[Federal Register Volume 59, Number 162 (Tuesday, August 23, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-20563]


[[Page Unknown]]

[Federal Register: August 23, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20477; 812-8610]

 

IAI Retirement Funds, Inc., et al.

August 16, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or the 
``Commission'').

ACTION: Notice of Application for Exemptions under the Investment 
Company Act of 1940 (the ``1940 Act'' or ``Act'').

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APPLICANTS: IAI Retirement Funds, Inc. (``Fund''), Investment Adviser, 
Inc. (``IAI'') and certain life insurance companies and separate 
accounts.

RELEVANT 1940 ACT SECTIONS: Order request under Section 6(c) for 
exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the Act and 
Rules 6e-2(b) (15) and 6e3(T)(b)(15) thereunder.

SUMMARY OF APPLICATION: Applicants seek an order to the extent 
necessary to permit shares of the Fund and shares of any other 
investment company that is designed to fund insurance products and for 
which IAI, or any of its affiliates, may serve as investment adviser, 
administrator, manager, principal underwriter or sponsor, (the Fund and 
such other investment companies collectively, ``Funds'') to be sold to 
and held by variable annuity and variable life insurance separate 
accounts of both affiliated and unaffiliated life insurance companies.

FILING DATE: The application was filed on October 8, 1993 and amended 
on August 12, 1994.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing on the application by writing to the Secretary of the 
SEC and serving the Applicants with a copy of the request, personally 
or by mail. Hearing requests must be received by the SEC by 5:30 p.m. 
on September 12, 1994, and should be accompanied by proof of service on 
the Applicants in the form of an affidavit or, for lawyers, a 
certificate. Hearing requests should state the nature of the request 
and the issues contested. persons may request notification of the date 
of a hearing by writing to the Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C. 
20549. Applicants, C/O Christopher J. Smith, 3700 First Bank Place, 
P.O. Box 357, Minneapolis, Minnesota 55440-0357.

FOR FURTHER INFORMATION CONTACT:Joyce M. Pickholz, Senior Counsel, or 
Michael V. Wible, Special Counsel, at (202) 942-0670, Division of 
Investment Management, Office of Insurance Products.

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

Applicants' Representations

    1. The Fund was organized as a corporation under the laws of the 
State of Minnesota. It will be comprised of three separately managed 
series, each of which will have its own investment objective and 
policies. Additional services may be added to the Fund in the future.
    2. IAI serves as the investment adviser and manager of the Fund. 
IAI is an affiliate of Hill Samuel Group BV (``Hill Samuel''), an 
international merchant banking and financial services group based in 
London, England. Hill Samuel, in turn, is owned by TSB Group plc, a 
publicly-held financial services organization headquartered in London, 
England.
    3. Shares of each series of the Fund may be offered only to 
insurance company separate accounts to fund variable annuity and 
variable life insurance contracts (``Contracts''). The Fund initially 
intends to offer its shares exclusively to variable annuity and 
flexible premium variable life insurance separate accounts established 
by Lincoln Benefit Life Company (``Lincoln Benefit'') or its 
affiliates. It is contemplated that, in the future, shares of each 
series of the Fund would be offered to life insurance company separate 
accounts offering scheduled or flexible premium variable life insurance 
or variable annuities, regardless of whether such insurance companies 
are affiliated.
    4. Lincoln Benefit and its affiliates and the other insurance 
companies to which shares of the Funds will be offered (collectively, 
``Participating Insurance Companies'') will establish their own 
separate accounts and design their own Contracts. It is anticipated 
that the Companies will rely on Rule 6e-2 or 6e-3(T) under the Act, 
although some may rely on individual exemptive orders as well.
    5. The use of a common management investment company as the 
underlying investment medium for both variable annuity and variable 
life insurance separate accounts is commonly referred to as ``mixed 
funding''. The use of a common investment company as the underlying 
investment medium for separate accounts of unaffiliated insurance 
companies is commonly referred to as ``shared funding''. ``Mixed and 
shared funding'' denotes the use of a common management company to fund 
a variable annuity separate account of one insurance company and the 
variable annuity or variable life separate accounts of other affiliated 
and unaffiliated insurance companies. Rule 6e-2(b)(15) precludes mixed 
and shared funding while Rule 6e-3(T)(b)(15) permits mixed funding but 
precludes shared funding.

