[Federal Register Volume 61, Number 130 (Friday, July 5, 1996)]
[Notices]
[Pages 35275-35280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17150]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22045; No. 812-9988]
Royce Capital Trust, et al.
June 27, 1996.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``1940 Act'').
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APPLICANTS: Royce Capital Trust (``Trust'') and Quest Advisory Corp.
(``Quest'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) granting
exemptions from Sections 9(a), 13(a), 15(a), and 15(b) of the 1940 Act
and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder.
SUMMARY OF APPLICATION: Applicants seek an order permitting shares of
any current or future series of the Trust and shares of any other
investment company that is designed to fund variable insurance products
and for which Quest or its affiliates may in the future serve as
investment adviser, administrator, manager, principal underwriter or
sponsor (collectively with the Trust, ``Funds''), to be sold to and
held by: (1) variable annuity and variable life insurance separate
accounts of both affiliated and unaffiliated insurance companies
(``Participating Insurance Companies''); and (2) qualified pension and
retirement plans outside of the separate account context (``Plans'').
FILING DATE: The application was filed on February 9, 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 Secretary of the
Commission 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 July 22, 1996 and should be accompanied by proof of
service on Applicants in the form of an affidavit or, for lawyers, a
[[Page 35276]]
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: Howard J. Kashner, Esq., Quest Advisory Corp., 1414
Avenue of the Americas, New York, New York 10019.
FOR FURTHER INFORMATION CONTACT: Edward P. Macdonald, Staff Attorney,
or Wendy F. Friedlander, Deputy Chief, Office of Insurance Products
(Division of Investment Management), at (202) 942-0670.
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the Public
Reference Branch of the Commission.
Applicants' Representations
1. The Trust was organized as a Delaware Business Trust in January,
1996, and has registered with the Commission as an open-end management
investment company.
2. Quest serves as investment adviser to the Trust and is a
registered investment adviser under the Investment Advisers Act of
1940.
3. The Funds propose to offer shares of one or more of their series
to insurance company separate accounts that fund variable annuity and
variable life insurance contracts (``Contracts'') established by
Participating Insurance Companies. These separate accounts may be
registered as investment companies under the 1940 Act or exempt from
registration pursuant to Section 3(c)(1) of the 1940 Act. Each
Participating Insurance Company will enter into a fund participation
agreement with the Funds in which the Participating Insurance company
invests.
4. The Funds also intend to offer shares of each series directly to
Plans outside of the separate account context. The Plans may choose one
or more series of any of the Funds as the sole investment under the
Plan or as one of several investments.
Applicants' Legal Analysis
1. 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 (``UIT''), Rule 63-
2(b)(15) provides partial exemptions from Sections 9(a), 13(a), 15(a)
and 15(b) of the 1940 Act. The relief provided by Rule 6e-2(b)(15) is
available to a separate account's investment adviser, principal
underwriter, and sponsor or depositor. The exemptions granted by Rule
6e-2(b)(15) are available, however, only where the management
investment company underlying the UIT offers its shares ``exclusively
to variable life insurance separate accounts of the life insurer, or of
any affiliated life insurance company.''
2. 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.'' ``Mixed and shared funding'' denotes
the use of a common management investment company to fund the variable
annuity and variable life insurance separate accounts of affiliated and
unaffiliated insurance companies. The relief granted by Rule 6e-
2(b)(15), thus, is not available with respect to a scheduled premium
variable life insurance separate account that owns shares of an
underlying fund that also offers its shares to a variable annuity
separate account of the same company or of any other affiliated or
unaffiliated life insurance company. Rule 6e-2(b)(15), therefore,
precludes mixed and shared funding.
3. Applicants state that because the relief under rule 6e-2(b)(15)
is available only where shares are offered exclusively to separate
accounts of insurance companies, additional exemptive relief is
necessary if shares of the Funds are also to be sold to Plans.
4. In connection with flexible premium variable life insurance
contracts issued through a UIT, rule 6e-3(T)(b)(15) provides partial
exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act.
The exemptions granted to a separate account by Rule 6e-3(T)(b)(15) are
available only where all of the assets of the separate account consist
of the shares of one or more registered management investment companies
which offer their 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) thus permits
mixed funding but does not permit shared funding.
