their
participation in the Funds.
10. None of the Funds will accept a purchase order from a Qualified
Plan if such purchase would make the Qualified Plan shareholder an
owner of 10% or more of the assets of a portfolio (or class thereof) of
such Fund unless such Qualified Plan executes a fund participation
agreement with the relevant Fund that includes the conditions set forth
herein to the extent applicable. A Qualified Plan will execute a
shareholder participation agreement containing an acknowledgment of
this condition at the time of its initial purchase of shares of such
Fund.
Conclusion
For the reasons summarized above, Applicants asserts that the
requested exemptions are appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-17386 Filed 6-29-98; 8:45 am]
BILLING CODE 8010-01-M
