[Federal Register Volume 64, Number 168 (Tuesday, August 31, 1999)]
[Notices]
[Pages 47541-47548]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22550]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-23966; File No. 812-11516]
Mitchell Hutchins Series Trust, et al.; Notice of Application
August 24, 1999.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an order pursuant to Section 6(c) of
the Investment Company Act of 1940 (``1940 Act''), granting exemptive
relief 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.
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Summary of Application
Applicants seek an order of exemption to the extent necessary to
permit shares of the Mitchell Hutchins Series Trust (``Fund'') and
shares of other Insurance Products Funds, as defined below, to be sold
to and held by: (a) variable annuity and variable life insurance
separate accounts of both affiliated and unaffiliated life insurance
[[Page 47542]]
companies; and (b) qualified pension and retirement plans outside of
the separate account context (``Qualified Plans'' or ``Plans'').
Applicants
Mitchell Hutchins Series Trust and Mitchell Hutchins Asset
Management Inc.(``Mitchell Hutchins'').
Filing Date
The Application was filed on February 19, 1999, and amended and
restated on August 13, 1999.
Hearing or Notification of Hearing
An order (``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
20, 1999, and should be accompanied by proof of service on the
Applicants in the form of an affidavit or, for lawyers, a certificate
of service. Hearing requests should state the nature of the writer's
interest, the reason for the request and the issues contested. Persons
may request notification of the date of a hearing by writing to the
Secretary of the Commission.
ADDRESSES: Secretary, Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549-0609. Applicants, c/o Dianne E. O'Donnell, Deputy General
Counsel, Mitchell Hutchins Asset Management Inc., 1285 Avenue of the
Americas, New York, New York 10019.
FOR FURTHER INFORMATION CONTACT: Paul G. Cellupica, Senior Counsel, or
Kevin M. Kirchoff, 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
Commission's Public Reference Branch, 450 Fifth Street, N.W.,
Washington, D.C. 20549 (202-942-8090).
Applicants' Representations
1. The fund is a Massachusetts business trust registered under the
1940 Act as an open-end management company. The Fund currently is
comprised of thirteen separately managed series, each of which consists
of two classes of shares and has its own investment objective and
policies. Additional series could be added in the future. Other
Insurance Products Funds are those other investment companies or
investment company series for which Mitchell Hutchins, PaineWebber
Incorporated (``PaineWebber'') or any of their affiliates serve, now or
in the future, an investment adviser, administrator, manager, principal
underwriter or sponsor and which offer their shares only to insurance
company separate accounts.
2. Mitchell Hutchins serves as the investment adviser and
administrator for each of the Fund's series. Mitchell Hutchins is a
wholly owned asset management subsidiary of Paine Webber, which in turn
is a wholly owned subsidiary of Paine Webber Group Inc. (``PW Group''),
a publicly held financial services holding company.
3. Pacific Investment Management Company (``PIMCO'') serves as the
sub-adviser for Strategic Fixed Income Portfolio. PIMCO is a subsidiary
partnership of PIMCO Advisers L.P., a publicly held investment advisory
firm.
4. Nicholas-Applegate Capital Management (``NACM''), a California
limited partnership, serves as the sub-adviser for Aggressive Growth
Portfolio. NACM's general partner is Nicholas-Applegate Capital
Management Holdings, L.P., a California limited partnership controlled
by Arthur E. Nicholas.
5. Invista Capital Management Inc. (``Invista'') serves as the sub-
adviser for Global Growth Portfolio's foreign investments. Invista is
an indirect wholly owned subsidiary of Principal Life Insurance
Company.
6. The Fund currently offers its shares exclusively to insurance
company separate accounts that fund variable annuity contracts.
Applicants propose that shares of each Insurance Product Fund be
offered to affiliated and unaffiliated insurance companies for their
separate accounts as an investment vehicle to fund various insurance
products including, among others, variable annuity contracts, variable
group life insurance contracts, scheduled premium variable life
insurance contracts, single premium and modified single premium
variable life insurance contracts, and flexible premium variable life
insurance contracts (collectively, ``Variable Contracts''). Some of
these separate accounts may not be registered as investment companies
under the 1940 Act pursuant to the exceptions from registration in
Section 3(c)(1), 3(c)((7) and 3(c)(11) of the Act. In addition,
Applicants propose that shares of each Insurance Product Fund also be
offered directly to Qualified Plans. Separate accounts owning shares of
the Insurance Product Funds and their insurance company depositors are
referred to herein as ``Participating Separate Accounts'' and
``Participating Insurance Companies,'' respectively.