5. Applicants state that because the relief under Rule 6e-3(T) is
available only where shares are offered exclusively to separate
accounts, additional relief is necessary if shares of the Funds also
are to be sold to Plans. Applicants assert that the relief granted by
paragraphs (b)(15) of Rules 6e-2 and 6e-3(T) should not be affected by
the proposed sale of Fund shares to Plans because such sales may allow
for the development of larger pools of assets, resulting in the
potential for greater investment and diversification opportunities and
for decreased expenses at higher asset levels resulting in greater cost
efficiencies.
6. Applicants state that changes in the tax law have created the
opportunity for the Funds to increase their asset base through the sale
of Fund shares to the Plans. Applicants state that Section 817(h) of
the Internal Revenue code, as amended, (``Code'') imposes certain
diversification requirements on the underlying assets of the Contracts
held in the Funds. The Code provides that such Contracts shall not be
treated as an annuity contract or a life insurance contract for any
period in which the underlying assets are not, in accordance with
regulations prescribed by the Treasury Department, adequately
diversified. On March 2, 1989, the Treasury Department issued
regulations which established diversification requirements for the
investment portfolios underlying variable contracts. Treas. Reg. 1.817-
5 (1989). The regulations provide that, 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 allows shares in an investment company
to be held by a qualified pension or retirement plan without adversely
effecting the ability of shares in the same investment company to also
be held by the separate accounts of insurance companies in connection
with their variable contracts. Treas. Reg. 1.817-5(f)(3)(iii).
7. Applicants state that the promulgation of Rules 6e-2 and 6e-3(T)
under the 1940 Act preceded the issuance of these Treasury regulations,
and that the sale of shares of the same investment company to both
separate accounts and Plans could not have been envisioned at the time
of the adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15).
8. Applicants therefore request relief from Section 9(a), 13(a),
15(a) and 15(b) of the 1940 Act, and Rules 6e-2(b)(15)
[[Page 35277]]
and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares
of the Fund to be offered and sold in connection with both mixed and
shared funding, and to be sold directly to Plans. Relief is requested
for a class or classes of persons and transactions consisting of
Participating Insurance Companies and their scheduled premium variable
life insurance separate accounts and flexible premium variable life
insurance separate accounts (and, to the extent necessary, any
investment adviser, principal underwriter, and depositor of such
separate accounts) investing in any of the Funds.
Disqualification
9. Section 9(a) of the 1940 Act provides that it is unlawful for
any company to serve as an investment adviser to or principal
underwriter for 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 exemption from Section 9(a) under certain
circumstances, subject to the limitations on mixed and shared funding.
The relief provided by Rules 6e-2(b)(15)(i) and 6e-3(T)(b)(15)(i)
permit 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 Rules 6e-
2(b)(15)(ii) and 6e-3(T)(b)(15)(ii) permit 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) participate in the management or
administration of the Fund.
10. Applicants state that the partial relief from Section 9(a) of
the 1940 Act found in Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder,
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 that section. Applicants state that those rules
recognize that it is not necessary for the protection of investors or
the purposes fairly intended by the policy or provisions of the 1940
Act to apply the provisions of Section 9(a) to the many individuals
employed by the Participating Insurance Companies, most of whom will
have no involvement in matters pertaining to investment companies
within that organization. Applicants note that the Participating
Insurance Companies are not expected to play any role in the management
or administration of the Funds. Therefore, Applicants assert, applying
the restrictions of Section 9(a) serves no regulatory purpose.
Applicants state that the relief requested should not be affected by
the proposed sale of shares of the Funds to the Plans because the Plans
are not investment companies and are not, therefore, subject to Section
9(a).
Pass-Through Voting
11. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) under the 1940
Act assume the existence of a pass-through voting requirement with
respect to management investment company share held by a separate
account. The application states that the Participating Insurance
Companies will provide pass-through voting privileges to all Contract
owners so long as the Commission interprets the 1940 Act to require
such privileges.
12. Rules 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 observance of the
limitations on mixed and shared funding imposed by the 1940 Act and the
rules thereunder.
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
Variable 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.
Rules 6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(B) provide that
the insurance company may disregard voting instructions of its Contract
owners if the Contract owners initiate any change in the investment
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)(15)(ii) and (b)(7)(ii)(B) and (C) of each rule.
