[Federal Register Volume 59, Number 153 (Wednesday, August 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19446]
[[Page Unknown]]
[Federal Register: August 10, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20440; 812-8936]
Connecticut Mutual Financial Services Series Fund I, Inc. et al.
August 3, 1994.
agency: Securities and Exchange Commission (the ``SEC'' or the
``Commission'').
action: Notice of Application for exemptions under the Investment
Company Act of 1940 (the ``1940 Act'').
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applicants: Connecticut Mutual Financial Services Series Fund I, Inc.
(the ``Fund''), G.R. Phelps & Co., Inc. (``G.R. Phelps''), and certain
life insurance companies (``Participating Insurance Companies'') and
their separate accounts (``Separate Accounts'').
relevant 1940 act sections and rules: 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)
under the 1940 Act.
summary of application: Applicants seek an order to the extent
necessary to permit shares of the Fund to be sold to, and held by,
variable annuity and variable life insurance separate accounts of both
affiliated and unaffiliated life insurance companies.
filing dates: The application was filed on April 12, 1994 and will be
amended during the notice period to reflect certain comments of the SEC
staff.
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 Commission's Secretary
and serving the Applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on August 29, 1994, and should be accompanied by proof of service
on the Applicants in the form of an affidavit or, for lawyers, a
certificate of service. Hearing requests should state the nature of
writer's interest, the reason for the request, and the issues
contested. Persons who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
addresses: Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW., Washington, DC 20549. Applicants, c/o Robert Vegliante,
Esq., 140 Garden Street, Mail Stop 326, Hartford, Connecticut 06154.
for further information contact: C. Christopher Sprague, Senior
Counsel, at (202) 942-0670, or Michael V. Wible, Special Counsel, at
(202) 942-0670, Office of Insurance Products, Division of Investment
Management.
supplementary information: The following is a summary of the
application; the complete application is available for a fee from the
Commission's Public Reference Branch.
Applicants' Representations
1. The Fund is a Maryland corporation registered under the 1940 Act
as an open-end, diversified management investment company. G.R. Phelps
is the investment adviser for the Fund. The Fund currently consists of
six separate portfolios, (individually a ``Portfolio'' and
collectively, the ``Portfolios''): The Money Market Portfolio, the
Government Securities Portfolio, the Income Portfolio, the Total Return
Portfolio, the Growth Portfolio, and the International Equity
Portfolio. Each Portfolio has its own investment objective, or
objectives, and policies. Presently, shares of the Fund are sold to
Connecticut Mutual Life Insurance Company (``CML'') to be credited, as
appropriate, to its Panorama Separate Account, CML Variable Annuity
Account A, CML Variable Annuity Account B, and CML Accumulation Annuity
Account E. Each of these separate accounts established by CML funds
benefits under variable annuity contracts issued by CML. Shares of the
Fund are also sold to C.M. Life Insurance Company (``C.M. Life''), a
wholly-owned subsidiary of CML, to be credited to its Panorama Plus
Separate Account to fund benefits under variable annuity contracts
issued by C.M. Life.
2. Shares of the Fund, may, in the future, be sold to other
separate accounts established by CML or C.M. Life or to other issuers
of variable annuity or variable life insurance contracts. Specifically,
the Fund intends to offer its shares to separate accounts of any
interested insurance company, including insurance companies
unaffiliated with CML, in order to fund variable annuity contracts,
single premium variable life insurance contracts, scheduled premium
variable life insurance contracts, and/or flexible premium variable
life insurance contracts (referred to collectively as ``variable
contracts''). Such Participating Insurance Companies will establish
their own Separate Accounts and will design their own variable
contracts.
It is anticipated that Participating Insurance Companies will rely
on Rules 6e-2 or 6e-3(T) under the 1940 Act with respect to their
scheduled premium variable life insurance contracts, respectively,
although some Participating Insurance Companies also may rely on
individual exemptive orders. The use of a common management investment
company as the underlying investment medium for both variable annuity
and variable life insurance separate accounts is referred to herein as
``mixed funding.'' The use of a common management investment company as
the underlying investment medium for separate accounts of unaffiliated
insurance companies is referred to herein as ``shared funding.''
Applicants request an order of the Commission exempting the
Participating Insurance Companies and their Separate Accounts (and, to
the extent necessary, any principal underwriter and depositor of such
an Account) 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) under the 1940 Act, to
the extent necessary to permit mixed and shared funding.
