[Federal Register Volume 60, Number 165 (Friday, August 25, 1995)]
[Notices]
[Pages 44368-44372]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21127]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21315; File No. 812-9432]
The Alger American Fund, et al.; Notice of Application
August 18, 1995.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an amended order of exemption under
the Investment Company Act of 1940 (the ``Act'').
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APPLICANTS: The Alger American Fund (the ``Fund'') and Fred Alger
Management, Inc. (``Alger Management'').
RELEVANT 1940 ACT SECTIONS AND RULES: Order requested under Section
6(c) for exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the
Act and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder.
SUMMARY OF THE APPLICATION: Applicants seek an order under Section 6(c)
of the Act granting exemptions from Sections 9(a), 13(a), 15(a) and
15(b) of the Act and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder,
to the extent necessary to amend an existing order issued by the
Commission on February 17, 1989 (Investment Company Release No. 16822)
(``Existing Order''), to engage in mixed and shared funding. The
proposed relief would amend the prior order to permit the Fund to sell
its shares directly to qualified pension and retirement plans
(``Qualified Plans'') outside of the separate account context.
FILING DATE: The application was filed on January 12, 1995 and amended
on August 4, 1995.\1\
\1\ Applicants represent that they will amend the application
during the notice period to include the representations herein.
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HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be
[[Page 44369]]
issued unless the Commission orders a hearing. Interested persons may
request a hearing by writing to the Commission's Secretary and serving
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 September
12, 1995, and should be accompanied by proof of service on
Applications, 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 who wish to be notified of a hearing may request
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notification by writing to the Commission's Secretary.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street NW., Washington, D.C. 20549. Applicants, The Alger American
Fund, 75 Maiden Lane, New York, New York 10038.
FOR FURTHER INFORMATION CONTACT: Edward P. Macdonald, Staff Attorney,
or Wendy Friedlander, Deputy Chief, 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 may be obtained for a fee from
the Commission's Public Reference Branch.
Applicants' Representations
1. The Fund, organized as a Massachusetts Business Trust, is an
open-end diversified management investment company. It currently has
six portfolios. The Fund may offer additional portfolios in the future.
The Fund's shares are distributed by Fred Alger & Company,
Incorporated.
2. Fred Alger Management, Inc. (``Alger Management''), a registered
investment adviser under the Investment Advisers Act of 1940, is the
investment adviser to each portfolio. Alger Management is owned by
Alger Inc., which in turn is owned by Alger Associates, Inc., a
financial services holding company.
3. The Existing Order allows the Fund to offer its shares to
registered separate accounts of insurance companies, which may be
affiliated or unaffiliated, issuing variable annuity contracts or
scheduled or flexible premium variable life insurance contracts.
Applicants now propose that the Fund also sell its shares directly to
Qualified Plans outside of the separate account context so that it may
increase its asset base through the sale of its shares to such
Qualified Plans.
Applicants' Legal Analysis
1. Section 817(h) of the Internal Revenue Code of 1986 (the
``Code'') imposes certain diversification requirements on the
underlying assets of variable contracts held in the portfolios of
management investment companies. The Code provides that a variable
contract shall not be treated as an annuity or life insurance contract
for any period for which the investments are not adequately diversified
in accordance with Treasury Department Regulations (``Regulations'').
2. In March 1989, the Treasury Department issued Treasury
Regulation Sec. 1.817-5 which established diversification requirements
for investment company portfolios underlying variable contracts. In
order to satisfy the diversification requirements of Regulation
Sec. 1.817-5, all of the beneficial interests in the investment company
must be held by the segregated asset accounts of one or more insurance
companies. However, the Regulations also contain certain exceptions to
this requirement, one of which allows shares in an investment company
to be held by the trustee of a Qualified Plan without adversely
affecting the ability of the same investment company's shares to be
held also by insurance company separate accounts.
3. Rules 6e-2 and 6e-3(T) under the Act provide certain exemptions
from the Act in order to permit insurance company separate accounts,
investing in registered investment companies, to issue variable life
insurance contracts.
