[Federal Register Volume 63, Number 170 (Wednesday, September 2, 1998)]
[Notices]
[Pages 46816-46822]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23611]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23414; File No. 812-11158]
Life & Annuity Trust, et al.; Notice of Application
August 26, 1998.
AGENCY: Securities and Exchange Commission (the ``Commission'').
ACTION: Notice of Application for an order pursuant to Section 6(c) of
the Investment Company Act of 1940 (the ``1940 Act'').
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[[Page 46817]]
SUMMARY: Applicants seek an order pursuant to Section 6(c) of the 1940
Act for 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 to the extent necessary to permit shares of Life & Annuity
Trust (``Trust'') and shares of any other investment company or
portfolio that is designed to fund insurance products and for which
Wells Fargo Bank (``Wells Fargo'') may serve in the future, as
investment manager, investment adviser, or administrator (``Future
Trusts'') (the Trust together with Future Trusts are the ``Trusts'') to
be sold to and held by separate accounts funding variable annuity and
variable life insurance contracts (``Variable Contracts'') issued by
both affiliated and unaffiliated life insurance companies and by
qualified pension and retirement plans (``Qualified Plans'' or
``Plans'') outside of the separate account context.
Applicants: Life & Annuity Trust and Wells Fargo Bank, N.A.
Filing Date: The application was filed on May 28, 1998. Applicants have
agreed to file an amendment, the substance of which is incorporated in
this notice, during the notice period.
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 on this application by writing to the
Secretary of the Commission and serving Applicants with a copy of the
request, in person or by mail. Hearing requests must be received by the
Commission by 5:30 p.m. on September 21, 1998, and should 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 requester's interest, the reason for the
request, and the issues contested. Persons who wish to be notified of a
hearing may request notification by writing to the Secretary of the
Commission.
ADDRESSES: Secretary, Securities and Exchange Commission: 450 Fifth
Street, NW., Washington, DC 20549. Applicants, c/o C. David Messman,
Esq., Wells Fargo Bank, 111 Sutter Street, 18th Floor, San Francisco,
CA 94104.
FOR FURTHER INFORMATION CONTACT: Susan M. Olson, Attorney, 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
Public Reference Branch of the Commission, 450 Fifth Street, NW.,
Washington, DC 20549 (202-942-8090).
Applicants' Representations
1. The Trust is a Delaware business trust that is registered under
the 1940 Act as an open-end management investment company. The Trust
consists of six separate portfolios (each a ``Fund''), each of which
has its own investment objective or objectives, and policies.
2. Wells Fargo, a bank as defined in Section 2(a)(5) of the 1940
Act, is a wholly owned subsidiary of Wells Fargo & Company, and serves
as the investment adviser and administrator to the Trust.
3. Shares representing interests in each Fund are currently offered
to insurance companies (each a ``Current Participating Insurance
Company'') as an investment vehicle for separate accounts supporting
Variable Contracts.
4. The Trust intends to offer shares representing interests in each
Fund, and any other portfolios established by the Trust (``Future
Portfolios'') (Fund, together with Future Portfolios are the
``Portfolios'' or each a ``Portfolio''), to separate accounts of both
the Current Participating Insurance Companies and other insurance
companies (``Other Insurance Companies'') to serve as the investment
vehicle for Variable Contracts. The Current Participating Insurance
Companies and Other Insurance Companies that elect to purchase shares
of one or more Portfolios are collectively referred to herein as
``Participating Insurance Companies.'' The Participating Insurance
Companies have or will establish their own separate accounts
(``Separate Accounts'') and design their own Variable Contracts.
Applicants also propose that the Portfolios may offer and sell their
shares directly to Qualified Plans or Plans outside the separate
account context.
Applicants' Legal Analysis
1. Applicants request an order pursuant to Section 6(c) of the 1940
Act from the provisions of Sections 9(a), 13(a), 15(a), and 15(b) of
the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to
the extent necessary to permit shares of the Trusts to be sold to and
held by: (a) separate accounts funding variable annuity and variable
life insurance contracts issued by the same life insurance company or
any affiliated insurance companies (``mixed funding''); (b) separate
accounts funding variable annuity or variable life insurance contracts
issued by unaffiliated insurance companies (``shared funding''); and
(c) Qualified Plans.