Applicants' Legal Analysis
1. Rule 6e-2(b)(15) provides the exemptions from Sections 9(a),
13(a), 15(a), and 15(b) of the 1940 Act that are discussed below 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, those exemptions under Rule 6e-2 are not
available if a separate account invests in a fund engaged in mixed and/
or shared funding. Rule 6e-3(T)(b)(15) provides similar exemptions, but
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
separate accounts of the life insurer, or of any affiliated life
insurance company, offering either scheduled premium variable life
insurance contracts 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, or which offer their shares to any such life
insurance company in consideration solely for advances made by the life
insurer in connection with the operation of the separate account. Thus,
the exemptions set out in 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.
2. Section 9(a) 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 Rules 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. Rules 6e-2(b)(15)(iii) and 6e-
3(T)(b)(15)(iii) each provide a partial exemption from Sections 13(a),
15(a), and 15(b) of the 1940 Act to the extent those sections have been
deemed by the Commission to require ``pass-through'' voting with
respect to an underlying fund's shares.
3. 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 states 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 Fund 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 are not expected
to pay any role in the management or administration of the Fund.
Moreover, those individuals who participate in the management or
administration of the Fund will remain the same regardless of which
Separate Accounts or insurance companies use the Fund. 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. Further, the increased
monitoring costs would reduce the net rates of return realized by
contractowners.
4. 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 shares held by a separate
account. The Application states that pass-through voting privileges
will be provided with respect to all variable contractowners so long as
the Commission interprets the 1940 Act to require pass-through voting
privileges for variable contractowners. 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 the limitations on mixed and shared funding imposed by the
1940 Act and the rules thereunder are observed.
5. 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 holders. Rules 6e-2(b)(15)(iii)(A) 6e-
3(T)(b)(15)(iii)(A)(1) each provide that the insurance company may
disregard the voting instructions of its contractowners with respect to
the investments of an underlying fund, or any contract between a fund
and its investment adviser, when required to do so by an insurance
regulatory authority (subject to the provisions of paragraphs (b)(5)(i)
and (b)(7)(ii)(A) of 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 contractowners
if the contractowners 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 contractowner voting instructions
only with respect to certain specified items. Applicants also note that
the potential for disagreement among Participating Separate Accounts is
limited by the requirements in Rules 6e-2 and 6e-3(T) that the
participating insurance company's disregard of voting instructions be
reasonable and based on specific good faith determinations.
6. The Application states that making the Fund available for mixed
and shared funding will encourage more insurance companies to offer
variable contracts, and that 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 believe that mixed and shared funding should
provide several benefits to variable contractowners. Mixed and shared
funding would eliminate a significant portion of the costs of
establishing and administering separate funds. Mixed and shared funding
also would provide the Fund with a larger pool of funds, thereby
promoting economies of scale and permitting increased safety through
greater diversification.
7. 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. Applicants do not believe that mixed
and shared funding will have any adverse Federal income tax
consequences.
Applicants' Conditions
If the requested order is granted, Applicants consent to the
following conditions:
1. A majority of the Board of Directors of the Fund (the ``Board'')
shall consist of persons who are not ``interested persons'' of the
Fund, 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 director or
directors, then the operation of this condition shall 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. The Board will monitor the Fund for the existence of any
material irreconcilable conflict between the interests of the
contractowners of all Separate Accounts investing in the Fund. 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 any series are being managed; (e) a
difference in voting instructions given by variable annuity
contractowners and variable life insurance contractowners; or (f) a
decision by an insurer to disregard the voting instructions of
contractowners.
3. Participating Insurance Companies and G.R. Phelps will report
any potential or existing conflicts to the Board. Participating
Insurance Companies and G.R. Phelps will be responsible for assisting
the 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 Board whenever contractowner voting instructions
are disregarded. The responsibility to report such information and
conflicts to and to assist the Board will be a contractual obligation
of all insurers investing in the Fund under their agreements governing
participation in the Fund and these responsibilities will be carried
out with a view only to the interests of the contractowners.
