[Federal Register Volume 61, Number 29 (Monday, February 12, 1996)]
[Notices]
[Pages 5419-5425]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-3044]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21734; No. 812-9856]
The Evergreen Variable Trust, et al.
February 5, 1996.
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: The Evergreen Variable Trust (``Trust'') and Evergreen
Asset Management Corporation (``Evergreen Asset'').
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 sub-paragraph (b)(15) of Rules 6e-2 and 6e-3(T)
thereunder.
SUMMARY OF APPLICATION: Applicants seek an order to the extent
necessary to permit shares of the Trust and shares of any other
investment company that is designed to fund variable insurance products
and for which Evergreen Asset or its affiliates may serve as investment
adviser, administrator, manager, principal underwriter or sponsor
(collectively with the Trust, ``Funds'') to be sold to and held by: (1)
variable annuity and variable life insurance separate accounts of both
affiliated and unaffiliated life insurance companies; and (2) qualified
pension and retirement plans outside the separate account context.
FILING DATE: The application was filed on November 14, 1995. An amended
application was filed on January 29, 1996.
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 should be received by the SEC
by 5:30 p.m. on March 1, 1996 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: c/o Joseph J. McBrien, Esq., Evergreen Asset
Management Corp., 2500 Westchester Avenue, Purchase, New York 10577.
FOR FURTHER INFORMATION CONTACT: Yvonne M. Hunold, Assistant Special
Counsel, or Patrice M. Pitts, Special Counsel, Office of Insurance
Products (Division of Investment Management), at (202) 942-0670.
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the Public
Reference Branch of the Commission.
Applicants' Representations
1. The Trust is an open-end, management investment company
organized as a Massachusetts Business Trust. The Trust currently
consists of three separately managed series (collectively,
``Portfolios''). Additional series may be offered in the future
(``Future Portfolios'').
2. Evergreen Asset serves as investment adviser to the Trust and is
a registered investment adviser under the Investment Advisers Act of
1940. Evergreen Asset is a wholly-owned subsidiary of First Union
National Bank of North Carolina, a national bank, which is, in turn, a
wholly-owned subsidiary of First Union Corporation, a bank holding
company.
3. Applicants state that shares of the Trust currently are proposed
to be offered only to variable annuity separate accounts, registered
with the Commission under the 1940 Act as unit investment trusts,
established by The Nationwide Life Insurance Company (``Nationwide'').
4. Applicants state further that shares of the funds will be
offered in the future to insurance company separate accounts \1\ that
fund variable annuity and variable life insurance established by
Nationwide and its affiliate insurance companies and by unaffiliated
insurance companies (collectively, ``Participating Insurance
Companies'') that fund variable annuity and variable life insurance
contracts (including single premium, scheduled premium, modified single
premium and flexible premium) (collectively, ``Variable Contracts'').
Each Participating Insurance Company will enter into a fund
participation agreement (``Participation Agreement'')
[[Page 5420]]
with the Trust on behalf of the Fund in which the Participating
Insurance Company invests. Applicants state that the Participating
Insurance Companies will rely on Rules 6e-2 or 6e-3(T) and may rely on
individual exemptive orders.
\1\ Applicants represent that these separate accounts will be
either registered as investment companies under the 1940 Act or
exempt from registration under the 1940 Act pursuant to Section
3(c)(1).
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5. In connection with any Variable Contract issued by a
Participating Insurance Company, the application states that each such
company will have the legal obligation of satisfying all applicable
requirements under federal securities laws. Applicants further state
that the role of the Funds under this arrangement, insofar as the
federal securities laws are applicable, will consist of offering shares
to the separate accounts of Participating Insurance Companies and
fulfilling any conditions that the Commission may impose upon granting
the order requested in the application.
6. Applicants also states that shares of the Funds also may be
offered directly to qualified pension and retirement plans (``Plans'')
outside of the separate account context.