7. The use of a common management investment company as the
underlying investment medium for both variable annuity and variable
life insurance separate accounts of a single insurance company (or of
two or more affiliated insurance companies) is referred to as ``mixed
funding.'' The use of a common investment company as the underlying
investment medium for separate accounts of unaffiliated insurance
companies is referred to as ``shared funding.'' The use of a common
investment company as the underlying investment medium for variable
annuity and variable life separate accounts of affiliated and
unaffiliated insurance companies and for Qualified Plans is referred to
as ``extended mixed and shared funding.''
Applicants' Legal Analysis
1. Section 6(c) of the 1940 Act authorizes the Commission to exempt
any person, security or transaction, or any class or classes of person,
securities or transactions from any provisions of the 1940 Act or the
rules or regulations thereunder, if and to the extend that such
exemption is necessary or appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the 1940 Act.
2. In connection with scheduled premium variable life insurance
contracts issued through a separate account registered under the 1940
Act as a unit investment trust (``UIT''), Rule 6e-2(b)(15) provides
partial exemptions from the following sections of the 1940 Act: (a)
Section 9(a), which makes it unlawful for any company to serve as an
investment adviser or principal underwriter of any registered UIT if an
affiliated person of that company is subject to a disqualification
enumerated in Section 9(a) (1) or (2); and (b) Sections 13(a), 15(a)
and 15(b) of the 1940 Act, to the extent that those sections might be
deemed to require ``pass-through'' voting with respect to an underlying
investment company's shares.
3. The exemptions granted by Rule 6e-2(b)(15), however, are
available only if the management investment companies underlying the
UIT (``underlying funds'') offer their shares ``exclusively to variable
life insurance separate accounts of the life insurer, or any affiliated
life insurance company'' (emphasis added). Therefore, Rule 6e-2
[[Page 47543]]
does not permit either mixed or shared funding because the relief
granted by Rule 6e-2(b)(15) is not available with respect to a
scheduled premium variable life insurance separate account that owns
shares of an underlying fund that also offers its shares to a variable
annuity or a flexible premium variable life insurance account of the
same company or of any affiliated or unaffiliated life insurance
company. This rule also does not contemplate that shares of the
underlying fund might also be sold to Qualified Plans.
4. In connection with flexible premium variable life insurance
contracts issued through a separate account registered under the 1940
Act as a UIT, Rule 6e-3(T)(b)(15) provides partial exemptions from
Sections 9(a), and from Sections 13(a), 15(a) and 15(b) of the 1940 Act
to the extent that those sections might be deemed by the Commission to
require ``pass-through'' voting with respect to an underlying fund's
shares.
5. The exemptions granted by Rule 6e-3(T) are available only where
the UIT's underlying funds offer their shares ``exclusively to separate
accounts of the life insurer, or of any affiliated life insurance
company, offering either scheduled contracts or flexible contracts, or
both; or which also offer their shares to variable annuity separate
accounts of the life insurer or of an affiliated life insurance
company'' (emphasis added). Therefore, Rule 6e-3(T) permits mixed
funding but does not permit shared funding. Rule 6e-3(T) also does not
contemplate that shares of the underlying fund might also be sold to
Qualified Plans.
6. Section 817(h) of the Internal Revenue Code of 1986, as amended
(``Code''), imposes certain diversification standards 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 contract or life insurance contract, as
applicable, for any period (and any subsequent period) for which the
investments are not adequately diversified in accordance with
regulations issued by the Treasury Department. Treasury Regulation
Sec. 1.817-5, which establishes diversification requirements for such
portfolios, specifically permits, among other things, qualified pension
or retirement plans, general accounts and separate accounts to share
the same underlying management investment company. As a result,
Qualified Plans may invest in Insurance Product Funds without
endangering the tax status of Variable Contracts issued through
Participating Insurance Companies. Shares of the Insurance Product
Funds sold to Qualified Plans would be held by the trustees of those
Plans as required by Section 403(a) of the Employee Retirement Income
Security Act (``ERISA'').
