[Federal Register Volume 64, Number 168 (Tuesday, August 31, 1999)]
[Notices]
[Pages 47550-47557]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22621]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23967; File No. 812-11552]
Target/United Funds, Inc., et al.
August 24, 1999.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for an order pursuant to Section 6(c) of
the Investment Company Act of 1940 (``1940 Act'') granting exemptive
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.
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Summary of Application
Applicants seek an order to permit shares of Target/United Funds,
Inc. (``Fund'') and any other similar investment company or investment
company series that Waddell & Reed Investment Management Company
(``WRIMCO'') or any of its affiliates serve, now or in the future, as
investment adviser, administrator, manager, principal underwriter or
sponsor (the Fund and such other investment companies and series
thereof, the ``Insurance Products Funds''), to be offered and sold to
and held by: (1) Separate accounts funding variable annunity and
variable life insurance contracts issued by both affiliated and
unaffiliated life insurance companies; and (2) qualified pension and
retirement plans outside of the separate account context.
Applicants
Target/United Funds, Inc. and Waddell & Reed Investment Management
Company.
Filing Date
The application was filed on March 30, 1999, and amended and
restated on July 16, 1999.
Hearing or Notification of Hearing
An order granting the application will be issued unless the SEC
orders a hearing. Interested persons may request a hearing by writing
to the SEC's Secretary and serving applicants with a copy of the
request, personally or by mail. Hearing requests should be received by
the Commission by 5:30 p.m. on September 17, 1999, 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 writer's interest, the reason for the
request, and the issues contested. Persons who wish to be notified of a
[[Page 47551]]
hearing may request notification by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW, Washington, DC 20549-
0609. Applicants, c/o Helge K. Lee, Esq., Senior Vice President,
Secretary and General Counsel, Waddell & Reed, Inc., 6300 Lamar Avenue,
Overland Park, Kansas 66202.
FOR FURTHER INFORMATION CONTACT: Keith E. Carpenter, Senior Counsel, or
Kevin M. Kirchoff, Branch Chief, Office of Insurance Products, Division
of Investment Management, at (202) 942-0670.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch, 450 Fifth Street, NW, Washington, DC
20549 ((202) 942-8090).
Applicant's Representations
1. The Fund is an open-end management investment company organized
as a corporation under the laws of the State of Maryland. The Fund
currently consists of eleven separately managed series, each of which
has its own investment objective and policies. Additional series could
be added to the Fund in the future.
2. WRIMCO is registered as an investment adviser under the
Investment Advisers Act of 1940, and serves as the investment manager
and accounting services agent for each of the Fund's series.
3. The Fund currently offers its shares exclusively to insurance
company separate accounts that fund variable insurance products. The
Fund's shares are offered only to the separate accounts of United
Investors Life Insurance Company (``United Investors''). United
Investors receives no payments from the Fund for services in connection
with the distribution of the shares. Applicants propose that shares of
each Insurance Products Fund be offered to United Investors and/or one
or more other insurance companies, whether affiliated or unaffiliated,
for their separate accounts as an investment vehicle to fund various
insurance products including, among others, variable annuity contracts,
variable group life insurance contracts, scheduled premium variable
life insurance contracts, single premium and modified single premium
variable life insurance contracts, and flexible premium variable life
insurance contracts (``Variable Contracts''). Some of these separate
accounts may not be registered as investment companies under the 1940
Act pursuant to the exceptions from registration in Sections 3(c)(1),
3(c)(7) or 3(c)(11) of the 1940 Act. In addition, Applicants propose
that shares of each Insurance Products Fund be eligible to be offered
directly to qualified pension and retirement plans (``Qualified Plans''
or ``Plans'') outside of the separate account context. Separate
accounts owning shares of the Insurance Products Funds and their
insurance company depositors are referred to herein as ``Participating
Separate Accounts'' and ``Participating Insurance Companies,''
respectively.
