[Federal Register Volume 62, Number 184 (Tuesday, September 23, 1997)]
[Notices]
[Pages 49711-49717]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-25133]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22823; File No. 812-10692]
Variable Annuity Portfolios, et al.; Notice of Application
September 17, 1997.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the
``Commission'').
ACTION: Notice of Application for an order under Section 6(c) of the
Investment Company Act of 1940 (the ``1940 Act'') granting relief 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.
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SUMMARY OF APPLICATION: Applicants seek exemptive relief to the extent
necessary to permit shares of the Variable Annuity Portfolio (the
``Trust'') to be sold to and held by: (1) separate accounts (``Separate
Accounts'') funding variable annuity and variable life insurance
contracts issued by both affiliated and unaffiliated life insurance
companies (``Participating Insurance Companies''); (2) qualified
pension and retirement plans; and (3) subadvisers to certain series of
the Trust.
APPLICANTS: Variable Annuity Portfolios and Citibank, N.A.
(``Citibank'').
FILING DATE: The application was filed on June 5, 1997, and an
amendment was filed on September 5, 1997.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing on this application by writing to the
Secretary of the Secretary of the SEC and serving Applicants with a
copy of the request, in person or by mail.
[[Page 49712]]
Hearing requests must be received by the Commission by 5:30 on October
14, 1997, and accompanied by proof or service on the Applicants in the
form of an affidavit or, for lawyers, a certificate of service.
Hearings 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 SEC.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, Lea Anne Copenhefer, Esq., Bingham, Dana & Gould,
LLP, 150 Federal Street, Boston, Massachusetts, 02110.
FOR FURTHER INFORMATION CONTACT: Megan L. Dunphy, Attorney, or Mark
Amorosi, Branch Chief, Office of Insurance Products, Division of
Investment Management, at (202) 942-0670.
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the Public
Reference Branch of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549 (tel. (202) 942-8090).
Applicant's Representations
1. Trust is organized as a Massachusetts business trust and is
registered under the 1940 Act as an open-end, management investment
company. The Trust currently offers shares in five separate investment
portfolios and may in the future offer shares in additional portfolios
(collectively, the ``Portfolios'').
2. Citibank serves as investment adviser to each Portfolio.
Responsibility for the day to day investment management of certain
securities has been delegated to other investment advisers (the
``Subadvisers'').
3. Shares of the Portfolios will initially be offered only to
Citicorp Life Variable Annuity Separate Account and First Citicorp Life
Variable Annuity Separate Account, separate accounts of Citicorp Life
Insurance Company and First Citicorp Life Insurance Company (the
``Citicorp Insurance Companies''). The Citicorp Insurance Companies are
indirect subsidiaries of Citicorp, a bank holding company organized
under the laws of Delaware. The Trust intends to offer shares of the
Portfolios to separate accounts of other insurance companies, including
insurance companies that are not affiliated with the Citicorp Insurance
Companies, to serve as investment vehicles for various types of
insurance products (``variable contracts'').
4. Each Portfolio may offer its shares to qualified pension or
retirement plans (``Plans'') described in Treasury Regulation
Sec. 1.817-6(f)(3)(iii).
5. Each Portfolio may offer its shares to any Subadviser, or its
affiliates, either directly or through a qualified pension or
retirement plan. Any shares in a Portfolio purchased by a Subadviser
will be automatically redeemed if and when the Subadviser's subadvisory
agreement with that Portfolio terminates.
6. Citibank may act as an investment adviser to one or more of the
Plans which purchases shares of the Portfolios. A Subadviser may act as
an investment adviser to one or more Plans which may invest in the
Portfolios.
Applicant's Legal Analysis
1. Applicants request that the Commission issues an order under
Section 6(c) of the 1940 Act granting exemptions from Sections 9(a),
13(a), 15(a) and 15(b) thereof, and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) thereunder, to the extent necessary to permit shares of the
Portfolios or of any Other Portfolios to be offered and sold to, and
held by: (1) both variable annuity separate accounts and variable life
insurance separate accounts of the same life insurance company or of
affiliated life insurance companies (``mixed funding''); (2) separate
accounts of unaffiliated life insurance companies (including both
variable annuity separate accounts and variable life insurance separate
accounts) (``shared funding''); (3) trustees of Plans; and (4)
Subadvisers to the Portfolios.
