[Federal Register Volume 59, Number 211 (Wednesday, November 2, 1994)]
[Notices]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27163]


[[Page Unknown]]

[Federal Register: November 2, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20665; File No. 812-9128]

 

Dean Witter Variable Investment Series, et al.

October 27, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for exemption under the Investment 
Company Act of 1940 (the ``1940 Act'' or ``Applicants'').

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APPLICANTS: Dean Witter Variable Investment Series (the ``Fund'') and 
Dean Witter Intercapital Inc. (together, ``Applicants'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) for 
exemptions from Sections 9(a), 13(a), 15(a), and 15(b) and Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) thereunder.

SUMMARY OF APPLICATION: Applicants seek an order of exemption 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 DATE: The application was filed on July 28, 1994 and amended on 
October 18, 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 by writing to the SEC's Secretary and serving 
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 November 21, 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 may request notification 
of the date of the hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street NW., Washington, D.C. 
20549. Applicants, c/o Sheldon Curtis, Esq., Dean Witter Variable 
Investment Series, Two World Trade Center, New York, New York 10048.

FOR FURTHER INFORMATION CONTACT: Joyce M. Pickholz, Senior Counsel, on 
(202) 942-0683 or C. Gladwyn Goins, Associate Director on (202) 942-
0665, Division of Investment Management.

