[Federal Register Volume 60, Number 164 (Thursday, August 24, 1995)]
[Notices]
[Pages 44099-44103]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20955]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21312; No. 812-8924]


Merrill Lynch Life Insurance Company, et al.

August 17, 1995.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an exemption pursuant to the 
Investment Company Act of 1940 (the ``1940 Act'').

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APPLICANTS: Merrill Lynch Life Insurance Company; ML Life Insurance 
Company of New York; Merrill Lynch Variable Life Separate Account; 
Merrill Lynch Variable Life Separate Account II; ML of New York 
Variable Life Separate Account; ML of New York Variable Life Separate 
Account II; Merrill Lynch Variable Series Funds, Inc. (the ``Fund''); 
and Merrill Lynch Asset Management, L.P.

RELEVANT 1940 ACT SECTIONS: Order requested pursuant to Section 6(c) 
granting exemptions from the provisions of Sections 9(a), 13(a), 15(a), 
and 15(b) of the 1940 Act and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) 
thereunder.

SUMMARY OF APPLICATION: Applicants seek an order permitting 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 April 11, 1994, and amended 
and restated on April 12, 1995. Applicants have undertaken to amend the 
application during the notice period to make the representations 
contained herein.

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 Secretary of the 
Commission and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on September 11, 1995, and must 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 writer'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 Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 5th 
Street NW., Washington, DC 20549. Applicants, c/o Barry G. Skolnick, 
Esq., Merrill Lynch Life Insurance Company, and Philip L. Kirstein, 
Esq., Merrill Lynch Asset Management, L.P., both at 800 Scudders Mill 
Road, Plainsboro, New Jersey 08536.

FOR FURTHER INFORMATION CONTACT:
Kevin M. Kirchoff, Senior Counsel, or Wendy Friedlander, Deputy Chief, 
Office of Insurance Products (Division of Investment Management), at 
(202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application; the complete application is available for a fee from the 
Public Reference Branch of the Commission.

Applicants' Representatives

    1. Merrill Lynch Life Insurance Company (``Merrill Lynch'') is a 
stock life insurance company organized under the laws of the State of 
Arkansas. Merrill Lynch Variable Life Separate Account and Merrill 
Lynch Variable Life Separate Account II are separate investment 
accounts established by Merrill Lynch and registered with the 
Commission pursuant to the 1940 Act as unit investment trusts.
    2. ML Life Insurance Company of New York (``ML Life'') is a stock 
life insurance company organized under the laws of the State of New 
York. ML of New York Variable Life Separate Account and ML of New York 
Variable Life Separate Account II are separate 

[[Page 44100]]
investment accounts established by ML Life and registered with the 
Commission pursuant to the 1940 Act as unit investment trusts.
    3. The Fund was incorporated on October 16, 1981, as a Maryland 
corporation and is registered with the Commission pursuant to the 1940 
Act as an open-end, management investment company. The Fund currently 
consists of seventeen separate portfolios (the ``Portfolios''), each of 
which has its own investment objective, or objectives, and policies.
    4. Merrill Lynch Asset Management, L.P. (``MLAM''), a limited 
partnership, is the investment adviser for the Fund. MLAM is registered 
with the Commission as an investment adviser pursuant to the Investment 
Advisers Act of 1940. Princeton Services, Inc., the general partner of 
MLAM, is a wholly-owned subsidiary of Merrill Lynch & Co., Inc.
    5. Shares of the Portfolios currently are sold to Merrill Lynch, ML 
Life (collectively, the ``Merrill Insurance Companies'') and Family 
Life Insurance Company (``Family Life,'' together with the Merrill 
Insurance Companies, the ``Current Participating Insurance 
Companies''). The Merrill Insurance Companies are affiliated because 
they are both wholly-owned subsidiaries of Merrill Lynch & Co., Inc. 
Family Life is not affiliated with the Merrill Insurance Companies.
    6. Currently, shares of certain Portfolios are sold either to: (a) 
the Merrill Insurance Companies for their separate accounts to fund 
variable annuity contracts; (b) the Merrill Insurance Companies to fund 
variable life insurance contracts; or (c) to Family Life to fund 
benefits under variable annuity contracts.
    7. Applicants state that, upon the granting of the exemptive relief 
requested by the Application, the Fund intends to offer shares of its 
existing Portfolios, and any future portfolios, to separate accounts of 
insurance companies, including both the Current Participating Insurance 
Companies and other insurance companies not affiliated with them 
(``Other Insurance Companies'') to serve as the investment vehicle for 
various types of insurance products, which may include variable annuity 
contracts, single premium variable life insurance contracts, scheduled 
premium variable life insurance contracts, and flexible premium 
variable life insurance contracts (collectively, ``variable 
contracts''). The Current Participating Insurance Companies and Other 
Insurance Companies which elect to purchase shares of one or more 
Portfolios are collectively referred to herein as ``Participating 
Insurance Companies.'' The Participating Insurance Companies will 
establish their own separate accounts (``Participating Separate 
Accounts'') and design their own variable annuity or variable life 
insurance contracts.
Applicants' Legal Analysis