4. Participating Insurance Companies establish their own
Participating Separate Accounts and design their own Variable
Contracts. Each such Variable Contract has or will have certain unique
features and probably will differ from other Variable Contracts
supported by the Insurance Products Funds with respect to insurance
guarantees, premium structure, charges, options, distribution method,
marketing techniques, sales literature, and other aspects. Each
Participating Insurance Company, on behalf of its Participating
Separate Account(s), will enter into a fund participation agreement
with each Insurance Products Fund in which such Participating Separate
Account invests, and will have the legal obligation of satisfying all
applicable requirements under state and federal law. The role of the
Insurance Products Funds, so far as the federal securities laws are
applicable, will be limited to that of offering their shares to
separate accounts of various insurance companies and fulfilling any
conditions the Commission may impose upon granting the order requested
herein.
5. The Plans will be pension or retirement plans intended to
qualify under sections 401(a) and 501(c) of the Internet Revenue Code
of 1986, as amended (``Code''). A plan may include a cash or deferred
arrangement (permitting salary reduction contributions) intended to
qualify under Section 401(k) of the Code. The Plans will also be
subject to, and will be designed to comply with, the provisions of the
Employee Retirement Income Security Act of 1974, as amended
(``ERISA''), applicable to pension benefit plans, specifically ``Title
I--Protection of Employee Benefit Rights.'' The Plans, therefore, will
be subject requirements under the Code and ERISA regarding, for
example, reporting and disclosure, participation and vesting, funding,
fiduciary responsibility, and enforcement.
6. The Qualified Plans may choose any of the Insurance Products
Funds as their sole investments or as one of several investments. Plan
participants may or may not be given an investment choice depending on
the Plan itself. Shares of any of the Insurance Products Funds sold to
Qualified Plans would be held by the trustees of those Plans as
mandated by Section 403(a) of ERISA. WRIMCO (or any other investment
adviser to an Insurance Products Fund) may, to the extent permitted by
law, act as investment adviser to any of the Qualified Plans that
purchase shares of any of the Insurance Products Funds. Applicants
state that there likely will be no pass-through voting to the
participants in such Qualified Plans as it is not required to be
provided to such participants pursuant to ERISA.
Applicants' 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 exemptions granted by Rule 6e-2(b)(15)
are available only where all of the assets of the separate account
consist of the shares of one or more registered management investment
companies which offer their shares ``exclusively to variable life
insurance separate accounts of the life insurer, or of any affiliated
life insurance company'' (emphasis added). Therefore, 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 investment company that also offers its shares to a
variable annuity separate account or a flexible premium variable life
insurance account of the same company or of any affiliated or
unaffiliated insurance company. The use of a common management
investment company as the underlying investment medium for both
variable annuity and variable life insurance separate accounts is
referred to as ``mixed funding.''
2. The relief granted by Rule 6e-2(b)(15) also is not available if
the scheduled premium variable life insurance separate account owns
shares of an underlying investment company that also offers its shares
to separate accounts funding Variable Contracts of one or more
unaffiliated life insurance companies. The use of a common investment
company as the underlying investment medium for separate accounts of
unaffiliated insurance companies is referred to herein as ``shared
funding.''
3. Applicants assert that the relief granted by rule 6e-2(b)(15)
does not
[[Page 47552]]
relate to Qualified Plans, or to a registered investment company's
ability to sell its shares to these entities. However, because the
relief under rule 6e-2(b)(15) is available only where shares are
offered exclusively to separate accounts, additional exemptive relief
is necessary if the shares of the Insurance Products Funds are also to
be sold to Plans. The use of a common investment company as the
underlying investment medium for variable annuity and variable life
insurance separate accounts of affiliated and unaffiliated insurance
companies and Qualified Plans is referred to as ``extended mixed and
shared funding.''
4. 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 exemptions
granted by rule 6e3(T) are available only where all of the assets of
the separate account consist of the 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 company.'' (emphasis added). Therefore, Rule 6e-3(T)(b)(15)
permits mixed funding for flexible premium variable life insurance
separate accounts but does not permit shared funding, because the
relief granted by Rule 6e-3(T)(b)(15) is not available with respect to
a flexible premium variable life insurance separate account that owns
shares of an investment company that also offers its shares to separate
accounts (including flexible premium variable life insurance separate
accounts) of unaffiliated life insurance companies.
5. Applicants assert that if shares of the Insurance Products Funds
were sold only to Qualified Plans, exemptive relief under rule 6e-3(T)
would not be necessary. Applicants, however, state that because the
relief under rule 6e-3(T) is available only if shares are offered
exclusively to separate accounts, additional exemptive relief is
necessary if the shares of the Insurance Products Funds are also to be
sold to Plans.
