[Federal Register Volume 60, Number 165 (Friday, August 25, 1995)]
[Notices]
[Pages 44368-44372]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21127]



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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-21315; File No. 812-9432]


The Alger American Fund, et al.; Notice of Application

August 18, 1995.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an amended order of exemption under 
the Investment Company Act of 1940 (the ``Act'').

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APPLICANTS: The Alger American Fund (the ``Fund'') and Fred Alger 
Management, Inc. (``Alger Management'').

RELEVANT 1940 ACT SECTIONS AND RULES: Order requested 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 6e-3(T)(b)(15) thereunder.

SUMMARY OF THE APPLICATION: Applicants seek an order under Section 6(c) 
of the Act granting exemptions 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 amend an existing order issued by the 
Commission on February 17, 1989 (Investment Company Release No. 16822) 
(``Existing Order''), to engage in mixed and shared funding. The 
proposed relief would amend the prior order to permit the Fund to sell 
its shares directly to qualified pension and retirement plans 
(``Qualified Plans'') outside of the separate account context.

FILING DATE: The application was filed on January 12, 1995 and amended 
on August 4, 1995.\1\

    \1\ Applicants represent that they will amend the application 
during the notice period to include the representations herein.
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HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be 

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issued unless the Commission orders a hearing. Interested persons may 
request a hearing by writing to the Commission's Secretary and serving 
Applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the Commission by 5:30 p.m. on September 
12, 1995, and should be accompanied by proof of service on 
Applications, 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 who wish to be notified of a hearing may request 
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notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street NW., Washington, D.C. 20549. Applicants, The Alger American 
Fund, 75 Maiden Lane, New York, New York 10038.

FOR FURTHER INFORMATION CONTACT: Edward P. Macdonald, Staff Attorney, 
or Wendy Friedlander, Deputy Chief, at (202) 942-0670, Office of 
Insurance Products, Division of Investment Management.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee from 
the Commission's Public Reference Branch.

Applicants' Representations

    1. The Fund, organized as a Massachusetts Business Trust, is an 
open-end diversified management investment company. It currently has 
six portfolios. The Fund may offer additional portfolios in the future. 
The Fund's shares are distributed by Fred Alger & Company, 
Incorporated.
    2. Fred Alger Management, Inc. (``Alger Management''), a registered 
investment adviser under the Investment Advisers Act of 1940, is the 
investment adviser to each portfolio. Alger Management is owned by 
Alger Inc., which in turn is owned by Alger Associates, Inc., a 
financial services holding company.
    3. The Existing Order allows the Fund to offer its shares to 
registered separate accounts of insurance companies, which may be 
affiliated or unaffiliated, issuing variable annuity contracts or 
scheduled or flexible premium variable life insurance contracts. 
Applicants now propose that the Fund also sell its shares directly to 
Qualified Plans outside of the separate account context so that it may 
increase its asset base through the sale of its shares to such 
Qualified Plans.