    1. The use of a common management investment company as the 
underlying investment medium for both variable annuity and variable 
life insurance separate accounts of the same life insurance company or 
of any affiliated life insurance company is referred to as ``mixed 
funding.'' The use of a common management investment company as the 
underlying investment medium for variable life insurance separate 
accounts of one insurance company and separate accounts funding 
variable contracts of one or more unaffiliated life insurance companies 
is referred to as ``shared funding.'' Applicants request an order 
exempting the Participating Insurance Companies and Participating 
Separate Accounts (and, to the extent necessary, any principal 
underwriter and depositor of Participating Separate Accounts) from 
Sections 9(a), 13(a), 15(a), and 15(b) of the 1940 Act, and Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to 
permit mixed and shared funding.\1\

    \1\ Since shares of those Portfolios that currently are sold to 
Family Life are sold to the Merrill Insurance Companies only for 
their separate accounts to fund benefits under variable annuity 
contracts, there is no mixed funding presently occurring with 
respect to those Portfolios. Similarly, since shares of those 
Portfolios that currently are sold to the Merrill Insurance 
Companies for certain of their separate accounts to fund flexible 
premium variable life insurance contracts are not sold to Family 
Life, the mixed funding that occurs with respect to those Portfolios 
occurs only with respect to insurance companies that are affiliates 
of each other. Accordingly, Applicants do not believe they require 
relief, nor are they by the Application requesting relief, with 
respect to the manner in which shares of the various Portfolios of 
the Fund are currently sold.
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    2. 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 provided by Rule 6e-2 
are not available if a separate account invests in a fund engaged in 
mixed and/or shared funding.
    3. 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: (a) Separate accounts or variable annuity separate accounts of the 
life insurance company, or of any affiliated life insurance company; or 
(b) the life insurance company or affiliated life insurance company in 
consideration solely for advances made by the life insurance company in 
connection with the operation of the separate account. Thus, the 
exemptions provided by 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.
    4. 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.
    5. 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 state 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 

[[Page 44101]]
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 play 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 
contract owners.
    6. 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. Applicants state that pass-through voting privileges will be 
provided with respect to all variable contract owners with respect to 
Separate Accounts registered under the 1940 Act (``registered Separate 
Accounts'') so long as the Commission interprets the 1940 Act to 
require such pass-through voting privileges. 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 that the limitations on mixed and shared funding 
imposed by the 1940 Act and the rules promulgated thereunder are 
observed.
    7. 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) and 6e-
3(T)(b)(15)(iii)(A)(1) each 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 (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 contract owners 
if the contract owners 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 voting instructions of contract 
owners 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 
a Participating Insurance Company's disregard of voting instructions be 
reasonable and based on specific good faith determinations.
    8. Applicants state 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 contract owners. 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.
    9. 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

    Applicants have consented to the following conditions if the 
exemptive relief requested by the Application is granted:
    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 
promulgated 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 contract 
owners of all separate accounts investing in the Fund. A material 
irreconcilable conflict may arise for a variety of reasons including, 
without limitation: (a) an action by any state insurance regulatory 
authority; (b) a change in applicable Federal or state insurance, tax, 
or securities laws or regulations; (c) a public ruling, private letter 
ruling, no-action or interpretative letter, or any similar action by 
federal or state insurance, tax, or securities regulatory authorities; 
(d) an administrative or judicial decision in any relevant proceeding; 
(e) the manner in which the investments of any series are being 
managed; (f) a difference in voting instructions given by variable 
annuity contract owners and variable life insurance contract owners; or 
(g) a decision by a Participating Insurance Company to disregard the 
voting instructions of contract owners.
    3. Participating Insurance Companies and MLAM will report any 
potential or existing conflicts to the Board. Participating Insurance 
Companies and MLAM 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 contract owner voting instructions are disregarded. The 
responsibility to report such information and conflicts to the Board 
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 contract owners.
    4. If it is determined by a majority of the Board, or a majority of 
the disinterested directors of the Board, that 

[[Page 44102]]
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 contract owners and, as appropriate, segregating the 
assets of any appropriate group (i.e., annuity contract owners or 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 a decision by a Participating Insurance Company to disregard the 
voting instructions of contract owners, and that decision represents a 
minority position or would preclude a majority vote, then the insurance 
company may be required, at the Fund's election, to withdraw the 
insurance company'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 contract owners.
    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 MLAM 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 contract owners 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 contract owners with respect to 
registered Separate Accounts so long as the Commission continues to 
interpret the 1940 Act as requiring pass-through voting privileges for 
variable contract owners. Accordingly, Participating Insurance 
Companies will vote shares of the Fund held in their registered 
Separate Accounts in a manner consistent with voting instructions 
timely-received from contract owners. Each Participating Insurance 
Company will vote shares of the Fund held in the Participating 
Insurance Company's registered Separate Accounts for which no voting 
instructions from contract owners 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 contract owners are timely-received. 
Participating Insurance Companies shall be responsible for assuring 
that each of their registered 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 registered 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 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.
    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 Board 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 the 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 are 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 by Applicants, 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 MLAM, at least 
annually, shall submit to the Board such reports, materials, or data as 
the Board reasonably may request so that the Board can fully carry out 
the obligations imposed upon it by the conditions provided for by the 
order granting the exemptive relief requested by 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 to 
the Board, 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, and all Board action with regard to determining the existence of 
a conflict, notifying Participating Insurance Companies of a conflict, 
and determing 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.

 
[[Page 44103]]

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-20955 Filed 8-23-95; 8:45 am]
BILLING CODE 8010-01-M