[Federal Register Volume 59, Number 153 (Wednesday, August 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19446]


[[Page Unknown]]

[Federal Register: August 10, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-20440; 812-8936]

 

Connecticut Mutual Financial Services Series Fund I, Inc. et al.

August 3, 1994.
agency: Securities and Exchange Commission (the ``SEC'' or the 
``Commission'').

action: Notice of Application for exemptions under the Investment 
Company Act of 1940 (the ``1940 Act'').

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applicants: Connecticut Mutual Financial Services Series Fund I, Inc. 
(the ``Fund''), G.R. Phelps & Co., Inc. (``G.R. Phelps''), and certain 
life insurance companies (``Participating Insurance Companies'') and 
their separate accounts (``Separate Accounts'').

relevant 1940 act sections and rules: Order requested under Section 
6(c) of the 1940 Act for 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) 
under the 1940 Act.

summary of application: Applicants seek an order to the extent 
necessary to permit shares of the Fund to be sold to, and held by, 
variable annuity and variable life insurance separate accounts of both 
affiliated and unaffiliated life insurance companies.

filing dates: The application was filed on April 12, 1994 and will be 
amended during the notice period to reflect certain comments of the SEC 
staff.

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 Commission's Secretary 
and serving the 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 August 29, 1994, 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 
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 Commission's Secretary.

addresses: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549. Applicants, c/o Robert Vegliante, 
Esq., 140 Garden Street, Mail Stop 326, Hartford, Connecticut 06154.

for further information contact: C. Christopher Sprague, Senior 
Counsel, at (202) 942-0670, or Michael V. Wible, Special Counsel, at 
(202) 942-0670, Office of Insurance Products, Division of Investment 
Management.

supplementary information: The following is a summary of the 
application; the complete application is available for a fee from the 
Commission's Public Reference Branch.

Applicants' Representations

    1. The Fund is a Maryland corporation registered under the 1940 Act 
as an open-end, diversified management investment company. G.R. Phelps 
is the investment adviser for the Fund. The Fund currently consists of 
six separate portfolios, (individually a ``Portfolio'' and 
collectively, the ``Portfolios''): The Money Market Portfolio, the 
Government Securities Portfolio, the Income Portfolio, the Total Return 
Portfolio, the Growth Portfolio, and the International Equity 
Portfolio. Each Portfolio has its own investment objective, or 
objectives, and policies. Presently, shares of the Fund are sold to 
Connecticut Mutual Life Insurance Company (``CML'') to be credited, as 
appropriate, to its Panorama Separate Account, CML Variable Annuity 
Account A, CML Variable Annuity Account B, and CML Accumulation Annuity 
Account E. Each of these separate accounts established by CML funds 
benefits under variable annuity contracts issued by CML. Shares of the 
Fund are also sold to C.M. Life Insurance Company (``C.M. Life''), a 
wholly-owned subsidiary of CML, to be credited to its Panorama Plus 
Separate Account to fund benefits under variable annuity contracts 
issued by C.M. Life.
    2. Shares of the Fund, may, in the future, be sold to other 
separate accounts established by CML or C.M. Life or to other issuers 
of variable annuity or variable life insurance contracts. Specifically, 
the Fund intends to offer its shares to separate accounts of any 
interested insurance company, including insurance companies 
unaffiliated with CML, in order to fund variable annuity contracts, 
single premium variable life insurance contracts, scheduled premium 
variable life insurance contracts, and/or flexible premium variable 
life insurance contracts (referred to collectively as ``variable 
contracts''). Such Participating Insurance Companies will establish 
their own Separate Accounts and will design their own variable 
contracts.
    It is anticipated that Participating Insurance Companies will rely 
on Rules 6e-2 or 6e-3(T) under the 1940 Act with respect to their 
scheduled premium variable life insurance contracts, respectively, 
although some Participating Insurance Companies also may rely on 
individual exemptive orders. The use of a common management investment 
company as the underlying investment medium for both variable annuity 
and variable life insurance separate accounts is referred to herein as 
``mixed funding.'' The use of a common management investment company as 
the underlying investment medium for separate accounts of unaffiliated 
insurance companies is referred to herein as ``shared funding.'' 
Applicants request an order of the Commission exempting the 
Participating Insurance Companies and their Separate Accounts (and, to 
the extent necessary, any principal underwriter and depositor of such 
an Account) 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) under the 1940 Act, to 
the extent necessary to permit mixed and shared funding.