Applicants' Legal Analysis

    1. In connection with scheduled premium variable life insurance 
contracts issued through a separate account registered under the Act as 
a unit investment trust, Rule 6e2(b)(15) provides partial exemption 
from sections 9(a), 13(a), 15(a) and 15(b) of the Act. The exemptions 
granted to a separate account (and any investment adviser, principal 
underwriter and depositor thereof) by Rule 6e(b)(15), however, are not 
available with respect to a scheduled premium variable life insurance 
separate account that owns shares of an investment company that also 
offers its shares to a variable annuity separate account of the same or 
of any affiliated or unaffiliated insurance company (``mixed 
funding''). In addition, the relief granted by Rule 6e-2(b)(15) is not 
available if shares of the underlying investment company are offered to 
variable annuity or variable life insurance separate accounts of 
unaffiliated insurance companies (``shared funding''). Accordingly, 
Applicants seek an order exempting scheduled premium variable life 
insurance separate accounts (and, to the extent necessary, any 
investment adviser, principal underwriter and depositor of such an 
account) from Sections 9(a), 13(a), 15(a) and 15(b) of the Act, the 
Rule 6e-2(b)(15) thereunder, to the extent necessary to permit shares 
of the Funds to be offered and sold in connection with both mixed 
funding and shared funding.
    2. In connection with flexible premium variable life insurance 
contracts issued through a separate account registered under the Act as 
a unit investment trust, Rule 6e-3(T)(b)(15) provides partial 
exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the Act. The 
exemptions granted to a separate account (and to any investment 
adviser, principal underwriter and depositor thereof) by Rule 6e-
3(T)(b)(15) permit mixed funding of flexible premium variable life 
insurance but preclude shared funding. Accordingly, Applicants seek an 
order exempting flexible premium variable life insurance separate 
accounts (and, to the extent necessary, any investment adviser, 
principal underwriter and depositor of such an account) from Sections 
9(a), 13(a), 15(a) and 15(b) of the Act, and Rule 6e-3(T)(b)(15) (and 
any comparable permanent rule) thereunder, to the extent necessary to 
permit shares of the Funds to be offered and sold to separate accounts 
in connection with shared funding.
    3. Section 9(a) of the Act provides that it is unlawful for any 
company to serve as investment adviser or principal underwriter of any 
registered open-end investment company if an affiliated person of that 
company is subject to a disqualification enumerated in Section 9(a) (1) 
or (2). However, Rule 6e-2(b)(15) (i) and (ii) and Rule 6e-3(T)(b)(15) 
(i) and (ii) provide partial exemption from Section 9(a) under certain 
circumstances, subject to the limitation discussed above on mixed and 
shared funding. These exemptions limit the disqualification to 
affiliated individuals or companies that directly participate in the 
management or administration of the underlying investment company. The 
exemptions contained in Rule 6e-2(b)(15) and 6e-3(T)(b)(15) recognize 
that it is unnecessary to apply Section 9(a) to the thousands of 
individuals who may be involved in a large insurance company but who 
would have no connection with the investment company funding the 
separate account. Applicants believe that it is unnecessary to limit 
the applicability of the rule merely because shares of the Funds may be 
sold in connection with mixed and shared funding. Therefore, Applicants 
assert that applying the restrictions of Section 9(a) serve no 
regulatory purpose. Indeed, applying such restrictions would increase 
the monitoring costs incurred by the Participating Insurance Company 
and, therefore, would reduce the net rates realized by Contract owners.
    4. If the limitations on mixed and shared funding are satisfied, 
Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(iii) provide exemption from the 
pass-through voting requirements of Sections 13(a), 15(a) and 15(b) of 
the Act in limited situations. Rule 6e-2(b)(15)(iii)(A) and 6e-
3(T)(b)(iii)(A) provide that an insurance company may disregard the 
voting instructions of its Contract owners with respect to the 
investments of an underlying investment company or any contract between 
an investment company and its investment adviser, when an insurance 
regulatory authority so requires. Rules 6e-2(b)(15)(iii)(B) and 6e-
3(T)(b)(15)(iii)(B) provide that the insurance company may disregard 
Contract owner's voting instructions with regard to changes initiated 
by the contract holders in the investment company's investment 
policies, principal underwriter or investment adviser, as follows: 
voting instructions with respect to a change in investment policies may 
be disregarded only if such action is reasonable and the insurance 
company makes a good faith determination that such change would: (1) 
violate state law; (2) not be consistent with the investment objectives 
of the separate account; or (3) result in investments that would vary 
from the general quality and nature of investments and investment 
techniques used by other separate accounts of the company or of an 
affiliated life insurance company with similar investment objectives. 
Voting instructions with respect to a change in a principal underwriter 
may be disregarded if such action is reasonable. Voting instructions 
with respect to a change in an investment adviser may be disregarded 
only if such action is reasonable and the insurance company makes a 
good faith determination that: (1) the adviser's fee would exceed the 
maximum rate that may be charged against the separate account's assets; 
(2) the proposed adviser may be expected to employ investment 
techniques that vary from the general techniques used by the current 
adviser; (3) the proposed adviser may be expected to manage the 
investment company's investments in a manner that would be inconsistent 
with its investment objectives or in a manner that would result in 
investments that vary from certain standards.