2. Section (6)(c) authorizes the Commission to grant exemptions
from the provisions of the 1940 Act, and rules thereunder, if and to
the extent that an 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.
3. In connection with the funding of scheduled premium variable
life insurance contracts issued through a separate account registered
under the 1940 Act as a unit investment trust (the ``Trust Account''),
Rule 6e-2(b)(15) provides exemptions from Sections 9(a), 13(a), 15(a)
and 15(b) of the 1940 Act. The exemptions granted by Rule 6e-2(b)(15)
are available only where the management investment company underlying
the Trust Account (``underlying fund'') offers its shares ``exclusively
to variable life insurance separate accounts of the life insurer, or of
any affiliated life insurance company'' (emphasis added). Therefore,
the relief granted by Rule 6e-2(b)(15) is not available if the
scheduled premium variable life insurance separate account owns shares
of an underlying fund that also offers its shares to a variable annuity
or a flexible premium variable life insurance separate account of the
same insurance company or an affiliated or unaffiliated life insurance
company. Also, the relief granted by Rule 6e-2(b)(15) is not available
if the scheduled premium variable life insurance separate account owns
shares of an underlying fund that also offers its shares to Plans or to
the Portfolios' Subadvisers.
4. In connection with the funding of flexible premium variable life
insurance contracts issued through a Trust Account, Rule 6e-3(T)(b)(15)
provides partial exemptions from Sections 9(a), 13(a), 15(a), and 15(b)
of the 1940 Act. The exemptions granted by Rule 6e-3(T)(b)(15) are
available only where the Trust Account's underlying fund offers its
shares ``exclusively to separate accounts of the life insurer, or of
any affiliated life insurance company, offering either scheduled or
flexible contracts, or both; or which offer their shares to variable
annuity separate accounts of the life insurer or of an affiliated life
insurance company'' (emphasis added). Thus, Rule 6e-3(T) grants an
exemption if the underlying fund engages in mixed funding, but not if
it engages in shared funding or sells its shares to Plans or to the
Portfolios' Subadvisers.
5. Applicants state that the current tax law permits the Portfolios
or any Other Portfolios to increase its asset base through the sale of
shares to Plans. Section 817(h) of the Internal Revenue Code of 1986,
as amended (the ``Code''), imposes certain diversification standards on
the underlying assets of variable contracts held in the Portfolios. The
Code provides that such variable contracts shall not be treated as an
annuity contract or life insurance contract for any period in which the
underlying assets are not adequately diversified as prescribed by the
Treasury regulations. To meet the diversification requirements, all of
the beneficial interests in an underlying fund must be held by the
segregated asset accounts of one or more insurance companies. Treas.
Reg. Sec. 1.817-5. The regulations do contain certain exceptions to
this requirement, however, one of which allows shares in an investment
company to be held by the trustee of a qualified pension or retirement
plan without adversely affecting the ability of shares in the same
investment company also to be held by the separate accounts of
insurance companies in connection
[[Page 49713]]
with their variable contracts. Treas. Reg. Sec. 1.817-5(f)(3)(iii).
6. The promulgation of Rules 6e-2 and 6e-3(T) preceded the issuance
of these Treasury regulations. Applicants state that, given the then-
current tax law, the sale of shares of the same investment company to
both separate accounts and Plans could not have been envisioned at the
time of the adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15).
7. Section 9(a)(3) of the 1940 Act provides that it is unlawful for
any company to serve as investment adviser to or principal underwriter
for 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 Rule 6e-
3(T)(b)(15)(i) and (ii) provide partial exemptions from Section 9(a),
subject to the limitations discussed above on mixed and shared funding.
These exemptions limit the application of the eligibility restrictions
to affiliated individuals or companies that directly participate in the
management of the underlying management company.
