[Federal Register Volume 64, Number 185 (Friday, September 24, 1999)]
[Notices]
[Pages 51812-51818]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-24869]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-24018; File No. 812-11698]
Templeton Variable Products Series Fund, et al.
September 17, 1999.
AGENCY: Securities and Exchange Commission (the ``Commission'' or
``SEC'').
ACTION: Notice of application for an amended order of exemption
pursuant to Section 6(c) of the Investment Company Act of 1940 (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.
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SUMMARY OF APPLICATION: Templeton Variable Products Series Fund (the
``Templeton Trust''), Franklin Templeton Variable Insurance Products
Trust (formerly Franklin Valuemark Funds) (the ``VIP Trust,'' and
together with the Templeton Trust, the ``Funds''), Templeton Funds
Annuity Company (``TFAC'') or any successor to TFAC, and any future
open-end investment company for which TFAC or any affiliate is the
administrator, sub-administrator, investment manager, adviser,
principal underwriter, or sponsor (``Future Funds'') seek amended order
of the Commission to (1) add as parties to that order the VIP Trust and
any Future Funds and (2) permit shares of the Funds and Future Funds to
be issued to and held by qualified pension and retirement plans outside
the separate account context.
APPLICANTS: Templeton Variable Products Series Fund, Franklin Templeton
Variable Insurance Products Trust, Templeton Funds Annuity Company or
any successor to TFAC, and any future open-end investment company for
which TFAC or any affiliate is the administrator, sub-administrator,
investment manager, adviser, principal underwriter, or sponsor
(collectively, the ``Applicants'').
FILING DATE: The application was filed on July 14, 1999, and amended
and restated on September 17, 1999.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Secretary of the
Commission and serving Applicants with a copy of the request,
personally or by mail. Hearing requests should be received by the
Commission by 5:30 p.m., on October 12, 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 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, D.C. 20549-0609. Applicants: Templeton Variable
Products Series Fund and Franklin Templeton Variable Insurance Products
Trust, 777 Mariners Island Boulevard, San Mateo, California 94404,
Attn: Karen L. Skidmore, Esq.
FOR FURTHER INFORMATION CONTACT: Kevin P. McEnery, Senior Counsel, or
Susan M. Olson, Branch Chief, Office of Insurance Products, Division of
Investment Management, at (202) 942-0690.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application is available for a fee from the
SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington, D.C.
20549-0102 (tel. (202) 942-8090).
Applicants' Representations
1. Each of the Funds is registered under the 1940 Act as an open-
end management investment company and was organized as a Massachusetts
business trust. The Templeton Trust currently consists of eight
separate series, and the VIP Trust consists of twenty-five separate
series. Each Fund's Declaration of Trust permits the Trustees to create
additional series of shares at any time. The Funds currently serve as
the underlying investment medium for variable annuity contracts
[[Page 51813]]
and variable life insurance policies issued by various insurance
companies. The Funds have entered into investment management agreements
with certain investment managers (``Investment Managers'') directly or
indirectly owned by Franklin Resources, Inc. (``Resources''), a
publicly owned company engaged in the financial services industry
through its subsidiaries.
2. TFAC is an indirect, wholly owned subsidiary of Resources. TFAC
is the sole insurance company in the Franklin Templeton organization,
and specializes in the writing of variable annuity contracts. The
Templeton Trust has entered into a Fund Administration Agreement with
Franklin Templeton Services, Inc. (``FT Services''), which replaced
TFAC in 1998 as administrator, and FT Services subcontracts certain
services to TFAC. FT Services also serves as administrator to all
series of the VIP Trust. TFAC and FT Services provide certain
administrative facilities and services for the VIP and Templeton
Trusts.
3. On November 16, 1993, the Commission issued an order granting
exemptive relief to permit shares of the Templeton Trust to be sold to
and held by variable annuity and variable life insurance separate
accounts of both affiliated and unaffiliated life insurance companies
(Investment Company Act Release No. 19879, File No. 812-8546) (the
``Original Order''). Applicants incorporate by reference into the
application the Application for the Original Order and each amendment
thereto, the Notice of Application for the Original Order, and the
Original Order, to the extent necessary, to supplement the
representations made in the application in support of the requested
relief. Applicants represent that all of the facts asserted in the
Application for the Original Order and any amendments thereto remain
true and accurate in all material respects to the extent that such
facts are relevant to any relief on which Applicants continue to rely.