Applicants' Legal Analysis

    1. Section 817(h) of the Internal Revenue Code of 1986 (the 
``Code'') imposes certain diversification requirements on the 
underlying assets of variable contracts held in the portfolios of 
management investment companies. The Code provides that a variable 
contract shall not be treated as an annuity or life insurance contract 
for any period for which the investments are not adequately diversified 
in accordance with Treasury Department Regulations (``Regulations'').
    2. In March 1989, the Treasury Department issued Treasury 
Regulation Sec. 1.817-5 which established diversification requirements 
for investment company portfolios underlying variable contracts. In 
order to satisfy the diversification requirements of Regulation 
Sec. 1.817-5, all of the beneficial interests in the investment company 
must be held by the segregated asset accounts of one or more insurance 
companies. However, the Regulations also contain certain exceptions to 
this requirement, one of which allows shares in an investment company 
to be held by the trustee of a Qualified Plan without adversely 
affecting the ability of the same investment company's shares to be 
held also by insurance company separate accounts.
    3. Rules 6e-2 and 6e-3(T) under the Act provide certain exemptions 
from the Act in order to permit insurance company separate accounts, 
investing in registered investment companies, to issue variable life 
insurance contracts.
    Rules 6e-2(b)(15) and 6e-3(T)(b)(15) require that shares of the 
registered management investment companies be offered exclusively to 
separate accounts of life insurance companies. Rule 6e-2(b)(15) 
precludes mixed and shared funding and Rule 6e-3(T)(b)(15) precludes 
shared funding. In the Existing Order, the Commission extended the 
requested mixed and shared funding relief to a class consisting of 
insurers and separate accounts investing in the Fund which would 
otherwise have been precluded from investing in the Fund by virtue of 
the Fund offering its shares to both variable annuity separate accounts 
and scheduled and flexible premium variable life insurance contracts of 
affiliated and unaffiliated separate accounts. Applicants assert that 
the relief previously granted in the Existing Order should not be 
affected by the proposed amendment to permit the sale of shares also 
directly to Qualified Plans.
    4. The promulgation of Rule 6e-2(b)(15) preceded the issuance of 
the Regulations which made it possible for shares of an investment 
company to be held by the trustee of a Qualified Plan without adversely 
affecting the tax status of the investment company's shares held also 
by insurance company separate accounts.
    5. Applicants assert that the relief granted by Rules 6e-2(b)(15) 
and 6e-3(T)(b)(15) is in no way affected by the purchase of Fund shares 
by Qualified Plans. However, in that the relief under these rules is 
available only where shares are offered exclusively to separate 
accounts, it is Applicants' belief that additional exemptive relief is 
necessary if the shares of the Fund are also sold to Qualified Plans. 
Applicants assert that if the Fund were to sell its shares only to 
Qualified Plans no exemptive relief would be necessary. None of the 
relief provided for in Rules 6e-2 and 6e-3(T) relate to Qualified Plans 
or to a registered investment company's ability to sell its shares to 
such Qualified Plans. It is only because the separate accounts 
investing in the Fund are themselves investment companies, which are 
relying upon Rules 6e-2 and 6e-3(T) and which desire to have the relief 
continue in place, that Applicants are applying for the requested 
relief.
    6. 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). 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 of the underlying management investment company.
    7. Applicants previously requested and received relief from 
Sections 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. In support of its previous requests for relief, 
Applicants represent that all variable annuity and variable life 
insurance contractholders would be provided pass-through voting rights 
with respect to the shares of the Fund and that any potential 
irreconcilable conflicts which could develop among the separate 
accounts due to an insurance company's right to disregard voting 
instructions in certain 