Applicants' Legal Analysis

    1. Rule 6e-2(b)(15) provides the exemptions from Sections 9(a), 
13(a), 15(a), and 15(b) of the 1940 Act that are discussed below only 
if the separate account is organized as a unit investment trust, all 
the assets of which consist of the shares of one or more registered 
management investment companies which offer their shares exclusively to 
variable life insurance separate accounts of the life insurer or of any 
affiliated life insurer. Thus, those exemptions under Rule 6e-2 are not 
available if a separate account invests in a fund engaged in mixed and/
or shared funding. Rule 6e-3(T)(b)(15) provides similar exemptions, but 
only if the separate account is organized as a unit investment trust, 
all the assets of which consist of the shares of one or more registered 
management investment companies which offer their shares exclusively to 
separate accounts of the life insurer, or of any affiliated life 
insurance company, offering either scheduled premium variable life 
insurance contracts or flexible premium variable life insurance 
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, or which offer their shares to any such life 
insurance company in consideration solely for advances made by the life 
insurer in connection with the operation of the separate account. Thus, 
the exemptions set out in Rule 6e-3(T)(b)(15) are available if the 
underlying fund is engaged in mixed funding, but are not available if 
the fund is engaged in shared funding.
    2. Section 9(a) of the 1940 Act provides, among other things, that 
it is unlawful for any company to serve as investment adviser or 
principal underwriter of any registered open-end investment company if 
an affiliated person of that company is subject to a disqualification 
enumerated in Sections 9(a)(1) or (2) of the 1940 Act. Rules 6e-
2(b)(15)(i) and (ii) and Rules 6e-3(T)(b)(15)(i) and (ii) under the 
1940 Act provide exemptions from Section 9(a) under certain 
circumstances, subject to the limitations on mixed and shared funding 
imposed by the 1940 Act and the rules thereunder. These exemptions 
limit the application of the eligibility restrictions to affiliated 
individuals or companies that directly participate in the management of 
the underlying management company. Rules 6e-2(b)(15)(iii) and 6e-
3(T)(b)(15)(iii) each provide a partial exemption from Sections 13(a), 
15(a), and 15(b) of the 1940 Act to the extent those sections have been 
deemed by the Commission to require ``pass-through'' voting with 
respect to an underlying fund's shares.
    3. 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 of the 
1940 Act, in effect, limits the amount of monitoring necessary to 
ensure compliance with Section 9 to that which is appropriate in light 
of the policy and purposes of Section 9. Applicants states that those 
1940 Act Rules recognize that it is not necessary for the protection of 
investors or the purposes fairly intended by the policy and provisions 
of the 1940 Act to apply the provisions of Section 9(a) to the many 
individuals in a large insurance company complex, most of whom will 
have no involvement in matters pertaining to investment companies in 
that organization. Applicants state that it is unnecessary to apply 
Section 9(a) to individuals in various unaffiliated Participating 
Insurance Companies (or affiliated companies of Participating Insurance 
Companies) that may utilize the Fund as the funding medium for variable 
contracts. According to Applicants, there is no regulatory purpose in 
extending the Section 9(a) monitoring requirements because of mixed or 
shared funding. The Participating Insurance Companies are not expected 
