[Federal Register Volume 62, Number 139 (Monday, July 21, 1997)]
[Notices]
[Pages 39034-39040]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19030]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22749: File No. 812-10648]
Hotchkis and Wiley Variable Trust, et al.
July 14, 1997.
AGENCY: The Securities and Exchange Commission (the ``Commission'').
ACTION: Notice of application for an exemption pursuant to the
Investment Company Act of 1940 (the ``1940 Act'').
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APPLICANTS: Hotchkis and Wiley Variable Trust (the ``Trust'') and
Merrill Lynch Asset Management, L.P. (``MLAM'').
RELEVANT 1940 ACT SECTIONS: Order requested pursuant to Section 6(c)
granting exemptions from the provisions of 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 exemptive relief to the extent
necessary to permit shares of the Trust and shares of any other
investment company or portfolio that is designed to fund insurance
products and for which Hotchkis and Wiley (``H&W'') may serve in the
future, as investment adviser, administrator, manager, principal
underwriter, or sponsor (``Future Trusts,'' together with Trust,
``Trusts'') to be sold to and held by variable annuity and variable
life insurance separate accounts of both affiliated and unaffiliated
life insurance companies and by qualified pension and retirement plans
(``Qualified Plans'' or ``Plans'') outside of the separate account
context.
FILING DATE: This application was filed on May 9, 1997.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request hearing by writing to the Secretary of the
Commission and serving Applicants with a copy of the request,
personally or by mail. Hearing requests must be
[[Page 39035]]
received by the Commission by 5:30 p.m. on August 8, 1997, and must be
accompanied by proof of service on Applicants in the form of an
affidavit or, for lawyers, a certificate of service. Hearing requests
should state the nature of the writer's interest, the reason for the
request, and the issues contested. Persons may request notification of
a hearing by writing to the Secretary of the Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Applicants, c/o Lawrence A.
Rogers, Esq., Merrill Lynch Asset Management, L.P., 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
FOR FURTHER INFORMATION CONTACT: Ethan D. Corey, Attorney, or Kevin M.
Kirchoff, Branch Chief, Office of Insurance Products, Division of
Investment Management, at (202) 942-0670.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application; the complete application is available for a fee from the
Public Reference Branch of the Commission.
Applicants' Representations
1. The Trust, a Massachusetts business trust, is registered under
the 1940 Act as an open-end, management investment company. The Trust
currently consists of three separate portfolios (each, a
``Portfolio''), each of which has its own investment objective or
objectives, and policies.
2. H&W, an operating division of MLAM, serves as the investment
adviser to the Trust. MLAM is a limited partnership, the general
partner of which is Princeton Services, Inc. and the limited partner of
which is Merrill Lynch & Co., Inc. MLAM is registered with the
Commission as an investment adviser pursuant to the Investment Advisers
Act of 1940.
3. Upon effectiveness of the Trust's registration statement, shares
of each Portfolio will be offered to insurance companies as investment
options for their separate accounts supporting variable annuity
contracts (``Current Participating Insurance Companies'').
4. Applicants state that, upon the granting of the exemptive relief
requested by the Application, the Trust intends to offer shares
representing interests in each Portfolio, and any future Portfolios
(each, a ``Future Portfolio,'' together with Portfolio ``Portfolios''),
to separate accounts of insurance companies, including both the Current
Participating Insurance Companies and other insurance companies
(``Other Insurance Companies'') to serve as the investment vehicle for
variable annuity contracts and variable life insurance contracts
(collectively, ``Variable Contracts''). The Current Participating
Insurance Companies and Other Insurance Companies which elect to
purchase shares of one or more Portfolios are collectively referred to
herein as ``Participating Insurance Companies.'' The Participating
Insurance Companies will establish their own separate accounts
(``Separate Accounts'') and design their own Variable Contracts.
Applicants also propose that the Portfolios offer and sell their shares
directly to Qualified Plans outside of the separate account context.