2. In connection with the funding of scheduled premium variable
life insurance contracts issued through a separate account registered
as a unit investment trust (``UIT'') under the 1940 Act, Rule 6e-
2(b)(15) provides partial exemptions from Sections 9(a), 13(a), 15(a),
and 15(b) of the 1940 Act. Rule 6e-2(b)(15) provides these exemptions
only where all of the assets of the UIT are shares of management
investment companies which offer their shares exclusively to variable
life insurance separate accounts of the life insurer or of any
affiliated life insurance company. Therefore, the relief granted by
Rule 62-2(b)(15) is not available with respect to a scheduled premium
life insurance separate account that owns shares of an underlying fund
that also offers it shares to a variable annuity or flexible premium
variable life insurance separate account of the same company.
3. The relief granted by Rule 6e-2(b)(15) also 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 separate accounts funding Variable Contracts of one or more
unaffiliated life insurance companies.
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) similarly provides partial exemptions
from Section 9(a), 13(a), 15(a), and 15(b) of the 1940 Act. The
exemptions granted by Rule 6e-3(T)(b)(15) are available only where all
the assets of the separate account consist of the shares of one or more
registered management investment companies which offer to sell their
shares exclusively to separate accounts of the life insurer, or of any
affiliated life insurance companies, 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. Therefore, Rule 6e-3(T) permits
mixed funding while not permitting shared funding.
5. In addition, neither Rule 6e-2 nor Rule 6e-3(T) contemplate that
shares of the underlying portfolio funding Variable Contracts might
also be soled to Qualified Plans. The use of a common management
investment company as the underlying investment medium for variable
annuity and variable life separate accounts of affiliated and
unaffiliated insurance companies, and the Qualified Plans, is referred
to herein
[[Page 46818]]
as ``extended mixed and shared funding.''
6. Applicants state that current tax law permits the Trust to
increase its asset base by selling its shares to Qualified Plans.
Section 817(h) of the Internal Revenue Code of 1986, as amended (the
``Code''), imposes certain diversification standards on the assets
underlying Variable Contracts, such as those in each Fund. The Code
provides that Variable Contracts will not be treated as annuity
contracts or life insurance contracts, as the case may be, for any
period (or any subsequent period) for which the underlying assets are
not, in accordance with regulations issued by the Treasury Department
(the ``Regulations''), adequately diversified. On March 2, 1989, the
Treasury Department issued regulations (Treas. Reg. 1.817-5) which
established specific diversification requirements for investment
portfolios underlying Variable Contracts. The Regulations generally
provide that, in order to meet these diversification requirements, all
of the beneficial interests in such portfolios must be held by the
segregated asset accounts of one or more life insurance companies.
Notwithstanding this, the Regulations also contain an exception to this
requirement that permits trustees of Qualified Plans to hold shares of
an investment company portfolio, the shares of which are also held by
insurance company segregated asset accounts, without adversely
affecting the status of the investment company portfolio as an
adequately diversified underlying investment for variable contracts
issued through such segregated asset accounts (Treas. Reg. 1.817-
5(f)(3)(iii).
7. Applicants note that the promulgation of Rules 6e-2(b)(15) and
6e-3(T)(b)(15) preceded the issuance of the Regulations which made it
possible for shares of an investment company portfolio to be held by
the trustee of a Qualified Plan without adversely affecting the ability
of shares in the same investment company portfolio also to be held by
the separate accounts of insurance companies in connection with their
variable contracts. Thus, the sale of shares of the same portfolio to
both separate accounts and Qualified Plans was not contemplated at the
time of the adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15).
8. Section 9(a)(3) of the 1940 Act provides that it is unlawful for
any company to serve as investment adviser or principal underwriter of
any registered open-end investment company if an affiliated person of
that company is subject to a disqualification enumerated in Sections
9(a)(1) or (2). 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
imposed on mixed and shared funding 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.