7. Applicants state that applicable tax law permits the Funds to
increase their asset base through the sale of Fund shares to Plans
without endangering the tax status of Variable Contracts issued by
Participating Insurance Companies. The Plans may choose any of the
Funds as the sole investment option under the Plan or as one of several
investment options. Participants may be given an investment choice
depending upon the Plan. Shares of any of the Funds sold to Plans will
be held by the trustees of the Plans as mandated by Section 403(a) of
the Employee Retirement Income Security Act (``ERISA''). Evergreen
Asset currently has no plans to offer investment advisory services to
Plans that will purchase shares of the Funds or to participants in such
Plans (``Plan Participants''). Applicants note that, pursuant to ERISA,
pass-through voting is not required to be provided to Plan
Participants.
Applicants' Legal Analysis
1. Applicants requests an order that would exempt variable life
insurance separate accounts of Participating Insurance Companies (and
any principal underwriters and depositors of such separate accounts),
from Sections 9(a), 13(a), 15(a) and 15(b) and the 1940 Act, and
paragraph (b)(15) of Rules 6e-2 and 6e-3(T) thereunder, to the extent
necessary to permit shares of the Funds to be sold to, and held by: (a)
variable annuity and variable life separate accounts of both affiliated
and unaffiliated life insurance companies; and (b) qualified pension
and retirement plans outside of the separate accounts context.
Mixed and Shared Funding and Sales to Plans
2. In connection with the funding of scheduled premium variable
life insurance contracts issued through a separate account registered
under the 1940 Act as a unit investment trust (``Separate Account-
UIT''), Rule 6e-2(b)(15) provides partial exemptions from Sections
9(a), 13(a), 15(a) and 15(b) of the 1940 Act. The relief provided by
Rule 6e-2(b)(15) extends to a separate account's investment adviser,
principal underwriter, and sponsor or depositor. The exemptions granted
by Rule 6e-2(b)(15) are available, however, only where the management
investment company underlying the Separate Account-UIT offers its
shares ``exclusively to variable life insurance separate accounts of
the life insurer, or of any affiliated life insurance company.''
3. The use of a common management investment company as the
underlying investment medium for both variable annuity and variable
life insurance separate accounts of a single insurance company (or of
two or more affiliated insurance companies) is referred to as ``mixed
funding.'' The use of a common management investment company as the
underlying investment medium for variable annuity and/or variable life
insurance separate accounts of unaffiliated insurance companies is
referred to as ``shared funding.'' ``Mixed and shared funding'' denotes
the use of a common management investment company to fund the variable
annuity and variable life insurance separate accounts of affiliated and
unaffiliated insurance companies. The relief granted by Rule 6e-
2(b)(15), thus, is not available with respect to a scheduled premium
variable life insurance separate account that owns shares of an
underlying fund that also offers its shares to a variable annuity
separate account of the same company or of any other affiliated or
unaffiliated life insurance company.\2\ Rule 6e-2(b)(15), therefore,
precludes mixed and shared funding.
\2\ Applicants note that amendments to Rule 6E-2 have been
proposed by the Commission and, if adopted, would permit shares of
one underlying fund to be sold to separate accounts of the insurer,
or any affiliated life insurance company offering variable annuity
contracts or scheduled premium or flexible premium variable life
insurance. See Release No. IC-14421 (Mar. 15, 1985). The proposed
amendment, however, would not permit shares of one underlying fund
to be sold to separate accounts of unaffiliated companies.
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4. In connection with flexible premium variable life insurance
contracts issued through a Separate Account-UIT Rule 6e-3(T)(b)(15)
provides partial exemptions from Sections 9(a), 15(a) and 15(b) of the
1940 Act. The exemptive relief extends to a separate account's
investment adviser, principal underwriter, and sponsor or depositor.
The exemptions granted to a separate account by Rule 6e-3(T)(b)(15) are
available only where all the assets of the separate account consist of
shares of one or more registered management investment companies which
offer their 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 * * *.'' Rule 6e-3(T) thus permits
mixed funding with respect to a flexible premium variable life
insurance separate account, subject to certain conditions, but
precludes shares funding.
