[Federal Register Volume 61, Number 172 (Wednesday, September 4, 1996)]
[Notices]
[Pages 46669-46674]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22454]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22180; File No. 812-10052]
Schwab Annuity Portfolios, et al.
August 27, 1996.
AGENCY: Securities and Exchange Commission (the ``SEC'' or
``Commission'').
ACTION: Notice of Application for Exemptions under the Investment
Company Act of 1940 (the ``1940 Act'').
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APPLICANT: Schwab Annuity Portfolios (the ``Trust'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act 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: Applicant seeks an order to the extent
necessary to permit shares of the Trust and shares of any other
investment company (the ``Future Funds,'' collectively, with the Trust,
the ``Funds'') that is designed to fund variable insurance products,
and for which Charles Schwab Investment Management, Inc. (the
``Investment Manager'') or an affiliate may serve as investment
adviser, manager, principal underwriter or sponsor, to be sold to and
held by: (a) variable annuity and variable life insurance separate
accounts (the ``Separate Accounts'') of both affiliated and
unaffiliated life insurance companies (the ``Participating Insurance
Companies''); and (b) qualified pension and retirement plans outside of
the separate account context (the ``Plans'').
FILING DATE: The application was filed on March 21, 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 on this 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
Commission by 5:30 p.m. on September 23, 1996, and accompanied by proof
of service on the Applicant in the form of an affidavit or, for
lawyers, a certificate of service. Hearing requests should state the
nature of the interest, the reason for the request and the issues
contested. Persons may request notification of the date of a hearing by
writing to the Secretary of the SEC.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicant, Frances Cole, Esq., Charles Schwab Investment
Management, Inc., 101 Montgomery Street, San Francisco, CA 94104.
FOR FURTHER INFORMATION CONTACT: Mark Amorosi, Attorney, 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 SEC.
Applicant's Representations
1. The Trust, an open-end management investment company organized
as a Massachusetts business trust on January 21, 1994, currently
consists of one series: the Schwab Money Market Portfolio (the
``Series'').
2. The Investment Manager, registered investment adviser under the
Investment Advisers Act of 1940, serves as the investment adviser and
administrator to each Fund. The Investment Manager is a wholly-owned
subsidiary of the Charles Schwab Corporation, a parent of investment
services companies incorporated in California.
[[Page 46670]]
3. The Trust currently offers shares of the Series only to
Transamerica Separate Account VA-5, a separate account of Transamerica
Occidental Life Insurance Company and to Separate Account VA-5 NLNY, a
separate account of First Transamerica Life Insurance Company
(collectively referred to as ``Transamerica''), to fund the benefits of
Schwab Investment AdvantageTM, a variable annuity contract issued
by Transamerica. It is intended, however, that shares of the Funds will
be offered to separate accounts of other insurance companies, including
insurance companies that are not affiliated with Transamerica. The
Funds also may be used as investment vehicles for qualified pension and
retirement plans outside of the separate account context.
4. Upon the granting of the order requested in the application, the
Funds intend to offer to Separate Accounts of Participating Insurance
Companies shares of the Series and of future investment series to serve
as the investment vehicle for various types of variable insurance
products, including, but not limited to, variable annuity contracts,
single premium variable life insurance policies, and flexible premium
variable life insurance contracts (collectively, the ``Contracts'').
The Funds also may offer shares of the Series and of future investment
series directly to Plans outside of the separate account context.
5. Participating Insurance Companies will establish their own
Separate Accounts and design their own variable contracts. 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 and fulfilling any conditions that the Commission may impose
upon granting the order requested in the application.
6. Tax law permits the Funds to increase their asset base through
the sale of shares of the Funds to Plans. Plans may choose the Funds as
the sole investment option under the Plan or as one of several
investment options. Which investment choices are available to a Plan
participant will depend upon the Plan. Shares 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'').