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) require that shares of the
registered management investment companies be offered exclusively to
separate accounts of life insurance companies. Rule 6e-2(b)(15)
precludes mixed and shared funding and Rule 6e-3(T)(b)(15) precludes
shared funding. In the Existing Order, the Commission extended the
requested mixed and shared funding relief to a class consisting of
insurers and separate accounts investing in the Fund which would
otherwise have been precluded from investing in the Fund by virtue of
the Fund offering its shares to both variable annuity separate accounts
and scheduled and flexible premium variable life insurance contracts of
affiliated and unaffiliated separate accounts. Applicants assert that
the relief previously granted in the Existing Order should not be
affected by the proposed amendment to permit the sale of shares also
directly to Qualified Plans.
4. The promulgation of Rule 6e-2(b)(15) preceded the issuance of
the Regulations which made it possible for shares of an investment
company to be held by the trustee of a Qualified Plan without adversely
affecting the tax status of the investment company's shares held also
by insurance company separate accounts.
5. Applicants assert that the relief granted by Rules 6e-2(b)(15)
and 6e-3(T)(b)(15) is in no way affected by the purchase of Fund shares
by Qualified Plans. However, in that the relief under these rules is
available only where shares are offered exclusively to separate
accounts, it is Applicants' belief that additional exemptive relief is
necessary if the shares of the Fund are also sold to Qualified Plans.
Applicants assert that if the Fund were to sell its shares only to
Qualified Plans no exemptive relief would be necessary. None of the
relief provided for in Rules 6e-2 and 6e-3(T) relate to Qualified Plans
or to a registered investment company's ability to sell its shares to
such Qualified Plans. It is only because the separate accounts
investing in the Fund are themselves investment companies, which are
relying upon Rules 6e-2 and 6e-3(T) and which desire to have the relief
continue in place, that Applicants are applying for the requested
relief.
6. Section 9(a) of the 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). Rules 6e-2(b)(15) (i) and (ii) and 6e-3(T)(b)(15) (i) and (ii),
provide exemptions from Section 9(a) under certain circumstances
subject to the limitations on mixed and shared funding. These
exemptions limit the application of the eligibility restrictions to
affiliated individuals or companies that directly participate in the
management of the underlying management investment company.
7. Applicants previously requested and received relief from
Sections 13(a), 15(a) and 15(b) of the Act and Rules 6e-2(b)(15) and
6e-3(T)(b)(15) thereunder to the extent necessary to permit mixed and
shared funding. In support of its previous requests for relief,
Applicants represent that all variable annuity and variable life
insurance contractholders would be provided pass-through voting rights
with respect to the shares of the Fund and that any potential
irreconcilable conflicts which could develop among the separate
accounts due to an insurance company's right to disregard voting
instructions in certain
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limited circumstances would be resolved through certain undertakings
which Applicants made as a condition of the exemptive relief granted.
8. Shares of the Fund sold to Qualified Plans would be held by the
trustees of the Qualified Plans mandated by Section 403(a) of the
Employee Retirement Income Security Act. Some of the Qualified Plans
may have their trustee(s) or other fiduciaries exercise voting rights
attributable to investment securities held by the Qualified Plans in
their discretion. Some of the Qualified Plans, however, may provide for
the trustee(s), an investment adviser or other named fiduciary to
exercise voting rights in accordance with instructions from
participants.
9. Where a Qualified Plan does not provide participants with the
right to give voting instructions, Applicants do not see any potential
for material irreconcilable conflicts of interest between or among
variable contractholders and Qualified Plan investors with respect to
voting of Fund shares. In that there is no pass-through voting with
respect to Qualified Plan participants, Applicants submit that, unlike
the case with insurance company separate accounts, the issue of the
resolution of material irreconcilable conflicts with respect to voting,
is not present with Qualified Plans. In this regard, investment in one
Fund by a Qualified Plan will not create any of the voting
complications occasioned by mixed and shared funding. Unlike mixed or
shared funding, Qualified Plan investor voting rights cannot be
frustrated by veto rights of insurers or state regulators.
10. Where a Qualified Plan provides participants with the right to
give voting instructions, Applicants assert that there is no reason to
believe that participants in Qualified Plans generally, or those in a
particular plan, either as a single group or in combination with
participants in other Qualified Plans, would vote in a manner that
would disadvantage variable contractholders. The purchase of Fund
shares by Qualified Plans that provide voting rights does not present
any complications not otherwise occasioned by mixed or shared funding
as addressed in the Existing Order.
11. Applicants assert that the Commission's primary concern with
respect to mixed and shared funding is that of potential conflicts of
interest. Applicants submit that no increased conflicts of interest
would be present if the Commission grants the exemptive relief
requested.
