[Federal Register Volume 62, Number 157 (Thursday, August 14, 1997)]
[Notices]
[Pages 43562-43568]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-21567]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-22783; File No. 812-10680]
Mutual Fund Variable Annuity Trust, et al.
August 7, 1997.
AGENCY: Securities and Exchange Commission (the ``Commission'').
ACTION: Notice of application for an order of exemption under the
Investment Company Act of 1940 (the ``1940 Act'').
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APPLICANTS: Mutual Fund Variable Annuity Trust (the ``Trust''), The
Chase Manhattan Bank (the ``Adviser'') and certain life insurance
companies and their separate accounts that do now or may in the future
purchase shares of capital stock (``Shares'') in the Trust.
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act from the provisions of Sections 9(a), 13(a), 15(a) and 15(b)
of the 1940 Act and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder.
SUMMARY OF APPLICATION: Applicants seek an order of exemption to the
extent necessary to permit Shares of the Trust to be sold to and held
by: (i) Variable annuity and variable life insurance separate accounts
(``Separate Accounts'') of both affiliated and unaffiliated life
insurance companies (``Participating Insurance Companies''), and (ii)
certain qualified pension and retirement plans outside of the separate
account context.
FILING DATE: The application was filed on May 22, 1997.
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 must be received by the
Commission by 5:30 p.m. September 2, 1997, and must be accompanied by
proof of service on Applicants in the form of an affidavit or, for
lawyers, a certificate of service. Hearing requests should state the
nature of the writer's interest, the reason for the
[[Page 43563]]
request, and the issues contested. Persons who wish to be notified of a
hearing may request notification by writing to the Secretary of the
Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Applicants, c/o Simpson Thacher &
Bartlett, 425 Lexington Avenue, New York, New York 10017, Attention:
Robert M. Kaner, Esq.
FOR FURTHER INFORMATION CONTACT: Lorna MacLeod, Staff Attorney, or Mark
C. Amorosi, Branch Chief, Office of Insurance Products, Division of
Investment Management, at (202) 942-0670.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application; the complete application is available for a fee from the
Public Reference Branch of the Commission.
Applicants' Representations
1. The Trust is a Massachusetts business trust organized on April
14, 1994, and is registered under the 1940 Act as an open-end,
management investment company. The Trust currently consists of, and
offers Shares in, six separate investment portfolios, each of which has
its own investment objective and policies, and may in the future issue
shares of additional portfolios and/or multiple classes of Shares of
each portfolio (such existing and future portfolios and/or classes of
shares of each are referred to collectively as the ``Portfolios'').
2. The Trust has retained the Adviser as an investment adviser of
each of the Portfolios. The Adviser is a bank chartered under the laws
of New York and is a wholly-owned subsidiary of The Chase Manhattan
Corporation, a bank holding company. The adviser serves as the overall
investment manager of and maintains responsibility for investment
decisions of the Portfolios, subject to the general direction and
supervision of the Board of Trustees of the Trust (the ``Board of
Trustees''). The Adviser has entered into investment subadvisory
agreements with two sub-advisers that make investment decisions for
their respective Portfolios on a day-to-day basis (the ``Sub-
Advisers''). Chase Asset Management, Inc. (``CAM''), a Delaware
corporation and a wholly-owned subsidiary of the Adviser, is the Sub-
Adviser to each of the Portfolios other than the International Equity
Portfolio. Chase Asset Management (London) Limited (``CAM London''), an
indirect wholly-owned subsidiary of the Adviser, is the Sub-Adviser to
the International Equity Portfolio. CAM and CAM London are registered
as investment advisers under the Investment Advisers Act of 1940.
3. Shares of the Trust are currently offered only to the Variable
Annuity Account Two, a separate account of Anchor National Life
Insurance Company (``Anchor National''), and FS Variable Annuity
Account Two, a separate account of First SunAmerica Life Insurance
Company (``First SunAmerica''). Variable Annuity Account Two and FS
Variable Annuity Account Two are registered as unit investment trusts
under the 1940 Act.
4. The Trust may determine to offer Shares of its Portfolios to
Separate Accounts of additional insurance companies, including
insurance companies that are not affiliated with Anchor National or
First SunAmerica in order to serve as the investment vehicle for
various types of insurance products, which may include variable annuity
contracts, single premium variable life insurance contracts, scheduled
premium variable life insurance contracts, and flexible premium
variable life insurance contracts (collectively referred to herein as
``Contracts''). Participating Insurance Companies will establish their
own Separate Accounts and design their own Contracts.