The Original Order allows the Templeton Trust to offer its shares to
insurance companies as the investment vehicle for their separate
accounts supporting variable annuity contracts and variable life
insurance contracts (collectively, the ``Variable Contracts'').
Applicants state that the Original Order does not (i) include the VIP
Trust or Future Funds as parties, nor (ii) expressly address the sale
of shares of the Funds or any Future Funds to qualified pension and
retirement plans outside the separate account context including,
without limitation, those trusts, plans, accounts, contracts or
annuities described in Sections 401(a), 403(a), 403(b), 408(b), 408(k),
414(d), 457(b), 501(c)(18) of the Internal Revenue Code of 1986, as
amended (the ``Code''), and any other trust, plan, contract, account or
annuity that is determined to be within the scope of Treasury
Regulation 1.817.5(f)(3)(iii) (``Qualified Plans'').
4. Separate accounts owning shares of the Funds and their insurance
company depositors are referred to in the application as
``Participating Separate Accounts'' and ``Participating Insurance
Companies,'' respectively. 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 management investment
company as the underlying investment medium for variable annuity and/or
variable life insurance separate accounts of unaffiliated insurance
companies is referred to as ``shared funding.''
Applicants' Legal Analysis
1. Applicants request that the Commission issue an amended order
pursuant to Section 6(c) of the 1940 Act, adding the VIP Trust and
Future Funds to the Original Order and exempting scheduled premium
variable life insurance separate accounts and flexible premium variable
life insurance separate accounts of Participating Insurance Companies
(and, to the extent necessary, any principal underwriter and depositor
of such an account) and the Applicants 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)
(and any comparable rule) thereunder, respectively, to the extent
necessary to permit shares of the Funds and any Future Funds to be sold
to and held by qualified Plans. Applicants submit that the exemptions
requested are appropriate in the public interest, consistent with the
protection of investors, and consistent with the purposes fairly
intended by the policy and provisions of the 1940 Act.
2. The Original Order does not include the VIP Trust or Future
Funds as parties nor expressly address the sale of shares of the Funds
or any Future Funds to Qualified Plans. Applicants propose that the VIP
Trust and Future Funds be added as parties to the Original Order and
the Funds and any Future Funds be permitted to offer and sell their
shares to Qualified Plans.
3. Section 6(c) of the 1940 Act provides, in part, that the
Commission, by order upon application, may conditionally or
unconditionally exempt any person, security or transaction, or any
class or classes of persons, securities or transactions from any
provisions of the 1940 Act or the rules or regulations thereunder, if
and to the extent 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.
4. 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 (``UIT''), Rule 6e-
2(b)(15) provides partial exemptions from various provisions of the
1940 Act, including the following: (1) Section 9(a), which makes it
unlawful for certain individuals to act in the capacity of employee,
officer, or director for a UIT, by limiting the application of the
eligibility restrictions in Section 9(a) to affiliated persons directly
participating in the management of a registered management investment
company; and (2) 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 fund's shares, by allowing an
insurance company to disregard the voting instructions of
contractowners in certain circumstances.
5. These exemptions are available, however, only where the
management investment company underlying the separate account (the
``underlying fund'') offers its shares ``exclusively to variable life
insurance separate accounts of the life insurer, or of any affiliated
life insurance company.'' Therefore, Rule 6e-2 does not permit either
mixed funding 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 it shares to a variable annuity or a flexible premium
variable life insurance separate account of the same company or of any
affiliated life insurance company. Rule 6e-2(b)(15) also does not
permit the sale of shares of the underlying fund to Qualified Plans.
6. 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) also provides partial exemptions from
Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act. These
exemptions,
[[Page 51814]]
however, are available only where the separate 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 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 but does not permit shared funding and also does
not permit the sale of shares of the underlying fund to Qualified
Plans. As noted above, the Original Order granted the Templeton Trust
exemptive relief to permit mixed and shared funding, but did not
expressly address the sale of its shares to Qualified Plans.
7. Applicants note that if the Funds were to sell their shares only
to Qualified Plans, exemptive relief under Rule 6e-2 and Rule 6e-3(T)
would not be necessary. Applicants state that the relief provided for
under 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 plans.
