[Federal Register Volume 59, Number 67 (Thursday, April 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-8283]


[[Page Unknown]]

[Federal Register: April 7, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20179; No. 812-8800]

 

Norwest Select Funds, et al.

March 31, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order under the Investment Company 
Act of 1940 (the ``1940 Act'').

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APPLICANTS: Norwest Select Funds (``Trust'') and Forum Financial 
Services, Inc. or any successor thereto (``Forum'') (collectively 
``Applicants'').

RELEVANT 1940 ACT SECTIONS: Order requested under 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).

SUMMARY OF APPLICATION: Applicants seek an order to the extent 
necessary to permit shares of the Trust to be sold to and held by 
separate accounts funding variable annuity and variable life insurance 
contracts issued by both affiliated and unaffiliated life insurance 
companies.

FILING DATE: The application was filed on January 27, 1994.

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 SEC's Secretary and 
serving Applicants with a copy of the request, personally or by mail. 
Hearing requests should be received by the SEC by 5:30 p.m. on April 
25, 1994, 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 may 
request notification of a hearing by writing to the Secretary of the 
SEC.

ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549. 
Applicants: Norwest Select Funds, 61 Broadway, New York, New York 
10006.

FOR FURTHER INFORMATION CONTACT:
Yvonne M. Hunold, Senior Attorney, at (202) 272-2676, or Wendell Faria, 
Deputy Chief, at (202) 272-2060, Office of Insurance Products (Division 
of Investment Management).

SUPPLEMENTARY INFORMATION: Following is a summary of the application. 
The complete application is available for a fee from the SEC's Public 
Reference Branch.

Applicants' Representations

    1. The Trust is an open-end management investment company that 
currently consists of three separate series (together with any future 
series, the ``Funds''): (a) ValuGrowth Stock Fund, (b) Intermediate 
Bond Fund, and (c) Adjustable U.S. Government Reserve Fund, each with 
its own investment objective and policy. The Trust filed its 
Notification of Registration on Form N-8A under the 1940 Act on 
December 8, 1993, and its Pre-Effective Registration Statement on Form 
N-1A under the 1940 Act and the Securities Act on January 21, 1994.
    2. Forum supervises the overall management of the Trust and 
provides certain administrative facilities and services for the Trust 
under a Management Agreement with the Trust. Forum also acts as the 
agent of the Trust in connection with the offering of shares of the 
Funds under a Distribution Agreement with the Trust. Forum receives no 
payments for its services as distributor.
    3. Shares of the Funds will be offered initially only to the 
Minnesota Mutual Life Insurance Company (``Minnesota Mutual'') and 
Fortis Benefits Insurance Company (``Fortis'') to be used as investment 
vehicles for certain variable annuity contracts, variable life 
insurance contracts and variable group life insurance contracts. Shares 
of existing and future Funds also may be offered to separate accounts 
of insurance companies that are unaffiliated with Minnesota Mutual or 
Fortis (together, ``Participating Insurance Companies'') to be used to 
fund various variable annuity contracts, scheduled premium variable 
life insurance contracts, and flexible premium variable life insurance 
contracts issued by the unaffiliated insurance companies (collectively 
with the Fortis and Minnesota Mutual contracts, ``Variable 
Contracts'').
    4. Norwest Investment Management (``Adviser'') serves as Investment 
Adviser to the Funds. The Adviser is a part of Norwest Bank Minnesota, 
N.A., a subsidiary of Norwest Corporation, a multi-bank holding 
company. The Adviser has not registered under the Investment Advisers 
Act of 1940 (``Advisers Act'') in reliance on the exclusions provided 
under section 202(a)(11) of the Advisers Act and in reliance on the 
provisions of rules 6e-2(a)(7) and 6e-3(T)(a)(6) of the 1940 Act.