8. Applicants assert that the partial relief granted in Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) from the requirements of Section 9, in
effect, limits the amount of monitoring necessary to ensure compliance
with Section 9 to that which is appropriate in light of the policy and
purposes of Section 9. Applicants state that it is not necessary for
the protection of investors or the purposes fairly intended by the
policy and provisions of the 1940 Act to apply the provisions of
Section 9(a) to the many individuals in an insurance company complex,
most of whom will have no involvement in matters pertaining to
investment companies in that organization. Applicants also assert that
it is unnecessary to apply the restrictions of Section 9(a) to
individuals in various unaffiliated insurance companies (or affiliated
companies of Participating Insurance Companies) that may utilize a
Portfolio as the funding medium for variable contracts.
9. Applicants maintain that there is no regulatory purpose in
extending the Section 9(a) monitoring requirements because of mixed and
shared funding and sales to Plans. The Participating Insurance
Companies and participating Plans are not expected to play any role in
the management or administration of the Portfolios. Those individuals
who participate in the management or administration of the Portfolios
will remain the same regardless of which separate accounts, insurance
companies or Plans use the Portfolios. The increased monitoring costs
would reduce the net rates of return realized by contract owners and
Plan participants. In addition, since the Plans are not investment
companies and will not be deemed affiliates by virtue of their
shareholdings, no additional relief is required with respect to Plans.
10. Applicants further state that no regulatory purpose is served
by extending the Section 9(a) monitoring requirements in the context of
the Portfolios selling shares to the Subadvisers. Rules 6e-2 and 6e-
3(T) provide relief from the eligibility restrictions of Section 9(a)
only for officers, directors or employees of Participating Insurance
Companies or their affiliates. Applicants state that it is not
anticipated that any of the Subadvisers will be the Participating
Insurance Companies or their affiliates, and if they were, the
eligibility restrictions would apply to those who participate directly
in the management or administration of the Portfolios. Applicants also
maintain that the monitoring requirements should not extend to all
officers, directors and employees of the Participating Insurance
Companies and their affiliates simply because the Portfolios sell
certain shares to the Shareadvisers. This monitoring would not benefit
contract owners and Plan participants and would only increase costs,
thereby reducing net rates of return.
11. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) assume the
existence of a ``pass-through voting'' requirement with respect to
management investment company shares held by a separate account. Rules
6e-2(b)(15)(iii)(A) and 6e-3(T)(b)(15)(iii)(A)(1) provide that an
insurance company may disregard the voting instructions of its contract
owners in connection with the voting of shares of an underlying fund if
such instructions would require such shares to be voted to cause such
companies to make (or refrain from making) certain investments which
would result in changes in the subclassification or investment
objectives of such companies or to approve or disapprove any contract
between a Portfolio and its investment adviser, when required to do so
by an insurance regulatory authority, subject to certain requirements.
Rules 6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2) provide that an
insurance company may disregard the voting instructions of its contract
owners if the contract owners initiate any change in the company's
investment policies, principal underwriter, or any investment adviser,
provided that disregarding such voting instructions is reasonable and
complies with the other provisions of Rules 6e-2 and 6e-3(T).
12. Rule 6e-2 recognizes that a variable life insurance contract
has important elements unique to insurance contracts; and is subject to
extensive state regulation. Applicants assert that in adopting Rule 6e-
2(b)(15)(iii), the Commission expressly recognized that state insurance
regulators have authority, pursuant to state insurance laws or
regulations, to disapprove or require change in investment policies,
investment advisers or principal underwriters. The Commission also
expressly recognized that state insurance regulators have authority to
require an insurer to draw from its general account to cover costs
imposed upon the insurer by a change approved by contract owners over
the insurer's objection. The Commission therefore deemed such
exemptions necessary ``to assure the solvency of the life insurer and
performance of its contractual obligations by enabling an insurance
regulatory authority or the life insurer to act when certain proposals
reasonably could be expected to increase the risks undertaken by the
life insurer.'' Applicants state that, in this respect, flexible
premium variable life insurance contracts are identical to scheduled
premium variable life insurance contracts; therefore, the corresponding
provisions of Rule 6e-3(T) were adopted in recognition of the same
factors.