8. Applicants state that changes in the federal tax law have
created the opportunity for each of the Funds to increase its asset
base through the sale of its shares to Qualified Plans. Applicants
state that Section 817(h) of the Internal Revenue Code of 1986, as
amended (the ``Code''), imposes certain diversification standards on
the assets underlying Variable Contracts. Treasury Regulations
generally require that, to meet the diversification requirements, all
of the beneficial interests in the underlying investment company must
be held by the segregated asset accounts of one or more life insurance
companies. Notwithstanding this, Applicants note that the Treasury
Regulations also contain an exception to this requirement that permits
trustees of a Qualified Plan to hold shares of an investment company,
the shares of which are also held by insurance company segregated asset
accounts, without adversely affecting the status of the investment
company as an adequately diversified underlying investment of Variable
Contracts issued through such segregated asset accounts (Treas. Reg.
1.817-5(f)(3)(iii)).
9. Applicants state that the promulgation of Rules 6e-2(b)(15) and
6e-3(T)(b)(15) under the 1940 Act preceded the issuance of these
Treasury Regulations. Thus, Applicants assert that the sale of shares
of the same investment company 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).
10. Section 9(a) provides that it is unlawful for any company to
serve as investment adviser or principal underwrite of any registered
open-end investment company if any affiliated person of that company is
subject to a disqualification enumerated in Sections 9(a)(1) or (2).
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) provide exemptions from Section
9(a) under certain circumstances, subject to the limitations on mixed
and shared funding. These exemptions limit the application of the
eligibility restrictions to affiliated individuals or companies that
directly participate in the management of the underlying portfolio
investment company.
11. Applicants state that the relief granted in Rules 6e-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 purposes of Section 9.
Applicants submit that those Rules recognize that it is not necessary
for the protection of investors or the purposes fairly intended by the
policy and provisions of the 1940 Act to apply the provisions of
Section 9(a) to the many individuals involved in an insurance company
complex, most of whom typically will have no involvement in matters
pertaining to investment companies funding the separate accounts.
12. Applicants to the Original Order previously requested and
received relief from Section 9(a) and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) to the extent necessary to permit mixed and shared funding.
Applicants maintain the relief previously granted from Section 9(a)
will in way be affected by the proposed sale of shares of the Funds to
Qualified Plans. Those individuals who participate in the management or
administration of the Funds will remain the same regardless of which
Qualified Plans use such Funds. Applicants maintain that more broadly
applying the requirements of Section 9(a) because of investment by
Qualified Plans would not serve any regulatory purpose. Moreover,
Qualified Plans, unlike separate accounts, are not themselves
investment companies and therefore are not subject to Section 9 of the
1940 Act.
13. Applicants state that Rule 6e-2(b)(15)(iii) and 6e-
3(T)(b)(15)(iii) provide exemptions from the pass-through voting
requirement with respect to several significant matters, assuming the
limitations on mixed and shared funding are observed. 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 contractowners
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 the Rules). Rules 6e-2(b)(15)(iii)(B)
and 6e-3(T)(b)(15)(iii)(A)(2) provide that the insurance company may
disregard contractowners' voting instructions if the contractowners
initiate any change in such 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) and (b)(7)(ii)(B) and (C) of the Rules).
14. Applicants assert that Qualified Plans, which are not
registered as investment companies under the 1940 Act, have no
requirement to pass-through the voting rights to plan participants.
Applicants state that applicable law expressly reserves voting rights
to certain specified persons. Under Section 403(a) of the Employment
Retirement Income Security Act (``ERISA''), shares of a fund sold to a
Qualified Plan must be held by the trustees of the Qualified Plan.
Section 403(a) also provides that the trustee(s) must have exclusive
authority and discretion to manage and control the Qualified Plan with
two exceptions: (1) When the Qualified 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 Qualified Plan and not
contrary to ERISA; and (2) when the authority to manage, acquire or
dispose of assets of the Qualified Plan is delegated to one or more
investment managers pursuant to Section 402(c)(3) of ERISA. Unless one
of the two above exceptions stated in Section 403(a) applies, Qualified
Plan trustees have the exclusive authority and responsibility for
voting proxies. Where a named fiduciary to a Qualified Plan 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. Where a Qualified Plan does not
provide participants with the right to give voting instructions,
Applications do not see any potential for material irreconcilable
conflicts of interest
[[Page 51815]]
between or among variable contract holders and Qualified Plan investors
with respect to voting of the respective Fund's shares. According,
Applicants state 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 respect to such
Qualified Plans since the Qualified Plans are not entitled to pass-
through voting privileges.