12. Applicants assert that regardless of the type of shareholder in
the Fund, Alger Management will continue to manage the portfolios
solely and exclusively in accordance with each portfolio's investment
objectives and restrictions, as well as any guidelines established by
the Board of Trustees of the Fund. Individual portfolio managers work
with a pool of money and do not take into account the identity of the
shareholders. The Fund is thus managed in the same manner as any other
mutual fund. If shareholders are displeased with the Fund's investment
results, or in the manner in which the Fund is being operated, they
redeem their shares. Since the Fund is sold without the imposition of
any sales load, such redemption is at net asset value without the
imposition of any other charge or fee. It is the duty of the management
of the Fund, including its governing board, to keep shareholders
informed through updated prospectuses and annual and semi-annual
reports. Applicants believe that these periodic communications to
shareholders function as they are intended. Qualified Plans as well as
contractholders will thus be given up-to-date information necessary for
them to make informed investment decisions.
13. The difference between a Qualified Plan shareholder and a
contractholder whose variable contract invests in the Fund is that the
Qualified Plan shareholder can immediately redeem its shares and
reinvest them while the contractholder must either wait for the
participating insurance company to fund another suitable investment
medium or exchange contracts, both of which require multiple steps and
some period of time.
14. Applicants assert that the sale of the shares of the Fund to
Qualified Plans should result in an increased amount of assets
available for investment by the Fund. This should inure to the benefit
of variable contractholders by promoting economies of scale, by
permitting greater safety through increased diversification, and by
making the addition of new portfolios to the Fund more feasible.
Further, Applicants submit that the purposes of an investment in the
Fund by a Qualified Plan is not that dissimilar to the purposes
currently served by variable contracts which are generally long-term
retirement vehicles. Applicants further submit that the sale of the
shares of the Fund of Qualified Plans will not increase the risk of
material irreconcilable conflicts to the Fund or to the separate
accounts of participating insurance companies.
Applicants' Conditions
Applicants represent that they will comply with the following
conditions:
1. A majority of the board shall consist of persons who are not
``interested persons'' of the Fund as defined by Section 2(a)(19) of
the 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, 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 among the interests of the
contractholders of all of the 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 interpretive letter, or similar action by
insurance, tax or securities regulatory authorities; (c) an
administrative or judicial decision in any relevant proceeding; (d) the
manner in which the investments of the Fund are being managed; (e) a
difference in voting instructions given by owners of variable annuity
contracts and owners of variable life insurance contracts; or (f) a
decision by a participating insurance company to disregard the voting
instructions of contractholders.
3. The participating insurance companies, Alger Management (or any
other investment adviser of the Fund), and any Qualified Plan that
executes a fund participation agreement upon becoming an owner of 10%
or more of the assets of the Fund (the ``Participants'') will report
any potential or existing conflicts to the Board. Participants will be
responsible for assisting the Board in carrying out its
responsibilities under these conditions by providing the Board with all
information reasonably necessary for the Board to consider any issues
raised. This responsibility includes, but is not limited to, an
obligation by each Participant to inform the Board whenever voting
instructions of contractholders are disregarded. The responsibility to
report such
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information and conflicts and to assist the Board will be a contractual
obligation of all Participants investing in the Fund under their
agreements governing participation in the Fund, and such agreements
shall provide that these responsibilities will be carried out with a
view only to the interests of contractholders.
4. If it is determined by a majority of the Board, or by a majority
of its disinterested trustees, that a material irreconcilable conflict
exists, the relevant Participant shall, at its expense and to the
extent reasonably practicable (as determined by a majority of the
disinterested trustees), take any steps necessary to remedy or
eliminate the material irreconcilable conflict, including: (a)
withdrawing the assets allocable to some or all of the separate
accounts from the Fund or a portfolio of the Fund 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 contractholders; and,
as appropriate, segregating the assets of any appropriate group (i.e.,
variable annuity contractholders, variable life insurance
contractholders, or variable contractholders of one or more
Participant) that votes in favor of such segregation, or offering to
the affected variable contractholders 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 Participant's decision to disregard voting
instructions of the contractholders, and that decision represents a
minority position or would preclude a majority vote, the Participant
may be required, at the election of the Fund, to withdraw its separate
account's assets 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
Participants under their agreements governing their participation in
the Funds. The responsibility to take such remedial action shall be
carried out with a view only to the interests of Contractholders. For
purposes of this Condition Four, a majority of the disinterested
members of the Board shall determine whether any proposed action
adequately remedies any material irreconcilable conflict, but, in no
event will the Fund or Alger Management (or any other investment
adviser of the Fund) be required to establish a new funding medium for
any Contract. Further, no Participant shall be required by this
Condition Four to establish a new funding medium for any variable
contract if any offer to do so has been declined by a vote of a
majority of the contractholders materially affected by the material
irreconcilable conflict.