Applicants' Legal Analysis
1. Applicants request an order pursuant to Section 6(c) of the 1940
Act exempting them from Sections 9(a), 13(a), 15(a), and 15(b) of the
1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the
extent necessary to permit shares of the Trusts to be offered and sold
to, and held by: (1) both variable annuity and variable life insurance
separate accounts of the same life insurance company or of any
affiliated life insurance company (''mixed funding''); (2) separate
accounts of unaffiliated life insurance companies (including both
variable annuity separate accounts and variable life insurance separate
accounts) (``shared funding''); and (3) trustees of Qualified Plans.
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 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 only if the separate
account is organized as a unit investment trust, all the assets of
which consist of the shares of one or more registered management
investment companies which offer their shares exclusively to variable
life insurance separate accounts of the life insurer or of any
affiliated life insurer. Thus, the exemptions provided by Rule 6e-2 are
not available if a scheduled premium variable life insurance separate
account owns shares of an underlying fund that also offers its shares
to a variable annuity separate account or a flexible premium variable
life insurance separate account of the same insurance company, or to an
unaffiliated life insurance company. In addition, the relief granted by
Rule 6e-2(b)(15) is not available if the scheduled premium variable
life insurance separate account owns shares of an underlying fund that
also offers its shares to Qualified Plans.
3. Rule 6e-3(T)(b)(15) provides similar partial exemptions in
connection with flexible premium variable life insurance contracts
issued through a separate account registered under the 1940 Act as a
unit investment trust. These exemptions, however, are available only if
all the assets of the separate account consist of the shares of one or
more registered management investment companies which offer their
shares ``exclusively to separate accounts of the life insurer, or of
any affiliated life insurance company, offering either scheduled
premium variable life insurance contacts 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.'' Thus, the exemptions provided by
Rule 6e-3(T)(b)(15) are available if the underlying fund is engaged in
mixed funding, but are not available if the fund is engaged in shared
funding or if the fund sells its shares to Qualified Plans.
4. Applicants state that current tax law permits the Trust 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, such as those in each Portfolio. 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 (or any subsequent period) for which the underlying assets are
not, in accordance with regulations issued by the Treasury Department
(the ``Regulations''), adequately diversified. On March 2, 1989, the
Treasury Department issued regulations (Treas. Reg. 1.817-5) which
established specific diversification requirements for investment
portfolios underlying Variable Contracts. The Regulations generally
provide that, in order to meet these diversification requirements, all
of the beneficial interests in the investment company must be held by
the segregated asset accounts of one or more life insurance companies.
Notwithstanding this, the Regulations also contain 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
[[Page 39036]]
through such segregated asset accounts (Treas. Reg. 1.817-
5(f)(3)(iii)).
5. The promulgation of Rules 6e-2 and 6e-3(T) preceded the issuance
of these Regulations. Applicants state that, given the then-current tax
law, the sale of shares of the same investment company to both the
separate accounts of insurers and to Qualified Plans could not have
been envisioned at the time of the adoption of Rules 6e-2(b)(5) and 6e-
3(T)(b)(15).
6. Section 9(a)(3) of the 1940 Act provides, among other things,
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 Sections 9(a) (1) or (2) of the 1940 Act. Rules 6e-
2(b)(15) (i) and (ii) and Rule 6e-3(T)(b)(15) (i) and (ii) under the
1940 Act provide exemptions from Section 9(a) under certain
circumstances, subject to the limitations on mixed and shared funding
imposed by the 1940 Act and the rules thereunder. These exemptions
limit the application of the eligibility restrictions to affiliated
individuals or companies that directly participate in the management of
the underlying management company.
