[Federal Register Volume 64, Number 225 (Tuesday, November 23, 1999)]
[Notices]
[Pages 65746-65752]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-30546]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-24140; File No. 812-11766]
Pacific Life Insurance Company, et al.; Notice of Application
November 17, 1999.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for an amended 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 amending an order
previously issued to permit shares of the Pacific Select Fund (the
``Fund'') and shares of any other existing or future investment company
that is designed to fund insurance products and for which Pacific Life
Insurance Company, or any of its affiliates, may serve as investment
manager, investment adviser, sub-adviser, administrator, manager,
principal underwriter or sponsor (the Fund and such other investment
companies being hereinafter referred to, collectively, as the
``Insurance Funds''), or shares of any current or future series of any
Insurance Fund, to be sold to and held by: (1) Separate accounts
funding variable annuity contracts and scheduled premium and flexible
premium variable life insurance contracts issued by both affiliated and
unaffiliated life insurance companies; and (2) qualified pension and
retirement plans (``Qualified Plans'' or ``Plans'') held outside of the
separate account context.
Applicants
Pacific Life Insurance Company (formerly Pacific Mutual Life
Insurance Company) (``Pacific Life''), Pacific Life & Annuity Company
(formerly PM Group Life Insurance Company) (``PL&A''), Pacific Select
Separate Account of Pacific Life Insurance Company (formerly Pacific
Select Separate Account of Pacific Mutual Life Insurance Company
(``Pacific Select Account''), Pacific Select Exec Separate Account of
Pacific Life Insurance Company (``Pacific Select Exec Account''),
Pacific Select Exec Separate Account of Pacific Life & Annuity
Insurance Company (``PL&A Account'') (each a ``Separate Account''), and
the Pacific Select Fund (collectively, the ``Applicants'').
FILING DATES: The application was filed on August 25, 1999.
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 the application by writing to the
Secretary of the Commission and serving Applicants with a copy of the
request, personally or by mail. Hearing requests must be received by
the SEC by 5:30 p.m. on December 13, 1999 and should be accompanied by
proof of service on the Applicants in the form of an affidavit or, for
lawyers, a certificate of service. Hearing requests should state the
nature of the writer's interest, the reason for the request, and the
issues contested. Persons may request notification of the date of the
hearing by writing to the Secretary of the Commission.
ADDRESSES: Secretary, Commission, 450 Fifth Street, NW, Washington, DC
20549-0609. Applicants, c/o Robin Yonis Sandlaufer, Esq., Pacific Life
Insurance Company, 700 Newport Center Drive, Newport Beach, California
92660.
FOR FURTHER INFORMATION CONTACT:
Paul G. Cellupica, Senior Counsel, or Mark Amorosi, Special Counsel,
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 is available for a fee from the
SEC's Public Reference Branch, 450 Fifth Street, NW, Washington, DC
20549 (202-942-8090).
Applicants' Representations
1. The Fund is an open-end management investment company organized
as a Massachusetts business trust. The Fund issues shares in multiple
series. Additional series of the Fund and additional Insurance Funds
may be established in the future.
2. Pacific Life serves as the investment adviser to the Fund.
Pacific Mutual Distributors, Inc. (``PMD'') serves as the Fund's
distributor.
3. Pacific Life is a life insurance company based in California.
Pacific Life is authorized to conduct life insurance and annuity
business in the District of Columbia and all states except New York.
Pacific Life is a subsidiary of Pacific LifeCorp, a holding company
which, in turn, is a subsidiary of Pacific Mutual Holding Company, a
mutual holding company.
4. PL&A is a life insurance company based in Arizona. PL&A, a
wholly-owned subsidiary of Pacific Life, is authorized to conduct life
insurance and annuity business in New York and certain other states.
5. The Pacific Select Account is registered as a unit investment
trust under the 1940 Act, and currently is comprised of fourteen
subaccounts called Variable Accounts. The assets in each Variable
Account are invested in shares of the corresponding portfolios of the
Fund, each of which pursues different investment objectives and
policies. The assets of the Pacific Select Account may not be charged
with any liabilities arising out of any other business conducted by
Pacific Life, but the obligations of the Pacific Select Account,
including benefits related to variable life insurance, are obligations
of Pacific Life. The Pacific Select Account funds individual flexible
premium variable life insurance policies.
