[Federal Register Volume 61, Number 146 (Monday, July 29, 1996)]
[Notices]
[Pages 39484-39490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19118]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22082; File No. 812-10058]
BT Insurance Funds Trust, et al.
July 19, 1996.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for an Order under the Investment Company
Act of 1940 (``1940 Act'').
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APPLICANTS: BT Insurance Funds Trust (``Trust''), Bankers Trust Global
Investment Management, a unit of Bankers Trust Company (``Investment
Management''), and certain other life insurance companies and their
separate accounts investing now or in the future in the Trust.
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 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 any other investment
company that is offered to fund variable insurance products and for
which Investment Management, or any of its affiliates, may serve as
investment adviser,
[[Page 39485]]
administrator, manager, principal underwriter, or sponsor
(collectively, ``Investment Companies'') to be sold to and held by the
separate accounts (``Separate Accounts'') funding variable annuity and
variable life insurance contracts (``Variable Contracts'') issued by
affiliated or unaffiliated life insurance companies (``Participating
Insurance Companies'') or to future qualified pension and retirement
plans outside of the separate account context (``Qualified Plans'' or
``Plans'').
FILING DATE: The application was filed on March 25, 1996.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the SEC's Secretary and
serving Applicants with a copy of the request, personally or by mail.
Hearing requests should be received by the SEC by 5:30 p.m. on August
13, 1996, and should be accompanied by proof of service on Applicants
in the form of an affidavit or, for lawyers, a certificate of service.
Hearing requests should state the nature of the requester'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
SEC.
ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C.
20549. Applicants: Burton M. Leibert, Esq. or Rosalind A. Fahey, Esq.,
Wilkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New
York, New York 10022.
FOR FURTHER INFORMATION CONTACT: Pamela K. Ellis, Senior Counsel, or
Wendy Finck Friedlander, Deputy Chief, both at (202) 942-0670, Office
of Insurance Products (Division of Investment Management).
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the SEC's Public
Reference Branch.
Applicants' Representations
1. The Trust is a Massachusetts business trust registered under the
1940 Act as an open-end management investment company. The Trust
currently consists of two series, each representing an interest in a
separate investment portfolio (``Portfolios''). The Trust may establish
additional series of shares at any time.
2. Investment Management serves as investment adviser to each
Portfolio of the Trust. Investment Management is a New York banking
corporation and a wholly owned subsidiary of Bankers Trust New York
Corporation (``Bankers Trust'').
3. 440 Financial Distributors, Inc., a broker-dealer registered
under the Securities Exchange Act of 1934 and a company not affiliated
with Bankers Trust, is the distributor of the Portfolios' shares.
4. Applicants propose that the Investment Companies serve as
investment vehicles for various types of Variable Contracts. Investment
Companies' shares will be offered to Separate Accounts of Participating
Insurance Companies which enter into participation agreements with the
Trust. These Separate Accounts may be registered with the Commission
under the 1940 Act or exempt from registration under Section 3(c)(1) of
the 1940 Act.
5. Applicants state that each Participating Insurance Company will
have the legal obligation of satisfying all applicable requirements
under state law and the federal securities laws in connection with any
Variable Contract issued by such company. Applicants further state that
the role of the Trust under this arrangement will consist of offering
its shares to the Separate Accounts and fulfilling any conditions the
Commission may impose upon granting the order requested in this
application.
6. In addition, Applicants state that the Trust desires to avail
itself of the opportunity to increase its assets base through the sale
of its shares to Qualified Plans, consistent with applicable tax law.
The Qualified Plans may choose any of the Investment Companies as the
sole investment option under the Qualified Plan or as one of several
investment options. Qualified Plans' participants may or may not be
given an investment choice among available alternatives depending on
the Qualified Plan itself. Shares of any Investment Company sold to
Qualified Plans would be held by the trustee(s) of such Qualified Plans
as mandated by Section 403(a) of the Employee Retirement Income
Security Act (``ERISA''). Investment Management may act as investment
adviser to any of the Qualified Plans that will purchase shares of the
Trust. Applicants note that pass-through voting is not required to be
provided to participants in Qualified Plans under ERISA.
Applicants' Legal Analysis
1. Applicants request that the Commission issue an order under
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) to the extent necessary to permit mixed and shared funding,
as defined below in Paragraphs 4 and 5.
2. Section 6(c) authorizes the Commission to grant exemptions from
the provisions of the 1940 Act, and rules thereunder, if and to the
extent that an exemption is necessary or appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940 Act.