5. The Trust also may offer Shares to the trustees (or custodians)
of certain qualified pension and retirement plans (the ``Plans'').
Neither the Advisor nor the Sub-Adviser will act as an investment
adviser to any of the Plans which will purchase Shares of the Trust.
6. The Trust's role with respect to the Separate Accounts and the
Plans will be limited to that of offering its Shares to the Separate
Accounts and the Plans and fulfilling any conditions the Commission may
impose upon granting the order requested in the application.
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, Rule 6e-2(b)(15) under
the 1940 Act provides partial exemptions from Sections 9(a), 13(a),
15(a) and 15(b) of the 1940 Act. The exemptions granted by Rule 6e-
2(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 variable
life insurance separate accounts of the life insurer or of any
affiliated life insurance company'' (emphasis supplied). Therefore, the
relief granted by Rule 6e-2(b)(15) is not available if the scheduled
premium variable life insurance separate account owns shares of a
management investment company that also offers its shares to a variable
annuity separate account of the same insurance company or an affiliated
insurance company. The use of a common management investment company as
the underlying investment medium for both variable annuity and variable
life insurance separate accounts of the same life insurance company or
of any affiliated life insurance company is referred to herein as
``mixed funding.''
2. In addition, the relief granted by Rule 6e-2(b)(15) is not
available if the scheduled premium variable life insurance separate
account owns shares of an underlying management investment company that
also offers its shares to separate accounts funding variable contracts
of one or more unaffiliated life insurance companies. The use of a
common management company as the underlying investment medium for
variable annuity and/or variable life insurance separate accounts of
one insurance company and separate accounts funding variable contracts
of one or more unaffiliated life insurance companies is referred to
herein as ``shared funding.''
3. The relief granted by Rule 6e-2(b)(15) also is not available if
the scheduled premium variable life insurance separate account owns
shares of an underlying management company that also offers its shares
to Plans.
4. In connection with flexible premium variable life insurance
contracts issued through a separate account registered under the 1940
Act as a unit investment trust, Rule 6e-2(T)(b)(15) under the 1940 Act
provides partial exemptions from Sections 9(a), 13(a), 15(a) and 15(b)
of the 1940 Act. The exemptions granted 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 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'' (emphasis supplied). Therefore,
Rule 6e-3(T)(b)(15) grants the exemptions if the underlying fund
engages in mixed funding, but not if it engages in shared funding or
sells its shares to Plans.
[[Page 43564]]
5. Applicants state that the current tax law permits the Trust to
increase its asset base through the sale of Shares to Plans. Section
817(h) of the Internal Revenue Code of 1986, as amended (the ``Code'')
imposes certain diversification requirements on the underlying assets
of the Contracts invested in the Trust. The Code provides that such
Contracts shall not be treated as an annuity contract or life insurance
contract for any period in which the underlying assets are not
adequately diversified as prescribed by Treasury regulations. 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. Treas. Reg. Sec. 1.817-5. The
regulations do, however, contain certain exceptions to this
requirement, one of which allows shares in an investment company to be
held by the trustee of a Plan without adversely affecting the ability
of shares in the same investment company also to be held by the
separate accounts of insurance companies in connection with their
contracts. Treas. Reg. Sec. 1-817-5(f)(3)(iii).
6. The promulgation of Rules 6e-2 and 6e-3(T) preceded the issuance
of these Treasury regulations. Applicants state that given the then-
current tax law, 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).
7. Accordingly, Applicants hereby request an order of the
Commission exempting the variable life insurance Separate Accounts of
Participating Insurance Companies (and, to the extent necessary, any
principal underwriter and depositor of such a Separate Account) and the
other Applicants from Sections 9(a), 13(a), 15(a) and 15(b) of the 1940
Act, and Rules 6e-2(b)(15) and 6e-3(T) thereunder (and any permanent
rule comparable to Rule 6e-3(T)), to the extent necessary to permit
Shares of the Trust to be offered and sold to, and held by: (i) Both
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); (ii) Separate Accounts of
unaffiliated life insurance companies (including both variable annuity
Separate Accounts and variable life insurance Separate Accounts) (i.e.,
shared funding); and (iii) trustees of Plans.