[[Page 65747]]
6. The Pacific Select Exec Account is registered as a unit
investment trust under the 1940 Act, and currently is comprised of 22
subaccounts called Variable Accounts. The assets in eighteen of the
Variable Accounts are invested in shares of the corresponding
portfolios of the Fund, and the assets of four of the Variable Accounts
are invested in shares of the corresponding portfolios of M Fund, Inc.,
an open-end investment company of the series type registered under the
1940 Act. The Pacific Select Exec Account will not be charged with any
liabilities arising out of any other business conducted by Pacific
Life, but the obligations of the Pacific Select Exec Account, including
liabilities related to variable life insurance, are obligations of
Pacific Life. The Pacific Select Exec Account funds individual flexible
premium variable life insurance policies.
7. The Pl&A Account is registered as a unit investment trust under
the 1940 Act and currently is comprised of eighteen subaccounts called
Variable Accounts. The assets in each of the Variable Accounts are
invested in shares of the corresponding portfolios of the Fund. The
PL&A Account will not be charged with any liabilities arising out of
any other business conducted by PL&A, but the obligations of the PL&A
Account, including liabilities related to variable life insurance, are
obligations of PL&A. The PL&A Account funds individual flexible premium
variable life insurance policies.
8. An order was issued by the Commission on September 30, 1987
(``Prior Order'') which, among other things, granted exemptions from
sections 9(a), 13(a), 15(a), and 15(b) of the 1940 Act and paragraph
(b)(15) of Rule 6e-3(T) to the extent necessary to permit the Fund to
be offered to the Pacific Select Account, other registered and
unregistered separate accounts of Pacific Life or other affiliated life
insurers that offer variable annuity contracts and flexible premium
variable life insurance policies, and to separate accounts of
unaffiliated life insurers offering variable annuity contracts or
scheduled or flexible premium variable life insurance contracts.
9. Pacific Life and/or its affiliates have purchased shares of
certain Portfolios of the Fund in connection with initial capital
investments. Apart from the investments for initial capital, the Fund
currently offers its shares only to separate accounts of Pacific Life,
and therefore serves as an investment medium only for persons who own a
variable annuity contract or flexible premium variable life insurance
policy issued or administered by Pacific Life. The Insurance Funds,
however, intend to offer shares of certain of their existing and future
series to Qualified Plans. Further, the Insurance Funds may in the
future offer shares of their existing and future series to separate
accounts of Pacific Life or its affiliates to serve as the investment
vehicle for scheduled premium variable life insurance contracts. The
Prior Order, however, would not permit the Insurance Funds to offer
their shares to separate accounts funding flexible premium variable
life insurance policies issued by Pacific Life or its affiliates if the
Insurance Funds also offered their shares to Qualified Plans.
Furthermore, the Prior Order would not permit the Insurance Funds to
offer their shares to Qualified Plans, separate accounts of other
insurance companies or separate accounts funding variable annuity
contracts issued by Pacific Life or its affiliates if the Insurance
Funds also offered their shares to separate accounts funding scheduled
premium variable life insurance policies issued by Pacific Life or its
affiliates.
Applicants' Legal Analysis
1. Applicants request that the Commission issue an order pursuant
to Section 6(c) of the 1940 Act amending the Prior Order to grant
exemptions 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 (including any comparable provisions of a permanent rule
that replaces Rule 64-3(T)), to the extent necessary to permit shares
of each existing and future series of each Insurance Fund to be sold to
and held by (1) separate accounts funding variable annuity contracts
and scheduled premium and flexible premium variable life insurance
contracts issued by both affiliated and unaffiliated life insurance
companies; and (2) qualified pension and retirement plans (``Qualified
Plan'' or ``Plans'') held outside of the separate account context.
2. Section 6(c) of the 1940 Act authorizes the Commission, by order
upon application, to conditionally or unconditionally exempt any
person, security, or transaction, or class or classes of persons,
securities or transactions, from any provision of the 1940 Act, or the
rules or regulations thereunder, if and to the extent that such
exemption is necessary or 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.