7. The promulgation of Rules 6e-2(b)(15) and 6e-3(T)(b)(15)
preceded the issuance of the Treasury regulations that made it possible
for shares of an investment company to be held by the trustees of
Qualified Plans without adversely affecting the ability of separate
accounts of insurance companies to hold shares of the same investment
company in connection with their variable annuity and variable life
contracts. Thus, the sale of shares of the same investment company to
separate accounts and Qualified Plans could not have been envisioned at
the time of the adoption of Rules 6e-2(b)(15) and 6e-3(T) (b)(15).
8. Applicants note that if the Insurance Product Funds were to sell
shares only to Qualified Plans, exemptive relief under Rule 6e-2 and
Rule 6e-3(T) would not be necessary. The relief provided by Rule 6e-
2(b)(15) and Rule 6e-3(T)(b)(15) does not relate to qualified pension
and retirement plans or to a registered investment company's ability to
sell its shares to such entities.
9. Applicants are not aware of any stated rationale for excluding
separate accounts and investment companies, or series thereof, engaged
in shared funding from the exemptive relief provided under Rules 6e-
2(b)(15) and 6e-3T (b)(15) or for excluding separate accounts and
investment companies, or series thereof, engaged in mixed funding from
the exemptive relief provided under Rule 6e-2(b)(15). Indeed, the
Commission's proposed amendments to Rule 6e-2 would eliminate the
exclusion of mixed funding from the relief provided under Rule 6e-
2(b)(15) and numerous exemptions permitting both mixed and shared
funding have been granted since the adoption of Rules 6e-2 and 6e-3.
10. Applicants similarly are not aware of any stated rationale for
excluding Participating Insurance Companies from the exemptive relief
requested because shares of the Insurance Products Funds may also sell
their respective shares to Qualified Plans. The relief provided under
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) does not relate to Qualified Plans
or to a registered investment company's ability to sell its shares to
such entities. Because the relief accorded under such Rules is
available where shares are offered exclusively to separate accounts,
Applicants believe that additional exemptive relief is required if
shares of Insurance Product Funds are also to be sold to Plans. The
Commission has granted numerous exemptions permitting extended mixed
and shared funding.
11. Applicants believe that the same policies and considerations
that led the Commission to grant exemptions to other applicants for
extended mixed and shared funding are present here. Moreover,
Applicants believe that the requested exemptions are appropriate in the
public interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940 Act.
12. 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). However, Rules 6e-2(b)(15) (i) and (ii) and 6e-
3(T)(b)(15) (i) and (ii) provide partial exemptions from Section 9(a)
under certain circumstances, subject to the limitations discussed above
on mixed and shared funding. These exemptions limit the eligibility
restrictions to affiliated individuals or companies that directly
participate in the management or administration of the underlying
investment company or series thereof.
13. Rules 6e-2(b)(15)(i) and 6e-3(T)(b)(15)(i) allow an individual
disqualified under Section 9(a) (1) or (2) to be an officer, director,
or employee of an insurance company, or any of its affiliates that
serves in any capacity with respect to an underlying investment
company, so long as the disqualified individual does not participate
directly in the management or administration of the underlying
investment company. Similarly, Rules 6e-2(b)(15)(ii) and 6e-
3(T)(b)(15)(ii) permit an insurance company disqualified under Section
9(a)(3) of the 1940 Act to serve in any capacity with respect to an
underlying investment company, provided that the affiliated person of
the disqualified company, ineligible under Section 9(a) (1) or (2) of
the 1940 Act, does not participate directly in the management or
administration of the investment company.
14. The partial relief granted in Rules 6-2(b)(15) and 6e-
3(T)(b)(15) from the requirements of Section 9 limits, in effect, the
amount of monitoring of an insurer's personnel that would otherwise be
necessary to ensure compliance with Section 9 to that which is
appropriate in light of the policy and
[[Page 47544]]
purposes of Section 9. These 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 Section 9(a) to the many
individuals who may be involved in a large insurance company but would
have no connection with the investment company funding the separate
accounts. Applicants believe that it is unnecessary to limit the
applicability of these rules merely because shares of the Insurance
Products Funds may be sold in connection with mixed and shared funding.