5. Applicants state that various factors have kept certain
insurance companies from offering variable annuity and variable life
insurance contracts. According to Applicants, these factors include:
the cost of organizing and operating an investment funding medium; the
lack of expertise with respect to investment management; the lack of
name recognition by the public of certain insurers as investment
professionals. Applicants argue that use of the Funds as common
investment media for the Variable Contracts would east these concerns.
Participating Insurance Companies would benefit not only from the
investment and administrative expertise of the Funds' investment
advisers, but also from the cost efficiencies and investment
flexibility afforded by a large pool of funds. Applicants state that
making the Funds available for mixed and shared funding may encourage
more insurance companies to offer variable contracts such as the
Variable Contracts which may, in turn, increase competition with
respect to both the design and pricing of variable contracts.
Applicants submit that this can be expected to result in greater
product variation and lower charges. Applicants thus argue that
Variable Contract owners would benefit because mixed and shared funding
will eliminate a significant portion of the costs of establishing and
administering separate funds. Moreover, Applicants assert that sales of
shares of the Funds to Plans should increase the amount of assets
available for investment by the Funds. This should, in turn, promote
[[Page 5421]]
economies of scale, permit increased safety of investment through
greater diversification, and make the addition of new portfolios more
feasible.
6. Applicants state that, because relief under paragraph (b)(15) of
Rules 6e-2 and 6e-3(T) is available only where shares are offered
exclusively to separate accounts of insurance companies, additional
exemptive relief is necessary if shares of the Funds also are to be
sold to Plans. Applicants assert that the relief granted by paragraph
(b)(15) of Rules 6e-2 and 6e-3(T) should not be affected by the
proposed sale of fund shares to Plans because such sales may allow for
the development of larger pools of assets resulting in the potential
for greater investment and diversification opportunities, and for
decreased expenses at higher asset levels resulting in greater cost
efficiencies. Applicants further assert that they are not aware of any
stated rationale for the exclusion of separate accounts and investment
companies engaged in shared funding from the exemptive relief provided
under paragraph (b)(15) of Rules 6e-2 and 6e-3(T), or for the exclusion
of separate accounts and investment companies engaged in mixed funding
from the exemptive relief provided under rule 6e-2(b)(15). Similarly,
Applicants are not aware of any stated rationale for excluding
Participating Insurance Companies from the exemptive relief requested
because the Funds also may sell their respective shares to qualified
pension and retirement plans.
7. Applicants state that current tax law permits funds to increase
their asset base through the sale of Fund shares to plans. Applicants
state that Section 817(h) of the Internal Revenue Code of 1986, as
amended (``Code''), imposes certain diversification requirements on the
underlying assets of Variable Contracts invested in the Funds. The Code
provides that such Variable Contracts shall not be treated as an
annuity contract or life insurance contract for any period in which the
underlying assets are not adequately diversified, as prescribed by
Treasury Department regulations; to meet the diversification
requirements, all of the beneficial interests in the investment company
must be held by the segregated asset accounts of one or more insurance
companies, subject to certain exceptions. Treas. Reg. Sec. 1.817-5
(1989). For example, shares in an investment company may be held by the
trustee of a qualified pension or retirement plan without adversely
affecting the ability of shares in the same investment company also to
be held by the separate accounts of insurance companies in connection
with the variable contracts. Treas. Reg. Sec. 1.817-5(b)(3)(iii).
8. Applicants state that the promulgation of rules 6e-2 and 6e-3(T)
under the 1940 Act preceded the issuance of these Treasury regulations,
and that the sale of shares of the same investment company to both
separate accounts and Plans could not have been envisioned at the time
of the adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15).