7. Applicants state that the partial relief granted in Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) from the requirements of Section 9 of the
1940 Act, in effect, limits the amount of monitoring necessary to
ensure compliance with Section 9 to that which is appropriate in light
of the policy and purposes of Section 9. Applicants state that those
1940 Act rules recognize that it is not necessary for the protection of
investors or the purposes fairly intended by the policy and provisions
of the 1940 Act to apply the provisions of Section 9(a) to the many
individuals in a large insurance company complex, most of whom will
have no involvement in matters pertaining to investment companies in
that organization. Applicants state that it is unnecessary to apply
Section 9(a) to individuals in various unaffiliated Participating
Insurance Companies (or affiliated companies of Participating Insurance
Companies) that may utilize the Trusts as the funding medium for
Variable Contracts. According to Applicants, there is no regulatory
purpose in extending the Section 9(a) monitoring requirements because
of mixed or shared funding. The Participating Insurance Companies and
Qualified Plans are not expected to play any role in the management or
administration of the Trusts. Moreover, those individuals who
participate in the management or administration of the Trusts will
remain the same regardless of which Separate Accounts or Qualified
Plans use the Trusts. Applicants argue that applying the monitoring
requirements of Section 9(a) because of investment by other insurers'
separate accounts would be unjustified and would not serve any
regulatory purpose.
8. Applicants also state that in the case of Qualified Plans, the
Plans, unlike the Separate Accounts, are not themselves investment
companies, and therefore are not subject to Section 9 of the 1940 Act.
Furthermore, it is not anticipated that a Qualified Plan would be an
affiliated person of any of the Trusts by virtue of its shareholders.
Pass-Through Voting
9. Rule 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) under the 1940 Act
provide exemptions from the pass-through voting requirement with
respect to several significant matters, assuming that the limitations
on mixed and shared funding imposed by the 1940 Act and the rules
promulgated thereunder are observed.
10. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act give
the Participating Insurance Companies the right to disregard voting
instructions of contract owners. Rules 6e-2(b)(15)(iii)(A) and 6e-
3(T)(b)(15)(iii)(A) each provide that the insurance company may
disregard the voting instructions of its contract owners with respect
to the investments of an underlying fund, or any contract between a
fund and its investment adviser, when required to do so by an insurance
regulatory authority (subject to the provisions of paragraphs (b)(5)(i)
and (b)(7)(ii)(A) of Rules 6e-2 and 6e-3(T) under the 1940 Act). Rules
6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2) each provide that the
insurance company may disregard voting instructions of contract owners
if the contract owners initiate any change in the underlying investment
company's investment policies, principal underwriter, or any investment
adviser (subject to the provisions of paragraphs (b)(5)(ii),
(b)(7)(ii)(B), and (b)(7)(ii)(C) of Rules 6e-2 and 6e-3(T) under the
1940 Act). Applicants represent that these rights do not raise any
issues different from those raised by the authority of state insurance
administrators over separate accounts. Under Rules 6e-2(b)(15) and 6e-
3(T)(b)(15), an insurer can disregard voting instructions of contract
owners only with respect to certain specified items. Applicants also
note that the potential for disagreement among Separate Accounts is
limited by the requirements in Rules 6e-2 and 6e-3(T) that a
Participating Insurance Company's disregard of voting instructions be
reasonable and based on specific good faith determinations.
11. Applicants further represent that the offer and sale of
Portfolio shares to Qualified Plans will not have any impact on the
relief requested in this regard. With respect to the Qualified Plans,
which are not registered as investment companies under the 1940 Act,
there is no requirement to pass through voting rights to Plan
participants. Indeed, to the contrary, applicable law expressly
reserves voting rights associated with Plan assets to certain specified
persons. Under Section 403(a) of ERISA, shares of a fund sold to a
Qualified Plan must be held by the trustees of the Plan. Section 403(a)
also provides that the trustee(s) must have exclusive authority and
discretion to manage and control the Plan with two exceptions: (a) When
the Plan expressly provides that the trustee(s) 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 Plan and not contrary to ERISA; and (b) when the authority
to manage, acquire or dispose of assets of the Plan is delegated to one
or more investment managers pursuant to Section 402(c)(3) of ERISA.