Applicants' Legal Analysis

    1. 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 (``Trust Account''), rule 
6e-2(b)(15) provides partial exemptions from sections 9(a), 13(a), 
15(a), and 15(b) of the 1940 Act. The relief provided by Rule 6e-2 is 
also available to a separate account's investment adviser, principal 
underwriter, and sponsor or depositor.
    The exemptions granted by the 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.'' Therefore, the relief granted by rule 6e-
2(b)(15) is not available with respect to a scheduled premium variable 
life insurance separate account that owns shares of an underlying fund 
that also offers its shares to a variable annuity or a flexible premium 
variable life insurance separate account of the same company or of any 
affiliated life insurance company. The use of a common management 
investment company as the underlying investment medium for both 
variable annuity and variable life insurance separate accounts of the 
same life insurance company or of any affiliated life insurance company 
is referred to herein as ``mixed funding.''
    2. Additionally, the relief granted by rule 6e-2(b)(15) is not 
available with respect to a scheduled premium variable life insurance 
separate account that owns shares of an underlying fund that also 
offers its shares to separate accounts that fund variable contracts of 
one or more unaffiliated life insurance companies. The use of a common 
management investment company as the underlying investment medium for 
variable life insurance separate accounts of one insurance company and 
separate accounts funding variable contracts of one or more 
unaffiliated life insurance companies is referred to herein as ``shared 
funding.''
    3. 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 relief provided by Rule 6e-3(T) also is available 
to a separate account's investment adviser, principal underwriter, and 
sponsor or depositor. The exemptions granted by rule 6e-3(T) 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 
contracts or flexible contracts, or both; or which also 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 with respect to a flexible premium variable life 
insurance separate account, subject to certain conditions. However, 
rule 6e-3(T) does not permit shared funding because the relief granted 
by rule 6e-3(T)(b)(15) is not available with respect to a flexible 
premium variable life insurance separate account that owns shares of a 
management company that also offers its shares to separate accounts 
(including variable annuity and flexible premium and scheduled premium 
variable life insurance separate accounts) of unaffiliated life 
insurance companies.
    4. Applicants therefore request that the Commission, under its 
authority in section 6(c) of the 1940 Act, grant relief from sections 
9(a), 13(a), 15(a) and 15(b) of the 1940 Act and rules 6e-2(b)(15) and 
6e-3(T)(b)(15) thereunder for themselves and for variable life 
insurance separate accounts of the Participating Insurance Companies, 
and the principal underwriters and depositors of such separate 
accounts, to the extent necessary to permit mixed funding and shared 
funding.
    5. Section 9(a) of the 1940 Act makes it unlawful for any company 
to serve as an investment adviser to, or principal underwriter for, any 
registered open-end investment company if an affiliated person of that 
company is subject to any disqualification specified in sections 
9(a)(1) or 9(a)(2). Rule 6e-2(b)(15) (i) and (ii) and rule 6e-
3(T)(b)(15) (i) and (ii) provide exemptions from section 9(a) under 
certain circumstances, subject to limitations on mixed and shared 
funding. The relief provided by rules 6e-2(b)(15)(i) and 6e-
3(T)(b)(15)(i) permits a person disqualified under section 9(a) to 
serve as an officer, director, or employee of the life insurer, or any 
of its affiliates, so long as that person does not participate directly 
in the management or administration of the underlying fund. The relief 
provided by rules 6e-2(b)(15)(ii) and 6e-3(T)(b)(15)(ii) permits the 
life insurer to serve as the underlying fund's investment adviser or 
principal underwriter, provided that none of the insurer's personnel 
who are ineligible pursuant to section 9(a) are participating in the 
management or administration of the fund.