9. Applicants therefore request relief from Sections 9(a), 13(a),
15(a) and 15(b) of the 1940 Act, and paragraph (b)(15) of Rules 6e-2
and 6e-3(T) thereunder to the extent necessary to permit shares of the
Funds to be offered and sold now and in the future to separate accounts
of Participating Insurance Companies in connection with both mixed and
shared funding, and to be sold directly to Plans. Relief is requested
for a class or classes of persons and transactions consisting of
Participating Insurance Companies and their scheduled premium variable
life insurance separate accounts and flexible premium variable life
insurance separate accounts (and, to the extent necessary, any
investment adviser, principal underwriter and depositor of such
separate accounts) investing in any of the Funds.
Disqualification
10. 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 a disqualification specified in Sections 9(a)(1)
or 9(a)(2).
11. Rules 6e-2(b) and 6e-3(T)(b)(15) provide exemptions from
Section 9(a) under certain circumstances, subject to the 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.
12. Applicants state that the partial relief from Section 9(a)
found in subparagraph (b)(15) of Rules 6e-2 and 6e-3(T), in effect,
limits the monitoring necessary to ensure compliance with Section 9 to
that which is appropriate in light of the policy and purposes of the
Section. Applicants state that those 1940 Act rules recognize that it
is not necessary for the protection of investors or for 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 an insurance
company complex, most of whom will have no involvement in matters
pertaining to investment companies within that organization. Applicants
note that the Participating Insurance Companies are not expected to
play any role in the management or administration of the Funds.
Therefore, Applicants assert, applying the restrictions of Section 9(a)
serves no regulatory purpose. The application states that the relief
requested should not be affected by the proposed sale of shares of the
Funds to the Plans. Plans are not investment companies and are not,
therefore, subject to Section 9(a).
Pass-Through Voting
13. Sections 13(a), 15(a) and 15(b) of the 1940 Act require ``pass-
through'' voting with respect to underlying investment company shares
held by a separate account. Subparagraph (b)(15)(iii) of Rules 6e-2 and
6e-3(T) assumes the existence of a pass-through voting requirement with
respect to management investment company shares held by a separate
account. Applicants represent that the participating Insurance
Companies will provide pass-through voting privileges to all Variable
Contract owners so long as the Commission interprets the 1940 Act to
require such privileges, and that Participating Insurance Companies
will vote all shares as to which no response from Variable Contract
owners is timely received, as well as shares owned by them, in the same
proportion as shares for which voting instructions are received.
14. Subparagraph (b)(15)(iii) of Rules 6e-2 and 6e-3(T) provides
partial exemptions from the pass-through voting requirement with
respect to several significant matters, assuming observance of the
limitations on mixed and shared funding. Subparagraph (b)(15)(iii)(A)
of Rules 6e-2 and 6e-3(T) provides that the insurance company may
disregard voting instructions of its contract owners with respect to
the subclassification or investment objectives of a fund or any
contract between a fund and its investment advisor, when required to do
so by an insurance regulatory authority.
15. Subparagraph (b)(15)(iii)(B) of Rule 6e-2 and subparagraph
[[Page 5422]]
(b)(15)(iii)(A)(2) of Rule 6e-3(T) provides that the insurance company
may disregard voting instructions of its contract owners if the
contract owners initiate any change in the company's investment
objectives, principal underwriter or investment adviser, provided that
disregarding such voting instructions is reasonable and subject to the
other provisions of paragraph (b(5)(iii) and (b)(7)(ii) (B) and (C) of
each rule.
16. Applicants represent that the Funds' sale of shares to Plans
does not affect the relief requested in this regard. As previously
noted, shares of the Funds sold to Plans would be held by the trustees
of such Plans as required by Section 403(a) of ERISA. Section 403(a)
also provides that the trustee(s) must have exclusive authority and
discretion to manage and control the Plan with two exceptions: (a) when
the Plan expressly provides that the trustee(s) are subject to the
direction of the named fiduciary who is not a trustee, in which case
the trustee(s) is (are) subject to proper directions made in accordance
with the terms of the Plan and not contrary to ERISA; and (b) when the
authority to manage, acquire or dispose of assets of the Plan is
delegated to one or more investment managers pursuant to Section
402(c)(3) of ERISA.