13. Applicants state that shares of the Funds sold to Plans will be
held by the trustees of such Plans as required by Section 403(a) of
ERISA. Section 403(a) also provides that the trustees must have
exclusive authority and discretion to manage and control the Plan with
two exceptions: (a) When the Plan expressly provides that the trustees
are subject to the direction of a named fiduciary who is not a trustee,
in which case the trustees are subject to proper directions made in
accordance with the terms of the 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 two exceptions stated in
Section 403(a) applies, Plan trustees have the exclusive authority and
responsibility for voting proxies. Where a named fiduciary appoints an
investment manager, the investment manager has the responsibility to
vote the shares held unless the right to vote such shares is reserved
to the trustees or to the named fiduciary. In any event, there is no
pass-through voting to the participants in such Plans. 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 Plans because the
Plans are not entitled to pass-through voting privileges. Applicants
further assert that investments in the Funds by Plans will not create
any of the voting complications occasioned by mixed and shared funding
because Plan investor voting rights cannot be frustrated by veto rights
of insurers or state regulators.
14. Applicants state that some Plans may provide participants with
the right to give voting instructions. Applicants submit that there is
no reason to believe that participants in Plans generally, or those in
a particular Plan, either as a single group or in combination with
other Plans, would vote in a manner that would disadvantage Contract
owners. Accordingly, Applicants assert that the purchase of Fund shares
by Plans that provide voting rights to participants does not present
any complication not otherwise occasioned by mixed and shared funding.
Conflicts of Interest
15. Applicants state that no increased conflicts of interest would
be present by the granting of the requested relief. Applicants assert
that shared funding does not present any issues that do not already
exist where a single insurance company is licensed to do business in
several states. Applicants note that where Participating Insurance
Companies are domiciled in different states, it is possible that the
state insurance regulatory body in a state in which one Participating
Insurance Company is domiciled could require action that is
inconsistent with the requirements of insurance regulators in one or
more other states in which other Participating Insurance Companies are
domiciled. Applicants submit that this possibility is no different and
no greater than exists where a single insurer and
[[Page 35278]]
its affiliates offer their insurance products in several states.
16. Applicants further submit that affiliation does not reduce the
potential for differences among state regulatory requirements. In any
event, the conditions (adapted from the conditions included in Rule 6e-
3(T)(b)(15) discussed below) are designed to safeguard against any
adverse effects that these differences may produce. If a particular
state insurance regulator's decision conflicts with the decisions of a
majority of other state regulators, the affected insurer may be
required to withdraw its separate account's investment in the relevant
Funds.
17. Applicants also argue that affiliation does not eliminate the
potential, if any exists, for divergent judgments as to when a
Participating insurance Company could disregard Contract owner voting
instructions. Potential disagreement is limited by the requirement that
the Participating Insurance Company's disregard of voting instructions
be both reasonable and based on specific good faith determinations.
However, if a Participating Insurance Company's decision to disregard
Contract owner instructions represents a minority position or would
preclude a majority vote approving a particular change, such
Participating Insurance Company may be required, at the election of the
relevant Fund, to withdraw its investment in that Fund. No charge or
penalty will be imposed as a result of such withdrawal.
18. Applicants submit that there is no reason why the investment
policies of a Fund with mixed funding would or should be materially
different from what those policies would or should be if such
investment company or series thereof funded only variable annuity or
variable life insurance contracts. Applicants therefore argue that
there is no reason to believe that conflicts of interest would result
from mixed funding. Moreover, Applicants represent that the Funds will
not be managed to favor or disfavor any particular insurance company or
type of Contract.
19. Applicants note that 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. Treasury regulation 1.817-
5(f)(3)(iii), which established diversification requirements for such
portfolios, specifically permits ``qualified pension or retirement
plans'' and separate accounts to share the same underlying investment
company. Therefore, Applicants have concluded that neither the Code,
nor the Treasury regulations, nor the revenue rulings thereunder,
present any inherent conflicts of interests if Plans, variable annuity
separate accounts and variable life insurance separate accounts all
invest in the same management investment company.