9. Applicants state that the partial relief granted in Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act 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 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 those
1940 Act rules further recognize that it also is unnecessary to apply
Section 9(a) of the 1940 Act to individuals in various unaffiliated
insurance companies (or affiliated companies of Participating Insurance
Companies) that may utilize the Trusts as the funding medium for
Variable Contracts. According to Applicants, there is not regulatory
purpose in extending the Section 9(a) monitoring requirements because
of extended mixed or shared funding. The Participating Insurance
Companies and Qualified Plans are not expected to play any role in the
management of the Trusts. Those individuals who participate in the
management of the Trusts will remain the same regardless of which
Separate Accounts or Qualified Plans use the Trusts. Applicants argue
that applying the monitoring requirements of Section 9(a) of the 1940
Act because of investment by separate accounts of other insurers or
Qualified Plans would be unjustified and would not serve any regulatory
purpose.
10. Applicants also state that in the case of Qualified Plans, the
Plans, unlike the Separate Accounts, are not themselves investment
companies, and therefore are not subject to Section 9 of the 1940 Act.
It is not anticipated that a Qualified Plan would be an affiliated
person of any of the Trusts by virtue of its shareholders.
11.Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) under the 1940
Act provide exemptions from the pass-through voting requirement with
respect to several significant matters assuming the limitations on
mixed and shared funding imposed by the 1940 Act and the rules
thereunder are observed.
12. Rules 6e-2(b)(15)(iii)(A) and 6e-3(T)(b)(15(iii)(A) provide
that the insurance company may disregard the voting instructions of its
contract owners with respect to the investments of an underlying fund,
or any contract between a fund and its investment adviser, when
required to do so by an insurance regulatory authority (subject to the
provisions of paragraphs (b)(5)(i) and (b)(7)(ii)(A) of Rule 6e-2 and
6e-3(T) under the 1940 Act.
13. Rules 6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2) provide
that the insurance company may disregard the voting instructions of its
contract owners if the contract owners initiate any change in such
insurance company's investment policies, principal underwriter, or any
investment adviser (provided that disregarding such voting instructions
is reasonable and subject to the other 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).
14. With respect to the Qualified Plans, which are not registered
as investment companies under the 1940 Act, there is no requirement to
pass through voting rights to Plan participants, Indeed, to the
contrary, applicable law expressly reserves voting rights associated
with Plan assets to certain specified persons. Under Section 403(a) of
the Employee Retirement Income Security Act (``ERISA''), shares of a
portfolio of a fund sold to a Qualified Plan must be held by the
trustees of the Plan. Section 403(a) also 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) are subject to the direction of a named fiduciary who is not
a trustee, in which case the trustees 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 above two
exceptions stated in Section 403(a) applies, Plan trustees have the
exclusive authority and responsibility for voting proxies.
15. Where a named fiduciary to a Qualified Plan appoints an
investment
[[Page 46819]]
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. 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 direction.
Some of the Qualified Plans, however, may provide for the trustee(s),
an investment adviser (or advisers) or another named fiduciary to
exercise voting rights in accordance with instructions from
participants.
16. 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 contract holders and Plan investors with respect to voting of
the respective Portfolio's shares. 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 such Qualified Plans since the Qualified Plans are not
required to pass-through voting privileges.
17. Applicants state that even if a Qualified Plan were to hold a
controlling interest in a Portfolio, Applicants do not believe that
such control would disadvantage other investors in such Portfolio to
any greater extent than is the case where 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 a Portfolio by a Plan will not create any of the voting
complications occasioned by mixed funding or shared funding. Unlike
mixed or shared funding, Plan investor voting rights cannot be
frustrated by veto rights of insurers or state regulators.
18. Where a Plan provides participants with the right to give
voting instructions, Applicants see 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 holders. The purchase of shares of Portfolios by
Qualified Plans that provide voting rights does not present any
complications not otherwise occasioned by mixed or shared funding.
19. Applicants state that shared funding by unaffiliated insurance
companies does not present any issues that do not already exist where a
single insurance company is licensed to do business in several or all
states. A particular state insurance regulatory body could require
action that is inconsistent with the requirements of other states in
which the insurance company offers its policies. The fact that
different insurers may be domiciled in different states does not create
a significantly different or enlarged problem.
20. Applicants state that shared funding by unaffiliated insurers,
in this respect, is no different than the use of the same investment
company as the funding vehicle for affiliated insurers, which Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act permit. Affiliated
insurers may be domiciled in different states and be subject to
differing state law requirements. Affiliation does not reduce the
potential, if any exists, for differences in state regulatory
requirements. In any event, the conditions set forth below are designed
to safeguard against, and provide procedures for resolving, any adverse
effects that differences among state regulatory requirements may
produce. If a particular state insurance regulator's decision conflicts
with the majority of other state regulators, then the affected insurer
will be required to withdraw its Separate Account's investment in the
Portfolios. This requirement will be provided for in agreements that
will be entered into by Participating Insurance Companies with respect
to their participation in the relevant Portfolio.
21. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act give
the insurance company the right to disregard the voting instructions of
the contract owners. This right does 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 contract owner voting instructions only with
respect to certain specified items. Affiliation does not eliminate the
potential, if any exists, for divergent judgments as to the
advisability or legality of a change in investment policies, principal
underwriter, or investment adviser initiated by contract owners. The
potential for disagreement is limited by the requirements in Rules 6e-2
and 6e-3(T) under the 1940 Act that the insurance company's disregard
of voting instructions be reasonable and based on specific good-faith
determinations.
22. Applicants state that a particular insurer's disregard of
voting instructions, nevertheless, could conflict with the majority of
contract owners' voting instructions. The insurer's action possibly
could be different than the determination of all or some of the other
insurers (including affiliated insurers) that the voting instructions
of contract owners should prevail, and either could preclude a majority
vote approving the change or could represent a minority view. If the
insurer's judgment represents a minority position or would preclude a
majority vote, then the insurer may be required, at the relevant
Trust's election, to withdraw its Separate Account's investment in such
Portfolio. No charge or penalty will be imposed as a result of such
withdrawal. This requirement will be provided for in the agreements
entered into with respect to participation by the Participating
Insurance Companies in the Portfolios.
23. Applicants submit that there is no reason why the investment
policies of the Portfolios would or should be materially different from
what these policies would or should be if the Portfolios funded only
variable annuity contracts or variable life insurance policies, whether
flexible premium or scheduled premium policies. Each type of insurance
product is designed as a long-term investment program. Each Portfolio
will be managed to attempt to achieve the investment objective or
objectives of such Portfolio, and not to favor or disfavor any
particular Participating Insurance Company or type of insurance
product.
24. Applicants state that 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. A Portfolio supporting even one type of insurance
product must accommodate these diverse factors in order to attract and
retain purchasers. Permitting mixed and shared funding will provide
economic justification for the continuation of the relevant Portfolio.
Mixed and shared funding will broaden the base of contract owners which
will facilitate the establishment of additional Portfolios serving
diverse goals.
25. Applicants do not believe that the sale of the shares of the
Portfolios to qualified Plans will increase the potential for material
irreconcilable conflicts of interest between or among different types
of investors. In particular, Applicants see very little potential for
such conflicts beyond that which would otherwise exist between variable
annuity and variable life insurance contract owners.
26. As noted above, Section 817(h) of the Code imposes certain
diversification
[[Page 46820]]
standards on the underlying assets of Variable Contracts held in an
underlying mutual fund. The Code provides that a variable contract
shall not be treated as an annuity contract or life insurance, as
applicable, for any period (and any subsequent period) for which the
investments are not, in accordance with regulations prescribed in the
Treasury Department, adequately diversified.
27. Regulations issued under Section 817(h) provide that, in order
to meet the statutory diversification requirements, all of the
beneficial interests in the investment company must be held by the
segregated asset accounts of one or more insurance companies. However,
the Regulations contain certain exceptions to this requirement, one of
which allows shares in an underlying mutual fund to be held by the
trustees of a qualified pension or retirement plan without adversely
affecting the ability of such shares also to be held by separate
accounts of insurance companies in connection with their variable
contracts. (Treas. Reg. 1.817-5(f)(3)(iii)). Thus, the Regulations
specifically permit ``qualified pension or retirement plans'' and
separate accounts to invest in the same underlying fund. For this
reason, Applicants have concluded that neither the Code, nor
Regulations, nor Revenue Rulings thereunder, present any inherent
conflicts of interest.
28. Applicants note that while there are differences in the manner
in which distributions from Variable Contracts and Qualified Plans are
taxed, these differences will have no impact on the Trusts. When
distributions are to be made, and a Separate Account or qualified Plan
is unable to net purchase payments to make the distributions, the
separate Account and qualified Plan will redeem shares of the relevant
Portfolio at their respective net asset value in conformity with Rule
22c-1 under the 1940 Act (without the imposition of any sales charge)
to provide proceeds to meet distribution needs. A Participating
Insurance Company then will make distributions in accordance with the
terms of its Variable Contract, and a Qualified Plan then will make
distributions in accordance with the terms of the Plan.