Applicant's Legal Analysis
1. 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 (``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 is
available to the investment adviser, principal underwriter, and sponsor
or depositor of the Separate Account. The exemptions granted by Rule
6e-2(b)(15) are available only where the management investment company
underlying the UIT offers its shares ``exclusively to variable life
insurance separate accounts of the life insurer, or of any affiliated
life insurance company.'' The use of a common management investment
company as the underlying 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 variable life
insurance separate accounts of unaffiliated insurance companies is
referred to as ``shared funding.'' The relief granted by Rule 6e-
2(b)(15) is not available with respect to a scheduled premium variable
life insurance separate account that owns shares of an underlying fund
that offers its shares to a variable annuity separate account of the
same company or of any other affiliated or unaffiliated life insurance
company. Therefore, Rule 6e-2(b)(15) precludes mixed funding as well as
shared funding.
2. Applicant states that because the relief under Rule 6e-2(b)(15)
is available only where shares are offered exclusively to separate
accounts of insurance companies, additional exemptive relief is
necessary if shares of the Funds are also to be sold to Plans.
3. In connection with flexible premium variable life insurance
contracts issued through a separate account registered under the 1940
Act as a UIT, 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 relief
provided by Rule 6e-3(T) also is available to the investment adviser,
principal underwriter, and sponsor or depositor of the Separate
Account. The exemptions granted to a separate account by Rule 6e-
3(T)(b)(15) are available only where the UIT's underlying fund offers
its shares ``exclusively to separate accounts of the life insurer, or
of any affiliated life insurance company, offering either scheduled or
flexible contracts, or both; or which also offer their shares to
variable annuity separate accounts of the life insurer or of an
affiliated life insurance company.'' Thus, Rule 6e-3(T) permits mixed
funding, but does not permit shared funding.
4. Applicant states that because the relief under Rule 6e-3(T) is
available only where shares are offered exclusively to separate
accounts, additional exemptive relief is necessary if shares of the
Funds also are to be sold to Plans.
5. Applicant states that changes in the tax law have created the
opportunity for the Funds to increase their asset base through the sale
of Fund shares to Plans. Section 817(h) of the Internal Revenue Code of
1986, as amended (the ``Code''), imposes certain diversification
standards on the underlying assets of the Contracts held in the Funds.
The Code provides that such Contracts shall not be treated as an
annuity contract or life insurance contracts for any period in which
the underlying assets are not, in accordance with regulations
prescribed by the Treasury Department, adequately diversified. On March
2, 1989, the Treasury Department issued regulations which established
diversification requirements for the investment portfolios underlying
variable contracts. Treas. Reg. Sec. 1.817-5(1989). The regulations
provide that, to meet the diversification requirements, all of the
beneficial interests in the investment company must be held by the
segregated assets accounts of one or more insurance companies. The
regulations do, however, contain certain exceptions to this
requirement, one of which allows shares in an investment company to 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 their variable contracts. Treas. Reg. Sec. 1.817-
5(f)(3)(iii).
6. Applicant states that the promulgation of Rules 6e-2 and 6e-3(T)
under the 1940 Act preceded the issuance of these Treasury Regulations.
Applicant asserts that, given the then current tax law, 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).
7. Applicant therefore requests relief from Sections 9(a), 13(a),
15(a) and 15(b) of the 1940 Act, and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) thereunder, to the extent necessary to permit shares of the
Funds to be offered and sold in connection with both mixed and shared
funding.
8. Section 9(a) of the 1940 Act provides that it is unlawful for
any company to serve as investment adviser
[[Page 46671]]
to or principal underwriter for 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) 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 Rules 6e-2(b)(15)(i) and 6e-
3(T)(b)(15)(i) 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 Rules 6e-2(b)(15)(ii) and 6e-3(T)(b)(15)(ii) 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) participate in the
management or administration of the fund.
9. Applicant states that the partial relief from Section 9(a)
provided by Rules 6e-2(b)(15) and 6e-3(T)(b)(15), 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 the
Section. Applicant states 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 within that organization. Applicant
notes that the Participating Insurance Companies are not expected to
play any role in the management or administration of the Funds.
Therefore, Applicant asserts, 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 because the Plans are not investment companies and
are not, therefore, subject to Section 9(a).