17. Unless one of the two exceptions stated in Section 403(a)
applies, Plan trustees have the exclusive authority and responsibility
for voting proxies. Where a named fiduciary appoints an investment
manager, the investment manager has the responsibility to vote the
shares held unless the right to vote such shares is reserved to the
trustees or to the named fiduciary. In any event, there is no pass-
through voting to the participants in such Plans. In addition,
Applicants represent that there is no contractual or other relationship
between the Participating Insurance Companies and any Plans which, for
example, would affect the solvency of the insurer or the performance of
its contractual obligations, or would be expected to increase the risks
undertaken by the insurer. Accordingly, Applicants assert 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 Plans are not entitled to pass-through voting
privileges.
Applicants further assert that investment in the Funds by Plans
will not create any of the voting complications occasioned by mixed and
shared funding because Plan investor voting rights cannot be frustrated
by veto rights of insurers or state regulators.
18. Applicants state that some Plans may provide participants with
the right to give voting instructions. Applicants submit that there is
no reason to believe that participants in Plans generally, or those in
a particular Plan, either as a single group or in combination with
other Plans, would vote in a manner that would disadvantage Variable
Contract owners. Accordingly, Applicants assert that the purchase of
Fund shares by Plans that provide voting rights to participants does
not present any complications not otherwise occasioned by mixed and
shared funding.
Conflicts of Interest
19. Applicants state that no increased conflicts of interest would
be present by the granting of the requested relief. Applicants assert
that shared funding 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. Applicants note that where insurers are
domiciled in different states, it is possible that the state insurance
regulatory body in a state in which one insurance company is domiciled
could require action that is inconsistent with the requirements of
insurance regulators in one or more other states in which other
insurance companies are domiciled. Applicants submit that this
possibility is no different and no greater than exists where a single
insurer and its affiliates offer their insurance products in several
states.
20. Applicants further submit that affiliation does not reduce the
potential, if any exists, for differences among state regulatory
requirements. In any event, the conditions (adapted from the conditions
included in Rule 6e-3(T)(b)(15)) discussed below are designed to
safeguard against any adverse effects that these differences may
produce. If a particular state insurance regulator's decision conflicts
with the decisions of a majority of other state regulators, the
affected insurer may be required to withdraw its separate account's
investment in the relevant Funds.
21. Applicants also argue that affiliation does not eliminate the
potential, if any, for divergent judgments as to when a Participating
Insurance Company could disregard Variable Contract owner voting
instructions. Potential disagreement is limited by the requirement that
the Participating Insurance Company's disregard of voting instructions
be both reasonable and based on specific good faith determinations.
However, if a Participating Insurance Company's decision to disregard
Variable Contract owner instructions represents a minority position or
would preclude a majority vote approving a particular change, such
Participating Insurance Company may be required, at the election of the
relevant Fund, to withdraw its investment in that Fund. No charge or
penalty will be imposed as a result of such withdrawal.
22. Applicants state that there is no reason why the investment
policies of a Fund with mixed funding would or should be materially
different from what those policies would or should be if such
investment company or series thereof funded only variable annuity or
variable life insurance contracts. Applicants therefore argue that
there is no reason to believe that conflicts of interest would result
from mixed funding. Moreover, Applicants represent that the Funds will
not be managed to favor or disfavor any particular insurance company or
type of Variable Contract.
23. Applicants note that Section 817(h) imposes certain
diversification standards on the underlying assets of variable annuity
contracts and variable life insurance contracts held in the portfolios
of management investment companies. Treasury Regulation 1.817-
5(f)(3)(iii), which established diversification requirements for such
portfolios, specifically permits ``qualified pension of retirement
plans'' and insurance company separate accounts to share the same
underlying investment company. Therefore, Applicants have concluded
that neither the Code, nor the Treasury regulations, nor the revenue
rulings thereunder, present any inherent conflicts of interest if
Plans, variable annuity separate accounts and variable life insurance
separate accounts all invest in the same management investment company.