29. Applicants determined it is possible to provide an equitable
means of giving voting rights to contract owners in the Separate
Accounts and to Qualified Plans. In connection with any meeting of
shareholders, the Trusts will inform each shareholder, including each
Separate Account and Qualified Plan, of information necessary for the
meeting, including their respective share of ownership in the relevant
Portfolio. Each Participating Insurance Company then will solicit
voting instructions in accordance with Rules 6e-2 and 6e-3(T), as
applicable, and its agreement with a Trust concerning participation in
the relevant Portfolio. 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 the Portfolios 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.
30. Applicants further concluded that the ability of the Trusts to
sell shares of Portfolios directly to Qualified Plans does not create a
senior security. ``Senior security'' is defined under Section 18(g) of
the 1940 Act to include ``any stock of a class having priority over any
other class as to distribution of assets or payment of dividends.'' As
noted above, regardless of the rights and benefits of participants
under Qualified Plans, or contract owners under Variable Contracts, the
Qualified Plans and Separate Accounts only have rights with respect to
their respective shares of the Portfolios. They only can redeem such
shares at net asset value. No shareholder of a Portfolio has any
preference over any other shareholder with respect to distribution of
assets or payment of dividends.
31. Applicants submit that there are no conflicts between the
contract owners of the Separate Accounts and of the participants under
the Qualified Plans with respect to the state insurance commissioners'
veto powers over investment objectives. Applicants note that the basic
premise of corporate democracy and shareholder voting is that not all
shareholders may agree with a particular proposal. Although the
interests and opinions of shareholders may differ, this does not mean
that inherent conflicts of interest exist 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.
32. Conversely, the trustees of Qualified Plans or the participants
in participant-directed Qualified Plans can make the decision quickly
and redeem their interests in the Portfolios and reinvest in another
funding vehicle without the same regulatory impediments faced by the
Separate Accounts or, as is the case with most Qualified Plans, even
hold cash pending suitable investment.
33. Applicants do not see any greater potential for material
irreconcilable conflicts arising between the interests of participants
in the Qualified Plans and contract owners of the Separate Accounts
from future changes in the federal tax laws than that which already
exists between variable annuity contract owners and variable life
insurance contract owners. Applicants recognize that the foregoing is
not an all inclusive list, but rather is representative of issues which
they believe are relevant. Applicants believe that the sale of shares
of the Portfolios to Qualified Plans does not increase the risk of
material irreconcilable conflicts of interest. Further, Applicants
submit that the use of the Portfolios with respect to Qualified Plans
is not substantially dissimilar from the Portfolio's anticipated use,
in that Qualified Plans, like Variable Contracts, are generally long-
term retirement vehicles.
34. Applicants state that various factors have kept more insurance
companies from offering variable annuity and variable life insurance
contracts than currently offer such contracts. 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 name
recognition by the public of certain insurers as investment experts
with whom the public feels comfortable entrusting their investment
dollars. Use of a Portfolio, as a common investment media for variable
contracts, would reduce or eliminate these concerns. Mixed and shared
funding also should provide several benefits to variable contract
owners by eliminating a significant portion of the costs of
establishing and administering separate funds. Participating Insurance
Companies will benefit not only from the investment and administrative
expertise of Wells Fargo, but also from the cost efficiencies and
investment flexibility afforded by a large pool of funds. Mixed and
shared funding also would permit a greater amount of assets available
for investment by a Portfolio, thereby promoting economies of scale, by
permitting increased safety through greater diversification, or by
making the addition of new Portfolios more feasible. Therefore, making
the Portfolios available for mixed and shared funding will encourage
more insurance companies to offer variable contracts, and this should
result in increased competition with respect to both variable contract
design and pricing,
[[Page 46821]]
which can be expected to result in more product variation and lower
charges. Applicants also assert that the sale of shares of the
Portfolios to Qualified Plans, in addition to the Separate Accounts,
will result in an increased amount of assets available for investment
by such Portfolios. This may benefit variable contract owners by
promoting economies of scale, by permitting increased safety of
investments through greater diversification, and by making the addition
of new Portfolios more feasible.