Since the Participating Insurance Companies and Qualified Plans are not
expected to play any role in the management or administration of the
Insurance Products Funds, Applicants assert that applying the
restrictions of Section 9(a) serves no regulatory purpose. Applicants
further assert that applying such restrictions would increase the
monitoring costs incurred by the Participating Insurance Companies and,
therefore, would reduce the net rates of return realized by Variable
Contract owners.
15. Moreover, appropriateness of the relief requested will not be
affected by the proposed sale of shares of Insurance Products Funds to
Qualified Plans. The insulation of the Insurance Product Fund from
those individuals who are disqualified under the 1940 Act remains in
place. Applying the requirements of section 9(a) because of investment
by Qualified Plans would be unjustified and would not serve any
regulatory purpose. Since the Qualified Plans are not investment
companies and will not be deemed to be affiliated solely by virtue of
their shareholdings, no additional relief is necessary.
16. Rules 6e-2(b)915)(iii) and 6e-3(T)(b)(15)(iii) assume that
contract owners are entitled to pass-through voting privileges with
respect to investment company shares held by a related separate
account. However, if the limitations on mixed and shared funding are
satisfied, Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) provide
exemptions from the pass-through requirements in limited situations.
These rules provide that an insurance company may disregard the voting
instructions of its contract owners with respect to the investments of
an underlying investment company or any contract between an investment
company and its investment adviser, when an insurance regulatory
authority so requires (subject to the provisions of paragraphs
(b)(5)(i) and (b)(7)(ii)(A) of the rules). In addition, Rules 6e-
2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2) provide that the
insurance company may disregard contract owners' voting instructions
with regard to certain changes initiated by the contract owners in the
investment company's investment policies, principal underwriter or
investment adviser.
17. The Commission has deemed exemptions from the pass-through
voting requirements as necessary to assure the solvency of the life
insurer and the performance of its contractual obligations and
therefore has enabled 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 assert
that these considerations are no less important or necessary when an
insurance company funds its separate accounts in connection with mixed
and shared funding. Such funding does not compromise the goals of the
insurance regulatory authorities or of the Commission. While the
Commission may have wished to reserve wide latitude with respect to the
once unfamiliar variable annuity product, that product is now familiar
and there appears to be no reason for the maintenance of prohibitions
against mixed and shared funding arrangements. Indeed, by permitting
such arrangements, the Commission eliminates needless duplication of
start-up and administrative expenses and potentially increases an
investment company's assets, thereby making effective portfolio
management strategies easier to implement and promoting other economies
of scale.
18. In addition, the Insurance Products funds' sale of shares to
Qualified Plans will have no impact on the relief requested in this
regard. Shares of the Insurance Products Funds sold to Qualified Plans
would be held by the trustees of said Plans as mandated by Section
403(a) of ERISA. Section 403(a) provides that the trustee(s) must have
exclusive authority and discretion to manage and control the Plan 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 the named fiduciary.
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 Qualified Plans since
such plans are not entitled to pass-through voting privileges.
19. Even if a Qualified Plan were to hold a controlling interest in
an Insurance Product Fund, Applicants do not believe that such control
would disadvantage other investors in that Insurance Product Fund to
any greater extent than is the case when any institutional shareholder
holds a majority of the voting securities of any open-end management
investment company. In this regard, Applicants submit that investment
in an Insurance Product Fund by a Qualified Plan will not create any of
the voting complications occasioned by mixed or shared funding. Unlike
mixed or shared funding, Plan investor voting rights cannot be
frustrated by veto rights of insurers or state regulators.
20. The Qualified Plan may have their trustees or other fiduciaries
exercise voting rights attributable to investment securities held by
the Qualified Plan in their discretion. Some of the Qualified Plans,
however, may provide for the trustees, an investment adviser or another
named fiduciary to exercise voting rights in accordance with
instructions from participants.
21. Where a Qualified Plan does not provide participants with the
right to give voting instructions, the Applicants submit that there is
no potential for material irreconcilable conflicts of interest between
or among Variable Contract owners and Plan investors with respect to
voting of the respective Insurance Product Fund's shares.