    6. Applicants state that the partial relief granted in rules 6e-
2(b)(15) and 6e-3(T)(b)(15) from the requirements of section 9(a), in 
effect, limits the 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 state that rules 6e-2 and 6e-3(T) recognize that it is not 
necessary for the protection of investors or for the purposes of the 
1940 Act to apply the provisions of section 9(a) to the many 
individuals in an insurance company complex, most of whom typically 
will have no involvement in matters pertaining to an investment company 
in that organization. Applicants submit that there is no regulatory 
reason to apply the provisions of section 9(a) to the many individuals 
in various unaffiliated insurance companies (or affiliated companies of 
Participating Insurance Companies) that may utilize a Fund as the 
funding medium for variable contracts.
    7. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) provide partial 
exemptions from sections 13(a), 15(a), and 15(b) of the 1940 Act to the 
extent that those sections have been deemed by the Commission to 
require ``pass-through'' voting with respect to management investment 
company shares held by a separate account, to permit the insurance 
company to disregard the voting instructions of its contractowners in 
certain limited circumstances.
    Rules 6e-2(b)(15)(iii)(A) and 6e-3(T)(b)(15)(iii)(A) provide that 
the insurance company may disregard voting instructions of its 
contractowners 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 fund and its investment advisers, 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 each rule.
    Rules 6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(B) provide that 
the insurance company may disregard contractowners' voting instructions 
if the contractowners initiate any change in such company's investment 
policies or any principal underwriter or 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 each rule.
    Applicants believe that the limits on pass-through voting 
privileges contained in rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) 
should continue to apply under mixed and shared funding.
    8. Applicants submit that shared funding by unaffiliated insurance 
companies should not present any issues that do not already exist where 
a single insurance company is licensed to do business in several or all 
states. In this regard, Applicants state 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.
    9. Applicants state further that, under rules 6e-2(b)(15)(iii) and 
6e-3(T)(b)(15)(iii), the rights of the insurance company to disregard 
the voting instructions of its contractowners do not raise any issues 
different from those raised by the authority of state insurance 
administrators over separate accounts, and that affiliation does not 
eliminate the potential, if any, for divergent judgments as to the 
advisability or legality of a change in investment policies, principal 
underwriter, or investment adviser initiated by contractowners. 
Applicants state that 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 instructions be reasonable and based on specific 
good faith determinations.
    10. Applicants submit that mixed funding and shared funding should 
benefit variable contractowners by: (a) Eliminating a significant 
portion of the costs of establishing and administering separate funds; 
(b) allowing for a greater amount of assets available for investment by 
the Funds, thereby promoting economies of scale, permitting greater 
safety through greater diversification, and/or making the addition of 
new portfolios more feasible; and (c) encouraging more insurance 
companies to offer variable contracts, resulting 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. Each Fund will be managed to attempt to achieve its investment 
objectives and not to favor or disfavor any particular Participating 
Insurance Company or type of insurance product.
    11. Applicants believe that there is no significant legal 
impediment to permitting mixed and shared funding. Applicants state 
that separate accounts organized as unit investment trusts have 
historically been employed to accumulate shares of mutual funds which 
have not been affiliated with the depositor or sponsor of the separate 
account. Applicants also believe that mixed and shared funding will 
have no adverse federal income tax consequences.