10. 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. The application states that the Participating Insurance
Companies will provide pass-through voting privileges to all Contract
owners so long as the Commission interprets the 1940 Act to require
such privileges.
11. 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 observance of the
limitations on mixed and shared funding imposed by the 1940 Act and the
rules thereunder. More specifically, Rules 6e-2(b)(15)(iii)(A) and 6e-
3(T)(b)(15)(iii)(A) provide that an insurance company may disregard
voting instructions of its contract owners with respect to the
investments of an underlying fund, or any contract between an
underlying fund and its investment adviser, when required to do so by
an insurance regulatory authority. In addition, Rules 6e-
2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(B) provide that an insurance
company may disregard voting instructions of its contract owners if the
contract owners initiate any change in the company's investment
policies, principal underwriter, or any investment adviser, provided
that disregarding such voting instructions is reasonable and subject to
the other provisions of paragraphs (b)(15)(ii) and (b)(7)(ii)(B) and
(C) of each rule.
12. Applicant states that Rule 6e-2 recognizes that variable life
insurance contracts have important elements unique to insurance
contracts, and are subject to extensive state regulation. Applicant
maintains, therefore, that in adopting Rule 6e-2, the Commission
expressly recognized that exemptions from pass-through voting
requirements are necessary ``to assure the solvency of the life insurer
and performance of its contractual obligations by enabling an insurance
regulatory authority or the life insurer to act when certain proposals
reasonably could be expected to increase the risks undertaken by the
life insurer.'' Applicant notes that, in this respect, flexible premium
variable life insurance contracts are identical to scheduled premium
variable life insurance contracts, and submits that the corresponding
provisions of Rule 6e-3(T) (which apply to flexible premium insurance
contracts and which permit mixed funding) undoubtedly were adopted in
recognition of the same considerations as the Commission applied in
adopting Rule 6e-2. Applicant further submits that these considerations
are no less important or necessary when an insurance company funds its
separate accounts in connection with mixed and shared funding, and that
such mixed and shared funding does not compromise the goals of the
insurance regulatory authorities or of the Commission.
13. Applicant further represents that the Funds' sale of shares to
the Plans does not affect the relief requested in this regard. As noted
previously, 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) 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) is (are) subject
to the direction of a 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. 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. Accordingly,
Applicant notes that, unlike the case with Separate Accounts of
Participating Insurance Companies, the issue of the resolution of
material irreconcilable conflicts with respect to voting is not present
with Plans.
14. Applicant states that no increased conflicts of interest would
be presented if the requested relief were granted. Applicant asserts
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. Applicant notes 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. Applicant submits that this
possibility is no different from and no greater than what exists where
a single insurer and its affiliates offer their insurance products in
several states.
15. Applicant further submits that affiliation does not reduce the
potential, if any exists, for differences in state regulatory
requirements. In any event, the conditions (adapted from the conditions
included in Rule 6e-3(T)(b)(15)) discussed below are
[[Page 46672]]
designed to safeguard against any adverse effects these differences may
produce. If a particular state insurance regulator's decision conflicts
with that of a majority of other state regulators, the affected insurer
may be required to withdraw its Separate Account's investment in the
relevant Fund.
16. Applicant also argues that affiliation does not eliminate the
potential, if any exists, for divergent judgments as to the
advisability or legality of a change in investment policies, principal
underwriter, or investment adviser initiated by Contract owners.
Potential disagreement is limited by the requirement that the
Participating Insurance Company's disregard of voting instructions be
both reasonable and based on specified good faith determinations.
However, if a Participating Insurance Company's decision to disregard
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.
17. Applicant states 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. Applicant therefore argues that
there is no reason to believe that conflicts of interest would result
from mixed funding. Moreover, Applicant represents that the Funds will
not be managed to favor or disfavor any particular insurance company or
type of Contract.
18. Applicant notes that no one investment strategy can be
identified as appropriate to a particular insurance product. Each pool
of variable annuity and variable life insurance contract owners is
composed of individuals of diverse financial status, age, insurance,
and investment goals. An investment company supporting even one type of
insurance product must accommodate these diverse factors in order to
attract and retain purchasers.