22. Where a Plan provides participants with the right to give
voting instructions, Applicants likewise submit 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 Contract owners. The purchase of shares of
the Insurance Product Funds by Qualified Plans that provide voting
rights does not present an complications not otherwise occasioned by
mixed or shared funding.
23. Applicants assert that shared funding does not present any
conflict of interest issues that do not already exist
[[Page 47545]]
when a single insurance company is licensed to do business in several
states. For example, when different Participating Insurance Companies
are domiciled in different states, it is possible that the state
insurance regulatory body in a state in which one Participating
Insurance Company is domiciled could require action that is
inconsistent with the requirements of insurance regulators in one or
more other states in which other Participating Insurance Companies are
domiciled. That possibility, however, is no different and no greater
than that which exists when a single insurer and its affiliates offer
their insurance products in several states, as currently is permitted.
24. In addition, affiliations among insurers do not reduce the
potential, if any exists, for differences in state regulatory
requirements. In any event, the conditions discussed below (which are
adapted from the conditions included in Rule 6e-3(T)(b)(15)) are
designed to safeguard against any adverse effects that differences
among state regulatory requirements may produce. Similarly, affiliation
does not eliminate the potential, if any exists, for divergent
judgments as to when a Participating Insurance Company could disregard
contract owner voting instructions. The potential for disagreement in
limited by the requirement that disregarding voting instructions be
reasonable and based on specified good faith determinations. However,
if a particular state insurance regulator's decision conflicts with the
majority of other state regulators or if a Participating Insurance
Company's decision to disregard contract owner voting instructions
represents a minority position or would preclude a majority vote
approving a particular change, the Participating Insurance Company may
be required, at the election of the relevant Insurance Products Fund,
to withdraw its Participating Separate Accounts' investment in that
fund and no charge or penalty will be imposed as a result of such
withdrawal.
25. Similarly, there is no reason why the investment policies of an
Insurance Products Fund that engages in mixed funding would or should
materially differ from what those policies would or should be if that
fund only supported variable annuity or only variable life insurance
contracts. Hence, there is no reason to believe that conflicts of
interest would result from mixed funding. Moreover, no one investment
strategy can be identified as appropriate to a particular insurance
product. Each pool of variable annuity and variable life insurance
contract owners is composed of individuals of diverse financial status,
age, insurance and investment goals. Those diversities are of greater
significance than any differences in insurance products. An investment
company supporting even one type of insurance product must accommodate
those diverse factors. The sale of shares to Qualified Plans should not
increase the potential for material irreconcilable conflicts of
interest between or among different types of investors. There should be
very little potential for such conflicts beyond that which would
otherwise exist between variable annuity and variable life contract
owners.
26. Moreover, the Code, Treasury regulations, and revenue rulings
do not present any inherent conflicts of interest if Qualified Plans
and separate accounts invest in the same underlying investment company.
As described above, Section 817(h) imposes certain diversification
standards on the underlying assets of variable annuity contracts and
variable life contracts held in the portfolios of management investment
companies. However, Treasury Regulation Sec. 1.817-5(f)(3), which
established diversification requirements for such portfolios,
specifically permits, among other things, qualified pension or
retirement plans, general accounts and separate accounts to share the
same underlying management investment company.
27. While there are differences in the manner in which
distributions from Variable Contracts and Qualified Plans are taxed,
these tax consequences do not raise any conflicts of interest. When
distributions are to be made, and a Participating Separate Account or
Qualified Plan cannot net purchase payments to make the distributions,
the Participating Separate Account and Qualified Plan will redeem
shares of the Insurance Product Funds at their respective net asset
value in conformity with Rule 22c-1 under the 1940 Act to provide
proceeds to meet distribution needs. The Qualified Plan will then make
distributions in accordance with the terms of the Plan. The
Participating Life Insurance Company will surrender values from the
Participating Separate Account into the general account to make
distributions in accordance with the terms of the Variable Contract.