6. Applicants state that Section 817(h) of the Code imposes certain
diversification standards on the assets underlying the Variable
Contracts held by the portfolios of the Insurance Production Funds. The
Code provides that Variable Contracts will not be treated as annuity
contracts or life insurance contracts for any period (and any
subsequent period) for which the investments are not adequately
diversified in accordance with regulations issued by the Treasury
Department. Applicants also state that on March 2, 1989, the Treasury
Department issued Regulations (Treas. Reg Sec. 1.817-5) which
established diversification requirements for the investment portfolios
underlying Variable Contracts. The Regulations generally provide that,
in order to meet the diversification requirements, all of the
beneficial interests in the underlying investment company must be held
by the segregated asset accounts of one or more insurance companies.
However, the Regulations also contain certain exceptions to this
requirement, one of which allows trustees of Qualified Plans to hold
shares of an investment company without adversely affecting the status
of the investment company as an adequately diversified underlying
investment for Variable Contracts issued through separate accounts of
insurance companies (Treas. Reg. Sec. 1.817-5(f)(3)(iii)). As a result
of this exception to the general diversification requirements,
Applicants assert that Qualified Plans may select the Insurance
Products Funds as investment options without endangering the tax status
of Variable Contracts issued through Participating Insurance Companies.
7. Applicants state that the promulgation of rules 6e-2(b)(15) and
6e-3(T)(b)(15) preceded the issuance of the treasury Regulations which
made it possible for shares of an investment company to be held by the
trustees of Qualified Plans without adversely affecting the ability of
separate accounts of insurance companies to hold shares of the same
investment company in connection with their variable annuity and
variable life contracts. Thus, Applicants assert that the sale of
shares of the same investment company to separate accounts and
Qualified Plans could not have been envisioned at the time of the
adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15).
8. Accordingly, Applicants request that the Commission issue an
order pursuant to Section 6(c) of the 1940 Act exempting scheduled and
flexible premium variable life insurance separate accounts (and, to the
extent necessary, any investment adviser, sub-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 subparagraph (b)(15) of
rules 6e2 and 6e3(T) (and any comparable permanent rule) thereunder, to
the extent necessary to permit shares of the Insurance Products Funds
to be offered and sold in connection with extended mixed and shared
funding.
9. In general, Section 9(a) of the 1940 Act disqualifies any person
convicted of certain offenses, and any company affiliated with that
person from acting or serving in various capacities with respect to a
registered investment company. More specifically, Section 9(a)(3)
provides that it is unlawful for any company to serve as a 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 enumerated in Sections 9(a)(1) or (2).
10. Rules 6e2(b)(15)(i) and (ii) and 6e-3(T)(b)(15)(i) and (ii)
however, provide partial exemptions from Section 9(a) under certain
circumstances, subject to the limitations discussed above on mixed and
shared funding. These exemptions limit the application of the
eligibility restrictions to affiliated individuals or companies that
directly participate in the management or administration of the
underlying investment company or series thereof. The relief provided by
the rules permits a person disqualified under Section 9(a)(1) or (2) to
be an officer, director, or employee of an insurance company, or any of
its affiliates that serves in any capacity with respect to any
underlying investment company, so long as the disqualified individual
does not participate directly in the management or administration of
the underlying investment company.
11. Applicants state that the partial relief granted in Rules 6e-2
and 6e-3(T) from the requirements of Section 9 of the 1940 Act limits,
in effect, the amount of monitoring necessary to ensure compliance with
Section 9 to that which is appropriate in light of the policy and
purposes of that section. Applicants state the exemptions contained in
Rules 6e-29(b)(15) and 6e-3(T) recognize that it is not necessary for
the protection of investors or the purposes fairly intended under the
1940 Act to apply Section 9(a) to the many individuals who may be
involved in a large insurance company but would have no connection with
the investment company, or any series thereof, funding the separate
accounts. Applicants believe that is unnecessary to limit the
applicability of the rules merely because shares of the Insurance
Products funds may be sold in connection with mixed and shared funding.
Applicants state that neither the Participating Insurance Companies nor
the Qualified Plans are expected to play any role in the management or
administration of the
[[Page 47553]]
Insurance Products Funds. Applicants assert that, therefore, applying
the restrictions of Section 9(a) serves no regulatory purpose.