Applicants' Conditions

    The Applicants have consented to the following conditions:
    1. A majority of the Board of Trustees of the Trust (``Board'') 
shall consist of persons who are not ``interested persons,'' as defined 
by section 2(a)(19) of the 1940 Act and Rules thereunder and as 
modified by any applicable orders of the Commission, except that, if 
this condition is not met by reason of death, disqualification, or bona 
fide resignation of any trustee or trustees, then the operation of this 
condition shall be suspended: (i) For a period of 45 days, if the 
vacancy or vacancies may be filled by the Board; (ii) for a period of 
60 days, if a vote of shareholders is required to fill the vacancy or 
vacancies; or (iii) 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 between the interests of the 
contractowners of all separate accounts investing in the Trust. A 
material irreconcilable conflict may arise for a variety of reasons, 
including: (a) State insurance regulatory authority action; (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 Trust are being managed; (e) a difference in voting 
instructions given by variable annuity and variable life insurance 
contractowners; or (f) a decision by an insurer to disregard 
contractowner voting instructions.
    3. Participating Insurance Companies and Forum will report any 
potential or existing conflicts, of which they become aware, to the 
Board. Participating Insurance Companies and Forum will be obligated to 
assist the Board in carrying out its responsibilities by providing the 
Board with all information reasonably necessary for it 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 contractowner voting instructions are disregarded. These 
responsibilities will be contractual obligations of all Participating 
Insurance Companies investing in the Trust under their agreements 
governing participation therein, and such agreements shall provide that 
such responsibilities will be carried out with a view only to the 
interests of the contractowners.
    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 shall, at their 
expense and to the extent reasonably practicable (as determinated by a 
majority of disinterested members of the Board), take whatever steps 
are necessary to remedy or eliminate the irreconcilable material 
conflict, up to and including: (a) Withdrawing the assets allocable to 
some or all of the separate accounts from the Trust or any Fund therein 
and reinvesting such assets in a different investment medium (including 
another Fund, if any, of the Trust), or submitting the question whether 
such segregation should be implemented to a vote of all affected 
contractowners and, as appropriate, segregating the assets of any 
appropriate group (i.e., annuity contractowners, life insurance 
contractowners, or variable contractowners of one or more Participating 
Insurance Companies) that votes in favor of such segregation, or 
offering to the affected contractowners 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 contractowner voting instructions, and that decision 
represents a minority position or would preclude a majority vote, the 
Participating Insurance Company may be required, at the election of the 
Trust, to withdraw its separate account's 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 an irreconcilable material conflict and to bear the 
cost of such remedial action shall be a contractual obligation of all 
Participating Insurance Companies under their agreements governing 
participation in the Trust and these responsibilities will be carried 
out with a view only to the interests of the contractowners.
    For the purposes of condition (4), a majority of 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 Forum be required to establish a new funding 
medium for any variable contract. No Participating Insurance Company 
shall be required by this 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 contractowners materially affected by the 
irreconcilable material conflict.
    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 Participating Insurance Companies.
    6. Participating Insurance Companies will provide pass-through 
voting privileges to all variable contractowners so long as the 
Commission continues to interpret the 1940 Act as requiring pass-
through voting privileges for variable contractowners. Accordingly, 
each Participating Insurance Company will vote shares of each Fund held 
in its separate accounts in a manner consistent with timely voting 
instructions received from contractowners. Each Participating Insurance 
Company also will vote shares of each Fund held in its separate 
accounts for which no timely voting instructions from contractowners 
are received, as well as shares it owns, in the same proportion as 
those shares for which voting instructions are received. Each 
Participating Insurance Company shall be responsible for assuring that 
each of their separate accounts participating in the Trust calculates 
voting privileges in a manner consistent with all other Participating 
Insurance Companies. The obligation to calculate voting privileges in a 
manner consistent with all other separate accounts investing in the 
Trust shall be a contractual obligation of all Participating Insurance 
Companies under their agreements governing participation in the Trust.
    7. The Trust will notify all Participating Insurance Companies that 
prospectus disclosure regarding potential risks of mixed and shared 
funding may be appropriate. The Trust shall disclose in its Prospectus 
that: (a) Its shares are offered to insurance company separate accounts 
which fund both annuity and life insurance contracts; (b) because of 
differences of tax treatment or other considerations, the interests of 
various contractowners participating in the Trust 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.
    8. 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 Participating Insurance 
Companies 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.
    9. If and to the extent rule 6e-2 and rule 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 the Trust and/or the 
Participating Insurance Companies, as appropriate, shall take such 
steps as may be necessary to comply with rule 6e-2 and rule 6e-3(T), as 
amended, and rule 6e-3, as adopted, to the extent such rules are 
applicable.
    10. 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 either will provide for annual 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) (although the 
Trust is not one of the trusts described in this section) as well as 
with sections 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.
    11. The Participating Insurance Companies and/or Forum, at least 
annually, shall submit to the Board such reports, materials or data as 
the Board may reasonably request so that it may fully carry out the 
obligations imposed upon it by these stated conditions, and said 
reports, materials, and data shall be submitted more frequently if 
deemed appropriate by the Board. The obligations of the Participating 
Insurance Companies to provide these reports, materials, and data to 
the Board when it so reasonably requests, shall be a contractual 
obligation of all Participating Insurance Companies under their 
agreements governing participation in each Fund.

Conclusion

    For the reasons stated 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.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-8283 Filed 4-6-94; 8:45 am]
BILLING CODE 8010-01-M