3. Rules 6e-2(b)(15) provides partial exemptive relief from
Sections 9(a), 13(a), 15(a), and 15(b) of the 1940 Act to separate
accounts registered under the 1940 Act as unit investment trusts to the
extent necessary to offer and sell scheduled premium variable life
insurance contracts. The relief provided by the ruled also extends to a
separate account's investment adviser, principal underwriter, and
sponsor or depositor.
4. The exemptions granted by Rule 6e-2(b)(15) are available only to
a management investment company underlying a separate account
(``Underlying Fund'') that offers its shares exclusively to variable
life insurance separate accounts of a life insurer, or of any other
affiliated life insurance company, issuing scheduled premium variable
life insurance contracts. The relief granted by Rule 6e-2(b)(15) is not
available to a separate account issuing scheduled premium variable life
insurance contracts if the Underlying Fund also offers its shares to a
separate account issuing variable annuity or flexible premium variable
life insurance contracts. The use of a common Underlying Fund as an
investment vehicle for both variable annuity contracts and scheduled or
flexible premium variable life insurance contracts is referred to
herein as ``mixed funding.''
5. Additionally, the relief granted by Rule 6e-2(b)(15) is not
available to separate accounts issuing scheduled premium variable life
insurance contracts if the Underlying Fund also offers its shares to
unaffiliated life insurance company separate accounts funding variable
contracts. The use of a common fund as an underlying investment vehicle
for separate accounts of unaffiliated insurance companies is referred
to herein as ``shared funding.'' Moreover, because the relief granted
by Rule 6e-2(b)(15) is available only where shares of the Underlying
Fund are offered exclusively to separate accounts of insurance
companies, additional exemptive relief is necessary if the shares of
the Trust also are to be sold to Qualified Plans.
6. Applicants, therefore, request an order of the Commission
exempting scheduled premium variable life
[[Page 39486]]
insurance separate accounts of Participating Insurance Companies (and,
to the extent necessary, any principal underwriter and depositor of
such account) and the Applicants from Sections 9(a), 13(a), 15(a), and
15(b) of the 1940 Act, and Rule 6e-2(b) thereunder, to the extent
necessary to permit shares of the Investment Companies to be offered
and sold to, and held by: (1) Variable annuity separate accounts and
variable life insurance separate accounts of the same life insurance
company or of affiliated life insurance companies (i.e., mixed
funding); (2) variable life insurance separate accounts of one life
insurance company and separate accounts funding variable contracts of
unaffiliated life insurance companies (i.e., shared funding); (3)
Qualified Plans.
7. Regarding the funding of flexible premium variable life
insurance contracts issued through a separate account, Rule 6e-
3(T)(b)(15) provides partial exemptions from Sections 9(a), 13(a),
15(a), and 15(b) of the 1940 Act. This exemptive relief extends to a
separate account's investment adviser, principal underwriter, and
sponsor or depositor. These exemptions are available only where the
Underlying Fund of the separate account 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 * * *.'' Rule 6e-3(T), therefore, permits mixed
funding with respect to a flexible premium variable life insurance
separate account, subject to certain conditions. However, Rule 6e-3(T)
does not permit shared funding because the relief granted by Rule 6e-
3(T)(b)(15) is not available to a flexible premium variable life
insurance separate account that owns shares of a management company
that also offers its shares to separate accounts of unaffiliated life
insurance companies. Moreover, because the relief afforded by Rule 6e-
3(T) is available only where shares of the Underlying Fund are offered
exclusively to separate accounts of insurance companies, additional
relief is necessary if shares of the Trust also are to be sold to
Qualified Plans.
8. Accordingly, Applicants request an order of the Commission
exempting flexible premium life insurance separate accounts of
Participating Insurance Companies (and, to the extent necessary, any
principal underwriter and depositor of such accounts) and the
Applicants from Sections 9(a), 13(a), 15(a), and 15(b) thereunder, to
permit shares of the Investment Companies to be offered and sold to,
and held by: (1) Separate accounts funding variable contracts of
affiliated and unaffiliated life insurance companies; and (2) Qualified
Plans.