13. Applicants further represent that the offer and sale of the
Portfolio's shares to Plans will not have any impact on the relief
requested in this regard. Shares of the Portfolios sold to Plans would
be held by the Trustees of the Plans as required by Section 403(a) of
the Employee Retirement Income Security Act of 1974 (``ERISA'').
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) 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
[[Page 49714]]
such shares is reserved to the trustees or to the named fiduciary. In
any event, ERISA does not require pass-through voting to the
participants in Plans. Accordingly, Applicants note 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 Plans because they are not entitled to pass-through
voting privileges.
14. Some Plans, however, may provide participants with the right to
give voting instructions. However, Applicants note that there is no
reason to believe that participants in Plans generally, or those in a
particular Plan, either as a single group or in combination with other
Plans, would vote in a manner that would disadvantage contract owners.
Therefore, Applicants submit that the purchase of Portfolio shares by
Plans that provide voting rights to their participants does not present
any complications not otherwise occasioned by mixed and shared funding.
15. Applicants state that the prohibitions on mixed and shared
funding may reflect some concern with possible divergent interests
among different classes of investors. Applicants submit that shared
funding does not present any issues that do not already exist where a
single insurance company is licensed to do business in several states.
In this regard, Applicants not that a particular state insurance
regulatory body could require action that is inconsistent with the
requirements of other states in which the insurance company offers its
policies. Accordingly, Applicants submit that the fact that different
insurers may be domiciled in different states does not create a
significantly different or enlarged problem.
16. Applicants submit that shared funding by unaffiliated insurers,
in this respect, is no different than the use of the same investment
company as the funding vehicle for affiliated insurers, which Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) permit. Affiliated insurers may be
domiciled in different states and be subject to differing state law
requirements. Applicants state that affiliation does not reduce the
potential, if any exists, for differences in state regulatory
requirements. In any event, the conditions discussed below are designed
to safeguard against, and provide procedures for resolving, any adverse
effects that differences among state regulatory requirements may
produce.
17. Rule 6e-2(b)(15) and 6e-3(T)(b)(15) give the insurance company
the right to disregard the voting instructions of the contract owners.
This right does not raise any issues different from those raised by the
authority of state insurance administrators over separate accounts.
Affiliation does not eliminate the potential for divergent judgments as
to the advisability or legality of a change in investment policies,
principle underwriter, or investment adviser initiated by contract
owners. The potential for disagreement is limited by the requirements
in Rules 6e-2 and 6e-3(T) that the insurance company's disregard of
voting instruction be reasonable and based on specific good-faith
determinations.
18. A particular insurer's disregard of voting instructions
nevertheless could conflict with the majority of contract owner voting
instructions. If the insurer's judgment represents a minority position
or would preclude a majority vote, then the insurer may be required, at
the election of the Portfolio, to withdraw its separate account's
investment in such Portfolio, and no charge or penalty will be imposed
as a result of such withdrawal.
19. Applicants submit that investment by the Plans in any of the
Portfolios will present no conflict. Applicants assert that the
likelihood that voting instructions of insurance company separate
account holders will be disregarded or the possible withdrawal referred
to immediately above is extremely remote and this possibility will be
known, through prospectus disclosure, to any Plan choosing to invest in
the Portfolios. Moreover, Applicants state that even if a material
irreconcilable conflict involving Plans arises, the Plans may simply
redeem their shares and make alternative investments.
20. Applicants submit that investments by the Subadvisers will
similarly present no conflict. Applicants state that each Subadviser
will agree to vote its shares of a Portfolio in the same proportion as
all contract owners having voting rights with respect to that Portfolio
or in such other manner as may be required by the Commission or its
staff.
21. Applicants state that there is no reason why the investment
policies of any Portfolio would or should be materially different from
what those policies would or should be if any such Portfolio funded
only variable annuity contracts or variable life insurance products,
whether flexible premium or scheduled premium contracts. In this
regard, Applicants note that each type of variable contract is designed
as a long-term investment program, and that Plans also have long-term
investment goals. Moreover, Applicants submit that the Portfolios will
be managed to attempt to achieve their investment objectives, and not
to favor or disfavor any particular Participating Insurance Company or
type of insurance product.