    5. The Applicants submit that Rule 6e-2 recognizes that scheduled 
premium variable life insurance contracts have important elements 
unique to insurance contracts and are subject to extensive state 
regulation. Thus, Applicants assert, in adopting Rule 6e-2, the 
Commission expressly recognized the exemptions from pass-through voting 
requirements were necessary to assure the solvency of the life insurer 
and the performance of its contractual obligations by enabling an 
insurance regulatory authority or the life insurer to act when certain 
proposals reasonably could be expected to increase the risks undertaken 
by the life insurer. Flexible premium variable life insurance contracts 
are subject to substantially the same state insurance regulatory 
authority, and therefore, the corresponding provisions of Rule 6e-3(T) 
presumably were adopted in recognition of the same consideration as the 
Commission applied in adopting Rule 6e-2. The Applicants argue that 
these considerations are no less important or necessary when an 
insurance company funds its separate accounts in connection with shared 
and mixed funding. Such funding does not compromise the goals of the 
insurance regulatory authorities or of the Commission. Indeed, 
Applicants assert, by permitting such arrangements, the Commission 
eliminates needless duplication of start-up and administrative expenses 
and potentially increases an investment company's assets, thereby 
making effective portfolio management strategies easier to implement 
and promoting other economies of scale.
    6. Applicants believe that shared funding does not present any 
issues that do not already exist where a single insurance company is 
licensed to do business in several states. For example, when different 
Participating Insurance Companies are domiciled in different states, it 
is possible that the state insurance regulatory body in a state in 
which one Participating Insurance Company is domiciled could require 
action that is inconsistent with the requirements of insurance 
regulators in one or more other states in which other Participating 
Insurance Companies are domiciled. That possibility, however, is no 
different and no greater than exists when a single insurer and its 
affiliates offer their insurance products in several states, as 
currently is permitted.
    7. According to the Applicants, affiliations do not reduce the 
potential, if any exists, for differences in state regulatory 
requirements. In any event, the conditions set forth below, which are 
adapted from the conditions included in Rule 6e-3(T)(b)(15), are 
designed to safeguard against adverse effects that differences among 
state regulatory requirements may produce. Applicants state that if a 
particular state insurance regulator's decision conflicts with the 
majority of other state regulators, the affected insurer may be 
required to withdraw its separate account's investment in the relevant 
Insurance Products Fund. Similarly, affiliation does not eliminate the 
potential, if any exists, for divergent judgments as to when a 
Participating Insurance Company could disregard Contract owner 
instructions. The potential for disagreement is limited, Applicants 
assert, by the requirement that disregarding voting instructions be 
reasonable and based on specified good faith determinations. However, 
if a Participating Insurance Company's decision to disregard Contract 
owner voting instructions represents a minority position or would 
preclude a majority vote approving a particular change, such 
Participating Insurance Company may be required, at the election of the 
relevant Insurance Products Fund, to withdraw its separate account's 
investment in that fund and no charge or penalty will be imposed as a 
result of such withdrawal. Also, according to Applicants, no one 
investment strategy can be identified as appropriate to a particular 
insurance product. Each pool of variable annuity and variable life 
insurance contract owners is composed of individuals of diverse 
financial status, age, insurance and investment goals. Those 
diversities are of greater significance than any differences in 
insurance products. An investment company supporting even one type of 
insurance product must accommodate those diverse factors.
    8. Applicants contend that there is no reason why the investment 
policies of a Fund with mixed funding would or should be materially 
different from what they would or should be if such investment company 
or series thereof funded only variable annuity or only variable life 
insurance contracts. Hence, there is no reason to believe that 
conflicts of interest would result from mixed funding.
    9. Applicants state that various factors have kept more insurance 
companies from offering variable annuity and variable life insurance 
contracts than currently do so. According to Applicants, these factors 
include the costs of organizing and operating a funding medium, the 
lack of expertise with respect to investment management (principally 
with respect to stock, bond and money market investments) and the lack 
of public name recognition as investment experts. In particular, some 
smaller life insurance companies may not find it economically feasible, 
or within their investment or administrative expertise, to enter the 
variable contract business on their own. Use of the Insurance Products 
Funds as common investment media for Contracts would ameliorate these 
concerns. Participating insurance companies would benefit not only from 
the investment advisory and administrative expertise of IAI, but also 
from the cost efficiencies and investment flexibility afforded by a 
large pool of funds. Therefore, making the Insurance Products Funds 
available for mixed and shared funding will encourage more insurance 
companies to offer Contracts. This should result in increased 
competition with respect to both Contract design and pricing, which can 
be expected to result in more product variation and lower charges. 
Contract owners would benefit because mixed and shared funding should 
eliminate a significant portion of the costs of establishing and 
administering separate funds.