9. Applicants state that changes in the tax law have created the
opportunity for the Portfolios to increase their asset base through the
sale of Portfolio shares to Qualified Plans. Applicants state that
Section 817(h) of the Internal Revenue Code of 1986, as amended
(``Code''), imposes certain diversification standards on the assets
underlying variable contracts, such as those in each Portfolio of the
Trust. The Code provides that a variable contract shall not be treated
as an annuity contract or life insurance contract for any period for
which the underlying assets are not, in accordance with regulations
prescribed by the Treasury Department, adequately diversified. These
diversification requirements are applied by taking into account the
assets of the Underlying Fund if all the beneficial interests in the
Underlying Fund are held by certain designated persons. On March 2,
1989, the Treasury Department issued regulations that adopted
diversification requirements for Underlying Funds. Treas. Reg.
Sec. 1.817-5 (1989). These regulations provide that, in order to meet
the diversification requirements, all of the beneficial interests in
the investment company must be held by the segregated asset accounts of
one or more insurance companies. The regulations do, however, contain
certain exceptions to this requirement, one of which permits trustee(s)
of a qualified pension or retirement plan to hold shares of an
investment company, the shares of which also are held by separate
accounts of insurance companies, without adversely affecting the status
of the investment company as an adequately diversified underlying
investment vehicle for variable contracts issued through such
segregated asset accounts. Treas. Reg. Sec. 1.817-5(f)(3)(iii).
10. Applicants state that the promulgation of Rules 6e-2(b)(15) and
6e-3(T)(b)(15) preceded the issuance of the Treasury Department's
regulations which made it possible for shares of an investment company
to be held by the trustee(s) of qualified plans without adversely
affecting the ability of shares in the same investment company also to
be held by separate accounts of insurance companies in connection with
their variable contracts. Thus, the sale of shares of the same
investment company to separate accounts and qualified plans could not
have been envisioned at the time of the adoption of Rules 6e-2(b)(15)
and 6e-3(T)(b)(15) given the then current tax law.
11. Moreover, Applicants assert that if the Trust were to sell its
shares only to Qualified Plans, no exemptive relief would be necessary.
Applicants state that none of the relief provided for in Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) relates to qualified pension or retirement
plans or to an Underlying Fund's ability to sell its shares to such
plans. It is only because the Separate Accounts investing in the Trust
are themselves investment companies which are relying upon Rules 6e-2
and 6e-3(T) and which propose to have the relief continue in place that
Applicants are applying for the requested relief.
12. Section 9(a) of the 1940 Act makes it unlawful for any company
to serve as an investment adviser to, or principal underwriter of, any
registered open-ended investment company if an affiliated person of
that company is subject to any disqualification specified in Sections
9(a)(1) or 9(a)(2). Subparagraphs (b)(15) (i) and (ii) of Rules 6e-2
and 6e-3(T) provide exemptions from Section 9(a) under certain
circumstances, subject to limitations on mixed and shared funding. The
relief provided by subparagraphs (b)(15)(i) of Rules 6e-2 and 6e-3(T)
permits a person disqualified under Section 9(a) to serve as an
officer, director, or employee of the life insurer, or any of its
affiliates, so long as that person does not participate directly in the
management or administration of the Underlying Fund. The relief
provided by subparagraph (b)(15)(ii) of Rules 6e-2 and 6e-3(T) permits
the life insurer to serve as the Underlying Fund's investment adviser
or principal underwriter, provided that none of the insurer's personnel
who are ineligible pursuant to Section 9(a) are participating in the
management or administration of the fund.
13. Applicants state that the partial relief granted under
subparagraphs (b)(15) of Rules 6e-2 and 6e-3(T) from the requirements
of Section 9(a), in effect, limits the monitoring of an insurer's
personnel that would otherwise be necessary to ensure compliance with
Section 9 to that which is appropriate in light of the policy and
purposes of Section 9. Applicants submit that Rules 6e-2 and 6e-3(T)
recognize that it is not necessary for the protection of investors or
for the purposes of the 1940 Act to apply the provisions of Section
9(a) to the many individuals in an insurance company complex, most of
whom typically will have no involvement in matters pertaining to an
investment company in
[[Page 39487]]
that organization. The Participating Insurance Companies are not
expected to play any role in the management or administration of the
Investment Companies. Applicants, therefore, submit that there is no
regulatory reason to apply the provisions of Section 9(a) to the many
individuals in various Participating Insurance Companies.
14. Subparagraphs (b)(15)(iii) of Rules 6e-2 and 6e-3(T) provide
partial exemptions from Sections 13(a), 15(a), and 15(b) of the 1940
Act to the extent that those sections have been deemed by the
Commission to require ``pass-through'' voting with respect to
management investment company shares held by a separate account, to
permit the insurance company to disregard the voting instructions of
its variable contract owners in certain limited circumstances.