[[Page 44370]]
limited circumstances would be resolved through certain undertakings 
which Applicants made as a condition of the exemptive relief granted.
    8. Shares of the Fund sold to Qualified Plans would be held by the 
trustees of the Qualified Plans mandated by Section 403(a) of the 
Employee Retirement Income Security Act. Some of the Qualified Plans 
may have their trustee(s) or other fiduciaries exercise voting rights 
attributable to investment securities held by the Qualified Plans in 
their discretion. Some of the Qualified Plans, however, may provide for 
the trustee(s), an investment adviser or other named fiduciary to 
exercise voting rights in accordance with instructions from 
participants.
    9. Where a Qualified Plan does not provide participants with the 
right to give voting instructions, Applicants do not see any potential 
for material irreconcilable conflicts of interest between or among 
variable contractholders and Qualified Plan investors with respect to 
voting of Fund shares. In that there is no pass-through voting with 
respect to Qualified Plan participants, Applicants submit that, unlike 
the case with insurance company separate accounts, the issue of the 
resolution of material irreconcilable conflicts with respect to voting, 
is not present with Qualified Plans. In this regard, investment in one 
Fund by a Qualified Plan will not create any of the voting 
complications occasioned by mixed and shared funding. Unlike mixed or 
shared funding, Qualified Plan investor voting rights cannot be 
frustrated by veto rights of insurers or state regulators.
    10. Where a Qualified Plan provides participants with the right to 
give voting instructions, Applicants assert that there is no reason to 
believe that participants in Qualified Plans generally, or those in a 
particular plan, either as a single group or in combination with 
participants in other Qualified Plans, would vote in a manner that 
would disadvantage variable contractholders. The purchase of Fund 
shares by Qualified Plans that provide voting rights does not present 
any complications not otherwise occasioned by mixed or shared funding 
as addressed in the Existing Order.
    11. Applicants assert that the Commission's primary concern with 
respect to mixed and shared funding is that of potential conflicts of 
interest. Applicants submit that no increased conflicts of interest 
would be present if the Commission grants the exemptive relief 
requested.
    12. Applicants assert that regardless of the type of shareholder in 
the Fund, Alger Management will continue to manage the portfolios 
solely and exclusively in accordance with each portfolio's investment 
objectives and restrictions, as well as any guidelines established by 
the Board of Trustees of the Fund. Individual portfolio managers work 
with a pool of money and do not take into account the identity of the 
shareholders. The Fund is thus managed in the same manner as any other 
mutual fund. If shareholders are displeased with the Fund's investment 
results, or in the manner in which the Fund is being operated, they 
redeem their shares. Since the Fund is sold without the imposition of 
any sales load, such redemption is at net asset value without the 
imposition of any other charge or fee. It is the duty of the management 
of the Fund, including its governing board, to keep shareholders 
informed through updated prospectuses and annual and semi-annual 
reports. Applicants believe that these periodic communications to 
shareholders function as they are intended. Qualified Plans as well as 
contractholders will thus be given up-to-date information necessary for 
them to make informed investment decisions.
    13. The difference between a Qualified Plan shareholder and a 
contractholder whose variable contract invests in the Fund is that the 
Qualified Plan shareholder can immediately redeem its shares and 
reinvest them while the contractholder must either wait for the 
participating insurance company to fund another suitable investment 
medium or exchange contracts, both of which require multiple steps and 
some period of time.
    14. Applicants assert that the sale of the shares of the Fund to 
Qualified Plans should result in an increased amount of assets 
available for investment by the Fund. This should inure to the benefit 
of variable contractholders by promoting economies of scale, by 
permitting greater safety through increased diversification, and by 
making the addition of new portfolios to the Fund more feasible. 
Further, Applicants submit that the purposes of an investment in the 
Fund by a Qualified Plan is not that dissimilar to the purposes 
currently served by variable contracts which are generally long-term 
retirement vehicles. Applicants further submit that the sale of the 
shares of the Fund of Qualified Plans will not increase the risk of 
material irreconcilable conflicts to the Fund or to the separate 
accounts of participating insurance companies.

Applicants' Conditions

    Applicants represent that they will comply with the following 
conditions:
    1. A majority of the board shall consist of persons who are not 
``interested persons'' of the Fund as defined by Section 2(a)(19) of 
the 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, 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 among the interests of the 
contractholders of all of the separate accounts investing in the Fund. 
A material irreconcilable conflict may arise for a variety of reasons, 
including: (a) an action by any state insurance regulatory authority; 
(b) a change in applicable federal or state insurance, tax or 
securities laws or regulations, or a public ruling, private letter 
ruling, no-action or interpretive letter, or 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 Fund are being managed; (e) a 
difference in voting instructions given by owners of variable annuity 
contracts and owners of variable life insurance contracts; or (f) a 
decision by a participating insurance company to disregard the voting 
instructions of contractholders.
    3. The participating insurance companies, Alger Management (or any 
other investment adviser of the Fund), and any Qualified Plan that 
executes a fund participation agreement upon becoming an owner of 10% 
or more of the assets of the Fund (the ``Participants'') will report 
any potential or existing conflicts to the Board. Participants 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 responsibility includes, but is not limited to, an 
obligation by each Participant to inform the Board whenever voting 
instructions of contractholders are disregarded. The responsibility to 
report such 