Applicants' Conditions

    Applicants consent to the following conditions if an order is 
granted:
    1. A majority of the Board of Directors (the ``Board'') of each 
Fund will consist of persons who are not ``interested persons'' 
thereof, as defined by Section 2(a)(19) of the 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 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 or 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 Boards will monitor their respective Funds for the existence 
of any material irreconcilable conflict between the interests of the 
Contract owners of all separate accounts investing in the Funds. 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 the Funds are being managed; (e) a 
difference in voting instructions given by variable annuity Contract 
owners and variable life insurance Contract owners; or (f) a decision 
by a Participating Insurance Company to disregard the voting 
instructions of Contract owners.
    3. Participating Insurance Companies and IAI and affiliated 
advisors will report any such potential or existing conflicts to the 
Board of any relevant Fund. Participating insurance Companies and IAI 
and affiliated advisors will be responsible for assisting the 
appropriate 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 includes, 
but is not limited to, an obligation by a Participating Insurance 
Company to inform the Board whenever it has determined to disregard 
Contract owner voting instructions. The responsibility to report such 
information and conflicts and to assist the Boards will be contractual 
obligations of all insurers investing in Funds under their agreements 
governing participation in the Funds, and these responsibilities will 
be carried out with a view only to the interests of Contract owners.
    4. If it is determined by a majority of the Board of a Fund or by a 
majority of its disinterested directors, that a material irreconcilable 
conflict exists, the relevant Participating Insurance Companies will, 
at their expense and to the extent reasonably practicable (as 
determined by a majority of the disinterested directors), take whatever 
steps are necessary to remedy or eliminate the irreconcilable material 
conflict, which steps could include: (a) withdrawing the assets 
allocable to some or all of the separate accounts from the Fund or any 
series and reinvesting such assets in a different investment medium, 
which may include another series of a Fund or another Fund, or 
submitting the question of whether such segregation should be 
implemented to a vote of all affected Contract owners and, as 
appropriate, segregating the assets of any appropriate group (i.e., 
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 Contract owners 
the option of making such a change; and (b) establishing a new 
registered management investment company or managed separate account. 
If a material irreconcilable conflict arises because of an insurer's 
decision to disregard Contract owner voting instructions and that 
decision represents a minority position or would preclude a majority 
vote, the insurer may be required, at the election of the Fund, to 
withdraw its separate account's investment in such fund, and no charge 
or penalty will be imposed as a result of such withdrawal. The 
responsibility of taking remedial action in the event of a Board 
determination of an irreconcilable material conflict and bearing the 
cost of such remedial action will be a contractual obligation of all 
Participating Insurance Companies under their agreements governing 
participation in the Funds and these responsibilities will be carried 
out with a view only to the interests of Contract owners. For purposes 
of this condition, a majority of the disinterested members of the 
applicable Board will determine whether or not any proposed action 
adequately remedies any irreconcilable material conflict, but in no 
event will the Fund or IAI or affiliated advisors be required to 
establish a new funding medium for any Contract. No Participating 