15. Voting instructions may be disregarded under subparagraphs
(b)(15)(iii)(A) of Rules 6e-2 and 6e-3(T) if they would cause the
Underlying Fund to make, or refrain from making, certain investments
which would result in changes to the subclassification or investment
objectives of the Underlying Fund, or to approve or disapprove any
contract between a fund and its investment advisers, 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 each Rule.
16. Under subparagraph (b)(15)(iii)(B) of Rule 6e-2 and
subparagraph (b)(15)(iii)(A)(2) of Rule 6e-3(T), an insurance company
may disregard variable contract owners' voting instructions if the
variable contract owners initiate any change in the Underlying Fund's
investment objectives, principal underwriter, or 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 each Rule.
17. Applicants assert that the proposed sale of shares of the Trust
to Qualified Plans does not impact of the relief requested. As
previously noted, Rules 6e-2(b)(15)(iii) and 6e-3(T)(15)(iii) permit an
insurer to disregard variable contract owner voting instructions in
certain circumstances. Offering shares of the Trust to Qualified Plans
would not affect the circumstances and conditions under which any veto
right would be exercised by a Participating Insurance Company.
Furthermore, as stated above, shares of the Trust would be sold only to
Qualified Plans for which such shares would be held by the trustee(s)
of such plans as mandated by Section 403(a) of ERISA. Section 403(a)
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
trustee(s) are subject to the direction of an named fiduciary who is
not a trustee, in which case the trustee(s) are subject to proper
directions of such fiduciary made in accordance with the terms of the
qualified plan and not contrary to ERISA; and (2) when the authority to
manage, acquire, a dispose of assets of the Qualified Plans is
delegated to one or more investment managers under Section 402(c)(3) of
ERISA. Unless one of the two exceptions stated in Section 403(a)
applies, the Qualified Plans' trustee(s) have the exclusive authority
and responsibility for voting proxies. When a named fiduciary appoints
an investment manager, the investment manager has the responsibility to
vote the shares held unless the right to vote such shares is reserved
to the trustee(s) or the named fiduciary. In any event, Applicants
assert that pass-through voting to the participants in such Qualified
Plans is not required. Accordingly, Applicants note 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 Qualified Plans.
18. Applicants state that no increased conflicts of interest would
be present by the granting of the requested relief. Applicants submit
that 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. In this
regard, Applicants assert that a particular state insurance regulatory
body could require action that is inconsistent with the requirements of
other states in which the insurance company offers its variable
contracts. Accordingly, Applicants submit that the fact that different
insurers may be domiciled in different states does not create a
significantly different or enlarged problem.
19. Applicants state further that, under paragraph (b)(15) of Rules
6e-2 and 6e-3(T), the right of an insurance company to disregard
Variable Contract owners' voting instructions does not raise any issues
different from those raised by the authority of state insurance
administrators over separate accounts, and that affiliation does not
eliminate the potential, if any, for divergent judgments as to the
advisability or legality of a change in investment policies, principal
underwriter, or investment adviser. Applicants state that the potential
for disagreement is limited by the requirements in Rules 6e-2 and 6e-
3(T) that the insurance company's disregard of voting instructions be
reasonable and based on specific good faith determinations. If a
participating Insurance Company's decision to disregard Variable
Contract owners' instructions represents a minority position or would
preclude a majority vote approving a particular change, however, such
Participating Insurance Company may be required, at the election of the
relevant Investment Company, to withdraw its Separate Account's
investment in such Investment Company. No charge or penalty will be
imposed as result of such withdrawal.
20. Applicants state that there is no reason why the investment
policies of the Investment Companies with mixed funding would or should
be materially different from what they would or should be if the
Investment Companies funded only variable annuity contracts or variable
life insurance policies. Each type of insurance product is designed as
a long-term investment program. Moreover, Applicants assert that the
Investment Companies will continue to be managed in an attempt to
achieve their investment objectives, and not to favor any particular
Participating Insurance Company or type of insurance product.
Applicants, therefore, argue that there is no reason to believe that
conflicts of interest would result from mixed funding.
21. In addition, Applicants assert that the sale of shares of the
Trust to Qualified Plans will not increase the potential for material
irreconcilable conflicts of interest between or among different types
of investors. Section 817 is the only section in the Code where
separate accounts are discussed. Section 817(h) imposes certain
diversification standards on Underlying Funds of variable contracts.