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

Applicants' Representations

    1. The Fund is a Massachusetts business trust registered under the 
Act as an open-end diversified management investment company. The Fund 
is composed of eleven separate portfolios. Currently, shares of the 
Fund are sold only to Northbrook Life Insurance Company and Allstate 
Life Insurance Company of New York (the ``Companies'') to fund flexible 
premium variable annuity contracts issued through certain of their 
separate accounts. Dean Witter InterCapital Inc. (``InterCapital''), a 
wholly owned subsidiary of Dean Witter, Discover & Co., is the 
investment manager for the Fund. InterCapital and the Companies were 
previously under common control (ultimately owned by Sears, Roebuck and 
Co.).
    2. The Fund intends to offer its shares to separate accounts of 
various insurance companies to fund variable annuity contracts and 
variable life insurance contracts (collectively, ``variable 
contracts''). Insurance companies whose separate accounts do or will 
own shares of the Fund are referred to herein as ``participating 
insurance companies.'' It is anticipated that participating insurance 
companies will rely on rules 6e-2 or 6e-3(T) under the Act, although 
some may rely on individual exemptive orders as well, in connection 
with variable life insurance contracts.
    3. The use of a common management investment company as the 
underlying investment medium for variable annuity and variable life 
insurance separate accounts is referred to 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 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 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 request an order of the Commission exempting 
variable life insurance 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 Act, and Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to 
permit mixed and 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 6e-2(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-2(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, and Rule 6e-2(b)(15) thereunder, to the extent necessary to permit 
shares of the Fund 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)(6)(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) 
thereunder, to the extent necessary to permit shares of the Fund to be 
offered and sold to separate accounts in connection with shared 
funding.
    3. Section 9(a) 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 sections 9(a) (1) or (2). 
Rules 6e-2(b)(15) (i) and (ii), and 6e-3(T)(b)(15) (i) and (ii), 
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 or administration of the underlying management company.
    4. The application states 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 Act limits the amount of monitoring necessary to ensure compliance 
with section 9 of that which is appropriate in light of the policy and 
purposes of section 9. The Applicants state 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 Act to 
apply the provisions of section 9(a) to individuals in a large 
insurance company complex, most of whom will have no involvement in 
matters pertaining to investment companies in (or invested in by) that 
organization. Applicants state that it is also unnecessary to apply 
section 9(a) to individuals in various unaffiliated insurance companies 
(or affiliated companies of participating insurance companies) that may 
utilize the Fund as the funding medium for variable contracts. 
Applicants argue that applying the requirements of section 9(a) because 
of investment by other insurers' separate accounts would be unjustified 
and would not serve any regulatory purpose. The application states that 
the participating insurers are not expected to play any role in the 
management or administration of the Fund and that 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. Furthermore, the increased monitoring costs would reduce 
the net rates of return realized by contract owners.
    5. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(iii) assume the existence 
of a pass-through voting requirement with respect to management 
investment company shares held by a separate account. Applicants state 
that pass-through privileges will be provided with respect to all 
variable contract owners so long as the Commission interprets the Act 
to require pass-through voting privileges for variable contract owners. 
However, Rules 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.
    6. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) provide that the 
insurance company may disregard the voting instructions of its contract 
owners 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. Voting instructions may also 
be disregarded by the insurance company if the contract owners initiate 
any change in the investment company's investment policies, principal 
underwriter or any investment adviser provided that disregarding such 
voting instructions is reasonable and based on a specific good faith 
determination as required under the Rules. Applicants assert that the 
rights of an insurance company or of a state insurance regulator to 
disregard contract owners' voting instructions are not inconsistent 
with mixed or shared funding. According to the Applicants, there is no 
reason why the investment policies of any portfolio of the Fund would 
or should be materially different from what it would or should be if it 
funded only annuity contracts or only scheduled or flexible premium 
life contracts and that there is no reason to believe that different 
features of various types of contracts will lead to different 
investment policies for different types of variable contracts. 
Applicants represent that the Fund will not be managed to favor or 
disfavor any particular insurer or type of insurance product.
    7. The Application states that mixed and shared funding should 
provide several benefits to variable contract holders. It would permit 
a greater amount of assets available for investment, thereby promoting 
economies of scale, permitting a greater diversification, and making 
the addition of new portfolios more feasible. The Applicants believe 
that making the Fund available for mixed and shared funding will 
encourage more insurance companies to offer variable contracts, and 
this should result in increased competition with respect to both 
variable contract design and pricing, which can be expected to result 
in more product variation and lower charges.
    8. The Applicants see no significant legal impediment to permitting 
mixed and shared funding. 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. The Fund does 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 trustees 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 trustee or trustees, 
then the operation of this condition shall be suspended: (a) for a 
period of 45 days if the vacancy or vacancies may be filled by the 
Board; (b) for a period of 60 days if a vote of shareholders is 
required to fill a 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 life 
owners and annuity owners and any future owners in the Fund. An 
irreconcilable material conflict may arise for a variety of reasons, 
including: (1) An action by any state insurance regulatory authority; 
(2) 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; (3) an 
administrative or judicial decision in any relevant proceeding; (4) the 
manner in which the investments of any portfolio are being managed; (5) 
a difference in voting instructions given by variable annuity contract 
owners and variable life insurance contract owners.
    3. Participating insurance companies and InterCapital will report 
any potential or existing conflicts to the Board. Participating 
insurance companies and InterCapital 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 includes, but is not 
limited to, an obligation by each participating insurance company to 
inform the Board whenever contract owner voting instructions are 
disregarded. The responsibility to report such information and 
conflicts 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 the view only to interests of the contract owners.
    4. If it is determined by a majority of the Board, or a majority of 
its disinterested Trustee, that a material irreconcilable conflict 
exists, the relevant insurance companies shall, at their expense and to 
the extent reasonably practicable (as determined by a majority of the 
disinterested trustees), take whatever steps are necessary to remedy or 
eliminate the irreconcilable material conflict, up to and including: 
(1) 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 whether such segregation should be 
implemented to a vote of all affected contract owners and as 
appropriate, segregating the assets of any appropriate group (i.e., 
annuity contract owners, life insurance contract owners, or variable 
contract owners of one or more participating insurance companies) that 
votes in favor of such segregation, or offering to the affected 
contract owners the option of making such a change; and (2) 
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 Fund's 
election, to withdraw its 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 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 Fund.
    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 irreconcilable material conflicts, but in no 
event will the Fund or InterCapital 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 vote of a majority of contract owners materially adversely 
affected by the irreconcilable material conflict.
    5. The Board's determination of the existence of an irreconcilable 
material conflict and its implications shall be made known promptly to 
all participating insurance companies.
    6. Participating insurance companies will pass through voting 
privileges to all variable contract owners so long as the Commission 
continues to interpret the Act as requiring pass-through voting 
privileges for variable contract owners. Accordingly, participating 
insurance companies will vote shares of the Fund held in their separate 
accounts in a manner consistent with timely voting instructions 
received from contract owners. Each participating insurance company 
will vote shares of the Fund held in its separate accounts for which no 
timely voting instructions from contract holders are received, as well 
as shares it owns, in the same proportion as those shares for which 
voting instructions are received. Participating insurance companies 
shall be responsible for assuring that each of their separate accounts 
participating in 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 Act requiring 
voting by Shareholders, and in particular the Fund will either provide 
for annual meetings (except insofar as the Commission may interpret 
Section 16 not to require such meetings), or comply with section 16(c) 
of the Act (although the Fund is not one of the trusts described in the 
section 16(c) of the Act) as well as with section 16(a) and, if and 
when applicable, 16(b). 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 trustees and with whatever rules 
the Commission may promulgate with respect thereto.
    8. The Fund shall disclose in its prospectus that (1) 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, (2) material irreconcilable conflicts may possibly arise, 
and (3) the Board will monitor events in order to identify the 
existence of any material irreconcilable conflicts and determine what 
action, if any, should be taken in response to 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) are 
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any 
provision of the 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 shall at least annually 
submit to the Board such reports, materials or data as the Board may 
reasonably request so that the Board or the Fund may fully carry out 
the obligations imposed upon them by the conditions contained in the 
application and said reports, materials and data shall be submitted 
more frequently if deemed appropriate by the Board. The obligation 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 the Fund.
    11. All reports received by the Board of potential or existing 
conflicts, 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) of the 
1940 Act, are appropriate in the pubic 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.
Jonathan G. Katz,
Secretary.
[FR Doc. 94-27163 Filed 11-1-94; 8:45 am]
BILLING CODE 8010-01-M