3. 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 (``Trust Account''), 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 to a separate
account by Rule 6e-2(b)(15) are available only where the management
investment company underlying the Trust Account (``underlying fund'')
offers its shares ``exclusively to variable life insurance separate
accounts of the life insurer or of any affiliated life insurance
company * * *.'' (emphasis added). For these purposes, a variable life
insurance separate account refers to a separate account that funds
scheduled premium variable life insurance contracts. 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 underlying fund that also offers its shares to a variable
annuity or a flexible premium variable life insurance separate account
of the same company or of any affiliated life 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 of the same life insurance company or of any
affiliated life insurance company is referred to herein as ``mixed
funding.'' In addition, 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 also
offers its shares to separate accounts funding variable contracts of
one or more unaffiliated life insurance companies. The use of a common
management company as the underlying investment medium for variable
life insurance separate accounts of one insurance company and separate
accounts funding variable contracts of one or more unaffiliated life
insurance companies is referred to herein as ``shared funding.''
Moreover, because the relief under Rule 6e-2(b)(15) is available only
where shares are offered exclusively to separate accounts, additional
exemptive relief may be necessary if the shares of the Insurance Funds
are also to be sold Qualified Plans.
4. In connection with the funding of flexible premium variable life
insurance contracts issued through a Trust Account, Rule 6e-3(T)(b)(15)
provides partial exemptions from Sections 9(a), 13(a), 15(a), and 15(b)
of the 1940 Act. The exemptions granted to a separate
[[Page 65748]]
account by Rule 6e-3(T) are available only where the Trust Account's
underlying fund offers its 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, or which offer
their shares to any such life insurance company in consideration solely
for advances made by the life insurer in connection with the operation
of the separate account * * *.'' (emphasis added). Therefore, Rule 6e-
3(T) permits mixed funding with respect to a flexible premium variable
life insurance separate account, subject to certain conditions.
However, Rule 6e-3(T) 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 underlying fund that also offers its shares to separate
accounts (including variable annuity and flexible premium and scheduled
premium variable life insurance separate accounts) of unaffiliated life
insurance companies. Because the relief under Rule 6e-3(T) is available
only where shares are offered exclusively to separate accounts, or to
life insurers in connection with the operation of a separate account,
additional exemptive relief may be necessary if the shares of the
Insurance Funds are also to be sold to Qualified Plans.
5. The relief granted by Rules 6e-2(b)(15) and 6e-3(T)(b)(15) is in
no way affected by the purchase of the Insurance Funds' shares by
Qualified Plans. However, in that the relief under rules 6e-2(b)(15)
and 6e-3(T)(b)(15) is available only where shares are offered
exclusively to separate accounts, additional exemptive relief may be
necessary if the shares of the Insurance Funds are also to be sold to
Qualified Plans. Applicants therefore request relief in order to have
the participating insurance companies enjoy the benefits of the relief
granted in Rules 6e-2(b)(15) and 6e-3(T)(b)(15). Applicants assert that
if the Insurance Funds were to sell shares only to Qualified Plans and/
or separate accounts funding variable annuity contracts, no exemptive
relief would be necessary. None of the relief provided for in Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) relates to Qualified Plans or to a
registered investment company's ability to sell its shares to a
Qualified Plan. It is only because some of the separate accounts that
may invest in the Insurance Funds may themselves be investment
companies that rely upon Rules 6e-2 and 6e-3(T) and that desire to have
the relief continue in place, that the Applicants are applying for the
requested relief. If and when a material irreconcilable conflict
between the separate accounts arises in this context, the participating
insurance companies must take whatever steps are necessary to remedy or
eliminate the conflict, including eliminating the Insurance Funds as an
eligible investment. Applicants have concluded that the inclusion of
Qualified Plans as eligible shareholders should not increase the risk
of material irreconcilable conflicts among shareholder. However,
Applicants further assert that even if a material irreconcilable
conflict involving the Qualified Plans arose, the Qualified Plans,
unlike the separate accounts, could redeem their shares and make
alternative investments. Applicants thus argue that allowing limited
investment by Qualified Plans in the Insurance Funds should not
increase the opportunity for conflicts of interest.
6. Since the Prior Order was issued, regulations under the Internal
Revenue Code (``the Code'') have been issued that permit shares of an
investment company to be offered directly to Qualified Plans outside of
the separate account context as well as to insurance company separate
accounts. Section 817(h) of the Code imposes certain diversification
standards on the underlying assets of separate accounts funding
variable annuity contracts and variable life contracts. The Code
provides that such contracts shall not be treated as an annuity
contract or life insurance contract for any period (and any subsequent
period) for which the separate account investments are not, in
accordance with regulations prescribed by the Treasury Department,
adequately diversified. On March 2, 1989, the Treasury Department
issued Regulations (Treas. Reg. 1.817-5) that established
diversification requirements for the investment portfolios underlying
variable annuity and variable life contracts. The Regulations provide
that, in order 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. However,
the Regulations also contain certain exceptions to this requirement,
one of which allows shares in an investment company to be held by the
trustee of a qualified pension or retirement plan without adversely
affecting the ability of shares in the same investment company to also
be held by the separate accounts of insurance companies in connection
with their variable annuity and variable life contracts.