Treasury Regulation 1.817-5(f)(3)(iii) specifically permits ``qualified
pension or retirement plans'' and separate accounts to share the same
underlying management investment company. Applicants, therefore, have
concluded that neither the Code, nor the Treasury regulations or
revenue rulings thereunder, present any inherent conflicts of interest
between or among qualified pension or retirement plan participants and
variable contract owners if qualified pension and retirement plans and
variable annuity and variable life separate accounts invest in the same
management investment company.
[[Page 39488]]
22. Applicants assert that while there are differences in the
manner in which distributions are taxed for variable annuity and
variable life insurance contracts and Qualified Plans, these tax
consequences do not raise any conflicts of interest. When distributions
are made, and the Separate Account or the Qualified Plan is unable to
net purchase payments to make the distributions, the Separate Account
or the Qualified Plan will redeem shares of the Investment Companies at
their respective net asset value. The Qualified Plan then will make
distributions in accordance with the terms of the Plan, and a
Participating Insurance Company will surrender values from the Separate
Account into the general account to make distributions in accordance
with the terms of the variable contract.
23. With respect to voting rights, Applicants state that it is
possible to provide an equitable means of giving rights to Variable
Contract owners and participants in the Qualified Plans. In connection
with any meeting of shareholders, the Trust will inform each
shareholder, including each Separate Account and Qualified Plan, of the
information necessary for the meeting, including their respective share
of ownership in the Investment Companies. A Participating Insurance
Company will solicit voting instructions in accordance with the ``pass-
through'' voting requirement. Qualified Plans and Separate Accounts
each will have the opportunity to exercise voting rights with respect
to their shares in the investment Companies, although only the Separate
Accounts are required to pass through their vote to Contract owners.
The voting rights provided to Qualified Plans with respect to shares of
the Trust would be no different from the voting rights that are
provided to Qualified Plans with respect to shares of mutual funds sold
to the general public.
24. Applicants argue that the ability of the Investment Companies
to sell their shares directly to Qualified Plans does not create a
``senior security'' as defined by Section 18(g) of the 1940 Act. As
noted above, regardless of the rights and benefits of participants
under Qualified Plans, or variable Contract owners under Variable
Contracts, the Qualified Plans and the Separate Accounts have rights
only with respect to their respective shares of the Investment
Companies. They only can redeem such shares at their net asset value.
No shareholder of the Investment Companies has any preference over any
other shareholder with respect to distribution of assets of payment of
dividends.
25. Applicants have determined that of conflicts of interest exist
between the Variable Contract owners of the Separate Accounts and
Qualified Plans participants with respect to the state insurance
commissioners' veto powers over investment objectives. The basic
premise of corporate democracy and shareholder voting is that not all
shareholders may agree with a particular proposal. The state insurance
commissioners have been given the veto power in recognition of the fact
the insurance companies usually cannot simply redeem their separate
accounts out of one fund and invest in another fund. Generally, time-
consuming complex transactions must be undertaken to accomplish such
redemptions and transfers. Conversely, the trustee(s) of Qualified
Plans or the participants in participant directed Qualified Plans could
make the decision quickly and could implement the redemption of their
shares from the Investment Companies and reinvest in another funding
vehicle without the same regulatory impediments or, as is the case with
most Qualified Plans, even hold cash pending suitable investment.
26. Applicants state that they do not see any greater potential for
material irreconcilable conflicts arising between the interests of
participants under the Qualified Plans and Variable Contract owners of
the Separate Accounts from possible future changes in the federal tax
laws than that which already exists between Variable Contract owners.
27. Applicants assert that the requested relief is appropriate and
in the public interest because the relief will promote competitiveness
in the variable life insurance market. Various factors have limited the
number of insurance companies that offer variable contracts. These
factors include the costs of organizing and operating a funding medium,
the lack of expertise with respect to investment management, and the
lack of name recognition by the public of certain insurers as
investment experts to whom the public feels comfortable entrusting
their investment dollars. Applicants argue that use of Investment
Companies as common investment vehicles of Variable Contracts helps to
alleviate these concerns because Participating Insurance Companies
benefit not only from the investment and administrative expertise of
the Trust's investment adviser, but also from the cost efficiencies and
investment flexibility afforded by a large pool of funds. Making the
Portfolios available for mixed and shared funding may encourage more
insurance companies to offer variable contracts and, accordingly, could
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. Mixed and shared funding also would
benefit variable contract owners by eliminating a significant portion
of the costs of establishing and administering separate mutual funds.