Furthermore, Applicants assert that applying such restrictions would
increase the monitoring costs incurred by the Participating Insurance
Companies and, therefore, would reduce the net rates of return realized
by Variable Contract owners. Applicants further assert that the relief
requested will in no way be affected by the proposed sale of shares of
the Insurance Products Funds to Qualified Plans, and that the
insulation of the Insurance Products Funds from those individuals who
are disqualified under the 1940 Act will remain intact even if shares
of the Insurance Products Funds are sold to Qualified Plans. Applicants
state that since the Qualified Plans are not investment companies and
will not be deemed to be affiliated solely by virtue of their
shareholdings, no additional relief is necessary.
12. Subgaragraph (b(15)(iii) of Rules 6e-2 and 6e-3(T) under the
1940 Act assumes that contract owners are entitled to pass-through
voting privileges with respect to investment company shares held by a
related separate account. However, subparagraph (b)(15)(iii) of Rules
6e-2 and 6e3(T) provides exemptions from the pass-through voting
requirement in limited situations, if the limitations on mixed and
shared funding are satisfied.
13. Subparagraph (b)(15)(iii) of Rules 6e-2 and 6e-3(T) provides
that an insurance company may disregard the voting instructions of its
contract owners with respect to the investments of an underlying
investment company or any contract between and investment company and
its adviser, when an insurance regulatory authority so requires. In
addition, Rules 6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2)
provide that the insurance company may disregard contract owners voting
instructions with regard to certain changes initiated by the contract
owners in the investment company's policies, principal underwriter, or
investment adviser. Voting instructions with respect to a change in
investment policies may be disregarded only if the insurance company
makes a good-faith determination that such change would: (a) Violate
state law; or (b) result in investments that either would not be
consistent with the investment objectives of the separate account; or
(c) result in investments that would vary from the general quality and
nature of investments and investment and techniques used by other
separate accounts of the company or of an affiliated life insurance
company with similar investment objectives. Voting instructions with
respect to a change in the principal underwriter may be disregarded if
such disapproval is reasonable. Voting instructions with respect to a
change in an investment adviser may be disregarded only if the
insurance company makes a good-faith determination that: (a) The
adviser's fees would exceed the maximum rate that may be charged
against the separate account's assets; (b) the proposed adviser may be
expected to employ investment techniques that vary from the general
techniques used by the current adviser; or (c) the proposed adviser may
be expected to manage the investment company's investments in a manner
that would be inconsistent with its investment objectives or in a
manner that would result in investments that vary from certain
standards.
14. Applicants state that Rule 6e-2 recognizes that variable life
insurance contracts have important elements unique to insurance
contracts and are subjects to extensive state regulation. Applicants
maintain that in adopting Rule 6e-2, the Commission recognized that
state insurance regulators have authority, pursuant to state insurance
laws or regulations, to disapprove or require changes in investment
policies, investment advisers or principal underwriters. Applicants
also state that the Commission expressly recognized that state
insurance regulators have authority to require an insurance company to
draw from its general account to cover costs imposed upon the insurance
company by a change approved by contract owners over the insurance
company's objections. Therefore, the Commission deemed exemptions from
pass-through voting requirements necessary ``to assure the solvency of
the life insurer and the performance of its contractual obligations by
enabling an insurance regulatory authority of the insurer to act when
certain proposals reasonably could be expected to increase the risks
undertaken by the life insurer.'' Applicants assert that in this
respect, flexible premium variable life insurance contracts and
variable annuity contracts are subject to substantially the same state
insurance regulatory authority and, therefore, the corresponding
provisions of Rule 6e-3(T) for flexible premium insurance contracts
presumably were adopted in recognition of the same factors.
15. Applicants assert that these considerations are no less
important or necessary in connection with mixed and shared funding.
Applicants state that mixed and shared funding does not compromise the
goals of state insurance regulatory authorities or of the Commission.
Indeed, Applicants assert that by permitting these arrangements, the
Commission eliminates needless duplication of start-up and
administrative expenses and potentially increases an investment
company's assets, thereby making effective portfolio management
strategies easier to implement and promoting other economies of scale.
Applicants further state that the sale of Fund shares to Qualified
Plans will not have any impact on the relief requested in this regard.