22. Applicants further note that Section 817(h) imposes certain
diversification standards on the underlying assets of variable annuity
contracts and variable life insurance contracts held in the portfolios
of management investment companies. Treasury Regulation 1.817-
5(f)(3)(iii), which established diversification requirements for such
portfolios, specifically permits ``qualified pension or retirement
plans'' and insurance company separate accounts to share the same
underlying investment company. Therefore, Applicants have concluded
that neither the Code, nor the Treasury Regulations, nor the revenue
rulings thereunder present any inherent conflicts of interest if Plans,
variable annuity separate account and variable life insurance separate
accounts all invest in the same management investment company.
23. Applicants note that while there are differences in the manner
in which distributions are taxed for variable annuity contracts,
variable life insurance contracts and Plans, these tax consequences do
not raise any conflicts of interest. When distributions are to be made,
and the Separate Account or the Plan is unable to net purchase payments
to make the distributions, the Separate Account or the Plan will redeem
shares of the Portfolios at their respective net asset value. The Plans
will then make distributions in accordance with the terms of the Plan,
and a Participating Insurance Company will make distributions in
accordance with the terms of the variable contract.
24. Applicants state that it is possible to provide an equitable
means of giving voting rights to contract owners and to Plans.
Applicants represent that the Portfolios will inform each shareholder,
including each variable contract and each Plan, of its respective share
of ownership in the respective Portfolio. Each Participating Insurance
Company will then solicit voting instructions in accordance with the
``pass-through'' voting requirement.
25. Applicants submit that the ability of the Portfolios to sell
their respective shares directly to Plans does not create a ``senior
security,'' as that term is defined under Section 18(g) of the 1940
Act, with respect to any contract owner as opposed to a participant
under a Plan. Regardless of the rights and benefits of participants and
contract owners under the respective Plans and
[[Page 49715]]
contracts, the Plans and the Separate Accounts have rights only with
respect to their share of the Portfolios. Such shares may be redeemed
only at net asset value. No shareholder of any of the Portfolios has
any preference over any other shareholder with respect to distribution
of assets or payment of dividends.
26. Finally, Applicants state that there are no conflicts between
contract owners and participants under the Plans with respect to the
state insurance commissioners' powers over investment objectives. The
basic premise of shareholder voting is that not all shareholders may
agree with a particular proposal. The state insurance commissioners
have been given the veto power in recognition of the fact that
insurance companies cannot simply redeem shares of one underlying fund
held by their Separate Accounts and invest the proceeds in another
underlying fund. Complex and time-consuming transactions must be
undertaken to accomplish such redemptions and transfers. Conversely,
trustees of Plans may redeem shares of an investment vehicle, and
reinvest the proceeds in another investment vehicle without the same
regulatory impediments; most Plans may even hold cash pending suitable
investment. Based on the foregoing, Applicants represent that should
issues arise where the interests of contract owners and the interest of
Plans conflict, the issues can be resolved almost immediately because
trustees of the Plans can redeem shares out of the Portfolios
independently.
27. Applicants submit that mixed and shared funding should provide
benefits to contract owners by eliminating a significant portion of the
costs of establishing and administering separate funds. Participating
Insurance Companies will benefit not only from the investment and
administrative expertise of the Portfolios' investment adviser, 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 the Portfolios
thereby promoting economies of scale, by permitting increased safety
through greater diversification or by making the addition of Portfolios
more feasible. Therefore, making the Portfolio available for mixed and
shared funding may encourage more insurance companies to offer variable
contracts, and this should result in increased competition with respect
to both variable contract design and pricing, which can be expected to
result in more product variation and lower charges.
28. Applicants assert that there is no significant legal impediment
to permitting mixed and shared funding. Separate accounts organized as
unit investment trusts historically have been employed to accumulate
shares of mutual funds which have not been affiliated with the
depositor or sponsor of the separate account. Applicants do not believe
that mixed and shared funding, and sales to qualified Plans and
Subadvisers, will have any adverse federal income tax consequences.