7. 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, paragraph (3) of
Section 9(a) provides that it is unlawful for any company to serve as
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).
8. Rule 6e-2(b)(15) (i) and (ii) and Rule 6e-3(T)(b)(15) (i) and
(ii) provide 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 of the underlying management investment company. 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) are participating in the management or
administration of the fund.
9. The partial relief granted in Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) from the requirements of Section 9 limits, in effect, the
amount of monitoring of an insurer's personnel that would otherwise be
necessary to ensure compliance with Section 9 to that which is
appropriate in light of the policy and purposes of Section 9. Those
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 an insurance company complex, most of whom typically
will have no involvement in matters pertaining to investment companies
in that organization. It is also unnecessary to apply Section 9(a) to
the many individuals in various unaffiliated
[[Page 65749]]
insurance companies (or affiliated companies of participating insurance
companies) that may utilize the Insurance Funds as the funding medium
for variable contracts. There is no regulatory purpose in extending the
monitoring requirements to embrace a full application of Section 9(a)'s
eligibility restrictions because of mixed funding or shared funding and
sales to Qualified Plans. Applying the monitoring requirements of
Section 9(a) because of investment by separate accounts of other
participating insurance companies or Qualified Plans would be
unjustified and would not serve any regulatory purpose. Furthermore,
the increased monitoring costs would reduce the net rates of return
realized by contractworkers and Qualified Plan participants. Finally,
because the Qualified Plans are not investment companies and will not
be deemed affiliates by virtue of their shareholdings, no additional
relief is required with respect to Qualified Plans. Rules 6e-2 and 6e-
3(T) provide relief from the eligibility restrictions of Section 9(a)
only for officers, directors or employees of participating insurance
companies or their affiliates. The eligibility restrictions of Section
9(a) will still apply to any officers, directors or employees of the
Adviser or an affiliate who participate directly in the management or
administration of an Insurance Fund. The monitoring described above
would not benefit contractowners and Plan participants and would only
increase costs, thus reducing net rates of return.
10. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) provide partial
exemptions from Sections 13(a), 15(a), and 15(b) of the 1940 Act, to
the extent that those sections have been deemed by the Commission to
require ``pass-through'' voting with respect to management investment
company shares held by a separate account, to permit the insurance
company to disregard the voting instructions of its contractowners in
certain limited circumstances. Rules 6e-2(b)(15)(iii)(A) and 6e-
3(T)(b)(15)(iii)(A)(1) provide that the insurance company may disregard
the voting instructions of its contractowners in connection with the
voting of shares of an underlying fund if such instructions would
require such shares to be voted to cause such companies to make (or
refrain from making) certain investments which would result in changes
in the subclassification or investment objectives of such companies or
to approve or disapprove any contract between a fund and its investment
adviser, when required to do so by an insurance regulatory authority
(subject to the provisions of paragraphs (b)(5)(i) and (b)(7)(ii)(A) of
such Rules). Rules 6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2)
provide that the insurance company may disregard contractowners' voting
instructions if the contractowners initiate any change in such
company's investment policies, principal underwriter, or any investment
adviser (provided that disregarding such voting instructions is
reasonable and subject to the other provisions of paragraphs (b)(5)(ii)
and (b)(7)(ii)(B) and (C) of such Rules).
11. Rule 6e-2 recognizes that a variable life insurance contract is
an insurance contact; it has important elements unique to insurance
contracts; and it is subject to extensive state regulation of
insurance. In adoting Rule 6e-29(b)(15)(iii), the Commission expressly
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.
The Commission also expressly recognized that state insurance
regulators have authority to require an insurer to draw from its
general account to cover costs imposed upon the insurer by a change
approved by contractowners over the insurer's objection. The Commission
therefore deemed such exemptions 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.'' In this respect, flexible
premium variable life insurance contracts are identical to scheduled
premium variable life insurance contracts; therefore, Rule 6e-3(T)'s
corresponding provisions undoubtedly were adopted in recognition of the
same factors.