20. Applicants note that while there are differences in the manner
in which distributions are taxed for variable annuity contracts,
variable life insurance contracts and Plans these tax consequences do
not raise any conflicts of interest. When distributions are to be made,
and the separate account or the Plan is unable to net purchase payments
to make the distributions, the separate account or the Plan will redeem
shares of the Funds at their respective net asset values. The Plan will
then make distributions in accordance with the terms of the Plan. A
Participating Insurance Company will make distributions in accordance
with the terms of the variable contract.
21. Applicants state that they do not see any greater potential for
material irreconcilable conflicts arising between the interests of Plan
participants and owners of the Contracts issued by the separate
accounts of Participating Insurance Companies from possible future
changes in the federal tax laws than that which already exists between
variable annuity contract owners and variable life insurance contract
owners.
22. With respect to voting rights, Applicants state that it is
possible to provide an equitable means of giving such voting rights to
Contract owners and to Plans. Applicants represent that a Fund will
inform each shareholder, including each separate account and Plan, of
information necessary for the shareholder meeting, including their
respective share ownership in the Fund. A Participating Insurance
Company will then solicit voting instructions in accordance with the
``pass-through'' voting requirements of Rules 6e-2 and 6e-3(T).
23. Applicants argue that the ability of the Funds to sell their
respective shares directly to Plans does not create a ``senior
security'', as such term is defined under Section 18(g) of the 1940
Act, with respect to any Contract owner as opposed to a participant
under a Plan. Regardless of the rights and benefits of Plan
participants and Contract owners under their respective Plans and
Contracts, the Plans and separate accounts have rights only with
respect to their shares of the Funds. Such share may be redeemed only
at net asset value. No shareholder of any of the Funds has any
preference over any other shareholder with respect to distribution of
assets or payment of dividends.
24. Applicants state that there are no conflicts of interest
between Contract owners and Plan participants with respect to the state
insurance commissioners' veto powers over investment objectives. The
state insurance commissioners have been given the veto power to prevent
insurance companies indiscriminately redeeming their separate accounts
out of one Fund and investing those assets in another Fund. Generally,
to accomplish such redemptions and transfers, complex and time
consuming transactions must be undertaken. Conversely, trustees of
Plans or the participants in participant-direct Plans can make the
decision quickly and implement redemption of shares from a Fund and
reinvest the monies in another funding vehicle without the same
regulatory impediments or, as in the case with most Plans, even hold
cash pending a suitable investment. Based on the foregoing, Applicants
represent that even should there arise issues where the interests of
Contract owners and the interests of the Plans and Plan participants
conflict, the issues can be almost immediately resolved in that
trustees of the Plans can, independently, redeem shares out of the
Funds.
25. Applicants state that various factors have kept certain
insurance companies from offering Contracts. According to Applicants,
these factors include: the cost of organizing and operating an
investment funding medium; the lack of expertise with respect to
investment managers; and the lack of public name recognition as
investment experts. Specifically, Applicants state that smaller life
insurance companies may not find it economically feasible, or within
their investment or administrative expertise, to enter the Contract
business on their own. Applicants argue the use of the Funds as common
investment media for the Contracts would ease these concerns.
Participating Insurance Companies would benefit not only from the
investment and administrative expertise of Quest and its affiliates,
but also from the cost efficiencies and investment flexibility afforded
by a large pool of funds. Applicants state that making the Funds
available for mixed and shared funding may encourage more insurance
companies to offer variable contract such as the Contracts, which may
then increase competition with respect to both the design and the
pricing of variable contracts. Applicants submit that this can be
expected to
[[Page 35279]]
result in greater product variation and lower charges. Thus, Applicants
argue that Contract owners would benefit because mixed and shared
funding will eliminate a significant portion of the costs of
establishing and administering separate funds. Moreover, Applicants
assert that sales of shares of the Funds to Plans should increase the
amount of assets available for investment by such Funds. This should,
in turn, promote economies of scale, permit increased safety of
investments through greater diversification, and make the addition of
new portfolios more feasible.
26. Applicants state that, regardless of the types of Fund
shareholders, Quest is legally obligated to manage the Funds in
accordance with each Fund's investment objectives, policies and
restrictions as well as any guidelines established by the relevant
Board of Directors or Trustees of the Funds. Applicants assert that
Quest work with a pool of money without consideration for the identity
of shareholders, and, thus, manage the Funds in the same manner as any
other mutual fund.