28. It is possible to provide an equitable means of giving voting
rights to Participating Separate Account contract owners and Qualified
Plans. The transfer agent for the Insurance Product Fund will inform
each Participating Insurance Company of each Participating Separate
Account's share ownership in the Fund, as well as inform the trustees
of Qualified Plans of their holdings. Each Participating Insurance
Company then will solicit voting instructions in accordance with Rules
6e-2 and 6e-3(T), as applicable, and its participation agreement with
the relevant Insurance Product Fund. Shares held by Qualified Plans
will be voted in accordance with applicable law. The voting rights
provided to Qualified Plans with respect to shares of Insurance Product
Funds would be no different from the voting rights that are provided to
Qualified Plans with respect to shares of funds sold to the general
public.
29. The ability of Insurance Products Funds to sell their
respective shares directly to Qualified Plans does not create a
``senior security,'' as such term is defined under Section 18(g) of the
1940 Act, with respect to any contract owner as opposed to a Qualified
Plan participant. As noted above, regardless of the rights and benefits
of Qualified Plan participants or contract owners, the Qualified Plans
and Participating Separate Accounts only have rights with respect to
their respective shares of the Fund. They can only redeem such shares
at their net asset value. No shareholder of any of the Insurance
Products Funds has any preference over any other shareholder with
respect to distribution of assets or payment of dividends.
30. There are no conflicts between the contract owners of
Participating Separate Accounts and Qualified Plan participants with
respect to the state insurance commissioner's veto powers (direct with
respect to variable life and indirect with respect to variable annuity)
over investment objectives. The basic premise of shareholder voting is
that shareholders may not all agree with a particular proposal. While
the interests and opinions of shareholders may differ, however, this
does not mean that there are any inherent conflicts of interest between
or among such shareholders. State insurance commissioners have been
given the veto power in recognition of the fact that insurance
companies usually cannot simply redeem their separate accounts out of
one fund and invest in another. Generally, time-consuming, complex
transactions must be undertaken to accomplish such redemptions and
transfers. Trustees of Qualified Plans, on the other hand, can make the
decision quickly and redeem their shares of an Insurance Products Fund
and reinvest in another funding vehicle without the same regulatory
impediments faced by separate accounts or, as is the case with most
Plans, even hold cash pending
[[Page 47546]]
suitable investment. Based on the foregoing, even if there should arise
issues where the interests of contract owners and the interests of
Qualified Plan participants are in conflict, the issues can be almost
immediately resolved because the trustees of the Qualified Plans can,
on their own, redeem the shares out of the Insurance Product Funds.
31. There does not appear to be any greater potential for material
irreconcilable conflicts arising between the interests of Qualified
Plan participants and the contract owners from possible future changes
in federal tax laws than that which already exists between variable
annuity contract owners and variable life contract owners.
32. Applicants have concluded that even if there should arise
issues where the interests of Variable Contract owners and the
interests of Qualified Plan participants are in conflict, the issues
can be almost immediately resolved since the trustees of (or
participants in) the Qualified Plans can, on their own, redeem the
shares out of the Insurance Product Funds.
33. Various factors have prevented more insurance companies from
offering variable annuity and variable life insurance contracts than
currently do so. These factors include the costs of organizing and
operating a funding medium, the lack of expertise with respect to
investment management (principally with respect to stock and money
market investments) and the lack of public name recognition as
investment professionals. In particular, some smaller life insurance
companies may not find it economically feasible, or within their
investment or administrative expertise, to enter the variable contract
business on their own. Use of the Insurance Products Funds as common
investment media for Variable Contracts would ameliorate these
concerns. Participating Insurance Companies would benefit not only from
the investment advisory and administrative expertise of Mitchell
Hutchins and its affiliates, but also from the cost efficiencies and
investment flexibility afforded by a large pool of funds. Therefore,
making the Insurance Products Funds available for mixed and shared
funding will encourage more insurance companies to offer Variable
Contracts. 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. Mixed and shared
funding should also benefit Variable Contracts by eliminating a
significant portion of the costs of establishing and administering
separate funds.
34. Moreover, sale of the shares of Insurance Products Funds to
Qualified Plans should further increase the amount of assets available
for investment by such funds. This, in turn, should benefit Variable
Contract owners by promoting economies of scale, by permitting greater
safety through greater diversification, and by making the addition of
new portfolios to an Insurance Product Fund more feasible.