12. Applicants maintain that the Insurance Funds' sale of shares to
Qualified Plans will not have any impact on the relief requests. Shares
of the Insurance Funds sold to Qualified Plans would be held by the
trustees of such Plan. The exercise of voting rights by Qualified
Plans, whether by the trustees, by participants, or by investment
managers engaged by the Plans, does not present the type of issues
respecting the disregard of voting rights that are presented by
variable life separate accounts. With respect to Qualified Plans, which
are not registered as investment companies under the 1940 Act, there is
no requirement to pass through voting rights to Plan participants.
Indeed, to the contrary, applicable law expressly reserves voting
rights associated with certain types of Plan assets to certain
specified persons. If a named fiduciary to a Qualified Plan 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. The Qualified Plan nay have
their trustee(s) or other fiduciaries exercise voting rights
attributable to investment securities held by the Qualified Plans in
their discretion. Certain Qualified Plans, however, may provide for the
trustee(s), an investment adviser, or another named fiduciary to
exercise voting rights in accordance with instructions from
participants. If a Qualified Plan does not provide participants with
the right to give voting instructions, Applicants do not see any
potential for material irreconcilable conflicts of interest between or
among variable contractowners and Plan participants with respect to
voting of the respective Portfolio's shares. Accordingly, unlike the
case with insurance company separate accounts, the issue of the
resolution of material irreconcilable conflicts with respect to voting
is not present with Qualified Plans.
13. Applicants state that prohibitions on mixed and shared funding
might reflect some concern with possible divergent interests among
different classes of investors. In this regard, 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. A particular state insurance regulatory body could
require action that is inconsistent with the requirements of other
states in which the insurance company offers its policies. The fact
that different participating insurance companies may be domiciled in
different states does not create a significantly different or enlarged
problem.
14. Applicants further assert that shared funding is, in this
respect, no different than the use of the same investment company as
the funding vehicle for affiliated participating insurance companies,
which Rules 6e-2(b)(15) and 6e-3(T)(b)(15) permit under various
circumstances. Affiliated participating insurance companies may be
domiciled in different states and be subject to differing state law
requirements. Affiliation does not reduce the potential, if any exists,
for differences in state regulatory requirements.
[[Page 65750]]
15. Applicants submit that the right under Rules 6e-2(b)(15) and
6e-3(T)(b)(15) of the insurance company to disregard contractowners'
voting instructions does not raise any issues different from those
raised by the authority of state insurance administrators over separate
accounts. Under Rules 6e-2(b)(15) and 6e-3(T)(b)(15), an insurer can
disregard contractowner voting instructions only with respect to
certain specified items and under certain specified conditions.
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 contractowners. The potential for disagreement is limited
by the requirements in Rules 6e-2 and 6e-3(T) that the insurance
company's disregard of voting instructions be reasonable and based on
specific good faith determinations. However, a particular participating
insurance company's disregard of voting instructions nevertheless could
conflict with the majority of contractowner voting instructions. The
participating insurance company's action could arguably be different
than the determination of all or some of the other participating
insurance companies (including affiliated insurers) that the
contractowners' voting instructions should prevail, and could either
preclude a majority vote approving the change or could represent a
minority view. If the participating insurance company's judgment
represents a minority position or would preclude a majority vote, the
participating insurance company may be required, at an Insurance Fund's
election, to withdraw its separate account's investment in the
Insurance Fund, and no charge or penalty would be imposed as a result
of such withdrawal.
16. With respect to voting rights, it is possible to provide an
equitable means of giving such voting rights to contractowners and to
Qualified Plans. The transfer agent for the Insurance Funds will inform
each shareholder, including each separate account and each Qualified
Plan, of its share ownership in an Insurance Fund. Each participating
insurance company will then solicit voting instructions in accordance
with the ``pass-through'' voting requirement. Investment by Qualified
Plans in any Insurance Fund will similarly present no conflict. The
likelihood that voting instructions of insurance company separate
account holders will ever be disregarded or that the possible
withdrawal referred to immediately above will occur is extremely remote
and this possibility will be known, through prospectus disclosure or
disclosure in a Statement of Additional Information to any Qualified
Plan choosing to invest in an Insurance Fund. Moreover, even if a
material irreconcilable conflict involving Qualified Plans arises, the
Plans may simply redeem their shares and make alternative investments.