15. Even if a Qualified Plan were to hold a controlling interest in
one of the Funds, Applicants believe that such control would not
disadvantage other investors in such 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 a Fund by a Qualified
Plan will not create any of the voting complications occasioned by
mixed funding or shared funding. Unlike mixed or shared funding,
Qualified Plan investor voting rights cannot be frustrated by veto
rights of insurers or state regulators.
16. Applicants state that 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. Where a Qualified 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 Qualified 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. In sum,
Applicants maintain that the purchase of shares of the Funds by
Qualified Plans that provide voting rights does not present any
complications not otherwise occasioned by mixed or shared funding.
17. Applicants do not believe that the sale of the shares of Funds
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 contractowners.
18. As noted above, Section 817(h) of the Code imposes certain
diversification 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 by the Treasury Department, adequately diversified.
19. Treasury Department 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 shares in the underlying
fund 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, Applicants believe that the Treasury 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 the
Treasury Regulations or revenue rulings thereunder presents any
inherent conflict of interest.
20. 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 Funds. 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 Funds 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 Qualified Plan will make
distributions in accordance with the terms of the Qualified Plan.
21. Applicants maintain that it is possible to provide an equitable
means of giving voting rights to Participating Separate Account
contractowners and to Qualified Plans. In connection with any meeting
of shareholders, the Funds will inform each shareholder, including each
Participating Insurance Company and Qualified Plan, of information
necessary for the meeting, including their respective share of
ownership in the relevant Fund. Each Participating Insurance Company
will then solicit voting instructions in accordance with Rules 6e-2 and
6e-3(T), as applicable, and its participation agreement with the
relevant 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 the 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.
22. Applicants have concluded that even if there should arise
issues with respect to a state insurance commissioner's veto powers
over investment objectives where the interests of contractowners and
the interests of Qualified Plans 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
Funds. Applicants note that 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. Conversely, the trustees of Qualified Plans or the
participants in participant-directed Qualified Plans can make the
decision quickly and redeem their interest in the Funds and reinvest in
another funding vehicle without the same regulatory impediments faced
by separate accounts or, as is the case with most Qualified Plans, even
hold cash pending suitable investment.
23. Applicants also state that they do not see any greater
potential for material irreconcilable conflicts arising between the
interests of participants under Qualified Plans and contractowners of
Participating Separate Accounts from possible future changes in the
federal tax laws that that which already exist between variable annuity
contractowners and variable life insurance contractowners.
24. Applicants state that the sale of shares of the Funds to
Qualified Plans in addition to separate accounts of Participating
Insurance Companies will result in an increased amount of assets
available for investment by the Funds. This may benefit variable
contractowners by promoting economies of scale, by permitting increased
safety of investments through greater diversification, and by making
the addition of new portfolios more feasible.
25. Applicants assert that, regardless of the type of shareholders
in each Fund, each Fund's Investment Manager is or would be
contractually and otherwise obligated to manage the Fund solely and
exclusively in accordance with that Fund's investment objectives,
[[Page 51816]]
policies and restrictions as well as any guidelines established by the
Board of Trustees of such Fund (the ``Board''). The Investment Manager
works with a pool of money and (except in a few instances where this
may be required in order to comply with state insurance laws) does not
take into account the identify of the shareholders. Thus, each Fund
will be managed in the same manner as any other mutual fund. Applicants
therefore see no significant legal impediment to permitting the sale of
shares of the Funds to Qualified Plans.
26. Applicants state that the Commission has permitted the
amendment of a substantially similar original order for the purpose of
adding a party to the original order and has permitted open-end
management investment companies to offer their shares directly to
Qualified Plans in addition to separate accounts of affiliated or
unaffiliated insurance companies which issue either or both variable
annuity contracts or variable life insurance contracts. Applicants
state that the amended order sought in the application is identical to
precedent with respect to the conditions Applicants propose should be
imposed on Qualified Plans in connection with investment in the Funds.
Applicants' Conditions
If the requested amended order is granted, Applicants consent to
the following conditions:
1. A majority of the Board of each Fund shall consists 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 Board Member or Members, 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 remaining Board Members; (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 their respective Fund for the existence
of any material irreconcilable conflict among the interests of the
Variable Contract owners of all Separate Accounts investing in the
Funds and of the Qualified Plan participants investing in the Funds.