19. Applicant also notes that Section 817(h) of the Code 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 or retirement
plans'' and Separate Accounts to share the same underlying management
investment company. Therefore, Applicant has concluded that neither the
Code, 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.
20. Applicant states 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 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 then
will 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 distributions in accordance
with the terms of the variable contract.
21. Applicant also states that it is possible to provide an
equitable means of giving voting rights to Contract owners and to
Plans. Applicant represents that the Funds will inform each
shareholder, including each Separate Account and Plan, of its
respective share of ownership in the respective Funds. Each
Participating Insurance Company will then solicit voting instructions
in accordance with Rules 6e-2 and 6e-3(T).
22. Applicant submits 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 Contract owner as compared to a participant
under a Plan. Regardless of the rights and benefits of participants and
Contract owners under the respective Plans and Contracts, the Plans and
the Separate Accounts have rights only with respect to their shares of
the Funds. Such shares may be redeemed only at net asset value. No
shareholder of any of the Funds has any preference over any other
shareholder with respect to distribution of assets or payment of
dividends.
23. Applicant states that there are no conflicts between Contract
owners and participants under the Plans with respect to the state
insurance commissioners' veto powers over investment objectives. The
basic premise of 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 usually are unable to simply redeem their Separate
Accounts out of one fund and invest those monies in another fund.
Complex and time consuming transactions must be undertaken to
accomplish such redemptions and transfers. By contrast, trustees of
Plans or the participants in participant-directed Plans can make the
decision quickly and implement redemption of shares from a Fund and
reinvest the monies in another funding vehicle without the same
regulatory impediments or, as is the case with most Plans, even hold
cash pending suitable investment. Based on the foregoing, Applicant
represents that even should there arise issues where the interest of
Contract owners and the interests of Plans conflict, the issues can be
resolved almost immediately in that trustees of the Plans can,
independently, redeem shares out of the Funds.
24. Applicant states that various factors have kept certain
insurance companies from offering variable annuity and variable life
insurance contracts. According to Applicant, these factors include: the
cost of organizing and operating an investment funding medium; the lack
of expertise with respect to investment management (particularly with
respect to stock and money market investments); and the lack of name
recognition by the public of certain insurers as investment
professionals. Applicant argues that use of the Funds as common
investment media for the Contracts would ease these concerns.
Participating Insurance Companies would benefit not only from the
investment and administrative expertise of the Funds' investment
adviser, but also from the cost efficiencies and investment flexibility
afforded by a large pool of funds. Applicant states that making the
Funds available as common investment media for variable insurance
contracts would benefit contract owners by: (a) Eliminating a
significant portion of the costs of establishing and administering
separate funds; (b) increasing the amount of assets available for
investment by the Funds, thereby promoting economies of scale,
permitting increased safety of investments through greater
diversification, and making the addition of new portfolios more
feasible; and (c) encouraging more insurance companies to offer
variable contracts, resulting in
[[Page 46673]]
increased competition with respect to both the design and the pricing
of variable contracts, which can be expected to result in greater
product variation and lower charges. Applicant believes that there is
no significant legal impediment to permitting mixed and shared funding.
Applicant's Conditions
Applicant has consented to the following conditions if the order
requested in the application is granted:
1. A majority of the Board of Trustees or Directors of each Fund
(each, a ``Board'') shall consist of persons who are not ``interested
persons'' of the Funds, 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, of bona fide resignation of any trustee or
director, 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. Each Board will monitor its respective Fund for the existence of
any material irreconcilable conflict among the interests of the
Contract owners of all of the Separate Accounts investing in the
respective Funds. 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 interpretative 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 any series of the Funds are
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 Contract owners.