24. Applicants state that while there are differences in the manner
in which distributions are taxed for variable annuity contracts,
variable life insurance contracts and Plans, these tax consequences do
not raise any conflicts of interest. When distributions are to be made,
and the separate account of the Participating Insurance Company or the
Plan is unable to net purchase payments to make the distributions, the
separate account or the Plan will redeem shares of the Funds at their
respective net asset value. The Plan will then make distributions in
accordance with the terms of the Plan. A Participating Insurance
Company will surrender values from the separate account into the
general account to make
[[Page 5423]]
distributions in accordance with the terms of the Variable Contract.
25. Applicants state that they do not see any greater potential for
material irreconcilable conflicts arising between the interests of Plan
Participants and owners of the Variable Contracts issued by the
separate accounts of Participating Insurance Companies from possible
future changes in the federal tax laws than that which already exists
between variable annuity contract owners and variable life insurance
contract owners.
26. With respect to voting rights, Applicants state that it is
possible to provide an equitable means of giving such voting rights to
Variable Contract owners and to Plans. Applicants represent that a Fund
will inform each shareholder, including each separate account and Plan,
of information necessary for the shareholder meeting, including their
respective share ownership in the respective Funds. A Participating
Insurance Company will then solicit voting instructions in accordance
with the ``pass-through'' voting requirements of Rules 6e-2 and 6e-
3(T).
27. Applicants argue that the ability of the Funds to sell their
respective shares directly to Plans does not create a ``senior
security,'' as such term is defined under Section 18(g) of the 1940
Act, with respect to any Variable Contract owner as opposed to a
participant under a Plan. Regardless of the rights and benefits of
participants and Variable Contract owners under their respective Plans
and Variable Contracts, Plans and separate accounts of Participating
Insurance Companies have rights only with respect to their respective
shares of the Funds. Such shares may be redeemed only at net asset
value. No shareholder of the Funds has any preference over any other
shareholder with respect to distribution of assets or payment of
dividends.
28. Applicants state that there are no conflicts between Variable
Contract owners and Plan Participants with respect to the state
insurance commissioner's veto powers (direct with respect to variable
life insurance and indirect with respect to variable annuities) over
investment objectives. The basic premise of corporate democracy and
shareholder voting is that not all shareholders may agree with a
particular proposal. The state insurance commissioners have been given
the veto power in recognition of the fact that insurance companies can
not simply redeem their separate accounts out of one fund and invest
those assets in another fund. Generally, to accomplish such redemptions
and transfers, complex and time consuming transactions must be
undertaken. Conversely, trustees of (or participants in) Plans can
redeem shares of the Funds held by them and reinvest in another Fund
without the same regulatory impediments or, as is the case with most
Plans, even hold cash or other liquid assets pending suitable
alternative investment. Based on the foregoing, Applicants represent
that even should there arise issues where the interests of Variable
Contract owners and the interests of the Plans conflict, the issues can
be almost immediately resolved in that trustees of the Plans can,
independently, redeem shares out of the Funds.
29. Applicants have concluded that the addition of Plans as
eligible shareholders should not increase the risk of material
irreconcilable conflicts among shareholders. However, Applicants assert
further that, even if a material irreconcilable conflict involving
Plans arose, the trustees of (or participants in) the Plans, unlike the
separate accounts, can redeem their shares and make alternative
investments. Applicants thus submit that allowing Plans to invest
directly in shares of the Funds should not increase the opportunity for
conflicts of interest.
30. Further, Applicants state that, regardless of the types of Fund
shareholders, Evergreen Asset is legally obligated to manage the Funds
in accordance with each Fund's investment objectives, policies and
restrictions as well as any guidelines established by the relevant
Board of Directors or Trustees of the Funds. Applicants assert that
Evergreen Asset works with a pool of money without consideration for
the identity of shareholders, and, thus, manage the Funds in the same
manner as any other mutual fund.