Disqualification
8. Section 9(a)(3) of the 1940 Act provides that it is unlawful for
any company to serve as investment adviser or principal underwriter of
any registered open-end investment company if an affiliated person of
that company is subject to a disqualification enumerated in Section
9(a) (1) or (2). Rule 6e-2(b)(15) (i) and (ii) and Rule 6e-3(T)(b)(15)
(i) and (ii) provide partial exemptions from Section 9(a), subject to
the limitations discussed above on mixed and shared funding. These
rules provide: (i) That the eligibility restrictions of Section 9(a)
shall not apply to persons who are officers, directors or employees of
the life insurer or its affiliates who do not participate directly in
the management or administration of the underlying fund; and (ii) that
an insurer shall be ineligible to serve as an investment adviser or
principal underwriter of the underlying fund only if an affiliated
person of the life insurer who is disqualified by Section 9(a)
participates in the management or administration of the fund.
9. 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, 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 when the life insurer serves as investment
adviser to or principal underwriter for the underlying fund. Applicants
state that it is not necessary for the protection of investors or the
purposes fairly intended by the policy and provisions of the 1940 Act
to apply the provisions of Section 9(a) to many individuals in a
typical insurance company complex, most of whom will have no
involvement in matters pertaining to underlying investment companies.
10. Applicants submit that there is no regulatory purpose in
denying the partial exemptions because of mixed and shared funding and
sales to Plans. Applicants further assert that sales to those entities
do not change the fact that the purposes of the 1940 Act are not
advanced by applying the prohibitions of Section 9(a) to persons in a
life insurance complex who have no involvement in the underlying fund.
Pass-Through Voting
11. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) assume the
existence of a pass-through voting requirement with respect to
management investment company shares held by a separate account.
Applicants state that pass-through voting privileges will be provided
with respect to all Contract owners so long as the Commission
interprets the 1940 Act to require pass-through voting privileges for
Contract owners.
12. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) provide
exemptions from the pass-through voting requirement with respect to
several significant matters, assuming the limitations discussed above
on mixed and shared funding are observed. Rules 6e-2(b)(15)(iii)(A) and
6e-3(T)(15)(b)(iii)(A) provide that the insurance company may disregard
the voting instructions of its contract owners with respect to the
investments of an underlying fund, or any contract between a fund and
its investment adviser, when required to do so by an insurance
regulatory authority and subject to certain requirements. 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 contract owners if the
contract owners initiate any change in such insurance company's
investment policies, principal underwriter, or any investment adviser
(provided that disregarding such voting instructions is reasonable and
complies with the other provisions of Rules 6e-2 and 6e-3(T)).
13. Applicants state that Rule 6e-2 recognizes that a variable life
insurance contract has important elements unique to insurance
contracts, and is subject to extensive state regulation of insurance.
applicants assert that in adopting Rule 6e-2(b)(15)(iii), the
Commission expressly recognized that state insurance regulators have
authority, pursuant to state insurance laws or regulations, to
disapprove or require changes in investment policies, investment
advisers, or principal underwriters. The Commission also expressly
recognized that state insurance regulators have authority to require an
insurer to draw from its general account to cover costs imposed upon
the insurer by a change approved by contract owners over the insurer's
objection. The Commission, therefore, deemed such exemptions necessary
to ``assure the solvency of the life insurer and performance of its
contractual obligations by enabling an insurance regulatory authority
or the life insurer to act when certain proposals reasonably could be
expected to increase the risks undertaken by the life insurer.''
Applicants state that in this respect, flexible premium variable life
insurance contracts are identical to scheduled premium variable life
insurance contracts; therefore, Applicants assert that the
corresponding provisions of Rule 6e-3(T) undoubtedly were adopted in
recognition of the same factors.
14. Applicants further represent that the offer and sale of Shares
of the Trust
[[Page 43565]]
to Plans will not have any impact on the relief requested in this
regard. Shares of the Trust sold to Plans would be held by the trustees
of the Plans as required by Section 403(a) of the Employee Retirement
Income Security Act of 1974, as amended (``ERISA''), or applicable
provisions of the Code. Section 403(a) of ERISA also provides that
trustee(s) must have exclusive authority and discretion to manage and
control the Plan investments with two exceptions: (a) When the Plan
expressly provides that the trustee(s) is (are) subject to the
direction of a named fiduciary who is not a trustee, in which case the
trustee(s) is (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, ERISA permits
but does not require pass-through voting to the participants in Plans.