Unless one of the above two exceptions stated in Section 403(a)
applies, Plan trustees have the exclusive authority and responsibility
for voting proxies.
12. Where a named fiduciary 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. The Qualified Plans may have
their trustee(s) or other fiduciaries exercise voting rights
attributable to investment securities held by the Qualified Plans in
their discretion. 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.
13. 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 owners and Plan investors with respect to voting of
the respective Portfolio's shares. Accordingly, unlike the case with
insurance company separate accounts, the issue of the resolution of
material irreconcilable conflicts with respect to voting is not present
with
[[Page 39037]]
respect to such Qualified Plans since the Qualified Plans are not
entitled to pass-through voting privileges.
14. Some Qualified Plans, however, may provide participants with
the right to give voting instructions. Applicants note that there is no
reason to believe that participants in Qualified Plans generally or
those in a particular 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 owners. Applicants, therefore,
submit that the purchase of shares of the Portfolios by Qualified Plans
that provide voting rights does not present any complications not
otherwise occasioned by mixed or shared funding.
15. Applicants state that no increased conflicts of interest would
be presented by the granting of the requested relief. Shared funding by
unaffiliated insurance companies does not present any issues that do
not already exist where a single insurance company is licensed to do
business in several or all states. A particular state insurance
regulatory body could require action that is inconsistent with the
requirements of other states in which the insurance company offers its
policies. The fact that different insurers may be domiciled in
different states does not create a significantly different or enlarged
problem.
16. Applicants submit that shared funding by unaffiliated insurers,
in this respect, is no different that the use of the same investment
company as the funding vehicle for affiliated insurers, which Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act permit. Affiliated
insurers may be domiciled in different states and be subject to
differing state law requirements. Affiliation does not reduce the
potential for differences in state regulatory requirements. Applicants
state that the conditions set forth below are designed to safeguard
against, and provide procedures for resolving, any adverse effects that
differences among state regulatory requirements may produce. If a
particular state insurance regulator's decision conflicts with the
majority of other state regulators, then the affected insurer will be
required to withdraw its Separate Account's investment in the
Portfolios. This requirement will be provided for in agreements that
will be entered into by Participating Insurance Companies with respect
to their participation in the relevant Portfolio.
17. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act give
the insurance company the right to disregard the voting instructions of
the contract owners. Applicants assert that this right does not raise
any issues different from those raised by the authority of state
insurance administrators over separate accounts. Under Rules 6e-
2(b)(15) and 6e-3(T)(b)(15), an insurer can disregard contract owner
voting instructions only with respect to certain specified items.
Affiliation does not eliminate the potential, if any exists, for
divergent judgments as to the advisability or legality of a change in
investment policies, principal underwriter, or investment adviser
initiated by contract owners. The potential for disagreement is limited
by the requirements in Rules 6e-2 and 6e-3(T) under the 1940 Act that
the insurance company's disregard of voting instructions be reasonable
and based on specific good-faith determinations.
18. A particular insurer's disregard of voting instructions,
nevertheless, could conflict with the majority of contract owner's
voting instructions. The insurer's action possibly could be different
than the determination of all or some of the other insurers (including
affiliated insurers) that the voting instructions of contract owners
should prevail, and either could preclude a majority vote approving the
change or could represent a minority view. If the insurer's judgment
represents a minority position or would preclude a majority vote, then
the insurer may be required, at the relevant Portfolio's election, to
withdraw its Separate Account's investment in such Trust, and no charge
or penalty will be imposed as a result of such withdrawal. This
requirement will be provided for in the agreements entered into with
respect to participation by the Participating Insurance Companies in
the Portfolios.
19. Applicants submit that there is no reason why the investment
policies of the Portfolios would or should be materially different from
what these policies would or should be if the Portfolios funded only
variable annuity contracts or variable life insurance policies, whether
flexible premium or scheduled premium policies. Each type of insurance
product is designed as a long-term investment program. Each Portfolio
will be managed to attempt to achieve the investment objective or
objectives of such Portfolio, and not to favor or disfavor any
particular Participating Insurance Company or type of insurance
product.