Shares of the Insurance Products Funds sold to Qualified Plans will be
held by the trustees of those Plans as required by Section 403(a) of
ERISA. Section 403(a) also provides that the trustees must have
exclusive authority and discretion to manage and control the plan
investments with two exceptions: (a) When the plan expressly provides
that the trustees are subject to the direction of a named fiduciary who
is not a trustee, in which case the trustees 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. If a abed
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 the named fiduciary.
Accordingly, Applicant 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
respect to Qualified Plans since such plans are not entitled to pass-
though voting privileges.
16. Applicants submit that even if a Qualified Plan were to hold a
controlling interest in an Insurance Products Fund, Applicants do not
believe that such control would disadvantage other investors in that
Insurance Products Fund to any greater extent than is the case when any
institutional shareholder holds a controlling interest in the voting
securities of any open-end management investment company. In this
regard, Applicants submit that investment in an Insurance Products Fund
by a Qualified Plan will not create any of the voting complications
occasioned by mixed or
[[Page 47554]]
shared funding. Unlike mixed or shared funding, Plan investor voting
rights cannot be frustrated by veto rights of insurers or state
regulators.
17. Applicants generally expect many Qualified Plans to have their
trustees or other fiduciaries exercise voting rights attributable to
investment securities held by the Qualified Plan in their discretion.
Some of the Qualified Plans, however, may provide for the trustees,
investment advisers or another named fiduciary to exercise voting
rights in accordance with instructions from participants. Where a
Qualified Plan does not provide participants with the right to given
voting instructions, the Applicants submit that there is no potential
or material irreconcilable conflicts of interest between or among
contract owners and Plan investors with respect to voting of an
Insurance Products Fund's shares. Where a Plan provides participants
with the right to give voting instructions, Applicants likewise submit
that there is no reason to believe that participants in Qualified Plans
generally or those in a particular Plan, either as a single group or in
combination with participants in other Qualified Plans, would vote in a
manner that would disadvantage contract owners. In this regard,
Applicants submit that the purchase of shares of an Insurance Product
Fund by Qualified Plans that provide voting rights does not present any
complications nor otherwise occasioned by mixed or shared funding.
18. Applicants assert that no increased conflicts of interest would
be presented 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 states. Applicants note that it is possible that the state
insurance regulatory body in a state in which one Participant Insurance
Company is domiciled could require action that is inconsistent with the
requirements of insurance regulators in one or more states in which
other Participating Insurance Companies are domiciled. Applicants
submit that this possibility is no different and no greater than that
which exists when a single insurer and its affiliates offer their
insurance products in several states, as currently is permitted.
19. Applicants further submit 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 designed to
safeguard against any adverse effects that differences among state
regulatory requirements may produce. For example, if a particular state
insurance regulator's decision conflicts with the majority of other
state regulators, the affected insurer may be required to withdraw its
Participating Separate Account's investment in the relevant Insurance
Products Funds.
20. Applicants also argue that affiliation does not eliminate the
potential, if any exists, for divergent judgments as to when a
Participating Insurance Company could disregard contract owner voting
instructions. The potential for disagreement is limited by the
requirement that disregarding voting instructions be reasonable and
based on specific good faith determinations. However, if Participating
Insurance Company's decision to disregard contract owner voting
instructions represent a minority position or would preclude a majority
vote approving a particular change, the Participating Insurance Company
may be required, at the election of the relevant Insurance Products
Fund, to withdraw its separate account's investment in that fund, and
no charge or penalty will be imposed as a result of such a withdrawal.
21. Applicants submit that there is no reason why the investment
policies of an Insurance Products Fund that engages in mixed funding
would or should materially differ from what those policies would or
should be if that fund, or a series thereof, supported only variable
annuity or only variable life insurance contracts. Hence, Applicants
assert there is no reason to believe that conflicts of interest would
result from mixed funding. Moreover, Applicants state that the
Insurance Products Funds will not be managed to favor or disfavor any
particular insurer or type of contract.
22. Applicants submit 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. Applicants
assert that the sale of shares to Qualified Plans should not increase
the potential for material irreconcilable conflicts of interest between
or among different types of investors. Applicants also assert that
regardless of the type of shareholder in each Insurance Product Fund,
WRIMCO is or would be contractually or otherwise obligated to manage
each Insurance Products Fund solely and exclusively in accordance with
that fund's investment objectives, policies and restrictions as well as
any guidelines established by the board of directors (or trustees) of
each Insurance Products Fund.