3. The Participating Insurance Companies, the Investment Manager
(or any affiliated adviser), and any Plan that executes a fund
participation agreement upon becoming an owner of 10% or more of the
assets of a Fund (the ``Participants'') will report any potential or
existing conflicts to the respective responsible Board. Participants
will be responsible for assisting the appropriate 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 Participating Insurance Company to inform the Board
whenever Contract owner voting instructions are disregarded. The
responsibility to report such information and conflicts to and to
assist the Board will be a contractual obligation of all Participating
Insurance Companies and Plans 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 Contract owners, and, if applicable, Plan
participants.
4. If it is determined by a majority of the Board, or by a majority
of its disinterested trustees or directors, that an irreconcilable
material conflicts exists, the relevant Participating Insurance Company
and Plan shall, at its expense and to the extent reasonably practicable
(as determined by a majority of the disinterested trustees or
directors), take any steps necessary to remedy or eliminate the
irreconcilable material conflict, including: (a) Withdrawing the assets
allocable to some or all of the Separate Accounts from the affected
Funds and reinvesting such assets in a different investment medium
including another series of the relevant 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., variable annuity contract owners
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 charge; (b) withdrawing the assets allocable to some or all of
the Plans from the affected Fund or any series of the Fund and
reinvesting such assets in a different investment medium, including
another series of the Fund; 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 Contract owner voting
instructions, and that decision represents a minority position or would
preclude a majority vote, the insurer 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.
5. 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 and Plans under the agreements
governing their participation in the Funds. The responsibility to take
such remedial action shall be carried out with a view only to the
intents of Contract owners and Participants in the Plan.
6. For purposes of Condition Four, a majority of the disinterested
members of the applicable Board shall determine whether any proposed
action adequately remedies any material irreconcilable conflict, but in
no event will the relevant Fund or the Investment Manager (or any
affiliated adviser) be required to establish a new funding medium for
any Contract. Further, no Participating Insurance Company shall be
required by Condition Four to establish a new funding medium for any
Contract if any offer to do so has been declined by a vote of a
majority of the Contract owners materially affected by the material
irreconcilable conflict.
7. A Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known promptly and
in writing to all Participants.
8. Participating Insurance Companies will provide pass-through
voting privileges to all Contract owners so long as the Commission
continues to interpret the 1940 Act as requiring pass-through voting
privileges for Contract owners. Accordingly, the Participating
Insurance Companies will vote shares of the Funds held in their
Separate Accounts in a manner consistent with voting instructions
timely received from Contract owners. Each Participating Insurance
Company will vote shares of a Fund held in the Participating Insurance
Company's Separate Account(s) for which no voting instructions from the
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 will be responsible for assuring that each of their Separate
Accounts that participates in the Funds calculates voting privileges in
a manner consistent with other Participating Insurance Companies. The
obligation to calculate
[[Page 46674]]
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 their participation
in the Funds.
9. 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 Participants of a conflict, and
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.
10. Each 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 and certain qualified pension and retirement plans; (b)
material irreconcilable conflicts may arise; and (c) the Fund's 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. Each Fund will notify all
Participating Insurance Companies that Separate Account prospectus
disclosure regarding potential risks of mixed and shared funding may be
appropriate.
11. Each Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders, and, 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 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), 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.
12. If, and to the extent that, Rules 6e-2 and 6e-3(T) are amended
(or if Rule 6e-3 under the 1940 Act 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 by
Applicant, then the Funds and/or the 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.
13. No less than annually, the Participants shall submit to each
Fund's Board such reports, materials, or data as the Board reasonably
may request so that the directors or trustees, as appropriate, of the
Fund may carry out fully the obligations imposed upon them 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 Participating Insurance Companies and
Plans to provide these reports, materials, and data to a Fund's Board,
when the appropriate Board so reasonably requests, shall be a
contractual obligation of all Participating Insurance Companies and
Plans under the agreements governing their participation in the Funds.
14. If a Plan becomes 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 will execute an application with each of the Funds
containing an acknowledgment of this condition upon such Plan's initial
purchase of the shares of any Fund.
Conclusion
For the reasons stated above, Applicant asserts 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. 96-22454 Filed 9-3-96; 8:45 am]
BILLING CODE 8010-01-M