20. Furthermore, Applicants assert that no one investment strategy
can be identified as appropriate to a particular insurance product.
Each pool of variable annuity and variable life insurance contract
owners is composed of individuals of diverse financial status, age,
insurance, and investment goals. A Portfolio supporting even one type
of insurance product must accommodate these diverse factors in order to
attract and retain purchasers. Permitting mixed and shared funding will
provide economic justification for the continuation of the relevant
Portfolio. Mixed and shared funding will broaden the base of contract
owners which will facilitate the establishment of additional portfolios
serving diverse goals.
21. Applicants do not believe that the sale of the shares of the
Portfolios to Qualified Plans will increase the potential for material
irreconcilable conflicts of interest between or among different types
of investors. In particular, Applicants see very little potential for
such conflicts beyond that which would otherwise exist between variable
annuity and variable life insurance contract owners.
22. As noted above, Section 817(h) of the Code imposes certain
diversification standards on the underlying assets of variable annuity
contracts and variable life insurance contracts held in the portfolios
of management investment companies. The Code provides that a variable
contract shall not be treated as an annuity contract or life insurance,
as applicable, for any period (and any subsequent period) for which the
investments are not, in accordance with Regulations, adequately
diversified.
23. Regulations issued under Section 817(h) provide that, in order
to meet the statutory diversification requirements, all of the
beneficial interests in the investment company must be held by the
segregated asset accounts of one or more insurance companies. The
Regulations, however, contain certain exceptions to this requirement,
one of which allows shares in an underlying mutual fund to be held by
the trustees of a qualified pension or retirement plan without
adversely affecting the ability of shares in the underlying fund also
to be held by separate accounts of insurance companies in connection
with their variable contracts. (Treas. Reg. 1.817-5(f)(3)(iii)). Thus,
the Regulations specifically permit ``qualified pension or retirement
plans'' and separate accounts to invest in the same portfolio of an
underlying fund. For this reason, Applicants assert that neither the
Code, nor the Regulations, nor the Revenue Rulings thereunder, present
any inherent conflicts of interest.
24. Applicants note 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 Trusts. When
distributions are to be made, and a Separate Account or a
[[Page 39038]]
Qualified Plan is unable to net purchase payments to make the
distributions, the Separate Account and Qualified Plan will redeem
shares of the relevant Portfolio 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
Participating Insurance Company then will make distributions in
accordance with the terms of its Variable Contract, and a Qualified
Plan then will make distributions in accordance with the terms of the
Plan.
25. Applicants state that it is possible to provide an equitable
means of giving voting rights to contract owners in the Separate
Accounts and to Qualified Plans. In connection with any meeting of
shareholders, the Trusts will inform each shareholder, including each
Separate Account and Qualified Plan, of information necessary for the
meeting, including their respective share of ownership in the relevant
Portfolio. Each Participating Insurance Company then will solicit
voting instructions in accordance with Rules 6e-2 and 6e-3(T), as
applicable, and its participation agreement with the relevant Trust.
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 Trusts 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.
26. Applicants submit that the ability of the Portfolios to sell
their shares directly to Qualified Plans does not create a ``senior
security'' as such term is defined under Section 18(g) of the 1940 Act
``Senior security'' is defined under Section 18(g) of the 1940 Act to
include ``any stock of a class having priority over any other class as
to distribution of assets or payment of dividends.'' As noted above,
regardless of the rights and benefits of participants under Qualified
Plans, or contract owners under Variable Contracts, the Qualified Plans
and the Separate Accounts only have rights with respect to their
respective shares of the Portfolio and any Future Portfolio. They only
can redeem such shares at net asset value. No shareholder of the
Portfolios has any preference over any other shareholder with respect
to distribution of assets or payment of dividends.
