[Federal Register Volume 60, Number 164 (Thursday, August 24, 1995)]
[Notices]
[Pages 44099-44103]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20955]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21312; No. 812-8924]
Merrill Lynch Life Insurance Company, et al.
August 17, 1995.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an exemption pursuant to the
Investment Company Act of 1940 (the ``1940 Act'').
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APPLICANTS: Merrill Lynch Life Insurance Company; ML Life Insurance
Company of New York; Merrill Lynch Variable Life Separate Account;
Merrill Lynch Variable Life Separate Account II; ML of New York
Variable Life Separate Account; ML of New York Variable Life Separate
Account II; Merrill Lynch Variable Series Funds, Inc. (the ``Fund'');
and Merrill Lynch Asset Management, L.P.
RELEVANT 1940 ACT SECTIONS: Order requested pursuant to Section 6(c)
granting exemptions from the provisions of Sections 9(a), 13(a), 15(a),
and 15(b) of the 1940 Act and Rules 6e-2(b)(15) and 6e-3(T)(b)(15)
thereunder.
SUMMARY OF APPLICATION: Applicants seek an order permitting 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 DATE: The application was filed on April 11, 1994, and amended
and restated on April 12, 1995. Applicants have undertaken to amend the
application during the notice period to make the representations
contained herein.
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. on September 11, 1995, and must be accompanied
by proof of service on Applicants in the form of an affidavit or, for
lawyers, a certificate of service. Hearing requests should state the
nature of the writer's interest, the reason for the request, and the
issues contested. Persons may request notification of a hearing by
writing to the Secretary of the Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 5th
Street NW., Washington, DC 20549. Applicants, c/o Barry G. Skolnick,
Esq., Merrill Lynch Life Insurance Company, and Philip L. Kirstein,
Esq., Merrill Lynch Asset Management, L.P., both at 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
FOR FURTHER INFORMATION CONTACT:
Kevin M. Kirchoff, Senior Counsel, or Wendy Friedlander, Deputy 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' Representatives
1. Merrill Lynch Life Insurance Company (``Merrill Lynch'') is a
stock life insurance company organized under the laws of the State of
Arkansas. Merrill Lynch Variable Life Separate Account and Merrill
Lynch Variable Life Separate Account II are separate investment
accounts established by Merrill Lynch and registered with the
Commission pursuant to the 1940 Act as unit investment trusts.
2. ML Life Insurance Company of New York (``ML Life'') is a stock
life insurance company organized under the laws of the State of New
York. ML of New York Variable Life Separate Account and ML of New York
Variable Life Separate Account II are separate
[[Page 44100]]
investment accounts established by ML Life and registered with the
Commission pursuant to the 1940 Act as unit investment trusts.
3. The Fund was incorporated on October 16, 1981, as a Maryland
corporation and is registered with the Commission pursuant to the 1940
Act as an open-end, management investment company. The Fund currently
consists of seventeen separate portfolios (the ``Portfolios''), each of
which has its own investment objective, or objectives, and policies.
4. Merrill Lynch Asset Management, L.P. (``MLAM''), a limited
partnership, is the investment adviser for the Fund. MLAM is registered
with the Commission as an investment adviser pursuant to the Investment
Advisers Act of 1940. Princeton Services, Inc., the general partner of
MLAM, is a wholly-owned subsidiary of Merrill Lynch & Co., Inc.
5. Shares of the Portfolios currently are sold to Merrill Lynch, ML
Life (collectively, the ``Merrill Insurance Companies'') and Family
Life Insurance Company (``Family Life,'' together with the Merrill
Insurance Companies, the ``Current Participating Insurance
Companies''). The Merrill Insurance Companies are affiliated because
they are both wholly-owned subsidiaries of Merrill Lynch & Co., Inc.
Family Life is not affiliated with the Merrill Insurance Companies.
6. Currently, shares of certain Portfolios are sold either to: (a)
the Merrill Insurance Companies for their separate accounts to fund
variable annuity contracts; (b) the Merrill Insurance Companies to fund
variable life insurance contracts; or (c) to Family Life to fund
benefits under variable annuity contracts.
7. Applicants state that, upon the granting of the exemptive relief
requested by the Application, the Fund intends to offer shares of its
existing Portfolios, and any future portfolios, to separate accounts of
insurance companies, including both the Current Participating Insurance
Companies and other insurance companies not affiliated with them
(``Other Insurance Companies'') 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, ``variable
contracts''). The Current Participating Insurance Companies and Other
Insurance Companies which elect to purchase shares of one or more
Portfolios are collectively referred to herein as ``Participating
Insurance Companies.'' The Participating Insurance Companies will
establish their own separate accounts (``Participating Separate
Accounts'') and design their own variable annuity or variable life
insurance contracts.
Applicants' Legal Analysis
1. 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 as ``mixed
funding.'' The use of a common management investment company as the
underlying investment medium for 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 as ``shared funding.'' Applicants request an order
exempting the Participating Insurance Companies and Participating
Separate Accounts (and, to the extent necessary, any principal
underwriter and depositor of Participating Separate Accounts) from
Sections 9(a), 13(a), 15(a), and 15(b) of the 1940 Act, and Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to
permit mixed and shared funding.\1\
\1\ Since shares of those Portfolios that currently are sold to
Family Life are sold to the Merrill Insurance Companies only for
their separate accounts to fund benefits under variable annuity
contracts, there is no mixed funding presently occurring with
respect to those Portfolios. Similarly, since shares of those
Portfolios that currently are sold to the Merrill Insurance
Companies for certain of their separate accounts to fund flexible
premium variable life insurance contracts are not sold to Family
Life, the mixed funding that occurs with respect to those Portfolios
occurs only with respect to insurance companies that are affiliates
of each other. Accordingly, Applicants do not believe they require
relief, nor are they by the Application requesting relief, with
respect to the manner in which shares of the various Portfolios of
the Fund are currently sold.