Votes cast by the Qualified Plans, of course, cannot be disregarded but
must be counted and given effect.
17. Applicants submit that there is no reason why the investment
policies of an Insurance Fund, or a series thereof, would or should be
materially different from what they would or should be if such
Insurance Fund or series funded only variable annuity contracts or
variable life insurance polices, whether flexible premium or scheduled
premium policies. Each type of insurance product is designed as a long-
term investment program. Similarly, the investment strategy of
Qualified Plans--long-term investment--coincides with that of variable
contracts and should not increase the potential for conflicts. Each
Insurance Fund, or series thereof, will be managed to attempt to
achieve its investment objective, and not to favor or disfavor any
particular participating insurance company or type of insurance product
or other investor. There is no reason to believe that different
features of various types of contracts will lead to different
investment policies for different types of variable contracts. The sale
and ultimate success of all variable insurance products depends, at
least in part, on satisfactory investment performance, which provides
an incentive for the participating insurance company to seek optimal
investment performance.
18. Furthermore, Applicants assert that no one investment strategy
can be identified as appropriate to a particular insurance product.
Each pool of variable annuity and variable life insurance
contractowners is composed of individuals of diverse financial status,
age, insurance and investment goals. A fund supporting even one type of
insurance product must accommodate these diverse factors in order to
attract and retain purchasers. Permitting mixed and shared funding will
provide economic justification for the growth of the Insurance Funds.
In addition, permitting mixed and shared funding will facilitate the
establishment of additional series serving diverse goals. The broader
base of contractowners can also be expected to provide economic
justification for the creation of additional series of each Insurance
Fund with a greater variety of investment objectives and policies.
19. Applicants note that Section 871(h) of the Code imposes certain
diversification standards on the underlying assets of variable annuity
contracts and variable life 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, among other things, ``qualified
pension or retirement plans'' and separate accounts to share the same
underlying management investment company. Therefore, neither the Code,
the Treasury Regulations nor 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.
20. Applicants submit that the ability of the Insurance Funds to
sell their respective shares directly to Qualified Plans does not
create a ``senior security,'' as such term is defined under Section
18(g) of the 1940 Act, with respect to any contractowner as opposed to
a participant under a Qualified Plan. As noted above, regardless of the
rights and benefits of contractowners or participants under the
Qualified Plans, the Qualified Plans and the separate accounts have
rights only with respect to their respective shares of the insurance
Funds. They can only redeem such shares at their net asset value. No
shareholder of any of the Insurance Funds has any preference over any
other shareholder with respect to distribution of assets or payment of
dividends.
21. Applicants submit that various factors have limited the number
of insurance companies that offer variable annuities and variable life
insurance policies. 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 name recognition by the public of
certain participating insurance companies as investment experts. 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. Use of
the Insurance Funds as a common investment medium for variable
contracts and Qualified Plans would help alleviate these concerns,
because participating insurance companies and Qualified Plans will
[[Page 65751]]
benefit not only from the investment and administrative expertise of
Pacific Life, or any other investment adviser to an Insurance Fund or
series, but also from the cost efficiencies and investment flexibility
afforded by a large pool of funds. Therefore, making the Insurance
Funds available for mixed and shared funding and permitting the
purchase of Insurance Fund shares by Qualified Plans may encourage more
insurance companies to offer variable contracts, and 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.
23. Mixed and shared funding also may benefit variable
contractowners by eliminating a significant portion of the costs of
establishing and administering separate funds. Furthermore, granting
the requested relief should result in an increased amount of assets
available for investment by the insurance Funds. This may benefit
variable contractowners by promoting economies of scale, by permitting
increased safety through greater diversification, or by making the
addition of new portfolios more feasible.
Applicants' Conditions
Applicants consent to the following conditions if an order is
granted:
1. A majority of the Board of Trustees or Board of Directors (The
``Board'') of each Insurance Fund shall consist of persons who are not
``interested persons'' of the Insurance Fund, as defined by Section
2(a)(19) of the 1940 Act and the Rules thereunder and as modified by
any applicable orders of the Commission, except that if this condition
is not met by reason of the death, disqualification, or bona fide
resignation of any trustee or director, then the operation of this
condition shall be suspended: (i) For a period of 45 days if the
vacancy or vacancies may be filled by the Board; (ii) for a period of
60 days if a vote of shareholders is required to fill the vacancy or
vacancies; or (iii) for such longer period as the Commission may
prescribe by order upon application.