to pay any role in the management or administration of the Fund. 
Moreover, those individuals who participate in the management or 
administration of the Fund will remain the same regardless of which 
Separate Accounts or insurance companies use the Fund. Applicants argue 
that applying the monitoring requirements of Section 9(a) because of 
investment by other insurers' Separate Accounts would be unjustified 
and would not serve any regulatory purpose. Further, the increased 
monitoring costs would reduce the net rates of return realized by 
contractowners.
    4. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) under the 1940 
Act assume the existence of a pass-through voting requirement with 
respect to management investment company shares held by a separate 
account. The Application states that pass-through voting privileges 
will be provided with respect to all variable contractowners so long as 
the Commission interprets the 1940 Act to require pass-through voting 
privileges for variable contractowners. Rules 6e-2(b)(15)(iii) and 6e-
3(T)(b)(15)(iii) under the 1940 Act provide exemptions from the pass-
through voting requirement with respect to several significant matters, 
assuming the limitations on mixed and shared funding imposed by the 
1940 Act and the rules thereunder are observed.
    5. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act give the 
Participating Insurance Companies the right to disregard voting 
instructions of contract holders. Rules 6e-2(b)(15)(iii)(A) 6e-
3(T)(b)(15)(iii)(A)(1) each 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 Rules 6e-2 and 6e-3(T) under the 1940 Act). Rules 
6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2) each provide that the 
insurance company may disregard voting instructions of contractowners 
if the contractowners initiate any change in the underlying investment 
company's investment policies, principal underwriter, or any investment 
adviser (subject to the provisions of paragraphs (b)(5)(ii), 
(b)(7)(ii)(B), and (b)(7)(ii)(C) of Rules 6e-2 and 6e-3(T) under the 
1940 Act). Applicants represent that these rights do not raise any 
issues different from those raised by the authority of state insurance 
administrators over separate accounts. Under Rules 6e-2(b)(15) and 6e-
3(T)(b)(15), an insurer can disregard contractowner voting instructions 
only with respect to certain specified items. Applicants also note that 
the potential for disagreement among Participating Separate Accounts is 
limited by the requirements in Rules 6e-2 and 6e-3(T) that the 
participating insurance company's disregard of voting instructions be 
reasonable and based on specific good faith determinations.
    6. The Application states that making the Fund available for mixed 
and shared funding will encourage more insurance companies to offer 
variable contracts, and that 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. Applicants believe that mixed and shared funding should 
provide several benefits to variable contractowners. Mixed and shared 
funding would eliminate a significant portion of the costs of 
establishing and administering separate funds. Mixed and shared funding 
also would provide the Fund with a larger pool of funds, thereby 
promoting economies of scale and permitting increased safety through 
greater diversification.
    7. Applicants see no significant legal impediment to permitting 
mixed and shared funding. Separate accounts organized as unit 
investment trusts historically have been employed to accumulate shares 
of mutual funds which have not been affiliated with the depositor or 
sponsor of the separate account. Applicants do not believe that mixed 
and shared funding will have any adverse Federal income tax 
consequences.