The Board will determine what action, if any, shall 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 Funds are being managed;
(e) a difference in voting instructions given by variable annuity
contract owners, variable life insurance contract owners, and trustees
of Qualified Plans; (f) a decision by an insurer to disregard the
voting instructions of Variable Contract owners; or (g) if applicable,
a decision by a Qualified Plan to disregard the voting instructions to
Qualified Plan participants.
3. Participating Insurance Companies, the Investment Managers, and
any Qualified Plan that executes a fund participation agreement upon
becoming an owner of 10 percent or more of the assets of a Fund (a
``Participating Qualified Plan''), will report any potential or
existing conflicts of which it becomes aware to the Board of any
relevant Fund. Participating Insurance Companies, the Investment
Managers and the Participating Qualified Plans will be responsible for
assisting the Board in carrying out its responsibilities under these
conditions by providing the Board with all information reasonably
necessary for the Board to consider any issues raised. This
responsibility includes, but is not limited to, an obligation by each
Participating Insurance Company to inform the Board whenever voting
instructions of Contract owners are disregarded and, if pass-through
voting is applicable, an obligation by each Participating Qualified
Plan to inform the Board whenever it has determined to disregard
Qualified Plan participant voting instructions. The responsibility to
report such information and conflicts, and to assist the Board, will be
contractual obligations of all Participating Insurance Companies
investing in the Funds under their agreements governing participation
in the Funds, and such agreements shall provide that these
responsibilities will be carried out with a view only to the interests
of the Variable Contract owners. The responsibility to report such
information and conflicts, and to assist the Board, will be contractual
obligations of all Participating Qualified Plans under their agreements
governing participation in the Funds, and such agreements will provide
their responsibilities will be carried out with a view only to the
interests of Qualified Plan participants.
4. If it is determined by a majority of the Board of a Fund, or by
a majority of the disinterested Board Members, that a material
irreconcilable conflict exists, the relevant Participating Insurance
Companies and Participating Qualified Plans will, at their own 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 material irreconcilable conflict, which steps
could include: (a) In the case of Participating Insurance Companies,
withdrawing the assets allocable to some or all of the Separate
Accounts from the Fund or any portfolio thereof ad reinvesting such
assets in a different investment medium, including another portfolio of
an Fund or another Fund, or submitting the question as to whether such
segregation should be implemented to a vote of all affected Variable
Contract owners and, as appropriate, segregating 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) that votes in favor of such segregation, or offering to the
affected Variable Contract owners the option of making such a change;
(b) in the case of Participating Qualified Plans, withdrawing the
assets allocable to some or all of the Qualified Plans from the Fund
and reinvesting such assets in a different investment medium; and (c)
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
Variable 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 Fund's election, to withdraw the
insurer's Separate Account investment in such Fund, and no charge or
penalty will be imposed as a result of such withdrawal. If a material
irreconcilable conflict arises because of a Participating Qualified
Plan's decision to disregard Qualified Plan participant voting
instructions, if applicable, and that decision represents minority
position or would preclude a majority vote, the Participating Qualified
Plan may be required, at the Fund's election, to withdraw its
investment in such Fund, and no charge or penalty will be
[[Page 51817]]
imposed as a result of such withdrawal. The responsibility to take
remedial action in the event of a determination by a Board of a
material irreconcilable conflict and to bear the cost of such remedial
action will be a contractual obligation of all Participating Insurance
Companies and Participating Qualified Plans under their agreements
governing participation in the Funds, and these responsibilities will
be carried out with a view only to the interest of Variable Contract
owners and Qualified Plan participants.
5. For purposes of Condition 4, a majority of the disinterested
Board 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 relevant Fund or the Investment
Managers be required to establish a new funding medium for any
Contract. No Participating Insurance Company shall be required by
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
Variable Contract owners materially and adversely affected by the
material irreconcilable conflict. Further, no Participating Qualified
Plan shall be required by Condition 4 to establish a new funding medium
for any Participating Qualified Plan if (a) a majority of Qualified
Plan participants materially and adversely affected by the
irreconcilable material conflict vote to decline such offer, or (b)
pursuant to governing Qualified Plan documents and applicable law, the
Participating Qualified Plan makes such decision without a Qualified
Plan participant vote.