2. Each Board will monitor the Insurance Fund for the existence of
any material irreconcilable conflict among and between the interests of
the contractowners of all separate accounts and of Plan participants
investing in the Insurance 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:
(1) An action by any state insurance regulatory authority; (ii) a
change in applicable federal or state insurance, tax, or securities
laws of regulations, or a public ruling, private letter ruling, no-
action or interpretative letter, or any similar action by insurance,
tax or securities regulatory authorities; (iii) an administrative or
judicial decision in any relevant proceeding; (iv) the manner in which
the investments of any Insurance Fund or series are being managed; (v)
a difference in voting instructions given by variable annuity
contractowners and variable life insurance contractowners and Plan
trustees or participants; and (vi) a decision by a participating
insurance company to disregard the voting instructions of
countractowners; or (vii) if applicable, a decision by a Qualified Plan
to disregard the voting instructions of Plan participants.
3. Any Qualified Plan that executes a fund participation agreement
upon becoming an owner of 10% or more of the assets of an Insurance
Fund and any participating insurance company (collectively,
``Participants'') will report any potential or existing conflicts to
the Board. Participants will be responsible for assisting the Board in
carrying out its responsibilities under these conditions by providing
the Board with all information reasonably necessary for the Board to
consider any issues raised. This includes, but is not limited to, an
obligation by each participating insurance company to inform the Board
whenever contractowner voting instructions are disregarded and, if
pass-through voting is applicable, an obligation by each Qualified Plan
that is a Participant to inform the Board whenever it has determined to
disregard Plan participant voting instructions. The responsibility to
report such information and conflicts and to assist the Board will be a
contractual obligation of all Participants investing in an Insurance
Fund under their agreements governing participation in the Insurance
Fund, and such agreements shall provide that such responsibilities will
be carried out with a view only to the interests of the contractowners
or, if applicable, Plan participants.
4. If it is determined by a majority of the Board of an Insurance
Fund, or a majority of its disinterested trustees or directors, that a
material irreconcilable conflict exists, the relevant participating
insurance companies and Qualified Plans shall, at their expense or, at
the discretion of the investment adviser to an Insurance Fund, at that
investment adviser's expense, and to the extent reasonably practicable
(as determined by a majority of the disinterested trustees or
directors), take whatever steps are necessary to remedy or eliminate
the material irrconcilable conflict, up to and including: (i)
Withdrawing the assets allocable to some or all of the separate
accounts from the relevant Insurance Fund or any series therein and
reinvesting such assets in a different investment medium (including
another series, if any, of such Insurance Fund); (ii) in the case of
participating insurance companies, submitting the question of whether
such segregation should be implemented to a vote of all affected
contractowners and, as appropriate, segregating the assets of any
appropriate group (i.e., variable annuity contractowners or variable
life insurance contractowners of one or more participating insurance
companies) that votes in favor of such segregation, or offering to the
affected contractowners the option of making such a change; and (iii)
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, the participating
insurance company may be required, at the Insurance Fund's election, to
withdraw its separate account's investment in the Insurance Fund, and
no charge or penalty will be imposed as a result of such withdrawal. If
a material irreconcilable conflict arises because of a Qualified 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 Qualified Plan may be required, at the
election of the Insurance Fund, to withdraw its investment in the
Insurance Fund, and no charge or penalty will be imposed as a result of
such withdrawal. The responsibility to take remedial action in the
event of a Board determination of a material irreconcilable conflict
and to bear the cost of such remedial action shall be a contractual
obligation of all participating insurance companies and Qualified Plans
under their agreements governing participation in the Insurance Fund,
and these responsibilities will be carried out with a view only to the
interests of the contractowners or, as applicable, Plan participants.
5. For the purposes of Condition 4, a majority of the disinterested
members of the Board shall determine whether or not any proposed
actions adequately remedies any material irreconcilable conflict, but
in no event will the
[[Page 65752]]
Insurance Fund or its investment adviser be required to establish a new
funding medium for any variable contract. No participating insurance
company shall be required by Condition 4 to establish a new funding
medium for any variable contract if an offer to do so has been declined
by vote of a majority of contractowners materially adversely affected
by the material irreconcilable conflict. No Qualified Plan shall be
required by Condition 4 to establish a new funding medium for such
Qualified Plan if (a) a majority of Plan participants materially and
adversely affected by the material irreconcilable conflict vote to
decline such offer or (b) pursuant to governing Plan documents and
applicable law, the Plan makes such decision without Plan participant
vote.