Furthermore, Applicants assert that the sale of shares of the
Investment Companies to Qualified Plans, in addition to Separate
Accounts of Participating Insurance Companies, would result in an
increased amount of assets available for investment by the Investment
Companies. 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.
28. Applicants assert that there is no significant legal impediment
to permitting mixed and shared funding. Separate accounts organized as
unit investment trusts historically have been employed to accumulated
shares of mutual funds which have not been affiliated with the
depositor or sponsor of the separate account, and Applicants believe
that mixed and shared funding will have no adverse federal income tax
consequences.
Applicants' Conditions
The Applicants have consented to the following conditions:
1. A majority of the board of the Trust (``Board'') shall consist
of persons who are not ``interested persons'' of the Trust as defined
by Section 2(a)(19) of the 1940 Act and rules thereunder, and as
modified by any applicable orders of the Commission, except that, if
this condition is not met by reason of death, disqualification, or bona
fide resignation of any trustee or director, then the operation of this
condition shall be suspended: (i) For a period of 45 days, if the
vacancy or vacancies may be filled by the Board; (ii) for a period of
60 days, if a vote of shareholders is required to fill the vacancy or
vacancies; or (iii) for such longer period as the Commission may
prescribed by order upon application.
2. The Board will monitor the Investment Companies for the
existence of any material irreconcilable conflict between the contract
holders of all Separate Accounts and of participants of Qualified Plans
investing in the respective Investment Companies, and determined what
action, if any, should be taken in response to such conflicts. A
material irreconcilable conflict may
[[Page 39489]]
arise for a variety of reasons, including: (a) State insurance
regulatory authority action; (b) a change in applicable federal or
state insurance, tax, or securities laws or regulations, or a public
ruling, private letter ruling, 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 Investment Companies are
being managed; (e) a difference among voting instructions given by
Variable Contract owners; or (f) a decision by a Participating
Insurance Company to disregard Variable Contract owners' voting
instructions.
3. Participating Insurance Companies and Investment Management (or
any other investment manager of the Trust) and any Qualified Plan that
executes a fund participation agreement upon becoming an owner of 10%
or more of the assets of the Investment Company (``Participants'') will
report any potential or existing conflicts, of which they become aware,
to the Board. Participants will be obligated to assist the Board in
carrying out is responsibilities under these conditions by providing
the Board with all information reasonably necessary for it to consider
any issues raised. This responsibility includes, but is not limited to,
an obligation by each insurance company Participant to inform the board
whenever Variable Contract owners' voting instructions are disregarded.
The responsibility to report such information and conflicts and to
assist the Board will be a contractual obligation of all Participants
investing in an Investment Company under their participation
agreements, and those participation agreements shall provide that, in
the case of insurance company Participants, such responsibilities will
be carried out with a view only to the interests of the Variable
Contract owners.
4. If a majority of the Board, or a majority of its disinterested
members (``Independent Trustees''), determines that a material
irreconcilable conflict exists, the relevant Participant shall, at its
expense and to the extent reasonably practicable (as determined by a
majority of Independent Trustees), take whatever steps are necessary to
remedy or eliminate the irreconcilable material conflict, including:
(a) Withdrawing the assets allocable to some or all of the Separate
Accounts from the Portfolios and reinvesting those assets in a
different investment medium, which may include another portfolio of the
relevant Investment Company, or, in the case of insurance company
Participants, submitting the question whether such segregation should
be implemented to a vote of all affected contract owners and, as
appropriate, segregating the assets of any appropriate group (i.e.,
annuity contract owners, life insurance contract owners, or variable
contract owners of one or more Participant) 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 an insurance company
Participant's decision to disregard contract owners' voting
instructions, and that decision represents a minority position or would
preclude a majority vote, the Participant may be required, at the
election of the relevant Investment Company, to withdraw its separate
account's investment therein. No charge or penalty will be imposed as a
result of such withdrawal.