23. As noted above, Section 817(h) of the Code imposes certain
diversification standards on the assets underlying Variable Contracts
held in the portfolios of management investment companies. Treasury
Regulation Sec. 1.817-5, which establishes diversification requirements
for such portfolios, specifically permits, among other things,
qualified pension or retirement plans and separate accounts to share
the same underlying management investment company. Therefore,
Applicants assert that neither the Code, nor the Treasury regulations,
nor the revenue rulings thereunder, present any inherent conflicts of
interest if Qualified Plans, variable annuity separate accounts and
variable life separate accounts all invest in the same management
investment company.
24. Applicants note that while there may be differences in the
manner in which distributions from Variable Contracts and Qualified
Plans are taxed, the tax consequences do not raise any conflict of
interest. When distributions are to be made, and Participating Separate
Account or the Qualified Plan cannot net purchase payments to make the
distributions, the Separate Account or Qualified Plan will redeem
shares of the relevant Insurance Products Funds at their net asset
value. The Qualified Plan will then make distributions in accordance
with the terms of the Plan. The 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.
25. Applicants also state that it is possible to provide an
equitable means of giving voting rights to Participating Separate
Account Variable Contract owners and to Qualified Plans. Each Insurance
Products Fund or its agent will inform each Participating Insurance
Company of each Participating Separate Account's ownership in the Fund
shares, as well as inform the trustees of Qualified Plans of their
holdings. Each Participating Insurance Company will then solicit voting
instructions in accordance with Rules 6e-2 and 6e-3(T), as applicable,
and its participation agreement with the relevant Insurance Products
Fund. Shares held by Qualified Plans will be voted in accordance with
applicable law. The voting rights provided to Qualified Plans with
respect to shares of Insurance Products Funds would be no different
from the voting rights that are provided to Qualified Plans with
respect
[[Page 47555]]
to shares of funds sold to the general public.
26. Applicants submit that the ability of the Insurance Products
Funds to sell their respective shares directly to Qualified Plans does
not create a ``senior security,'' as this term is defined under Section
18(g) of the 1940 Act, with respect to any contract owner as opposed to
a participant in a Qualified Plan. Regardless of the rights and
benefits of participants in the Qualified Plans or contract owners, the
Qualified Plans and the Participating Separate Accounts have rights
only with respect to their respective shares of the Insurance Products
Funds. They can only redeem such shares at their net asset value. No
shareholder of any of the Insurance Products Funds has any preference
over any other shareholder with respect to distribution of assets or
payment of dividends.
27. Applicants state that there are no conflicts between the
contract owners of Participating Separate Accounts and Qualified Plan
participants with respect to the state insurance commissioners' veto
power over investment objectives. The state insurance commissioners
have been given the veto power in recognition of the fact that
insurance companies usually cannot simply redeem their separate
accounts out of one fund and invest in another. Generally, time-
consuming, complex transactions must be undertaken to accomplish these
redemptions and transfers. On the other hand, trustees of Qualified
Plans can make the decision quickly and redeem their shares of an
Insurance Products Fund and reinvest in another funding vehicle without
the same regulatory impediments faced by separate accounts, or, as is
the case with most plans, even hold cash pending suitable investment.
Based on the foregoing, Applicants represent that even if conflicts of
interest arise between contract owners and Qualified Plans
participants, the issues can be almost immediately resolved because the
trustees of the Qualified Plans can, on their own, redeem the shares of
the Insurance Products Funds.
28. Applicants assert that various factors have prevented more
insurance companies from offering variable annuity and variable life
insurance contracts than currently do so. Applicants state that these
factors include the costs of organizing and operating a funding medium,
the lack of expertise with respect to investment management
(principally with respect to stock and money market investments), and
the lack of public name recognition as investment professionals.
Applicants state that in particular, some smaller life insurance
companies may not find it economically feasible, or within their
investment or administrative expertise, to enter the Variable Contract
business on their own. Applicants assert that use of the Insurance
Products Funds as common investment medium for Variable Contracts would
alleviate these concerns. Participating Insurance Companies would
benefit not only from the investment advisory and administrative
expertise of WRIMCO, but also from the cost efficiencies and investment
flexibility afforded by a large pool of funds. Therefore, Applicants
assert, making the Insurance Products Funds available for mixed and
shared funding may encourage more insurance companies to offer Variable
Contracts. This should result in increased competition with respect to
both Variable Contract design and pricing, which can be expected to
result in more product variation and lower charges.