27. Applicants believe that there is no significant legal
impediment to permitting mixed and shared funding. Additionally,
Applicants note the previous issuance of orders permitting mixed and
share funding where shares of a fund were sold directly to qualified
plans, such as the Plans. Applicants note further that there is ample
precedent for extending exemptive relief to members of a class or
classes or persons, not currently identified, that may be similarly
situated in the future. Such class relief has been granted in various
contexts and from a wide variety of the 1940 Act's provisions including
class exemption in the context of mixed and shared funding.
Applicants' Conditions
The Applicants have consented to the following conditions if the
order requested in the application is granted:
1. A majority of the Board of Trustees or Board of Directors (each
a ``Board'') of each Fund shall consist of persons who are not
``interested persons'' of the Funds, 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
Director or Trustee, 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 appropriate Board, (ii) for a period of 60 days, if a
vote of shareholders is required to fill the vacancy or vacancies; or
(ii) for such longer period as the Commission may prescribe by order
upon application.
2. The Boards will monitor their respective Funds for the existence
of any irreconcilable material conflict between the interests of
Contract owners of all separate accounts and of Plan participants and
Plans investing in the Funds, and determine what action if any, 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 billing, 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
Funds are managed; (e) a difference in voting instructions given by
owners of variable annuity and variable life insurance contracts; or
(f) a decision by a Participating Insurance Company to disregard voting
instructions of Contract owners; and, (g) if applicable, a decision by
a Plan to disregard the voting instructions of Plan participants.
3. Participating Insurance Companies, Quest (or any other
investment manager of a Fund), and any Plan that executes a
participation agreement upon becoming an owner of 10% or more of the
issued and outstanding shares of a Fund (``Participating Plans'') will
report any potential or existing conflicts to the Board of any relevant
Fund. Quest (or any other investment adviser of a Fund), Participating
Insurance Companies and Participating Plans will be responsible for
assisting the appropriate Board in carrying out its responsibilities
under these conditions by providing the Board with all information
reasonably necessary for it to consider any issues raised. This
responsibility includes, but is not limited to, an obligation by a
Participating Insurance Company to inform the Board whenever it has
determined to disregard Contract holders' voting instructions and, if
pass-through voting is applicable, an obligation by a Participating
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 contractual
obligations of all Participating Insurance Companies and Participating
Plans investing in the Funds under their agreements governing
participating in the Funds, and such agreements shall provide that
these responsibilities will be carried out with a view only to the
interests of the Contract owners and, if applicable, Plan participants.
4. If it is determined by a majority of the Board of a Fund, or by
a majority of its disinterested trustees or directors, that a material
irreconcilable conflict exists, the relevant Participating Insurance
Companies and Participating Plans will, at their expense and to the
extent reasonably practicable (as determined by a majority of
disinterested trustees or members of the Board), take whatever steps
are necessary to remedy or eliminate the material irreconcilable
conflict, including: (a) Withdrawing the assets allocable to some or
all of the separate accounts from the Fund or any series and
reinvesting such assets in a different investment medium, which may
include another series of a Fund or another Fund; (b) submitting the
question of 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., variable annuity or variable
life insurance contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the
affected Contract owners the option of making such a change; and (c)
establishing a new registered management investment company or managed
separate account. If a material irreconcilable conflict arises because
of a Participating Insurance Company's decision to Contract owner
voting instructions and that decision represents a minority position or
would preclude a majority vote, the Participating Insurance Company may
be required, at the election of the Fund, to withdraw its separate
account's investment in the Fund, and no charge or penalty will be
imposed as a result of such withdrawal. If a material irreconcilable
conflict arises because of a Participating 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
Participating Plan may be required, at the election of the Fund, to
withdraw its investment in the 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 the existence of an irreconcilable
material conflict and bearing the cost of such remedial action, shall
be a contractual obligation of all
[[Page 35280]]
Participating Insurance Companies and Participating Plans under their
agreements governing participation in the Funds, and these
responsibilities will be carried out with a view only to the interests
of the Contract owners and, as applicable, Plan participants.