Insurance Company shall be required by this condition to establish a 
new funding medium for any Contract if an offer to do so has been 
declined by vote of a majority of Contract owners materially and 
adversely affected by the irreconcilable material conflict.
    5. Any Board's determination of the existence of an irreconcilable 
material conflict and its implications will be made known promptly and 
in writing to all Participating Insurance Companies.
    6. Participating Insurance Companies will provide pass-through 
voting privileges to all Contract owners so long as the Commission 
interprets the Act to require pass-through voting privileges for 
variable contract owners. Accordingly, the Participating Insurance 
Companies will vote shares of the Funds held in their separate accounts 
in a manner consistent with voting instructions timely received from 
Contract owners. Participating Insurance Companies will be responsible 
for assuring that each of their separate accounts participating in a 
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 will be a contractual obligation of all 
Participating Insurance Companies under the agreements governing 
participation in the Fund. The Participating Insurance Companies will 
vote shares for which they have not received voting instructions as 
well as shares attributable to them in the same proportion as they vote 
shares for which they have received instructions.
    7. All reports of potential or existing conflicts received by a 
Board, and all Board action with regard to determining the existence of 
a conflict, notifying 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 appropriate 
Board or other appropriate records, and such minutes or other records 
shall be made available to the Commission upon request.
    8. Each Fund will notify all Participating Insurance Companies that 
separate account prospectus disclosure regarding potential risks of 
mixed and shared funding may be appropriate. Each Fund will disclose in 
its prospectus that: (a) shares of the Fund are offered in connection 
with mixed and shared funding; (b) mixed and shared funding may present 
certain conflicts of interest, and (c) the Board of such fund will 
monitor for the existence of any material conflicts and determine what 
action, if any, should be taken.
    9. Each Fund will comply with all provisions of the Act requiring 
voting by shareholders, and, in particular, each Fund will either 
provide for annual meetings (except to the extent that the Commission 
may interpret Section 16 of the Act not to require such meetings) or 
comply with Section 16(c) of the Act, as well as with Section 16(a), 
and, if applicable, Section 16(b) of the 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 
directors and with whatever rules the Commission may promulgate with 
respect thereto.
    10. If and to the extent that Rules 6e-2 and 6e-3(T) are amended 
(or if Rule 6e-3 under the 1940 Act is adopted) to provide exemptive 
relief from any provision of the 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 by the 
Applicants, then the Funds and the Participating Insurance Companies, 
as appropriate, shall take such steps as may be necessary to comply 
with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to 
the extent applicable.
    11. No less than annually, the Participating Insurance Companies 
and/or IAI and affiliated advisors shall submit to each Board such 
reports, materials, or data as the Board may reasonably request so that 
the Board may carry out fully the obligations imposed upon it by the 
conditions contained in the Application. Such 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 shall be a contractual 
obligation of all Participating Insurance Companies under the 
agreements governing their participation in the Funds.

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 are consistent with the 
protection of investors and the purposes fairly intended by the policy 
and the provisions of the Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-20563 Filed 8-22-94; 8:45 am]
BILLING CODE 8010-01-M