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2. 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 provided by Rule 6e-2
are not available if a separate account invests in a fund engaged in
mixed and/or shared funding.
3. 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: (a) Separate accounts or variable annuity separate accounts of the
life insurance company, or of any affiliated life insurance company; or
(b) the life insurance company or affiliated life insurance company in
consideration solely for advances made by the life insurance company in
connection with the operation of the separate account. Thus, the
exemptions provided by Rule 6e-3(T)(b)(15) are available if the
underlying fund is engaged in mixed funding, but are not available if
the fund is engaged in shared funding.
4. 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.
5. Applicants state that the partial relief granted in Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) from the requirements of Section 9 of the
1940 Act, in effect, limits the amount of monitoring necessary to
ensure compliance with Section 9 to that which is appropriate in light
of the policy and purposes of Section 9. Applicants state that those
1940 Act rules recognize that it is not necessary for the protection of
investors or the purposes fairly intended by the policy and provisions
of the 1940 Act to apply the provisions of Section 9(a) to the many
individuals in a large insurance company complex, most of whom will
have no involvement in matters pertaining to investment companies in
that organization. Applicants state that it is unnecessary to
[[Page 44101]]
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 play 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
contract owners.
6. 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. Applicants state that pass-through voting privileges will be
provided with respect to all variable contract owners with respect to
Separate Accounts registered under the 1940 Act (``registered Separate
Accounts'') so long as the Commission interprets the 1940 Act to
require such pass-through voting privileges. 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 that the limitations on mixed and shared funding
imposed by the 1940 Act and the rules promulgated thereunder are
observed.
7. 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) and 6e-
3(T)(b)(15)(iii)(A)(1) each provide that the insurance company may
disregard the voting instructions of its contract owners with respect
to the investments of an underlying fund, or any contract between a
fund and its investment adviser, when required to do so by an insurance
regulatory authority (subject to the provisions of paragraphs (b)(5)(i)
and (b)(7)(ii)(A) of Rules 6e-2 and 6e-3(T) under the 1940 Act). Rules
6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2) each provide that the
insurance company may disregard voting instructions of contract owners
if the contract owners initiate any change in the underlying investment
company's investment policies, principal underwriter, or any investment
adviser (subject to the provisions of paragraphs (b)(5)(ii),
(b)(7)(ii)(B), and (b)(7)(ii)(C) of Rules 6e-2 and 6e-3(T) under the
1940 Act). Applicants represent that these rights do not raise any
issues different from those raised by the authority of state insurance
administrators over separate accounts. Under Rules 6e-2(b)(15) and 6e-
3(T)(b)(15), an insurer can disregard voting instructions of contract
owners only with respect to certain specified items. Applicants also
note that the potential for disagreement among Participating Separate
Accounts is limited by the requirements in Rules 6e-2 and 6e-3(T) that
a Participating Insurance Company's disregard of voting instructions be
reasonable and based on specific good faith determinations.
8. Applicants state 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 contract owners. 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.
9. 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
Applicants have consented to the following conditions if the
exemptive relief requested by the Application is granted:
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
promulgated 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 contract
owners of all separate accounts investing in the Fund. A material
irreconcilable conflict may arise for a variety of reasons including,
without limitation: (a) an action by any state insurance regulatory
authority; (b) a change in applicable Federal or state insurance, tax,
or securities laws or regulations; (c) a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by
federal or state insurance, tax, or securities regulatory authorities;
(d) an administrative or judicial decision in any relevant proceeding;
(e) the manner in which the investments of any series are being
managed; (f) a difference in voting instructions given by variable
annuity contract owners and variable life insurance contract owners; or
(g) a decision by a Participating Insurance Company to disregard the
voting instructions of contract owners.
3. Participating Insurance Companies and MLAM will report any
potential or existing conflicts to the Board. Participating Insurance
Companies and MLAM 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 contract owner voting instructions are disregarded. The
responsibility to report such information and conflicts to the Board
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 contract owners.
4. If it is determined by a majority of the Board, or a majority of
the disinterested directors of the Board, that
[[Page 44102]]
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 contract owners and, as appropriate, segregating the
assets of any appropriate group (i.e., annuity contract owners or life
insurance contract owners of one or more Participating Insurance
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 the
voting instructions of contract owners, and that decision represents a
minority position or would preclude a majority vote, then the insurance
company may be required, at the Fund's election, to withdraw the
insurance company'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 contract owners.
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 MLAM 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 contract owners 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 contract owners with respect to
registered Separate Accounts so long as the Commission continues to
interpret the 1940 Act as requiring pass-through voting privileges for
variable contract owners. Accordingly, Participating Insurance
Companies will vote shares of the Fund held in their registered
Separate Accounts in a manner consistent with voting instructions
timely-received from contract owners. Each Participating Insurance
Company will vote shares of the Fund held in the Participating
Insurance Company's registered Separate Accounts for which no voting
instructions from contract owners 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 contract owners are timely-received.
Participating Insurance Companies shall be responsible for assuring
that each of their registered 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 registered 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 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.
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 Board 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 the 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 are 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 by Applicants, 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 MLAM, at least
annually, shall submit to the Board such reports, materials, or data as
the Board reasonably may request so that the Board can fully carry out
the obligations imposed upon it by the conditions provided for by the
order granting the exemptive relief requested by the Application. Such
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 Board, 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, and all Board action with regard to determining the existence of
a conflict, notifying Participating Insurance Companies of a conflict,
and determing 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.
[[Page 44103]]
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-20955 Filed 8-23-95; 8:45 am]
BILLING CODE 8010-01-M