Accordingly, unlike the case with insurance company separate accounts,
the issue of the resolution of material irreconcilable conflicts with
respect to voting is not present with respect to plans because they are
not entitled to pass-through voting privileges.
15. Applicants explain that some Plans, however, may provide
participants with the right to give voting instructions. Applicants
note, however, 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. Applicant submit that, therefore,
the purchase of the Shares of the Trust by Plans that provide voting
rights to participants does not present any complications not otherwise
occasioned by mixed and shared funding.
Conflicts of Interest
16. Applicants submit that no increased conflicts of interest would
be presented by the granting of the requested relief. Applicants assert
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. Applicants
note 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 policies. The fact that
different insurers may be domiciled in different states does not create
a significantly different or enlarged problem.
17. Applicants submit that shared funding by unaffiliated insurers,
in this respect, is no different than the use of the same investment
company as the funding vehicle for affiliated insurers, which Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) permit. Affiliated insurers may be
domiciled in different states and be subject to differing state law
requirements. Applicants state that affiliation does not reduce the
potential, if any exists, for differences in state regulatory
requirements. In any event, the conditions proposed in the application,
which are adapted from the conditions included in Rule 6e-3(T)(b)(15),
are designed to safeguard against, and provide procedures for
resolving, any adverse effects that differences among state regulatory
requirements may produce. If a particular state insurance regulatory
decision conflicts with the majority of other state regulators, then
the affected insurer will be required to withdraw its Separate
Account's investment in the Trust.
18. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) give the insurance company
the right to disregard the voting instructions of the contract owners
under certain circumstances. Applicants assert that this right does not
raise any issues different from those raised by the authority of state
insurance administrators over separate accounts. Applicants submit that
affiliation does not eliminate the potential, if any exists, for
divergent judgments as to the advisability or legality of a change in
investment policies, principal underwriter, or investment adviser
initiated by contract owners. The potential for disagreement is limited
by the requirements in Rules 6e-2 and 6e-3(T) that the insurance
company's disregard of voting instructions be reasonable and based on
specific good-faith determinations.
19. A particular insurer's disregard of voting instructions,
nevertheless, could conflict with the majority of contract owner voting
instructions. The insurer's action possibly could be different from the
determination of all or some of the other insurers (including
affiliated insurers) that the voting instructions of contract owners
should prevail, and either could preclude a majority vote approving the
change or could represent a minority view. If the insurer's judgment
represents a minority position or would preclude a majority vote, then
the insurer may be required, at the Trust's election, to withdraw its
Separate Account's investment in the Trust, with the result that no
charge or penalty would be imposed as a result of such withdrawal.
20. Applicants submit that investment by the Plans in any of the
Portfolios will similarly present no conflict. The likelihood that
voting instructions of insurance company Separate Account holders will
ever be disregarded or the possible withdrawal referred to immediately
above is extremely remote and this possibility will be known, through
prospectus disclosure, to any Plan choosing to invest in the Trust.
Moreover, Applicants state that even if a material irreconcilable
conflict involving Plans were to arise, the Plans may simply redeem
their shares and make alternative investments.
21. Applicants also submit that there is no reason why the
investment policies of the Portfolios would or should be materially
different from what these policies would or should be if the Portfolios
funded only variable annuity contracts or variable life insurance
contracts, whether flexible premium or scheduled premium contracts.
Each type of insurance product is designed as a long-term investment
program. Similarly, the investment objectives of Plans--as long-term
investments--coincides with that of the Contracts and should not
increase the potential for conflicts. Applicants represent that each
Portfolio will be managed to attempt to achieve the investment
objective of the Portfolio and not to favor or disfavor any particular
Participating Insurance Company or type of insurance product.
22. Applicants note that no one investment strategy can be
identified as appropriate to a particular insurance product or to a
Plan. Each pool of variable annuity and variable life insurance
contract owners is composed of individuals of diverse financial status,
age, insurance and investment goals. A fund supporting even one type of
insurance product must accommodate these diverse factors in order to
attract and retain purchasers. Applicants submit that permitting mixed
and shared funding will provide economic support for the continuation
of the Trust. In addition, permitting mixed and shared funding also
will facilitate the establishment of additional Portfolios serving
diverse goals.