27. Applicants assert that there are no conflicts between the
contract owners of the Separate Accounts and participants under the
Qualified Plans with respect to the state insurance commissioners' veto
powers over investment objectives. Applicants note that the basic
premise of corporate democracy and shareholder voting is that not all
shareholders may agree with a particular proposal. Although the
interests and opinions of shareholders may differ, this does not mean
that inherent conflicts of interest exist between or among such
shareholders. 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.
28. 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 Portfolios 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.
29. Applicants also assert that there is no greater potential for
material irreconcilable conflicts arising between the interest of
participants in the Qualified Plans and contract owners of the Separate
Accounts from future changes in the federal tax laws than that which
already exist between variable annuity contract owners and variable
life insurance contract owners.
30. Applicants state that various factors have kept more insurance
companies from offering variable annuity and variable life insurance
contracts than currently offer such contracts. These factors include
the costs of organizing and operating a funding medium, the lack of
expertise with respect to investment management (principally with
respect to stock and money market investments), and the lack of name
recognition by the public of certain insurers as investment experts
with whom the public feels comfortable entrusting their investment
dollars. Use of a Portfolio as a common investment media for variable
contracts would reduce or eliminate these concerns. Mixed and shared
funding also should provide several benefits to variable contract
owners by eliminating a significant portion of the costs of
establishing and administering separate funds. Participating Insurance
Companies will benefit not only from the investment and administrative
expertise of MLAM and its operating division H&W, but also from the
cost efficiencies and investment flexibility afforded by a large pool
of funds. Mixed and shared funding also would permit a greater amount
of assets available for investment by a Portfolio, thereby promoting
economics of scale, by permitting increased safety through greater
diversification, or by making the addition of new Portfolios more
feasible. Applicants assert that making the Portfolios available for
mixed and shared funding will encourage more insurance companies to
offer variable contracts, and this should result in increased
competition with respect to both variable contract design and pricing,
which can be expected to result in more product variation and lower
charges. Applicants also assert that the sale of shares of the
Portfolios to Qualified Plans in addition to the Separate Accounts will
result in an increased amount of assets available for investment by
such Portfolios. This may benefit variable contract owners by promoting
economies of scale, by permitting increased safety of investments
through greater diversification, and by making the addition of new
Portfolios more feasible.
31. Applicants see no significant legal impediment to permitting
mixed and shared funding. Separate accounts organized as unit
investment trusts historically have been employed to accumulate shares
of mutual funds which have not been affiliated with the depositor or
sponsor of the separate account. As noted above, Applicants assert that
mixed and shared funding will have any adverse Federal income tax
consequences.
Applicants' Conditions
Applicants have consented to the following conditions:
1. A majority of the Board of each Trust will consist of persons
who are not ``interested persons'' of such Trust, as defined by Section
2(a)(19) of the 1940 Act, and the rules thereunder, and as modified by
any applicable orders of the Commission, except that if this condition
is not met by reason of the death, disqualification, or bona-fide
resignation of any trustee or trustees, then the operation of this
condition will 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. Each Board will monitor its respective Trust for the existence
of any material irreconcilable conflict between the interests of the
contract owners of all Separate Accounts and participants of all
Qualified Plans investing in such Trust, and determine what action, if
any
[[Page 39039]]
should be taken in response to such conflicts. A material
irreconcilable conflict may arise for a variety of reasons, including:
(a) An action by any state insurance regulatory authority; (b) a change
in applicable Federal or State insurance tax, or securities laws or
regulations, or a public ruling, private letter ruling, no-action or
interpretative letter, or any similar action by insurance tax, or
securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the
investments of such Trust are being managed; (e) a difference in voting
instructions given by variable annuity contract owners, variable life
insurance contract owners, and trustees of the Plans; (f) a decision by
a Participating Insurance Company to disregard the voting instructions
of contract owners; or (g) if applicable, a decision by a Qualified
Plan to disregard the voting instructions of Plan participants.