Applicants' Conditions
Applicants have consented to the following conditions:
1. A majority of the Board of Trustees of the Trust (the ``Board'')
shall consist of persons who are not ``interested persons'' of the
Trust, as defined by Section 2(a)(19) of the 1940 Act and the rules
thereunder, and as modified by any applicable orders of the Commission,
except that if this condition is not met by reason of the death,
disqualification, or bona fide resignation of any trustee or trustees,
then the operation of this condition shall be suspended: (a) for a
period of 45 days, if the vacancy or vacancies may be filled by the
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 Trust for the existence of any
material irreconcilable conflict among the interests of the contract
owners of all Separate Accounts and of the Plan participants investing
in any Portfolio. 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, pension or securities laws or regulations, or a public
ruling, private letter ruling, no-action or interpretative letter, or
any similar action by insurance, tax, pension, or securities regulatory
authorities; (c) an administrative or judicial decision in any relevant
proceeding; (d) the manner in which the investments of any Portfolio
are being managed; (e) a difference in voting instructions given by
variable annuity contract owners and variable life contract owners and
trustees of 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 voting instructions of
Plan participants.
3. The Participating Insurance Companies, the investment adviser
and any other investment adviser to the Trust, and any Plan that
executes a fund participation agreement upon becoming an owner of 10%
or more of the assets of the Trust (the ``Participants'') will report
any potential or existing conflicts to the Board. Participants will be
obligated to assist the Board in carrying out its responsibilities 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 Participating Insurance
Company to inform the Board whenever contract owner voting instructions
are disregarded and, if pass-through voting is applicable, an
obligation by Citibank and each Plan to inform the Board whenever it is
determined to disregard Plan participant voting instructions. These
responsibilities will be contractual obligations of all Participating
Insurance Companies and Plans investing in a Portfolio under their
agreements governing participation therein. Responsibilities will be
carried out with a view only to the interest of contract owners and
Plan participants.
4. If a majority of the Board, or a majority of the disinterested
members of the Board, determine that a material irreconcilable conflict
exists, the relevant Participating Insurance Companies and Plans shall,
at their expense and to the extent reasonably practicable (as
determined by a majority of the disinterested members of the Board),
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 a
Portfolio and reinvesting such assets in a different investment medium
(including another Portfolio, if any) or submitting the question
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, life insurance
contract owners, or variable contract owners of one or more
Participating Insurance Companies) that votes in favor of such
segregation, or offering to the affected variable 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 Participating
Insurance Company's decision to disregard contract owner voting
instructions, and the decision represents a minority position or would
[[Page 49716]]
preclude a majority vote, the Participating Insurance Company may be
required, at the election of the Portfolio, to withdraw its Separate
Account's investment therein, and no charge or penalty will be imposed
as a result of such withdrawal. If a material irreconcilable conflict
arises because of a Plan's decision to disregard Plan participant
voting instructions, if applicable, and that decision represents a
minority position or would preclude a majority vote, the Plan may be
required, at the election of the Portfolio, to withdraw its investment
therein and no charge or penalty will be imposed as a result of such
withdrawal. The responsibility to take remedial action in the event of
a Board determination of a material irreconcilable conflict and to bear
the cost of such remedial action shall be a contractual obligation of
all Participating Insurance Companies and Plans under their agreements
governing their participation in a Portfolio. Responsibilities will be
carried out with a view only to the interests of contract owners and
Plan participants.
For purposes of condition 4, a majority of the disinterested
members of the Board shall determine whether or not any proposed action
adequately remedies any irreconcilable material conflict, but in no
event will the Trust or the investment adviser be required to establish
a new funding medium for any variable contract. No Participating
Insurance Company shall be required by condition 4 to establish a new
funding medium for any variable contract if an offer to do so has been
declined by a vote of a majority of the contract owners materially
affected by the material irreconcilable conflict. Further, no Plan
shall be required by condition 4 to establish a new funding medium for
such Plan if (a) a majority of Plan participants materially and
adversely affected by the material irreconcilable conflict vote to
decline such offer, or (b) pursuant to governing Plan documents and
applicable law, the Plan makes such decision without a vote by Plan
participants.
5. The determination by the Board of the existence of an
irreconcilable material conflict and its implications shall be made
known promptly in writing to all Participants.