23. As noted above, Section 817(h) of the Code imposes certain
diversification standards on the underlying assets of
[[Page 43566]]
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 insurance company separate accounts
to share the same underlying investment company. Therefore, neither the
Code, nor the Treasury Regulations, nor the revenue rulings thereunder,
recognize or proscribe 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.
24. While there may be differences in the manner in which
distributions are taxed for variable annuity contracts, variable life
insurance contracts and Plans, Applicants assert that the tax
consequences do not raise any conflicts of interest. When distributions
are to be made, and the Separate Account or the Plan cannot net
purchase payments to make the distributions, the Separate Account or
the Plan will redeem Shares of the Trust at their net asset value. The
Plan will then make distributions in accordance with the terms of the
Plan and the Participating Insurance Company will make distributions in
accordance with the terms of the Contract.
25. Applicants state that it is possible to provide an equitable
means of giving voting rights to Contract owners and to Plans.
Applicants represent that the Portfolios will inform each shareholder,
including each Separate Account and each Plan, of its respective share
of ownership in the respective Portfolio. Applicants further represent
that, at that time, each Participating Insurance Company will then
solicit voting instructions in accordance with the ``pass-through''
voting requirement.
26. Applicants assert that the ability of the Portfolios to sell
their respective shares directly to qualified plans does not create a
``senior security,'' as that term is defined in Section 18(g) of the
1940 Act, with respect to any Contract owner as opposed to a
participant under a Plan. As noted above, regardless of the rights and
benefits of participants under the Plans or Contract owners under the
Contracts, the Plans and the Separate Accounts have rights only with
respect to their respective Shares of the Trust. They can only redeem
such Shares at their net asset value. No shareholder of any of the
Portfolios has any preference over any other shareholder with respect
to distribution of assets or payment of dividends.
27. Applicants assert that there are no conflicts between the
Contract owners of the separate accounts and the participants under the
Plans with respect to state insurance commissioners' veto powers over
investment objectives. A basic premise of 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 that insurance companies cannot simply redeem their
separate accounts out of one fund and invest in another. Time-
consuming, complex transactions must be undertaken to accomplish such
redemptions and transfers. Applicants submit that, on the other hand,
trustees of Plans can make the decision quickly and implement the
redemption of their Shares from a Portfolio and reinvest in another
funding vehicle without the same regulatory impediments or, as is the
case with most Plans, even hold cash pending suitable reinvestment.
Based on the foregoing, Applicants maintain that even if there should
arise issues where the interests of Contract owners and the interests
of participants in Plans are in conflict, the issues can be resolved
almost immediately because the trustees of the Plans can, on their own,
redeem the Shares out of the Portfolio.
28. Applicants state that various factors have kept more insurance
companies from offering variable annuity and variable life insurance
contracts than currently offer such contracts. According to the
Applicants, these factors include the cost of organizing and operating
a fund medium, the lack of expertise with respect to investment
management (principally with respect to stock and money market
investments), and the lack of name recognition by the public of certain
insurers as investment experts with whom the public feels comfortable
entrusting their investment dollars. Applicants submit that the use of
the Trust as a common investment medium for variable Contracts would
reduce or eliminate these concerns. Applicants argue, in addition, that
mixed and shared funding should provide several benefits to Contract
owners by eliminating a significant portion of the costs of
establishing and administering separate funds. Participating Insurance
Companies will benefit not only from the investment and administrative
expertise of the Adviser and the Sub-Advisers, but also from the cost
efficiencies and investment flexibility afforded by a larger pool of
assets. Mixed and shared funding also would permit a greater amount of
assets available for investment by the Trust, thereby promoting
economies of scale, by permitting increased safety through greater
diversification, and by making the addition of new Portfolios more
feasible. Applicants assert that, therefore, making the Trust available
for mixed and shared funding will encourage more insurance companies to
offer variable Contracts, and this should result in increased
competition with respect to both variable Contract design and pricing,
which can be expected to result in more product variation and lower
charges to investors. Applicants further note that the sale of Shares
of the Trust to Plans also can be expected to increase the amount of
assets available for investment by the Trust and thus promote economies
of scale and greater diversification.
29. 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 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, and sales to Plans, will have any
adverse federal income tax consequences.
Applicants' Conditions
Applicants have consented to the following conditions if the order
requested in the Application is granted.