3. Participating Insurance Companies, H&W, and any Qualified Plan
that executes a participation agreement upon becoming an owner of 10
percent or more of the assets of any Portfolio (collectively, the
``Participants'') will report any potential or existing conflicts to
the relevant Board. Participants will be responsible for assisting the
relevant Board in carrying out the Board's responsibilities under these
conditions by providing the Board with all information reasonably
necessary for the Board to consider any issues raised. This includes,
but is not limited to, an obligation by each Participating Insurance
Company to inform the relevant Board whenever contract owner voting
instructions are disregarded, and, if pass-through voting is
applicable, an obligation by each Qualified Plan to inform the Board
whenever it has determined to disregard Plan participant voting
instructions. The responsibility to report such information and
conflicts, and to assist the Board, will be a contractual obligation of
all Participating Insurance Companies under their participation
agreements with the Trusts, and these responsibilities will be carried
out with a view only to the interests of the contract owners. The
responsibility to report such information and conflicts, and to assist
the Board, also will be contractual obligations of all Qualified Plans
with participation agreements, and such agreements will provide that
these responsibilities will be carried out with a view only to the
interests of Plan participants.
4. If it is determined by a majority of a Board, or a majority of
the disinterested trustees of such Board, that a material
irreconcilable conflict exists, then the relevant Participant will, at
its expense and to the extent reasonably practicable (as determined by
a majority of the disinterested trustees), take whatever steps are
necessary to remedy or eliminate the material irreconcilable conflict,
up to and including: (a) Withdrawing the assets allocable to some or
all of the Separate Accounts from the relevant Portfolio and
reinvesting such assets in a different investment medium, including
another Portfolio, or in the case of insurance company participants
submitting the question as to whether such separation should be
implemented to a vote of all affected contract owners and, as
appropriate, segregating the assets of any appropriate group (i.e.,
annuity contract owners or life insurance contract owners of one or
more Participating Insurance Company) that votes in favor of such
segregation, or offering to the affected contract owners the option of
making such a change; and (b) establishing a new registered management
investment company or managed separate account. If a material
irreconcilable conflict arises because of a decision by a Participating
Insurance Company to disregard contract owner voting instructions, and
that decision represents a minority position or would preclude a
majority vote, then the insurer may be required, at the election of the
relevant Trust, to withdraw such insurer's Separate Account's
investment in such Trust, and no charge or penalty will be imposed as a
result of such withdrawal. If a material irreconcilable conflict arises
because of a Qualified Plan's decision to disregard Plan participant
voting instructions, if applicable, and that decision represents a
minority position or would preclude a majority vote, the Plan may be
required, at the election of the relevant Trust, to withdraw its
investment in such Trust, and no charge or penalty will be imposed as a
result of such withdrawal. The responsibility to take remedial action
in the event of a Board determination of a material irreconcilable
conflict and to bear the cost of such remedial action will be a
contractual obligation of all Participants under their agreements
governing participation in the Trusts, and these responsibilities will
be carried out with a view only to the interests of contract owners and
Plan participants.
For purposes of this Condition 4, a majority of the disinterested
members of a Board will determine whether or not any proposed action
adequately remedies any material irreconcilable conflict, but, in no
event, will any Trust or H&W be required to establish a new funding
medium for any variable contract. No Participating Insurance Company
will 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
vote of a majority of the contract owners materially and adversely
affected by the material irreconcilable conflict. Further, no Qualified
Plan will be required by this Condition 4 to establish a new funding
medium for the Plan if: (a) A majority of the Plan participants
materially and adversely affected by the irreconcilable material
conflict vote to decline such offer, or (b) pursuant to documents
governing the Qualified Plan, the Plan makes such decision without a
Plan participant vote.
5. A Board's determination of the existence of a material
irreconciliable conflict and its implications will be made known in
writing promptly to all Participants.