4. If it is determined by a majority of the Board, or a majority of
the disinterested directors of the Board, that a material
irreconcilable conflict exists, then the relevant insurance companies,
at their expense and to the extent reasonably practicable (as
determined by a majority of the disinterested directors), shall 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 Fund
or any Portfolio and reinvesting such assets in a different investment
medium, including another Portfolio of the Fund, or submitting the
question as to whether such segregation should be implemented to a vote
of all affected contractowners and, as appropriate, segregating the
assets of any appropriate group (i.e., annuity contractowners or life
insurance contractowners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the
affected contractowners 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
contractowner voting instructions, and that decision represents a
minority position or would preclude a majority vote, then the insurer
may be required, at the Fund's election, to withdraw the insurer's
Separate Account's investment in the Fund 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
shall be a contractual obligation of all Participating Insurance
Companies under their agreements governing participation in the Fund
and these responsibilities will be carried out with a view only to the
interests of contractowners.
For purposes of this Condition 4, a majority of the disinterested
members of the Board shall determine whether or not any proposed action
adequately remedies any material irreconcilable conflict, but, in no
event, will the Fund or G.R. Phelps be required to establish a new
funding medium for any variable contract. No Participating Insurance
Company shall 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 contractowners materially
adversely affected by the material irreconcilable conflict.
5. The Board's determination of the existence of a material
irreconcilable conflict and its implications shall be made known in
writing promptly to all Participating Insurance Companies.
6. Participating Insurance Companies will provide pass-through
voting privileges to all variable contractowners so long as the
Commission continues to interpret the 1940 Act as requiring pass-
through voting privileges for variable contractowners. Accordingly,
Participating Insurance Companies will vote shares of the Fund held in
their Separate Accounts in a manner consistent with voting instructions
timely-received from contractowners. Each Participating Insurance
Company will vote shares of the Fund held in the Participating
Insurance Company's Separate Accounts for which no voting instructions
from contractowners are timely-received, as well as shares of the Fund
which the Participating Insurance Company itself owns, in the same
proportion as those shares of the Fund for which voting instructions
from contractowners are timely-received. Participating Insurance
Companies shall be responsible for assuring that each of their Separate
Accounts participating in the Fund calculates voting privileges in a
manner consistent with other Participating Insurance Companies. The
obligation to calculate voting privileges in a manner consistent with
all other Separate Accounts investing in the Fund shall be a
contractual obligation of all Participating Insurance Companies under
their agreements governing participation in the Fund.
7. The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders, and, in particular, the 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 not one of the trusts described in 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, 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 and
with whatever rules the Commission may promulgate with respect
thereto.\1\
\1\Applicants will amend the application during the notice
period to reflect this condition.
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8. The Fund shall disclose in its prospectus that (a) the Fund is
intended to be a funding vehicle for all types of variable annuity and
variable life insurance contracts offered by various insurance
companies, (b) material irreconcilable conflicts possibly may arise,
and (c) the Fund's Board of Directors 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. The Fund will notify all Participating Insurance Companies
that Separate Account prospectus disclosure regarding potential risks
of mixed and shared funding may be appropriate.
9. If and to the extent that Rule 6e-2 and Rule 6e-3(T) under the
1940 Act as amended, or 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 any exemptions
granted in the order requested in this Application, then the Fund 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 Participating Insurance Companies and/or G.R. Phelps, at
least annually, shall submit to the Fund's Board of Directors such
reports, materials, or data as the Board reasonably may request so that
the directors of the Fund may fully carry out the obligations imposed
upon the Board by the conditions contained in this Application and said
reports, materials, and data shall be submitted more frequently if
deemed appropriate by the Board. The obligations of the Participating
Insurance Companies to provide these reports, materials, and data to
the Fund's Board of Directors, when the Board so reasonably requests,
shall be a contractual obligation of all Participating Insurance
Companies under their agreements governing participation in the Fund.
11. All reports of potential or existing conflicts received by the
Board of Directors, and all Board action with regard to determining the
existence of a conflict, notifying Participating Insurance Companies of
a conflict, and determining whether any proposed action adequately
remedies a conflict, will be properly recorded in the minutes of the
Board or other appropriate records, and such minutes or other records
shall be made available to the Commission upon request.
Applicants' Conclusion
For the reasons stated above, Applicants believe that the requested
exemptions, in accordance with the standards of Section 6(c) under the
1940 Act, are appropriate in the public interest and consistent with
the protection of investors and the purposes fairly intended by the
policy and provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-19446 Filed 8-9-94; 8:45 am]
BILLING CODE 8010-01-M