1. A majority of the Board of Trustees shall consist of persons who
are not ``interested persons'' of the Trust, as defined by Section
2(a)(19) of the 1940 Act, and the rules thereunder and as modified by
any applicable orders of the Commission, except that if this condition
is not met by reason of the death, disqualification, or bona fide
resignation of any Trustee or Trustees, then the operation of this
condition shall be suspended: (a) For a period of 45 days if the
vacancy or vacancies may be filled by the remaining Trustees; (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 of Trustees will monitor the Trust for the existence
of any material irreconcilable conflict between the interests of the
Contract owners of all Separate Accounts investing in the Trust and of
the Plan participants investing in the Trust. A material irreconcilable
conflict may arise for a variety of reasons, including: (a) An action
by any state insurance regulatory
[[Page 43567]]
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 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 any Portfolio are being managed; (e)
a difference in voting instructions given by variable annuity Contract
owners, variable life insurance Contract owners and trustees of Plans;
(f) a decision by an insurer to disregard the voting instructions of
Contract owners; or (g) if applicable, a decision by a Plan to
disregard voting instructions of Plan participants.
3. Participating Insurance Companies, the Adviser or any other
primary investment adviser of the Portfolios, and any Plan that
executes a fund participation agreement upon becoming an owner of 10
percent or more of the assets of the Trust (collectively, the
``Participants'') will report any potential or existing conflicts to
the Board of Trustees. Participants will be responsible for assisting
the Board of Trustees in carrying out its responsibilities under these
conditions by providing the Board of Trustees with all information
reasonably necessary for the Board of Trustees to consider any issues
raised. This responsibility includes, but is not limited to, an
obligation by each Participating Insurance Company to inform the Board
of Trustees whenever voting instructions of Contract owners are
disregarded and, if pass-through voting is applicable, an obligation by
each Plan to inform the Board of Trustees whenever it has determined to
disregard Plan participant voting instructions. The responsibility to
report such information and conflicts and to assist the Board of
Trustees will be contractual obligations of all Participating Insurance
Companies investing in the Trust under their respective agreements
governing participation in the Trust, and such agreements shall provide
that these responsibilities will be carried out with a view only to the
interests of the Contract owners. The responsibility to report such
information and conflicts and to assist the Board of Trustees will be
contractual obligations of all Plans with participation agreements, and
such agreements shall provide that these responsibilities will be
carried out with a view only to the interests of the Plan participants.
4. If it is determined by a majority of the Board of Trustees, or
by a majority of the disinterested Trustees, that a material
irreconcilable conflict exists, the relevant Participating Insurance
Companies and Plans will, at their own expense and to the extent
reasonably practicable (as determined by a majority of the
disinterested Trustees), take whatever steps are necessary to remedy or
eliminate the material irreconcilable conflict, which steps could
include: (a) Withdrawing the assets allocable to some or all of the
Separate Accounts from the Trust or any Portfolio and reinvesting such
assets in a different investment medium, including another Portfolio of
the Trust, or submitting the question as to 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 Contract owners 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 (b) establishing a new
registered management investment company or managed Separate Account.
If a material irreconcilable conflict arises because of a decision by a
Participating Insurance Company to disregard Contract owner voting
instructions and that decision represents a minority position or would
preclude a majority vote, then that insurer may be required, at the
Trust's election, to withdraw the insurer's Separate Account investment
in the Trust or relevant Portfolio(s) and no charge or penalty will be
imposed as a result of such withdrawal. If a material irreconcilable
conflict arises because of a Plan's decision to disregard Plan
participant voting instructions, if applicable, and that decision
represents a minority position or would preclude a majority vote, the
Plan may be required, at the Trust's election, to withdraw its
investment in the Trust or relevant Portfolio(s) 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 determination
by the Board of Trustees of a material irreconcilable conflict and to
bear the cost of such remedial action will be a contractual obligation
of all Participating Insurance Companies and Plans under their
agreements governing participating in the Trust, and these
responsibilities will be carried out with a view only to the interests
of Contract owners and Plan participants.
5. For purposes of Condition 4, a majority of the disinterested
Trustees will determine whether or not any proposed action adequately
remedies any material irreconcilable conflict, but in no event will the
Trust or the Adviser be required to establish a new funding medium for
any Contract. No Participating Insurance Company shall be required by
Condition 4 to establish a new funding medium for any Contract if any
offer to do so has been declined by vote of a majority of the Contract
owners materially and adversely affected by the material irreconcilable
conflict. Further, no Plan shall be required by Condition 4 to
establish a new funding medium for such Plan if (a) a majority of Plan
participants materially and adversely affected by the irreconcilable
material conflict vote to decline such offer, or (b) pursuant to
governing Plan documents and applicable law, the Plan makes such
decision without Plan participant vote.