6. Participating Insurance Companies will provide pass-through
voting privileges to all contract owners so long as the Commission
continues to interpret the 1940 Act as requiring pass-through voting
privileges for variable contract owners. Accordingly, the Participating
Insurance Companies will vote shares of each Portfolio held in their
Separate Accounts in a manner consistent with timely voting
instructions received from contract owners. Each Participating
Insurance Company also will vote shares of each Portfolio held in its
Separate Accounts for which no timely voting instructions from contract
owners are received, as well as shares it owns, in the same proportion
as those shares for which voting instructions are received.
Participating Insurance Companies shall be responsible for assuring
that each of their Separate Accounts participating in a Portfolio
calculates voting privileges in a manner consistent with other
Participating Insurance Companies. Each Plan will vote as required by
applicable law and governing Plan documents. The obligation to
calculate voting privileges in a manner consistent with all other
Separate Accounts investing in the Trust will be a contractual
obligation of all Participating Insurance Companies under their
agreements governing their participation in the Trust.
7. As long as the Commission continues to interpret the 1940 Act as
requiring pass-through voting privileges for contract owners, each
Subadviser will vote its shares of any Portfolio in the same proportion
as all contract owners having voting rights with respect to that
Portfolio; provided, however, that the Subadviser shall vote its shares
in such other manner as may be required by the Commission or its staff.
8. Each Portfolio will notify all Participating Insurance Companies
that separate account prospectus disclosure regarding potential risks
of mixed and shared funding may be appropriate. Each Portfolio shall
disclose in its prospectus that: (a) its shares may be offered to
Separate Accounts that fund both annuity and life insurance contracts
of affiliated and unaffiliated Participating Insurance Companies and
variable life insurance contracts offered by various insurance
companies and for qualified pension and retirement plans; (b) due to
differences of tax treatment or other considerations, the interests of
various contract owners participating in the Portfolios and the
interests of Plans in the Portfolios might at some time be in conflict;
and (c) the Board will monitor the Trust for any material conflicts and
determine what action, if any, should be taken.
9. All reports received by the Board regarding potential or
existing conflicts, and all Board action with respect 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 Board or other
appropriate records, and such minutes or other records shall be made
available to the Commission upon request.
10. If and to the extent that Rules 6e-2 and 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision
of the 1940 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, then each Portfolio, and/or
the Participating Insurance Companies, as appropriate, shall take such
steps as may be necessary to comply with Rule 6e-2 and 6e-3(T), as
amended, and Rule 6e-3, as adopted, to the extent such rules are
applicable.
11. The Trust 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 the shares of the Trust) and,
in particular, the Trust will either provide for annual meetings
(except insofar as the Commission may interpret Section 16 not to
require such meetings) or comply with Section 16(c) of the 1940 Act
(although, as noted above, the Trust is a Massachusetts business trust
which was organized in 1996 under a Declaration of Trust which provides
for the election of Trustees by shareholders except in certain
circumstances, and as such is not one of the trusts described in
Section 16(c)) as well as with Section 16(a) and, if and when
applicable, Section 16(b). Further, the Trust will act in accordance
with the Commission's interpretation of the requirements of Section
16(a) with respect to periodic elections of directors (or trustees) and
with whatever rules the Commission may promulgate with respect thereto.
12. The Participants, and where appropriate the investment adviser
and any other investment adviser to the Trust, at least annually, shall
submit to the Board such reports, materials, or data as the Board
reasonably may request so that it may fully carry out the obligations
imposed upon it by the conditions contained in the application and said
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 it so
reasonably requests, shall be a contractual obligation of all
Participants under their agreements governing their participating in
each Portfolio.
13. If a Plan should ever become a holder of 10% or more of the
assets of a Portfolio, such Plan will execute a participation agreement
with the Trust. A Plan will execute an application
[[Page 49717]]
containing an acknowledgment of this condition upon such Plan's initial
purchase of the shares of any Portfolio.
Conclusion
For the reasons stated above, Applicants assert that the requested
exemptions 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 are appropriate in
the public interest and consistent with the protection of investors and
the purposes fairly intended by the policy and provision of the 1940
Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-25133 Filed 9-22-97; 8:45 am]
BILLING CODE 8010-01-M