6. The determination of the Board of the existence of a material
irreconcilable conflict and its implications will be made known in
writing promptly to all Participating Insurance Companies and
Participating Qualified Plans.
7. Participating Insurance Companies will provide pass-through
voting privileges to Variable Contract owners who invest in registered
Separate Accounts so long as and to the extent that the Commission
continues to interpret the 1940 Act as requiring pass-through voting
privileges for Variable Contract owners. As to Variable Contracts
issued by unregistered Separate Accounts, pass-through voting
privileges will be extended to participants to the extent granted by
issuing issuance companies. Each Participating Insurance Company will
also vote shares of the Funds held in its Separate Accounts for which
no voting instructions from Contract owners are timely received, as
well as shares of the Funds which the Participating Insurance Company
itself owns, in the same proportion as those shares of the Funds for
which voting instructions from contract owners are timely received.
Participating Insurance Companies will be responsible for assuring that
each of their registered Separate Accounts participating in the Funds
calculates voting privileges in a manner consistent with other
Participating Insurance Companies. The obligation to calculate voting
privileges in a manner consistent with other registered Separate
Accounts investing in the Funds will be a contractual obligation of all
Participating Insurance Companies under their agreements governing
their participation in the Funds. Each Participating Qualified Plan
will vote as required by applicable law and governing Qualified Plan
documents.
8. All reports of potential of existing conflicts received by the
Board of a Fund and all action by such Board with regard to determining
the existence of conflict, notifying Participating Insurance Companies
and Participating Qualified Plans of a conflict, and determining
whether any proposed action adequately remedies a conflict, will be
properly recorded in the minutes of the meetings of such Board or other
appropriate records, and such minutes or other records shall be made
available to the Commission upon request.
9. Each Fund will notify all Participating Insurance Companies that
separate disclosure in their respective Separate Account prospectuses
may be appropriate to advise accounts regarding the potential risks of
mixed and shared funding. Each Fund shall disclose in its prospectus
that (a) the Fund is intended to be a funding vehicle for variable
annuity and variable life insurance contracts offered by various
insurance companies and for qualified pension and retirement plans; (b)
to differences to tax treatment and other considerations, the interests
of various Contract owners participating in the Fund and/or the
interests of Qualified Plans investing in the Fund may at some time be
in conflict; and (c) the Board of such Fund 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.
10. Each Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders (which, for these purposes, will be
the persons having a voting interest in the shares of the Funds), and,
in particular, the Funds will either provide for annual shareholder
meetings (except insofar as 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 Funds are not the type of trust described
in Section 16(c) of the 1940 Act, as well as with Section 16(a) of the
1940 Act and, if and when applicable. Section 16(b) of the 1940 Act.
Further, each Fund will act in accordance with the Commission's
interpretation of the requirements of Section 16(a) with respect to
periodic elections of Board Members and with whatever rules the
Commission may promulgate with respect thereto.
11. If and to the extent Rules 6e-2 or 6e-3(T) under the 1940 Act
is 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 Funds and/
or Participating Insurance Companies and Participating Qualified Plans,
as appropriate, shall take such steps as may be necessary to comply
with such Rules 6e-2 and 6e-3(T), as amended, or proposed Rule 6e-3, as
adopted, to the extent that such Rules are applicable.
12. The Participating Insurance Companies and Participating
Qualified Plans and/or the Investment Managers, at least annually, will
submit to the Board such reports, materials or data as the Board may
reasonably request so that the Board may fully carry out obligations
imposed upon it by the conditions contained in the application. Such
reports, materials and data will be submitted more frequently if deemed
appropriate by the Board. The obligations of the Participating
Insurance Companies and Participating Qualified Plans to provide these
reports, materials and data to the Board, when the Board so reasonably
requests, shall be a contractual obligation of all Participating
Insurance Companies and Participating Qualified Plans under their
agreements governing participation in the Funds.
13. If a Qualified Plan should ever become a holder of ten percent
or more of the assets of a Fund, such Qualified Plan will execute a
participation agreement with the Fund that includes the conditions set
forth herein to the extent applicable. A Qualified Plan will execute an
application containing an acknowledgment of this condition upon such
Qualified Plan's initial purchase of the shares of any Fund.
[[Page 51818]]
Conclusion
Applicants assert that, for the reasons summarized above, 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.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-24869 Filed 9-33-99; 8:45 am]
BILLING CODE 8010-01-M
