[Federal Register Volume 59, Number 215 (Tuesday, November 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27633]


[[Page Unknown]]

[Federal Register: November 8, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20677; No. 812-8910]

 

Lexington Emerging Markets Fund, Inc., et al.

November 1, 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: Lexington Emerging Markets Fund, Inc. (``Fund''), Lexington 
Natural Resources Trust (``Trust''), and Lexington Management 
Corporation (``LMC'') (collectively ``Applicants'').

Relevant 1940 Act Sections: 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).

SUMMARY OF APPLICATION: Applicants seek an order exempting themselves 
and certain affiliated and unaffiliated life insurance companies 
(``Participating Insurance Companies'') and their separate accounts 
(``Separate Accounts'') to the extent necessary to permit series of 
shares of any current or future investment series of the Trust and the 
Fund to be sold to and held by Separate Accounts funding variable 
annuity and variable life insurance contracts issued by the 
Participating Insurance Companies.

FILING DATE: The application was filed on March 22, 1994, and amended 
on September 30, 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 November 
28, 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, N.W., Washington, D.C. 
20549.

APPLICANTS: Lawrence Kantor, Managing Director, Lexington Management 
Corporation, Park 80 West--Plaza Two, Saddle Brook, New Jersey 07662.

FOR FURTHER INFORMATION CONTACT: Yvonne M. Hunold, Senior Counsel, at 
(202) 942-0670, 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 a Massachusetts Business Trust registered under the 
1940 Act as an open-end management investment company (File No. 33-
26116). The Trust's capitalization consists of an unlimited number of 
shares of beneficial interest, no par value, representing an interest 
in one underlying portfolio of investments. The Trust is managed by its 
Board of Trustees.
    2. The Fund is registered under the 1940 Act as an open-end 
management investment company (File No. 33-73520). The Fund's 
capitalization consists of one billion shares of authorized common 
stock, of which five hundred million are designated ``Lexington 
Emerging Market Fund Series'' (``Existing Portfolio''), and five 
hundred million are unissued and unclassified. The Board of Directors 
of the Fund is authorized to classify or reclassify any unissued shares 
of the Fund (``New Portfolios'') (together with Lexington Emerging 
Market Fund Series, ``Portfolios'').
    3. The Portfolios will serve as investment vehicles for various 
types of variable annuity and variable life insurance contracts 
(``Variable Contracts''). Portfolio shares will be offered to Separate 
Accounts of certain affiliated and unaffiliated Participating Insurance 
Companies which enter into Participation Agreements with the Portfolios 
and LMC. The Applicants represent that Portfolio shares will be offered 
only to individual Separate Accounts issuing variable annuity contracts 
until the Commission issues its order granting the requested relief.
    4. LMC serves as investment adviser to the Trust, the Fund and each 
Existing Portfolio. Lexington Funds Distributor, Inc. (``LFD'') serves 
as distributor for the Existing Portfolios. LMC is a registered 
investment adviser under the Investment Advisers Act of 1940. LMC and 
LFD are each a wholly-owned subsidiary of Piedmont Management Company, 
Inc. (``Piedmont''), a publicly traded corporation.