Applicants' Conditions
To the extent required by the Commission, Applicants consent to the
following conditions:
1. A majority of the board of trustees or board directors (each a
``Board'') of each Insurance Products Fund will consist of persons who
are not ``interested persons'' thereof, 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 director, 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. Each Board will monitor its respective Insurance Products Fund
for the existence of any material irreconcilable conflict between the
interests of the contract owners of all Participating Separate Accounts
and the interests of Qualified Plan participants investing in the
Insurance Products Fund and determine what action, if any, should be
taken in response to such conflicts. A material irreconcilable conflict
may arise for a variety of reasons, including: (a) an action by any
state insurance regulatory authority; (b) a change in applicable
federal or state insurance, tax, or securities laws or regulations, or
a public ruling, private letter 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 the
Insurance Products Fund are being managed; (e) a difference in voting
instructions given by variable annuity contract owners and variable
life insurance contract owners and trustees of the Qualified Plans; (f)
a decision by a Participating Insurance Company to disregard the voting
instructions of contract owners; or (g) if applicable, a decision by a
Plan to disregard the voting instructions of its participants.
3. Participating Insurance Companies, Mitchell Hutchins (or any
other investment adviser of an Insurance Products Fund), and Qualified
Plans that execute a participating agreement upon becoming an owner of
10% or more of an Insurance Product Fund's assets (collectively,
``Participants'') will report any potential or existing conflicts to
the Board of any relevant Insurance Products Fund. Participants will be
responsible for assisting the appropriate Board in carrying out its
responsibilities under these conditions by providing the Board with all
information reasonably necessary for the Board to consider any issues
raised. This responsibility includes, but is not limited to, an
obligation of each Participating Insurance Company to inform the Board
whenever it has determined to disregard voting instructions from
contract owners and, when pass-through voting is applicable, an
obligation of each Plan to inform the Board whenever it has determined
to disregard voting instructions from Plan participants. The
responsibilities to report such information and conflicts and to assist
the Boards will be contractual obligations of all Participants under
their agreements governing participation in the Insurance Products
Funds and these agreements shall provide, in the case of Participating
Insurance Companies, that these responsibilities will be carried out
with a view only to the interests of contract owners, and, in the case
of Qualified Plans, that these responsibilities will be carried out
with a view only to the interest of Plan participants.
4. If a majority of the Board of an Insurance Products Fund, or a
majority of its disinterested members, determines that a material
irreconcilable conflict exists, the relevant Participants will, at
their expense and to the extent reasonably practicable (as determined
by a majority of the disinterested board members), take whatever steps
are necessary to remedy or eliminate the irreconcilable material
conflict, including: (a) withdrawing the assets allocable to some or
all of the Participating Separate Accounts or Plans from the Insurance
Products Fund or any series thereof and reinvesting such assets in a
different investment medium, which may include another series of an
Insurance Products Fund or another Insurance Products Fund, or
submitting the question of whether such reinvestment should be
implemented to
[[Page 47547]]
a vote of all affected contract owners and Plan participants and, as
appropriate, reinvesting 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 or Plan
participants) that votes in favor of such reinvestment, or offering to
the affected contract owners and Plan participants 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 contract owners or Plan participants
and that decision represents a minority position or would preclude a
majority vote, the Participant may be required, at the election of the
Insurance Products Fund, to withdraw its investment in such Fund, and
no charge or penalty will be imposed as a result of such withdrawal. To
the extent permitted by applicable law, the responsibility to take
remedial action in the event of a Board determination of material
irreconcilable conflict and to bear the cost of such remedial action
will be a contractual obligation of all Participants under their
agreements governing participation in the Insurance Products Fund, 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
members of the applicable Board will determine whether or not any
proposed action adequately remedies any material irreconcilable
conflict, but in no event will the Insurance Products Fund or Mitchell
Hutchins or an affiliate be required to establish a new funding medium
for any Participant. No Participting Insurance Company or Qualified
Plan shall be required to establish a new funding medium for any
Variable Contract or Plan if: (a) an offer to do so has been declined
by vote of a majority of the contract owners or Plan participants
materially and adversely affected by the material irreconcilable
conflict; or (b) pursuant to governing Plan or Variable Contract
documents and applicable law, the Plan or Participating Insurance
Company makes such decision without a vote of the Plan participants or
Variable Contract owners.