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information and conflicts and to assist the Board will be a contractual 
obligation of all Participants investing in the Fund under their 
agreements governing participation in the Fund, and such agreements 
shall provide that these responsibilities will be carried out with a 
view only to the interests of contractholders.
    4. If it is determined by a majority of the Board, or by a majority 
of its disinterested trustees, that a material irreconcilable conflict 
exists, the relevant Participant shall, at its expense and to the 
extent reasonably practicable (as determined by a majority of the 
disinterested trustees), take any steps necessary to remedy or 
eliminate the material irreconcilable conflict, including: (a) 
withdrawing the assets allocable to some or all of the separate 
accounts from the Fund or a portfolio of the Fund 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 contractholders; and, 
as appropriate, segregating the assets of any appropriate group (i.e., 
variable annuity contractholders, variable life insurance 
contractholders, or variable contractholders of one or more 
Participant) that votes in favor of such segregation, or offering to 
the affected variable contractholders 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 Participant's decision to disregard voting 
instructions of the contractholders, and that decision represents a 
minority position or would preclude a majority vote, the Participant 
may be required, at the election of the Fund, to withdraw its separate 
account's assets 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 
Participants under their agreements governing their participation in 
the Funds. The responsibility to take such remedial action shall be 
carried out with a view only to the interests of Contractholders. For 
purposes of this Condition Four, a majority of the disinterested 
members of the Board shall determine whether any proposed action 
adequately remedies any material irreconcilable conflict, but, in no 
event will the Fund or Alger Management (or any other investment 
adviser of the Fund) be required to establish a new funding medium for 
any Contract. Further, no Participant shall be required by this 
Condition Four to establish a new funding medium for any variable 
contract if any offer to do so has been declined by a vote of a 
majority of the contractholders materially affected by the material 
irreconcilable conflict.
    5. The Board's determination of the existence of a material 
irreconcilable conflict and its implication shall be made known 
promptly and in writing to all Participants.
    6. Participants will provide pass-through voting privileges to all 
Contractholders so long as the Commission continues to interpret the 
Act as requiring pass-through voting privileges for variable 
contractholders. Accordingly, the Participants, where applicable, will 
vote shares of the Fund held in their separate accounts in a manner 
consistent with voting instructions timely received from variable 
contractholders. Participants will be responsible for assuring that 
each of their separate accounts that participates in the Fund 
calculates voting privileges in a manner consistent with other 
Participants. The obligation to calculate voting privileges in a manner 
consistent with all other separate accounts will be a contractual 
obligation of all Participants under the agreements governing their 
participation in the Fund. Each Participant will vote shares for which 
it has not received timely voting instructions as well as shares it 
owns in the same proportion as it votes those shares for which it has 
received voting instructions.
    7. All reports received by the Board of potential or existing 
conflicts, and all Board action with regard to: (a) determining the 
existence of a conflict; (b) notifying Participants of a conflict, and 
(c) determining whether any proposed action adequately remedies a 
conflict, will be properly recorded in the minutes of the Board or 
other appropriate records. Such minutes or other records shall be made 
available to the Commission upon request.
    8. The Fund will notify all Participants that separate account 
prospectus disclosure regarding potential risks of mixed and shared 
funding may be appropriate. The Fund shall disclose in its prospectus 
that: (a) shares of the Fund may be offered to insurance company 
separate accounts of both annuity and life insurance variable 
contracts, and to Qualified Plans; (b) due to differences of tax 
treatment and other considerations, the interests of various 
contractholders participating in the Fund and the interests of 
Qualified Plans investing in the Funds may conflict; and (c) the Board 
will monitor the Fund for any material conflicts and determine what 
action, if any, should be taken.
    9. The Fund will comply with all the provisions of the Act 
requiring voting by shareholders (which, for these purposes, shall be 
the persons having a voting interest in the shares of the Fund), and, 
in particular, the 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 
(although the Fund is not one of the trusts described in Section 16(c) 
of the Act), as well as Section 16(a), and, if applicable, Section 
16(b) of the 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 trustees 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 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 Applicants, then 
the Fund and/or Participants, 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 such rules are applicable.
    11. No less than annually, the Participants shall submit to the 
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 Participants to 
provide these reports, materials and data to the Board, when the Board 
so reasonably requests, shall be a contractual obligation of all 
Participants under the agreements governing their participation in the 
Fund.
    12. If a Qualified Plan becomes an owner of 10% or more of the 
assets of the Fund, such Qualified Plan will execute a fund 
participation agreement with the Fund. A Qualified Plan will execute an 
application containing an acknowledgement of this condition upon such 
Qualified Plan's initial purchase of the shares of the Fund.

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Conclusion

    For the reasons summarized above, Applicants represent that the 
exemptive relief requested is necessary or appropriate in the public 
interest and otherwise meets the standards of Section 6(c) of the Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-21127 Filed 8-24-95; 8:45 am]
BILLING CODE 8010-01-M