35. Applicants submit that, regardless of the type of shareholder
in a Fund or Future Portfolio, Wells Fargo is or would be contractually
and otherwise obligated to manage the Fund or such Future Portfolio
solely and exclusively in accordance with that portfolio's investment
objectives, policies and restrictions as well as any guidelines
established by the Board of Trustees or Directors of such Trust (the
``Board''). Wells Fargo will work with a pool of money and will not
take into account the identity of the shareholders. Thus, each Fund and
any Future Portfolio will be managed in the same manner as any other
mutual fund.
36. 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. As noted above, Applicants assert that
mixed and shared funding will not have any adverse Federal income tax
consequences.
Applicants' Conditions
Applicants have consented to the following conditions:
1. A majority of the Board of each Trust, or Trusts, will consist
of persons who are not ``interested persons'' of such Trust, as defined
by Section 2(a)(19) of the 1940 Act, and the rules thereunder, and as
modified by any applicable orders of the Commission, except that if
this condition is not met by reason of the death, disqualification or
bona-fide resignation of any trustee or trustees, then the operation of
this condition will 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 Trust for the existence
of any material irreconcilable conflict between the interests of the
contract owners of all Separate Accounts and participants of all
Qualified Plans investing in such Trust, 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
interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the
investments of such Trust are being managed; (e) a difference in voting
instructions given by variable annuity contract owners, variable life
insurance contract owners, and trustees of the 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 Qualified
Plan to disregard the voting instructions of Plan participants.
3. Participating Insurance Companies, Wells Fargo, and any
Qualified Plan that executes a participation agreement upon becoming an
owner of 10 percent or more of the assets of any Portfolio
(collectively, the ``Participants'') will report any potential or
existing conflicts to the relevant Board. Participants will be
responsible for assisting the relevant 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 relevant Board
whenever contract owner voting instructions are disregarded, and, if
pass-through voting is applicable, an obligation by each Qualified Plan
to inform the Board whenever it has determined to disregard Plan
participant voting instructions. The responsibility to report such
information and conflicts, and to assist the Board, will be contractual
obligation of all Participating Insurance Companies under their
participation agreements with the Trusts, and these responsibilities
will be carried out with a view only to the interests of the contract
owners. The responsibility to report such information and conflicts,
and to assist the Board, also will be contractual obligations of all
Qualified Plans with participation agreements, and such agreements will
provide that these responsibilities will be carried out with a view
only to the interests of Plan participants.
4. If it is determined by a majority of a Board, or a majority of
the disinterested trustees of such Board, that a material
irreconcilable conflict exists, then the relevant Participant will, at
its expense and to the extent reasonable practicable (as determined by
a majority of the disinterested trustees), 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 relevant Portfolio and
reinvesting such assets in a different investment medium, including
another Portfolio, or in the case of insurance company participants
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 Company) that votes in favor of such
segregation, or offering to the affected contract owners the option of
making such a change; and (b) establishing a new registered management
investment company or managed separate account. If a material
irreconcilable conflict arises because of a decision by a Participating
Insurance Company to disregard contract owner voting instructions, and
that decision represents a minority position or would preclude a
majority vote, then the insurer may be required, at the election of the
relevant Trust, to withdraw such insurer's Separate Account's
investment in such Trust, and no charge or penalty will be imposed as a
result of such withdrawal. If a material irreconcilable conflict arises
because of a Qualified Plan's decision to disregard Plan participating
voting instructions, if applicable, and that decision represents a
minority position or would preclude a majority vote, the Plan may be
required, at the election of the relevant Trust, to withdraw its
investment in such Trust, 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 will be a
contractual obligation of all Participants under their agreements
governing participation in the Trusts, and these responsibilities will
be carried out with a view only to the interests of contract owners and
Plan participants.
[[Page 46822]]
For purposes of this Condition 4, a majority of the disinterested
members of a Board will determine whether or not any proposed action
adequately remedies any material irreconcilable conflict, but, in no
event, will any Trust or Wells Fargo be required to establish a new
funding medium for any variable contract. No Participating Insurance
Company will 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 and
adversely affected by the material irreconcilable conflict. Further, no
Qualified Plan will be required by this Condition 4 to establish a new
funding medium for the Plan if: (a) a majority of the Plan participants
materially and adversely affected by the irreconcilable material
conflict vote to decline such offer; or (b) pursuant to documents
governing the Qualified Plan, the Plan makes such decision without a
plan participant vote.