6. Any Board's determination of the existence of a material
irreconcilable conflict and its implications will be made known
promptly and in writing to all Participants.
7. Participating Insurance Companies will provide pass-through
voting privileges to contract owners who invest in Participating
Separate Accounts so long as the Commission interprets the 1940 Act to
require pass-through voting for contract owners. Accordingly, the
Participating Insurance Companies will vote shares of an Insurance
Products Fund held in their Participating Separate Accounts in a manner
consistent with voting instructions timely received from contract
owners. Participating Insurance Companies will be responsible for
assuring that each of their Participating Separate Accounts investing
in an Insurance Products Fund calculates voting privileges in a manner
consistent with all other Participating Insurance Companies. The
obligation to calculate voting privilege in this manner will be a
contractual obligation of all Participating Insurance Companies under
the agreements governing participation in the Insurance Products Fund.
Each Participating Insurance Company will vote shares for which it has
not received timely voting instructions, as well as shares attributable
to it, in the same proportion as it votes shares for which it has
received instructions.
8. Each Qualified Plan will vote as required by applicable law and
governing Plan documents.
9. All reports of potential or existing conflicts by a Board, and
all Board action with regard to determining the existence of a
conflict, notifying Participants of a conflict, and determining whether
any proposed action adequately remedies a conflict, will be properly
recorded in the minutes of the appropriate Board or other appropriate
records, and such minutes or other records shall be made available to
the Commission upon request.
10. Each Insurance Products Fund will notify all Participants that
disclosure in separate account prospectuses or Plan prospectuses or
other Plan disclosure documents regarding potential risks of mixed and
shared funding may be appropriate. Each Insurance Products Fund will
disclose in its prospectus that: (a) the Insurance Product Fund 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 an Insurance Products Fund and the interests of Qualified Plans
investing in that Insurance Product Fund may conflict; and (c) the
Board of that Insurance Product Fund will monitor for the existence of
any material conflicts and determine what action, if any, should be
taken.
11. Each Insurance Products Fund will comply with all provisions of
the 1940 Act requiring voting by shareholders (which, for these
purposes, shall be the persons having a voting interest in shares of
the Insurance Products Fund), and, in particular, each Insurance
Product Fund will either provide for annual meetings (except to the
extent that the Commission may interpret Section 16 of the 1940 Act not
to require such meetings) or comply with Section 16(a), and, if
applicable, Section 16(b) of the 1940 Act. Further, each Insurance
Products Fund will act in accordance with the Commission's
interpretation of the requirements of Section 16(a) with respect to
periodic elections of directors or trustees and with whatever rules the
Commission may promulgate with respect thereto.
12. If, and to the extent that, Rule 6e-2 and 6e-3(T) are amended
(or if Rule 6e-3 under the 1940 Act is adopted) to provide exemptive
relief from any provision of the 1940 Act or the rules 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 Insurance Products Funds and the 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 applicable.
13. No less than annually, the Participants shall submit to the
Boards of the Insurance Products Funds such reports, materials, or data
as such Boards may reasonably request so that the Boards may carry out
fully the obligations imposed upon them by the conditions contained in
the Application. Such reports, materials, and data shall be submitted
more frequently if deemed appropriate by the applicable Boards. The
obligations of the Participating Insurance Companies and Qualified
Plans to provide these reports, materials, and data to the Boards shall
be a contractual obligation under the agreements governing their
participation in the Insurance Products Funds.
14. In the event that a Plan should ever become an owner of 10% or
more of the assets of an Insurance Products Fund, such Plan will
execute a fund participation agreement including the conditions set
forth herein, to the extent applicable, with that Insurance Product
Fund. A Plan will execute an application containing an acknowledgment
of this condition at the time of its initial purchase of shares of the
Insurance Products Fund.
[[Page 47548]]
Conclusion
For the reasons summarized above, Applicants believe that the
requested exemptions, in accordance with the standards of Section 6(c)
of the 1940 Act, are appropriate in the public interest and consistent
with the protection of investors and the purposes fairly intended by
the policy and provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-22550 Filed 8-31-99 8:45 am]
BILLING CODE 8010-01-M