29. Applicants also submit that mixed and shared funding also
should benefit Variable Contract owners by eliminating a significant
portion of the costs of establishing and administering separate funds.
Furthermore, the sale of shares of the Insurance Products Funds to
Qualified Plans should further increase the amount of assets available
for investment by those funds. This should benefit Variable Contract
owners by promoting economies of scale, by permitting greater safety
through greater diversification, and by making the addition of new
portfolios to an Insurance Products Fund more feasible.
Applicants' Conditions
Applicants have consented to the following conditions:
1. A majority of the board of directors (``Board'') of each
Insurance Products Fund will consist of persons who are not
``interested persons'' thereof, 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 for: (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 Insurance Products Fund
for the existence of any material irreconcilable conflict between the
interests of the contract owners of all Participating Separate Accounts
and the interests of the participants in Qualified Plans investing in
the Insurance Products Fund 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 Insurance
Products Fund are being managed; (e) a difference in voting
instructions given by variable annuity contract owners, variable life
insurance contract owners and trustees of the Qualified Plans; (f) a
decision by a Participating Insurance Company to disregard the voting
instructions of contract owners; or (g) if applicable, a decision by a
Plan to disregard voting instructions of its participants.
3. Participating Insurance Companies, WRIMCO (or any other
investment adviser of an Insurance Products Fund), and Qualified Plans
that execute a fund participation agreement upon becoming an owner of
10% or more of an Insurance Products Fund's assets (``Participants'')
will report any potential or existing conflicts to the Board of any
relevant Insurance Products Fund. 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 of each
Participating Insurance Company to inform the Board whenever it has
determined to disregard voting instructions from contract owners, and,
when pass-through voting is applicable, an obligation of each Plan to
inform the Board whenever it has determined to disregard voting
instructions from Plan participants. The responsibilities to report
such information and conflicts and to assist the Boards will be
contractual obligations of all Participants under their agreements
governing participation in the Insurance Products Funds and such
agreements shall provide, in the case of Participating Insurance
Companies, that these responsibilities will be carried out with a view
only to the interests of the contract owners, and,
[[Page 47556]]
in the case of Qualified Plans, that these responsibilities will be
carried out with a view only to the interest of Plan participants.
4. If a majority of the Board of an Insurance Products Fund, or a
majority of its disinterested members, determines that a material
irreconcilable conflict exists, the relevant Participants will, at
their expense and to the extent reasonably practicable (as determined
by a majority of the disinterested Board members), take whatever steps
are necessary to remedy or eliminate the irreconcilable material
conflict, including: (a) Withdrawing the assets allocable to some or
all of the Participating Separate Accounts or Plans from the Insurance
Products Fund or any series thereof and reinvesting such assets in a
different investment medium, which may include another series of an
Insurance Products fund or another Insurance Products fund, or
submitting the question of whether such reinvestment should be
implemented to a vote of all affected contract owners and Plan
participants 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 or Plan participants) that votes in favor of such
reinvestment, or offering to the affected contract owners and Plan
participants the option of making such a change; and (b) establishing a
new registered management investment company or managed separate
account. If a material irreconcilable conflict arises because of a
Participant's decision to disregard contract owner voting instructions
and that decision represents a minority position or would preclude a
majority vote, the Participant may be required, at the election of the
Insurance Products Fund, to withdraw its investment in such fund, and
no charge or penalty will be imposed as a result of the withdrawal. To
the extent permitted by applicable law, the responsibility to take
remedial action in the event of a Board determination of material
irreconcilable conflict and to bear the cost of such remedial action
will be a contractual obligation of all Participants under their
agreements governing participation in the Insurance Products Fund, and
these responsibilities will be carried out with a view only to the
interests of the contract owners and Plan participants.