6. Participating Insurance Companies will provide pass-through
voting privileges to all contract owners as required by the 1940
Act.Accordingly, each such Participant, where applicable, will vote
shares of the applicable Portfolio held in its Separate Accounts in a
manner consistent with voting instructions timely received from
contract owners. Participating Insurance Companies will be responsible
for assuring that each Separate Account investing in a Portfolio
calculates voting privileges in a manner consistent with other
Participants. The obligation to calculate voting privileges as provided
in the application will be a contractual obligation of all
Participating Insurance Companies under their agreement with Trust
governing participation in a Portfolio. Each Participating Insurance
Company will vote shares for which it has no 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. Each
Qualified Plan will vote as required by applicable law and governing
Plan documents.
7. Each Trust will comply with all provisions of the 1940 Act
requiring voting by shareholders, and, in particular, each Trust will
either provide for annual meetings (except to the extent that the
Commission may interpret Section 16 of the 1940 Act not to require such
meetings) or comply with Section 16(c) of the 1940 Act, as well as with
Section 16(a) of the 1940 Act and, if and when applicable, Section
16(b) of the 1940 Act. Further, each Trust will act in accordance with
the Commission's interpretation of the
[[Page 39040]]
requirements of Section 16(a) with respect to periodic elections of
trustees and with whatever rules the Commission may promulgate with
respect thereto.
8. The Trusts will notify all Participants that separate account
prospectus disclosure regarding potential risks of mixed and shared
funding may be appropriate. Each Trust will disclose in its prospectus
that: (a) Shares of such Trust may be offered to insurance company
separate accounts of both variable annuity and variable life insurance
contracts and to Qualified Plans; (b) due to differences in tax
treatment and other considerations, the interests of various contract
owners participating in such Trust and the interests of Qualified Plans
investing in such Trust may conflict; and (c) the Trust's Board of
Trustees will monitor events in order to identify the existence of any
material irreconcilable conflicts and to determine what action, if any,
should be taken in response to any such conflict.
9. If and to the extent that Rule 6e-2 and Rule 6e-3(T) under the
1940 Act are amended, or proposed Rule 6e-3 under the 1940 Act is
adopted, to provide exemptive relief from any provision of the 1940
Act, or the rules promulgated thereunder, with respect to mixed or
shared funding, on terms and conditions materially different from those
terms and conditions associated with the exemptive relief requested in
the application, then the Trusts and/or Participating Insurance
Companies, as appropriate, shall take such steps as may be necessary to
comply with Rules 6e-2 and 6e-3(T), or Rule 6e-3, as such rules are
applicable.
10. The Participants, at least annually, will submit to the Board
of each Trust such reports, materials, or data as a Board reasonably
may request so that the trustees of the Board may fully carry out the
obligations imposed upon a Board by the conditions contained in the
application, and said reports, materials, and data will be submitted
more frequently if deemed appropriate by a Board. The obligations of
the Participants to provide these reports, materials, and data to a
Board, when it so reasonably requests, will be a contractual obligation
of all Participants under their agreements governing participation in
the Portfolios.
11. All reports of potential or existing conflicts received by a
Board, and all Board action with regard to determining the existence of
a conflict, notifying Participants of a conflict, and determining
whether any proposed action adequately remedies a conflict, will be
properly recorded in the minutes of the relevant Board or other
appropriate records, and such minutes or other records shall be made
available to the Commission upon request.
12. The Trusts will not accept a purchase order from a Qualified
Plan if such purchase would make the Plan shareholder an owner of 10
percent or more of the assets of such Portfolio unless such Plan
executes an agreement with the relevant Trust governing participation
in such Portfolio. A Plan will execute an application containing an
acknowledgement of this condition at the time of its initial purchase
of shares of any Portfolio.
Conclusion
For the reasons summarized above, Applicants assert that the
requested exemptions are appropriate in the pubic 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. 97-19030 Filed 7-18-97; 8:45 am]
BILLING CODE 8010-01-M