Applicants' Legal Analysis

    1. Applicants request that the Commission issue an order under 
Section 6(c) of the 1940 Act granting exemptive 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). Exemptive relief is sought by applicants and affiliated 
and unaffiliated Participating Insurance Companies and their Separate 
Accounts to the extent necessary to permit mixed and shared funding.
    2. Rule 6e-2(b)(15) provides partial exemptive relief from Sections 
9(a), 13(a), 15(a) and 15(b) of the 1940 Act to separate accounts 
registered under the 1940 Act as a unit investment trust to the extent 
necessary to offer and sell scheduled premium variable life insurance 
contracts. The relief provided by the rule also extends to a separate 
account's investment adviser, principal underwriter, and sponsor or 
depositor.
    3. The exemptions granted by Rule 6e-2(b)(15) are available only to 
a management investment company underlying a separate account 
(``underlying fund'') that offers its shares exclusively to variable 
life insurance separate accounts of a life insurer, or of any 
affiliated life insurance company, issuing scheduled premium variable 
life insurance contracts. The relief granted by Rule 6e-2(b)(15) is not 
available to the separate account issuing scheduled premium variable 
life insurance contracts if the underlying fund also offers its shares 
to a separate account issuing variable annuity or flexible premium 
variable life insurance contracts. The use of a common underlying fund 
as an investment vehicle for both variable annuity contracts and 
scheduled or flexible premium variable life insurance contracts is 
referred to herein as ``mixed funding.''
    4. Additionally, the relief granted by Rule 6e-2(b)(15) is not 
available to separate accounts issuing scheduled premium variable life 
insurance contracts if the underlying fund also offers its shares to 
unaffiliated life insurance company separate accounts funding variable 
contracts. The use of a common fund as an underlying investment vehicle 
for separate accounts of unaffiliated insurance companies is referred 
to herein as ``shared funding.''
    5. Rule 6e-3(T)(b)(15) provides partial exemptions from Sections 
9(a), 13(a), 15(a), and 15(b) of the 1940 Act to separate accounts 
registered as a unit investment trust that is offering flexible premium 
variable life insurance contracts. The exemptive relief extends to a 
separate account's investment adviser, principal underwriter, and 
sponsor or depositor. These exemptions are available only where the 
underlying fund of the separate account offers its shares ``exclusively 
to separate accounts of the life insurer, or of any affiliated life 
insurance company, offering either scheduled contracts or flexible 
contracts, or both; or which also offer their shares to variable 
annuity separate accounts of the life insurer or of an affiliated life 
insurance company * * *.'' Therefore, Rule 6e-3(T) permits mixed 
funding 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 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.
    6. For these reasons, Applicants seek an order under section 6(c) 
of the 1940 Act. Section 6(c) authorizes the Commission to grant 
exemptions from the provisions of the 1940 Act, and rules thereunder, 
if and to the extent that an exemption is necessary or appropriate in 
the public interest and consistent with the protection of investors and 
the purposes fairly intended by the policy and provisions of the 1940 
Act.
    7. 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). Subparagraphs (b)(15)(i) and (ii) of Rules 6e-2 and 
6e-3(T) provide exemptions from Section 9(a) under certain 
circumstances, subject to limitations on mixed and shared funding. The 
relief provided by subparagraphs (b)(15)(i) of Rules 6e-2 and 6e-3(T) 
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 subparagraph (b)(15(ii) of Rules 6e-2 and 6e-3(T) 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.
    8. Applicants state that the partial relief granted under 
subparagraphs (b)(15) of Rules 6e-2 and 6e-3(T) 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 submit 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 further submit that 
there is no regulatory reason to apply the provisions of Section 9(a) 
to the many individuals in various unaffiliated Participating Insurance 
Companies that may utilize the Portfolios as the funding medium for 
variable contracts because of mixed and shared funding.
    9. Subparagraph (b)(15)(iii) of Rules 6e-2 and 6e-3(T) 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.\1\
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    \1\Applicants request no relief for variable annuity separate 
accounts from the disqualification or pass-through voting 
provisions.
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    10. Under subparagraph (b)(15)(iii)(A) of Rules 6e-2 and 6e-3(T), 
the insurance company may disregard voting instructions of its 
contractowners in connection with the voting of shares of an underlying 
fund under certain limited circumstances. Voting instructions may be 
disregarded if they would cause the underlying fund to make, or refrain 
from making, certain investments which would result in changes to the 
subclassification or investment objectives of the underlying fund, 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.
    11. Under subparagraph (b)(15)(iii)(B) of Rules 6e-2 and 6e-3(T), 
an insurance company may disregard contractowners' voting instructions 
if the contractowners initiate any change in the underly8ng fund's 
investment objectives, 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.
    12. Applicants submit that shared funding by unaffiliated insurance 
companies does 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.
    13. Applicants state further that, under paragraph (b)(15) of Rules 
6e-2 and 6e-3(T), the right of an insurance company to disregard 
contractowners' voting instructions does 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. Applicants state that the potential for 
disagreement is limited by the requirements in Rules 6e-2 and 63-3(T) 
that the insurance company's disregard of voting instructions be 
reasonable and based on specific good faith determinations.
    14. 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 Portfolios and the Trust, thereby promoting economies of scale, 
permitting increased 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 Portfolio 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.