31. Applicants believe that there is no significant legal
impediment to permitting mixed and shared funding. Additionally,
Applicants note the previous issuance of orders permitting mixed and
shared funding where shares of a fund were sold directly to qualified
plans, such as the Plans. Applicants note further that there is ample
precedent for extending exemptive relief to members of a class or
classes or persons, not currently identified, that may be similarly
situated in the future. Such class relief has been granted in various
contexts and from a wide variety of the 1940 Act's provisions including
class exemption in the context of mixed and shared funding.
Applicants' Conditions
The Applicants have consented to the following conditions if the
order requested in the application is granted:
1. A majority of the Board of Trustees or Board of Directors (each
a ``Board'') of each Fund shall consist of persons who are not
``interested persons'' of the Funds, 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 or Trustee, then the operation of this condition shall be
suspended: (i) for a period of 45 days, if the vacancy or vacancies may
be filed by the appropriate 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 its respective Funds for the existence
of any material irreconcilable conflict among the interests of the
Variable Contract owners of all the separate accounts of Participating
Insurance Companies and of Plan Participants investing in the
respective Funds, and determine what action, if any, should be taken in
response to such conflicts. 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 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 the Funds are managed; (e) a
difference in voting instructions given by owners of variable annuity
and variable life insurance contracts; (f) a decision by a
Participating Insurance Company to disregard voting instructions of
Variable Contract owners; or (g) if applicable, a decision by a Plan to
disregard the voting instructions of Plan Participations.
3. Participating Insurance Companies, Evergreen Asset (or any other
investment manager of a Fund), and any Plan that executes a
Participation Agreement upon becoming an owner of 10% of more of the
assets of a Fund (collectively, ``Participants'') shall report any
potential or existing conflicts to the relevant Board. Participants
will be responsible for assisting the appropriate Board in carrying out
its
[[Page 5424]]
responsibilities under these conditions by providing the Board with all
information reasonably necessary for it to consider any issues raised.
This responsibility includes, but is not limited to, an obligation by
Evergreen Asset and each Participating Insurance Company to inform the
Board whenever it has determined to disregard Variable Contract
holders' voting instructions and, if pass-through voting is a
applicable, an obligation by Evergreen Asset and a Plan to inform the
Board whenever it has determined to disregard Plan Participants voting
instructions. The responsibility to report such information and
conflicts and the assist the Board will be a contractual obligation of
the Participants investing in the Funds under their agreements
governing participation in the Funds, and such agreements shall provide
that these responsibilities will be carried out with a view only to the
interests of the Variable Contract owners and, if applicable, Plan
Participants.
4. If it is determined by a majority of the Board of a Fund, or by
a majority of its disinterested members, that a material irreconcilable
conflict exists, the Participants shall, at their expense and to the
extent reasonably practicable (as determined by a majority of
disinterested trustees or members of the Board), 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 a Fund or its portfolio and
reinvesting such assets in a different investment medium (including
another series of a Fund or another Fund); (b) in the case of
Participating Insurance Companies, submitting the question as to
whether such segregation should be implemented to a vote of all
affected Variable Contract owners and, as appropriate, segregating the
assets of any appropriate group (i.e., variable annuity or variable
life insurance contract owners of one or more Participating insurance
Companies) that votes in favor of such segregation, or offering to the
affected Variable Contract owners the option of making such a change;
and (c) 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, such Participating
Insurance Company may be required, at the election of the relevant
Fund, to withdraw its separate account's investment in the Fund, and no
charge or penalty will be imposed as a result of such withdrawal. If a
material irreconcilable conflict arises because of a Plan's decision to
disregard Plan Participant voting instructions, if applicable, and that
decision represents a minority position or would preclude a majority
vote, the Plan may be required, at the election of the Fund, to
withdraw its 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 that an irreconcilable material conflict exists, and to
bear the cost of such remedial action, shall be a contractual
obligation of the Participants under their agreements governing
participating in the Funds, and these responsibilities shall be carried
out with a view only to the interests of the Variable Contract owners
and, as applicable, Plan Participants.