5. For the purposes of condition 4, a majority of the disinterested
members of the applicable Board will determine whether or not any
proposed action adequately remedies any material irreconcilable
conflict, but in no event will the Insurance Products Fund, WRIMCO or
any of their respective affiliates be required to establish a new
funding medium for any Participant. No Participating Insurance Company
or Qualified Plan shall be required by condition 4 to establish a new
funding medium for any variable Contract or Plan if: (a) An offer to do
so has been declined by a vote of a majority of the Variable Contract
owners or Plan participants materially and adversely affected by the
irreconcilable material conflict; or (b) pursuant to governing Plan or
Variable Contract documents and applicable law, the Plan or
Participating Insurance Company makes such decision without a vote of
the Plan participants or Variable Contract owners.
6. Any Board's determination of the existence of a material
irreconcilable conflict and its implications will be made known
promptly in writing to all Participants.
7. Participating Insurance Companies will provide pass-through
voting privileges to contract owners who invest in Participating
Separate Accounts so long as the Commission interprets the 1940 Act to
require pass-through voting for contract owners. Accordingly, the
Participating Insurance Companies will vote shares of an Insurance
Products fund held in their Participating Separate Accounts in a manner
consistent with voting instructions timely received from contract
owners. Participating Insurance Companies will be responsible for
assuring that each of their Participating Separate Accounts investing
in an Insurance Products Fund calculates voting privileges in a manner
consistent with all other Participating Insurance Companies. The
obligation to calculate voting privileges as provided in the
Application will be a contractual obligation of all Participating
Insurance Companies under the agreements governing participation in the
Insurance Products Fund. Each Participating Insurance Company will vote
shares for which it has not received timely voting instructions, as
well as shares attributable to it, in the same proportion as it votes
shares for which it has received voting instructions. Each Qualified
Plan will vote as required by applicable law and governing Plan
documents.
8. All reports of potential or existing conflicts received by a
Board, 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, and such minutes or other records shall be made
available to the Commission upon request.
9. Each Insurance Products fund will notify all Participants that
disclosure in separate account prospectuses or Plan prospectuses or
other Plan disclosure documents regarding potential risks of mixed and
shared funding may be appropriate. Each Insurance Products Fund will
disclose in its prospectus that: (a) The Insurance Products Fund is
intended to be a funding vehicle for variable annuity and variable life
insurance contracts offered by various insurance companies and for
Plans; (b) due to the differences of tax treatment and other
considerations, the interests of various contract owners participating
in an Insurance Products Fund and the interests of Qualified Plans
investing in that Insurance Products Fund may conflict; and (c) the
Board of that Insurance Products Fund will monitor for the existence of
any material conflicts and determine what action, if any, should be
taken.
10. Each Insurance Products Fund will comply with all provisions of
the 1940 Act requiring voting by shareholders (which, for these
purposes, will be the persons having a voting interest in shares of the
Insurance Products Fund), and in particular, each Insurance Products
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(a), and if applicable, Section
16(b) of the 1940 Act. Further, each Insurance Products 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. if, and to the extent that, Rules 6e-2 and 6e-3(T) are amended
(or Rule 6e-3 under the 1940 Act is adopted) to provide exemptive
relief from any provision of the 1940 Act or the rules thereunder with
respect to mixed or shared funding on terms and conditions materially
different from any exemptions granted in the Order requested by
Applicants, then the Insurance Products Funds and the Participants, as
appropriate, will take such steps as may be necessary to comply with
Rules 6e-2 and 6e-3(T), as amended, or Rule 6e-3, as adopted, to the
extent applicable.
12. No less than annually, the Participants shall submit to the
Boards such reports materials, or data as the Boards may reasonably
request so that the Boards may carry out fully the
[[Page 47557]]
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 applicable Boards. The
obligations of the Participating Insurance Companies and Qualified
Plans to provide these reports, materials, and data to the Boards shall
be a contractual obligation of all Participating Insurance Companies
and Qualified plans under the agreements governing their participation
in the Insurance Products Funds.
13. In the event that a Plan should ever become an owner of 10% or
more of the assets of an Insurance Products Fund, such Plan will
execute a fund participation agreement including the conditions set
forth herein, to the extent applicable, with that Insurance Products
Fund. A plan will execute an application containing an acknowledge of
this condition at the time of its initial purchase of shares of the
Insurance Products Fund.
Conclusion
For the reasons summarized 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. 99-22621 Filed 8-30-99; 8:45 am]
BILLING CODE 8010-01-M