The responsibility to take remedial action in the event of a
determination by the Board that an irreconcilable material conflict
exists and to bear the cost of such remedial action shall be a
contractual obligation of all Participants under their participation
agreements governing participation in the Investment Companies and
these responsibilities, in the case of insurance company Participants,
will be carried out with a view only to the interests of the contract
owners. A majority of Independent Trustees shall determine whether or
not any proposed action adequately remedies any irreconcilable material
conflict, but in no event will the relevant Investment Company or
Investment Management (or any other investment adviser of the
Investment Companies) be required to establish a new funding medium for
any variable contract. No insurance company Participant shall be
required by this condition to establish a new funding medium for any
Variable Contract if an offer to do so has been declined by a vote of
majority of variable contract owners materially affected by the
irreconcilable material conflict.
5. The determination by the Board of the existence of an
irreconcilable material conflict and its implications shall be made
known promptly in writing to all Participants.
6. Insurance company Participants will provide pass-through voting
privileges to all contract owners so long as the Commission continues
to interpret the 1940 Act as requiring pass-through voting privileges
for variable contract owners. Accordingly, such Participants, where
appropriate, will vote shares of a Portfolio held in their Separate
Accounts in a manner consistent with timely voting instructions
received from contract owners. Insurance company Participants also will
vote shares of a Portfolio held in its Separate Accounts for which no
timely voting instructions from Variable Contract owners are received,
as well as shares it owns, in the same proportion as those shares for
which voting instructions are received. Insurance company Participants
shall be responsible for assuring that each of their Separate Accounts
investing in an Investment Company calculates voting privileges in a
manner consistent with other Participants. The obligation to calculate
voting privileges in a manner consistent with all other Separate
Accounts investing in an Investment Company shall be a contractual
obligation of all insurance company Participants under their
participation agreements.
7. Each Investment Company will notify all Participants that
prospectus disclosure regarding potential risks of mixed and shared
funding may be appropriate. Each Investment Company shall disclose in
its Prospectus that: (a) Its shares of the Investment Company may be
offered to insurance company separate accounts of both annuity and life
insurance variable contracts and to qualified plans; (b) because of
differences of tax treatment or other considerations, the interests of
various contract owners participating in the Investment Company and the
interests of Qualified Plan investing in the Investment Companies may
conflict; and (c) the Board will monitor for any material conflicts and
determine what action, if any, should be taken.
8. All reports received by the Board regarding potential or
existing conflicts, and all action of the Board with respect to
determining the existence of a conflict notifying Participants of a
conflict, and determining whether any proposed action adequately
remedies a conflict, will be properly recorded in the minutes of the
meetings of the Board or other appropriate records and such minutes or
other records shall be made available to the Commission upon request.
9. If and to the extent Rule 6e-2 or Rule 6e-3(T) is amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of
the 1940 act or the rules thereunder with respect to mixed and shared
funding on terms and conditions materially different from any
exemptions granted in the order requested, then the Investment
Companies and/or the Participants, as appropriate, shall take such
steps as
[[Page 39490]]
may be necessary to comply with Rule 6e-2 and Rule 6e-3(T), as amended,
and Rule 6e-3, as adopted, to the extent such rules are applicable.
10. Each Investment Company will comply with all provisions of the
1940 Act requiring voting by shareholders (which, for these purposes,
shall be the persons having a voting interest in the shares of the
Investment Companies), and, in particular, each Investment Company will
provide for meetings as required by applicable State law or the 1940
Act, including Section 16(c) of the 1940 Act (although the Investment
Companies are not one of the trusts described in that section) as will
as with Section 16(a) and, if and when applicable, Section 16(b).
Further, each Portfolio will act in accordance with the Commission's
interpretation of the requirements of Section 16(a) with respect to
periodic elections of directors and with whatever rules the Commission
may adopt with respect thereto.
11. The Participants shall, at least annually, submit to the Board
such reports, materials or data as the Board may reasonably request so
that the Board may fully carry out the obligations imposed upon it by
these stated conditions, and said 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 upon reasonable request of the Board shall be a contractual
obligation of all Participants under their participation agreements
with the Investment Companies.
12. None of the Investment Companies will accept a purchase order
from a Plan if such purchase would make the Plan shareholder an owner
of 10% or more of the assets of an Investment Company unless such
Qualified Plan executes fund participation agreement with such
Investment Company. A plan shareholder will execute an application
containing an acknowledgement of this condition upon its initial
purchase of the shares of an Investment Company.
Conclusion
For the reasons stated above, Applicants assert that the requested
exemptions, in accordance with the standards of Section 6(c), 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. 96-19118 Filed 7-26-96; 8:45 am]
BILLING CODE 8010-01-M