For purposes of this Condition ``4.,'' a majority of disinterstated
members of the applicable Board shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in
no event will the relevant Fund or Evergreen Asset (or any other
investment adviser to the Funds) be required to establish a new funding
medium for any Variable Contract. Further, 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 Variable Contract owners materially
affected by the irreconcilable material conflict. No Participating Plan
shall be required by this Condition ``4.'' to establish a new funding
medium for such Plan if (a) a majority of Plan Participants materially
and adversely affected by the irreconcilable material conflict vote to
decline such offer, or (b) pursuant to governing plan documents and
applicable law, the Participating Plan makes such decision without Plan
Participant vote.
5. The Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known promptly in
writing to the Participants.
6. Participating Insurance Companies will provide pass-through
voting privileges to all Variable Contract owners so long as the
Commission continues to interpret the 1940 Act as requiring pass-
through voting privileges for Variable Contract owners. Accordingly,
such Participating Insurance Companies, where applicable, will vote
shares of the Fund held in in its separate accounts in a manner
consistent with voting instructions timely received from Variable
Contract owners.
Also, each Participating Insurance Company will vote shares of a
Fund 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 will be
responsible for assuring that each of their separate accounts investing
in a Fund calculates voting privileges in a manner consistent with all
other Participating Insurance Companies. The obligation to vote a
Fund's shares and calculate voting privileges in a manner consistent
with all other separate accounts will be a contractual obligation of
all Participating Insurance Companies under the agreements governing
participation in the Funds.
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 appropriate
Board or other appropriate records. Such minutes or other records shall
be made available to the Commission upon request.
8. Each 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 its prospectus that: (a) Its shares may be offered to insurance
company separate accounts that fund both variable annuity and variable
life insurance contracts, as well as to qualified pension and
retirement plans; (b) differences in tax treatment or other
considerations may cause the interests of various Variable Contract
owners participating in the Funds and the interests of Plans investing
in the Funds to conflict; and (c) each Fund's Board will monitor the
Funds for any material conflicts and determine what action, if any,
should be taken.
9. Each Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders (for these purposes, the persons
having a voting interest in the shares of the Funds). In particular,
each Fund will either provide for annual meetings (except to the extent
that the Commission may interpret Section 16 of the 1940 Act not
[[Page 5425]]
to require such meetings) or comply with Section 16(c) of the 1940 Act
(although none of the Funds shall be one of the trusts described in
Section 16(c) of the 1940 Act), as well as with Section 16(a) and, if
applicable, Section 16(b) of the 1940 Act. Further, each 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.
10. If and to the extent Rule 6e-2 or Rule 6e-3(T) is 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 and shared
funding on terms and conditions materially different from any
exemptions granted in the order requested, then the Funds and/or the
Participants, as appropriate, shall take such steps as may be necessary
to comply with Rule 6e-2 or Rule 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 each
Board such reports, materials or data as each Board may reasonably
request so that such Boards may fully carry out the obligations imposed
upon them by the conditions stated in the application. Such reports,
materials, and data shall be submitted more frequently if deemed
appropriate by the Boards. The obligations of the Participants to
provide these reports, materials, and data upon reasonable request of a
Board shall be a contractual obligation of all Participants under their
agreements governing their participation in the Funds.
12. If a Plan or Plan Participant should become an owner of 10% or
more of the assets of a Fund, such Plan will execute a Fund
participation agreement with the applicable Fund, including the
conditions set forth herein to the extent applicable. A Plan or Plan
Participant will execute an application containing an acknowledgment of
this condition upon such Plan's initial purchase of the shares of any
Fund.
Conclusion
For the reasons stated above, Applicants assert that the requested
exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act
and Rules 6e-2 and 6e-3(T) thereunder 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. 96-3044 Filed 2-9-96; 8:45 am]
BILLING CODE 8010-01-M