5. The Board's determination of the existence of a material
irreconcilable conflict and its implication shall be made known
promptly and in writing to all Participants.
6. Participants will provide pass-through voting privileges to all
Contractholders so long as the Commission continues to interpret the
Act as requiring pass-through voting privileges for variable
contractholders. Accordingly, the Participants, where applicable, will
vote shares of the Fund held in their separate accounts in a manner
consistent with voting instructions timely received from variable
contractholders. Participants will be responsible for assuring that
each of their separate accounts that participates in the Fund
calculates voting privileges in a manner consistent with other
Participants. The obligation to calculate voting privileges in a manner
consistent with all other separate accounts will be a contractual
obligation of all Participants under the agreements governing their
participation in the Fund. Each Participant will vote shares for which
it has not received timely voting instructions as well as shares it
owns in the same proportion as it votes those shares for which it has
received voting instructions.
7. All reports received by the Board of potential or existing
conflicts, and all Board action with regard to: (a) determining the
existence of a conflict; (b) notifying Participants of a conflict, and
(c) determining whether any proposed action adequately remedies a
conflict, will be properly recorded in the minutes of the Board or
other appropriate records. Such minutes or other records shall be made
available to the Commission upon request.
8. The Fund will notify all Participants that separate account
prospectus disclosure regarding potential risks of mixed and shared
funding may be appropriate. The Fund shall disclose in its prospectus
that: (a) shares of the Fund may be offered to insurance company
separate accounts of both annuity and life insurance variable
contracts, and to Qualified Plans; (b) due to differences of tax
treatment and other considerations, the interests of various
contractholders participating in the Fund and the interests of
Qualified Plans investing in the Funds may conflict; and (c) the Board
will monitor the Fund for any material conflicts and determine what
action, if any, should be taken.
9. The Fund will comply with all the provisions of the Act
requiring voting by shareholders (which, for these purposes, shall be
the persons having a voting interest in the shares of the Fund), and,
in particular, the Fund will either provide for annual meetings (except
to the extent that the Commission may interpret Section 16 of the Act
not to require such meetings) or comply with Section 16(c) of the Act
(although the Fund is not one of the trusts described in Section 16(c)
of the Act), as well as Section 16(a), and, if applicable, Section
16(b) of the 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 trustees and with whatever rules the
Commission may promulgate with respect thereto.
10. If and to the extent that Rules 6e-2 and 6e-3(T) are amended
(or if Rule 6e-3 under the Act is adopted) to provide exemptive relief
from any provision of the Act or the rules thereunder with respect to
mixed and shared funding on terms and conditions materially different
from any exemptions granted in the order requested by Applicants, then
the Fund and/or Participants, as appropriate, shall take such steps as
may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and
Rule 6e-3, as adopted, to the extent such rules are applicable.
11. No less than annually, the Participants shall submit to the
Board such reports, materials or data as the Board may reasonably
request so that the Board may carry out fully the obligations imposed
upon it by the conditions contained in the Application. Such reports,
materials and data shall be submitted more frequently if deemed
appropriate by the Board. The obligations of the Participants to
provide these reports, materials and data to the Board, when the Board
so reasonably requests, shall be a contractual obligation of all
Participants under the agreements governing their participation in the
Fund.
12. If a Qualified Plan becomes an owner of 10% or more of the
assets of the Fund, such Qualified Plan will execute a fund
participation agreement with the Fund. A Qualified Plan will execute an
application containing an acknowledgement of this condition upon such
Qualified Plan's initial purchase of the shares of the Fund.
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Conclusion
For the reasons summarized above, Applicants represent that the
exemptive relief requested is necessary or appropriate in the public
interest and otherwise meets the standards of Section 6(c) of the Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-21127 Filed 8-24-95; 8:45 am]
BILLING CODE 8010-01-M