5. A Board's determination of the existence of a material
irreconcilable conflict and its implications will be made known in
writing promptly to all Participants.
6. Participating Insurance Companies will provide pass-through
voting privileges to all contract owners as required by the 1940 Act.
Accordingly, such Participants, where applicable, will vote shares of
the applicable Portfolio held in its Separate Accounts in a manner
consistent with voting instructions timely received from contract
owners. Participating Insurance Companies will be responsible for
assuring that each Separate Account investing in a Portfolio calculates
voting privileges in a manner consistent with other Participants. The
obligations to calculate voting privileges as provided in the
Application will be a contractual obligation of all Participating
Insurance Companies under their agreement with the Trusts governing
participation in a Portfolio. Each Participating Insurance Company 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. Each Qualified Plan will
vote as required by applicable law and governing Plan documents.
7. Each Trust will comply with all provisions of the 1940 Act
requiring voting by shareholders, and, in particular, each Trust will
either provide for annual meetings (except to the extent that the
Commission may interpret Section 16 of the 1940 Act not to require such
meetings) or comply with Section 16(c) of the 1940 Act (although the
Trust are not trusts of the type described in the Section 16(c) of the
1940 Act), as well as with Section 16(a) of the 1940 Act and, if and
when applicable, Section 16(b) of the 1940 Act. Further, each Trust
will act in accordance with the Commission's interpretation of the
requirements of Section 16(a) with respect to periodic elections of
trustees and with whatever rules the Commission may promulgate with
respect thereto.
8. The Trust will notify all Participants that separate account
prospectus disclosure regarding potential risk of mixed and shared
funding may be appropriate. Each Trust will disclose in its prospectus
that: (a) shares of Trust may be offered to insurance company separate
accounts for both variable annuity and variable life insurance
contracts and, if applicable to Qualified Plans; (b) due to differences
in tax treatment and other considerations, the interests of various
contract owners participating in such Trust and the interests of
Qualified Plans investing in such Trust, if applicable may conflict;
and (c) the Trust's Board of Trustees will monitor events in order to
identify the existence of any material irreconcilable conflicts and to
determine what action, if any, should be taken in response to any such
conflict.
9. If and to the extent that Rule 6e-2 and Rule 6e-3(T) under the
1940 Act are amended, or proposed Rule 6e-3 under the 1940 Act is
adopted, to provide exemptive relief from any provision of the 1940
Act, or the rules promulgated thereunder, with respect to mixed or
shared funding, on terms and conditions materially different from any
exemptions granted in the Order requested in the Application, then the
Trust and/or Participating Insurance Companies, as appropriate, shall
take such steps as may be necessary to comply with Rules 6e-2 and 6e-
3(T), or Rule 6e-3, as such rules are applicable.
10. The Participants, at least annually, will submit to the Board
of each Trust such reports, materials, or data as a Board reasonably
may request so that the trustees of the Board may fully carry out the
obligations imposed upon a Board by the conditions contained in the
Application, and said reports, materials, and data will be submitted
more frequently if deemed appropriate by the Board. The obligations of
the Participants to provide these reports, materials, and data to a
Board, when it so reasonably requests, will be a contractual obligation
of all Participants under their agreements governing participation in
the Portfolios.
11. All reports of potential or existing conflicts received 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 relevant Board or other
appropriate records, and such minutes or other records shall be made
available to the Commission upon request.
12. The Trusts will not accept a purchase order from a Qualified
Plan if such purchase would make the Plan shareholder an owner of 10
percent or more of the assets of such Portfolio unless such Plan
executes an agreement with the relevant Trust governing participation
in such Portfolio that includes these conditions to the extent
applicable. A Plan will execute an application containing an
acknowledgment of this condition at the time of its initial purchase of
shares of any Portfolio.
Conclusion
For the reasons summarized above, Applicants believe that the
requested exemptions, in accordance with the standards of Section 6(c),
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.
Johathan Katz,
Secretary.
[FR Doc. 98-23611 Filed 9-1-98; 8:45 am]
BILLING CODE 8010-01-M