    15. Applicants assert that there is no significant legal impediment 
to permitting mixed and shared funding. Applicants state that each of 
the Portfolios will be managed to attempt to achieve its investment 
objective and not to favor or disfavor any particular Participating 
Insurance Company, separate account, or type of insurance product. 
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 each of the Fund and the Trust shall 
consist of persons who are not ``interested persons'' of either the 
Fund or the Trust, respectively, 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 Director(s) 
or Trustee(s) then the operation of this conditions 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 of each of the Fund and the Trust will monitor the 
Fund and the Trust for the existence of any material irreconcilable 
conflict between the interests of the contractowners of all separate 
accounts investing in either of the Portfolios. 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 a Portfolio are being managed; (e) a difference among 
voting instructions given by variable annuity and variable life 
insurance contractowners; or (f) a decision by a Participating 
Insurance Company to disregard contractowners' voting instructions.
    3. Participating Insurance Companies and LMC will report any 
potential or existing conflicts, of which they become aware, to the 
Board of either the Fund or the Trust, as appropriate. Participating 
Insurance Companies and LMC will be obligated to assist the relevant 
Board in carrying out its responsibilities under these conditions by 
providing the relevant 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 relevant Board whenever contractowner voting 
instructions are disregarded. The responsibility to report such 
information and conflicts and to assist the relevant Board will be a 
contractual obligations of all Participating Insurance Companies 
investing in a Portfolio under their Participation Agreements, and 
those 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 of the Fund or the Trust, or a 
majority of the Independent Directors or Trustees, determine that a 
material irreconcilable conflict exists, the relevant Participating 
Insurance Companies shall, at their expense and to the extent 
reasonably practicable (as determined by a majority of Independent 
Directors or Trustees), 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 Portfolios and reinvesting those assets in a 
different investment medium (including another Applicant, if any) 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 LMC (on behalf of one or more of 
the Portfolios), 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 determination by the Board of the Fund or the Trust that an 
irreconcilable material conflict exists and to bear the cost of such 
remedial action shall be a contractual obligation of all Participating 
Insurance Companies under their Participation Agreements, and these 
responsibilities will be carried out with a view only to the interests 
of the contractowners.
    For purposes of condition ``4.'', a majority of Independent 
Directors or Trustees shall determine whether or not any proposed 
action adequately remedies any irreconcilable material conflict, but in 
no event will the Portfolios or LMC 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 Fund or the Trust of the 
existence of an irreconcilable material conflict and its implications 
shall be made known promptly in writing to all Participating Insurance 
Companies in the Fund or the Trust, respectively.
    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 a Portfolio held 
in their Separate Accounts in a manner consistent with timely voting 
instructions received from contractowners. Each Participating Insurance 
Company also will vote shares of a Portfolio 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. Participating 
Insurance Companies shall be responsible for assuring that each of 
their Separate Accounts participating in a Portfolio 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 a Portfolio 
shall be a contractual obligation of all Participating Insurance 
Companies under their Participating Agreements.
    7. Each Portfolio will notify all Participating Insurance Companies 
that prospectus disclosure regarding potential risks of mixed and 
shared funding may be appropriate. Each Portfolio shall disclose in its 
Prospectus that: (a) Its shares may be offered to insurance company 
separate accounts that fund annuity and life insurance contracts of 
Participating Insurance Companies that may or may not be affiliated 
with one another; (b) because of differences of tax treatment or other 
considerations, the interests of various contractowners might at some 
time be in conflict; and (c) a Board of the Fund or the Trust, as 
appropriate, will monitor for any material conflicts and determine what 
action, if any, should be taken.
    8. All reports received by the Board of the Fund or the Trust 
regarding potential or existing conflicts, and all action of a Board 
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 other appropriate records of the 
relevant Board, 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(T) 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 Portfolios 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 Portfolios 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 Portfolios), 
and in particular each Portfolio 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, as each Portfolio 
currently intends, comply with Section 16(c) (although neither the Fund 
nor the Trust are trusts described in this section) as well as with 
Section 16(a) and, if and when applicable, Section 16(b). Further, each 
Portfolio 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 adopt with 
respect thereto.
    11. The Participating Insurance Companies and/or LMC, shall at 
least annually submit to the Board of the Fund and the Trust such 
reports, materials or data as each Board may reasonably request so that 
such Board 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 a Board. The 
obligation of the Participating Insurance Companies to provide these 
reports, materials, and data upon reasonable request of a Board shall 
be a contractual obligation of all Participating Insurance Companies 
under their Participation Agreements.

Conclusion

    For the reasons stated above, Applicants assert 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. 94-27633 Filed 11-7-94; 8:45 am]
BILLING CODE 8010-01-M