[Federal Register Volume 60, Number 243 (Tuesday, December 19, 1995)]
[Notices]
[Pages 65369-65372]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30708]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC. 21592; File No. 812-9236]
Variable Insurance Funds, et al.
December 12, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (``1940 Act'').
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APPLICANTS: Variable Insurance Funds (the ``Trust''), The Winsbury
Company (``Winsbury'') and Qualivest Capital Management, Inc.
(``Qualivest'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) 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) thereunder.
SUMMARY OF APPLICATION: Applicants seek an order to permit shares of
each existing and future series of the Trust and shares of any other
investment company that is designed to fund insurance products and for
which Winsbury, or any of its affiliates, may serve as principal
underwriter and administrator (collectively with the Trust, ``Funds'')
to be sold to and held by variable annuity and variable life separate
accounts of both affiliated and unaffiliated life insurance companies.
FILING DATE: The application was filed on September 21, 1994 and
amended on May 9, 1995.
HEARING AND NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing on the application by writing to the
Secretary of the SEC 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 January 8, 1996, 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, DC 20549.
Applicants: The Trust and Winsbury, 1900 East Dublin-Granville Road,
Columbus, Ohio 34229; Qualivest, 111 S.W. Fifth Avenue, Portland,
Oregon 97204.
FOR FURTHER INFORMATION CONTACT:
Joyce Merrick Pickholz, Senior Counsel, or Wendy Finck Friedlander,
Deputy Chief, on (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.
Applicant's Representations
1. The Trust, an open-end management investment company organized
as a Massachusetts business trust, currently consists of four series,
each with its own investment objective and policies. Additional series
may be established in the future.
2. Winsbury, a registered broker-dealer and member of the National
Association of Securities Dealers, Inc., serves as the administrator
and the principal underwriter of the Trust, Winsbury is a division of
BISYS Group, Inc.
[[Page 65370]]
3. Qualivest serves as the investment adviser of each existing
series of the Trust. Qualivest is an affiliate of United States
National Bank of Oregon, which is a wholly owned subsidiary of U.S.
Bancorp.
4. Shares of each series of the Trust will be offered initially
only to one separate account to serve as the investment vehicle for
variable annuity contracts issued by one life insurance company (the
``Company''). The Trust intends, however, to offer shares of its
existing and future series to separate accounts of other insurance
companies, including insurance companies that are not affiliated with
the Company (together with the Company, the ``participating insurance
companies''), to serve as the investment vehicle for variable annuity
contracts, scheduled premium variable life insurance contracts and
flexible premium variable life insurance contracts (collectively,
``variable contracts'').
Applicants' Legal Analysis
1. In connection with scheduled premium variable life insurance
contracts issued through a separate account registered under the 1940
Act as a unit investment trust, Rule 6e-2(b)(15) provides partial
exemptions from Sections 9(a), 13(a), 15(a), 15(a) and 15(b) of the
1940 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 1940 Act, and Rule 6e-2(b)(15)
thereunder, to the extent necessary to permit shares of the Funds to be
offered and sold in connection with both mixed funding and shared
funding.
2. In connection with flexible premium variable life insurance
contracts issued through a separate account registered under the 1940
Act as a unit investment trust, Rule 6e-3(T) (b)(15) provides partial
exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 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 Section
9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and Rule 6e-3(T)(b)(15)
thereunder, to the extent necessary to permit shares of the Funds to be
offered and sold to separate accounts in connection with shared
funding.
3. Section 9(a) of the 1940 Act provides that it is unlawful for
any company to serve as investment adviser or principal underwriter of
any registered open-end investment company if an affiliated person of
that company is subject to a disqualification enumerated in Section
9(a) (1) or (2). However, Rule 6e-2(b)(15)(i) and (ii) and Rule 6e-
3(T)(b)(15)(i) and (ii) provide partial exemptions from Section 9(a)
under certain circumstances, subject to the limitation discussion above
on mixed and shared funding. These exemptions limit the
disqualification to affiliated individuals or companies that directly
participate in the management or administration of the underlying
investment company. Applicants state that the exemptions contained in
Rules 6e-2(b)(15) and 6e-(T)(b)(15) recognized that it is unnecessary
to apply Section 9(a) to the many individuals in an insurance complex,
most of whom will have no connection with the investment company
funding the separate account. Applicants believe that it is unnecessary
to limit the applicability of the rules merely because shares of the
Funds may be sold in connection with mixed and shared funding.
Therefore, Applicants assert that applying the restrictions of Section
9(a) serve no regulatory purpose.
4. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) 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 when required to do so by an insurance
regulatory authority. Paragraph (b)(15) of both Rules 6e-2 and 6e-3(T)
provides that the insurance company may disregard voting instructions
if its contractowners initiate any change in such company's investment
policies, principal underwriter or any investment adviser, provided
that disregarding such voting instructions is reasonable and subject to
certain other provisions in the rules. However, a particular insurer's
disregard of voting instructions could conflict with the majority of
contractowner voting instructions. Applicants state that if a
particular insurance company's disregard of voting instructions
conflicted with a majority of the contractowners' voting instructions,
or precluded a majority vote, the insurer may be required, at a Fund's
election, to withdraw its separate account's investment in the Fund,
and no charge or penalty would be imposed as a result of such
withdrawal.
5. Applicants assert 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.
6. Applicants argue that mixed funding and shared funding should
benefit variable contractowners by: (1) Eliminating a significant
portion of the costs of establishing and administering separate funds;
(2) allowing for a greater amount of assets available for investment by
a fund, thereby promoting economies of scale, permitting greater safety
through greater diversification, and/or making the addition of new
series more feasible; and (3) 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
Fund will be managed to attempt to achieve its investment objectives
and not to favor or disfavor any particular participating insurer or
type of insurance product. Applicants see no significant legal
[[Page 65371]]
impediment to permitting mixed and shared funding. According to
Applicants, 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. Finally, Applicants represent that they believe that mixed and
shared funding will have no adverse federal income tax consequences.
Applicants' Conditions
Applicants consent to the following conditions if an order is
granted:
1. A majority of the Board of Trustees or Board of Directors
(``Board'') of each Fund 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 director, then the operation of this condition 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. Each Board will monitor the Fund for the existence of any
material irreconcilable conflict between the interests of the
contractowners of all separate accounts investing in the Fund. A
material irreconcilable conflict may arise for a variety of reasons,
including: (i) An action by any state insurance regulatory authority;
(ii) 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; (iii) an
administrative or judicial decision in any relevant proceeding; (iv)
the manner in which the investments of any Fund or series are being
managed; (v) a difference in voting instructions given by variable
annuity contractowners and variable life insurance contractowners; or
(vi) a decision by an insurer to disregard the voting instructions of
contractowners.
3. Participating insurance companies, Winsbury and any other
investment adviser of a Fund or series will report any potential or
existing conflicts to the Board. Participating insurance companies,
Winsbury, and the investment adviser(s) 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 contractowner 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 a Fund under their agreements governing
participation in a Fund and such agreements shall provide that such
responsibilities will be carried out with a view only to the interests
of the contractowners.
4. If it is determined by a majority of the Board, or a majority of
its disinterested trustees or directors, 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 the distinguished trustees or directors),
take whatever steps are necessary to remedy or eliminate the material
irreconcilable conflict, up to and including: (i) Withdrawing the
assets allocable to some or all of the separate accounts from the Fund
or any series thereof and reinvesting such assets in a different
investment medium (including another series, if any, of the Fund) or
submitting the question of 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 (ii)
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 contractowner 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 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 the contractowners.
For the 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 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 contractowners 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
promptly in writing to all participating insurance companies.
6. Participating insurance companies will provide pass-through
voting privileges to all variable contractowners for 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 each Fund or
series thereof 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 each Fund or
series held in its separate accounts for which no timely voting
instructions 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 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 a Fund
shall be a contractual obligation of all participating insurance
companies under their agreements governing participation in the Fund.
7. A Fund will notify all participating insurance companies that
separate account prospectus disclosure regarding potential risks of
mixed and shared funding may be appropriate. Each Fund shall disclose
in every prospectus that (1) shares of the Fund are offered to
insurance company separate accounts which fund both annuity and life
[[Page 65372]]
insurance contracts, (2) due to differences of tax treatment or other
considerations, the interests of various contractowners participating
in the Fund might at some time be in conflict, and (3) the Board will
monitor for any material conflicts and determine what action, if any,
should be taken.
8. 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.
9. If and to the extent 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 1940 Act or the rules 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
each Fund 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. Each Fund 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 Fund), 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 1940 Act (although the
Trust is not one of the trusts described in Section 16(c) of the 1940
Act) as well as with Sections 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 directors (or trustees) and with whatever rules
the Commission may promulgate with respect thereto.
11. The participating insurance companies, Winsbury, and/or any
other investment adviser to a Fund or series, shall at least annually
submit to the Fund's Board such reports, materials or data as the Board
may reasonably request so that it may fully carry out the obligations
imposed upon it 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 obligations 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 each Fund.
Conclusion
For the reasons and upon the facts stated above, Applicants assert
that the requested exemptions 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. 95-30708 Filed 12-18-95; 8:45 am]
BILLING CODE 8010-01-M