Applicants' Conditions

    If the requested order is granted, Applicants consent to the 
following conditions:
    1. A majority of the Board of Directors of the Fund (the ``Board'') 
shall consist of persons who are not ``interested persons'' of the 
Fund, 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 director or 
directors, 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 Fund for the existence of any 
material irreconcilable conflict between the interests of the 
contractowners of all Separate Accounts investing in the Fund. A 
material irreconcilable conflict may arise for a variety of reasons, 
including: (a) An action by any state insurance regulatory authority; 
(b) a change in applicable Federal or state insurance, tax, or 
securities laws or regulations, or a public ruling, private letter 
ruling, no-action or interpretative letter, or any similar action by 
insurance, tax, or securities regulatory authorities; (c) an 
administrative or judicial decision in any relevant proceeding; (d) the 
manner in which the investments of any series are being managed; (e) a 
difference in voting instructions given by variable annuity 
contractowners and variable life insurance contractowners; or (f) a 
decision by an insurer to disregard the voting instructions of 
contractowners.
    3. Participating Insurance Companies and G.R. Phelps will report 
any potential or existing conflicts to the Board. Participating 
Insurance Companies and G.R. Phelps will be responsible for assisting 
the Board in carrying out the Board's responsibilities under these 
conditions by providing the Board with all information reasonably 
necessary for the Board to consider any issues raised. This includes, 
but is not limited to, an obligation by each Participating Insurance 
Company to inform the Board whenever contractowner voting instructions 
are disregarded. The responsibility to report such information and 
conflicts to and to assist the Board will be a contractual obligation 
of all insurers investing in the Fund under their agreements governing 
participation in the Fund and these responsibilities will be carried 
out with a view only to the interests of the contractowners.
    4. If it is determined by a majority of the Board, or a majority of 
the disinterested directors of the Board, that a material 
irreconcilable conflict exists, then the relevant insurance companies, 
at their expense and to the extent reasonably practicable (as 
determined by a majority of the disinterested directors), shall take 
whatever steps are necessary to remedy or eliminate the material 
irreconcilable conflict, up to and including: (a) Withdrawing the 
assets allocable to some or all of the Separate Accounts from the Fund 
or any Portfolio and reinvesting such assets in a different investment 
medium, including another Portfolio of the Fund, or submitting the 
question as to 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 or life 
insurance 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 decision by a Participating Insurance Company to disregard 
contractowner 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's investment in the Fund 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 under their agreements governing participation in the Fund 
and these responsibilities will be carried out with a view only to the 
interests of contractowners.
    For purposes of this Condition 4, a majority of the disinterested 
members of the Board shall determine whether or not any proposed action 
adequately remedies any material irreconcilable conflict, but, in no 
event, will the Fund or G.R. Phelps 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 any offer to do so has been 
declined by vote of a majority of the contractowners materially 
adversely affected by the material irreconcilable conflict.
    5. The Board's determination of the existence of a material 
irreconcilable conflict and its implications shall be made known in 
writing promptly 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, 
Participating Insurance Companies will vote shares of the Fund held in 
their Separate Accounts in a manner consistent with voting instructions 
timely-received from contractowners. Each Participating Insurance 
Company will vote shares of the Fund held in the Participating 
Insurance Company's Separate Accounts for which no voting instructions 
from contractowners are timely-received, as well as shares of the Fund 
which the Participating Insurance Company itself owns, in the same 
proportion as those shares of the Fund for which voting instructions 
from contractowners are timely-received. Participating Insurance 
Companies shall be responsible for assuring that each of their Separate 
Accounts participating in the Fund calculates voting privileges in a 
manner consistent with other Participating Insurance Companies. The 
obligation to calculate voting privileges in a manner consistent with 
all other Separate Accounts investing in the Fund shall be a 
contractual obligation of all Participating Insurance Companies under 
their agreements governing participation in the Fund.
    7. The Fund will comply with all provisions of the 1940 Act 
requiring voting by shareholders, and, in particular, the Fund will 
either provide for annual meetings (except to the extent that the 
Commission may interpret Section 16 of the 1940 Act not to require such 
meetings) or comply with Section 16(c) of the 1940 Act (although the 
Fund is not one of the trusts 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, the Fund will act 
in accordance with the Commission's interpretation of the requirements 
of Section 16(a) with respect to periodic elections of directors and 
with whatever rules the Commission may promulgate with respect 
thereto.\1\

    \1\Applicants will amend the application during the notice 
period to reflect this condition.
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    8. The Fund shall disclose in its prospectus that (a) the Fund is 
intended to be a funding vehicle for all types of variable annuity and 
variable life insurance contracts offered by various insurance 
companies, (b) material irreconcilable conflicts possibly may arise, 
and (c) the Fund's Board of Directors 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. The Fund will notify all Participating Insurance Companies 
that Separate Account prospectus disclosure regarding potential risks 
of mixed and shared funding may be appropriate.
    9. If and to the extent that Rule 6e-2 and Rule 6e-3(T) under the 
1940 Act as amended, or 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 this Application, then the Fund and/
or Participating Insurance Companies, as appropriate, shall take such 
steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), or 
Rule 6e-3, as such rules are applicable.
    10. The Participating Insurance Companies and/or G.R. Phelps, at 
least annually, shall submit to the Fund's Board of Directors such 
reports, materials, or data as the Board reasonably may request so that 
the directors of the Fund may fully carry out the obligations imposed 
upon the Board by the conditions contained in this Application 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 Fund's Board of Directors, when the Board so reasonably requests, 
shall be a contractual obligation of all Participating Insurance 
Companies under their agreements governing participation in the Fund.
    11. All reports of potential or existing conflicts received by the 
Board of Directors, and all Board action with regard 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.

Applicants' Conclusion

    For the reasons stated above, Applicants believe that the requested 
exemptions, in accordance with the standards of Section 6(c) under the 
1940 Act, are appropriate in the public interest and consistent with 
the protection of investors and the purposes fairly intended by the 
policy and provisions of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-19446 Filed 8-9-94; 8:45 am]
BILLING CODE 8010-01-M