For purposes of this Condition Four, 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 Quest (or any other
investment advisor to a Fund) be required to establish a new funding
medium for any Contract. No Participating Insurance Company shall be
required by this Condition Four to establish a new funding medium for
any Contract if an offer to do so has been declined by a vote of a
majority of Contract owners materially affected by the material
irreconcilable conflict. No Participating Plan shall be required by
this Condition Four to establish a new funding medium for such Plan if
(a) a majority of Plan participants materially and adversely affected
by the material irreconcilable conflict vote to decline such offer, or
(b) pursuant to governing plan documents and applicable law, the
Participating Plan makes such decision without Plan participant vote.
5. Quest, all Participating Insurance Companies, and Participating
Plans will be promptly informed in writing of any Board's determination
that a material irreconcilable conflict exists, and its implications.
6. Participating Insurance Companies 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 Contract owners. Accordingly, the Participating
Insurance Companies will vote shares of a Fund held in their separate
accounts in a manner consistent with voting instructions timely
received from Contract owners. Participating Insurance Companies will
be responsible for assuring that each of their separate accounts
calculates voting privileges in a manner consistent with all other
Participating Insurance Companies. The obligation to calculate voting
privileges in a manner consistent with all other separate accounts
investing in the Fund will be a contractual obligation of all
Participating Insurance Companies under the agreements governing
participation in the Fund. Each Participating Insurance Company will
vote shares for which it has not received voting instructions as well
as shares attributable to it in the same proportion as it votes shares
for which it has received instructions. Each Participating Plan will
vote as required by applicable law and governing plan documents.
7. All reports of potential or existing conflicts of interest
received by a Board, and all Board action with regard to determining
the existence of a conflict, notifying Quest, Participating Insurance
Companies and Participating 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 notify all Participating Companies that separate
account prospectus disclosure regarding potential risks of mixed and
shared funding may be appropriate. Each Fund shall disclose in its
prospectus that: (a) Its shares may be offered to insurance company
separate accounts that fund both variable annuity and variable life
insurance contracts, and to Plans; (b) due to differences of tax
treatment and other considerations, the interests of various Contracts
owners participating in the Fund and the interests of Plans investing
in the Fund may conflict; and, (c) the Board will monitor the Fund for
any material conflicts of interest and determine what action, if any,
should be taken.
9. Each Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders (which for these purposes, shall be
the persons having a voting interest in the shares of the Fund) and in
particular, each Fund 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 (although the Fund is one of the trusts described in Section
16(c) of the 1940 Act), as well as with Section 16(a) and, if
applicable, Section 16(b) of the 1940 Act. Further, the Fund will act
in accordance with the Commission's interpretation of the requirements
of Section 16(a) with respect to periodic elections of directors (or
trustees) and with whatever rules the Commission may promulgate with
respect thereto.
10. If and to the extent Rule 6e-2 or Rule 6e-3(T) is amended, or
Rule 6e-3(T) 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 by Applicants, then the Fund
and the Participating Insurance Companies, as appropriate, shall take
such steps as may be necessary to comply with Rule 6e-2 or Rule 6e-
3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules
are applicable.
11. No less than annually, Quest (or any other investment adviser
of a Fund), the Participating Insurance Companies and Participating
Plans shall submit to the Boards such reports, materials, or data as
the Boards may reasonably request so that the Boards may carry out
fully the obligations imposed upon them by the conditions stated in the
application. Such reports, materials, and data shall be submitted more
frequently if deemed appropriate by the Boards. The obligations of
Quest, Participating Insurance Companies and Participating Plans to
provide these reports, materials, and data to the Boards shall be a
contractual obligation of Quest, all Participating Insurance Companies
and Participating Plans under the agreements governing their
participation in the Fund.
12. If a Plan should become an owner of 10% or more of the issued
and outstanding shares of a Fund, such Plan will execute a
participation agreement with the applicable Fund including the
conditions set forth herein to the extent applicable. A Plan will
execute an application containing an acknowledgment of this condition
at the time of its initial purchase of shares of the Fund.
Conclusion
For the reasons stated above, Applicants assert that the requested
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, are appropriate in
the public interest 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. 96-17150 Filed 7-3-96; 8:45 am]
BILLING CODE 8010-01-M