6. The determination of the Board of Trustees of the existence of a
material irreconcilable conflict and its implications will be made
known in writing promptly to all Participants.
7. 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, Participating Insurance
Companies will vote Shares of the Trust held in their Separate Accounts
in a manner consistent with voting instructions timely-received from
Contract owners. Each Participating Insurance Company will also vote
shares of the Trust held in its Separate Accounts for which no voting
instructions from Contract owners are timely-received, as well as
Shares of the Trust which the Participating Insurance Company itself
owns, in the same proportion as those Shares of the Trust for which
voting instructions from Contract owners are timely-received.
Participating Insurance Companies will be responsible for assuring that
each of their Separate Accounts participating in the Trust 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
Trust will be a contractual obligation of all Participating Insurance
Companies under their agreements governing their participation in the
Trust. Each Plan will vote as required by applicable law and governing
Plan documents.
8. All reports of potential or existing conflicts received by the
Board of Trustees, and all action by the Board of Trustees with regard
to determining the existence of a conflict, notifying Participants of a
conflict, and
[[Page 43568]]
determining whether any proposed action adequately remedies a conflict,
will be properly recorded in the minutes of the meetings of the Board
of Trustees or other appropriate records, and such minutes or other
records shall be made available to the Commission upon request.
9. The Trust will notify all Participating Insurance Companies that
separate account disclosure in their respective Separate Account
prospectuses may be appropriate to advise accounts regarding the
potential risks of mixed and shared funding. The Trust shall disclose
in its prospectus that: (a) The Trust is intended to be a funding
vehicle for variable annuity and variable life insurance contracts
offered by various insurance companies and for Plans; (b) due to
differences of tax treatment and other considerations, the interests of
various Contract owners participating in the Trust and the interests of
Plans investing in the Trust may conflict; and (c) the Board of
Trustees will monitor events in order to identify the existence of any
material irreconcilable conflicts and to determine what action, if any,
should be taken in response to any such conflict.
10. The Trust will comply with all provisions of the 1940 Act that
require voting by shareholders (which, for these purposes, will be the
persons having a voting interest in the Shares of the Trust), and, in
particular, the Trust will either provide for annual shareholder
meetings (except insofar as 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 Trust is not one of the trusts described
in the 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 Trust will act in accordance with the Commission's
interpretation of the requirements of Section 16(a) with respect to
periodic elections of Trustees and with whatever rules the Commission
may promulgate with respect thereto.
11. If and to the extent that Rule 6e-2 or 6e-3(T) under the 1940
Act is amended, or proposed Rule 6e-3 under the 1940 Act is adopted, to
provide exemptive relief from any provision of the 1940 Act, or the
rules promulgated thereunder, with respect to mixed or shared funding,
on terms and conditions materially different from any exemptions
granted in the order requested in the application, then the Trust and/
or Participating Insurance Companies, as appropriate, shall take such
steps as may be necessary to comply with such Rules 6e-2 and 6e-3(T),
as amended, or proposed Rule 6e-3 as adopted, to the extent that such
Rules are applicable.
12. The Participants, at least annually, will submit to the Board
of Trustees such reports, materials, or data as the Board of Trustees
may reasonably request so that the Board of Trustees may fully carry
out the obligations imposed upon it by the conditions contained in the
application. Such reports, materials, and data will be submitted more
frequently if deemed appropriate by the Board of Trustees. The
obligations of the Participants to provide these reports, materials,
and data to the Board of Trustees, when the Board of Trustees so
reasonably requests, shall be a contractual obligation of all
Participants under their agreements governing participation in the
Trust.
13. If a Plan should ever become a holder of ten percent or more of
the assets of the Trust, such Plan will execute a participation
agreement with the Trust. A Plan will execute an application containing
an acknowledgment of this condition upon such Plan's initial purchase
of the Shares of the Trust.
Conclusion
For the reasons set forth above, Applicants assert that the
requested exemptions are appropriate in the public interest and
consistent with the protection of investors and purposes fairly
intended by the policy and provisions of the Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-21567 Filed 8-13-97; 8:45 am]
BILLING CODE 8010-01-M