6. The Board's determination of the existence of a material
irreconcilable conflict and its implications shall be made known
promptly in writing to all Participants.
7. Participating insurance companies will provide pass-through
voting privileges to all variable contractowners whose contracts are
funded through a registered separate account for so long as the
Commission continues to interpret the 1940 Act as requiring pass-
through voting privileges for variable contractowners. Accordingly,
such participating insurance companies will vote shares of each
Insurance Fund or series thereof held in their registered separate
accounts in a manner consistent with timely voting instructions
received from such contractowners. Each participating insurance company
will vote shares of each Insurance Fund or series held in its
registered separate accounts for which no timely voting instructions
are received, as well as shares held by any such registered separate
account, in the same proportion as those shares for which voting
instructions are received. Participating insurance companies shall be
responsible for assuring that each of their separate accounts investing
in an Insurance Fund calculates voting privileges in a manner
consistent with all other participating insurance companies. The
obligation to vote an Insurance Fund's shares and to calculate voting
privileges in a manner consistent with all other registered separate
accounts investing in an Insurance Fund shall be a contractual
obligation of all participating insurance companies under their
agreements governing participation in the Insurance Fund. Each Plan
will vote as required by applicable law and governing Plan documents.
8. An Insurance Fund will notify all participating insurance
companies that separate account prospectus disclosure regarding
potential risks of mixed and shared funding may be appropriate. Each
Insurance Fund shall disclose in its prospectus or statement of
additional information that: (a) Shares of the Insurance Fund are
offered to insurance company separate accounts which fund both variable
annuity and variable life insurance contracts, and to Qualified Plans;
(b) due to differences of tax treatment or other considerations, the
interests of various contractowners participating in the Insurance Fund
and the interests of Qualified Plans investing in the Insurance Fund
might at some time be in conflict; and (c) the Board will monitor the
Insurance Fund for any material conflicts and determine what action, if
any, should be taken.
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 Board or other
appropriate records, and such minutes or other records shall be made
available to the Commission upon request.
10. If and to the extent that Rule 6e-2 and Rule 6e-3(T) under the
1940 Act are amended, or Rule 6e-3 is adopted, to provide exemptive
relief from any provision of the 1940 Act or the rules thereunder with
respect to mixed or shared funding on terms and conditions materially
different from any exemptions granted in the order requested in the
Application, then each Insurance Fund and/or the Participants, as
appropriate, shall take steps as may be necessary to comply with Rule
6e-2 and Rule 6e-3(T), as amended, and Rule 6e-3, as adopted, to the
extent applicable.
11. Each Insurance Fund will comply with all provisions of the 1940
Act requiring voting by shareholders (which, for these purposes, shall
be the persons having a voting interest in the shares of that Insurance
Fund), and in particular each Insurance Fund will either provide for
annual meetings (except insofar as 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 Sections
16(a) and, if and when applicable, 16(b). Further, each Insurance 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. The Participants shall at least annually submit to the Board of
an Insurance Fund such reports, materials or data as the Board may
reasonably request so that it may fully carry out the obligations
imposed upon it by the conditions contained in the Application and said
reports, materials and data shall be submitted more frequently if
deemed appropriate by the Board. The obligations of a Participant to
provide these reports, materials and data to the Board of the Insurance
Fund when it so reasonably requests shall be a contractual obligation
of all Participants under their agreements governing participation in
each Insurance Fund.
13. If a Qualified Plan should become an owner of 10% or more of
the assets of an Insurance Fund, the Insurance Fund shall require such
Plan to execute a participation agreement with such Insurance Fund
which includes the conditions set forth herein to the extent
applicable. A Qualified Plan will execute an application containing an
acknowledgment of this condition upon such Plan's initial purchase of
the shares of any Insurance Fund.
Conclusion
For the reasons and upon the facts stated above, Applicants assert
that the requested exemptions are appropriate in the public interest
and consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-30546 Filed 11-22-99; 8:45 am]
BILLING CODE 8010-01-M