[Federal Register Volume 63, Number 152 (Friday, August 7, 1998)]
[Notices]
[Pages 42465-42471]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-21172]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23372; File No. 812-11090]
Barr Rosenberg Variable Insurance Trust, et al.
July 31, 1998.
AGENCY: The Securities and Exchange Commission (the ``Commission'').
ACTION: Notice of application for an order under Section 6(c) of the
Investment Company Act of 1940 (``Act'') granting exemptive relief from
Sections 9(a), 13(a), 15(a) and 15(b) of the 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
Barr Rosenberg Variable Insurance Trust (the ``Trust'') and any other
investment company that is designed to fund insurance products and for
which Rosenberg Institutional Equity Management or its affiliates may
serve as investment manager, investment adviser, investment sub-
adviser, administration, manager, principal underwriter or sponsor
(together with the Trust, ``Trusts'') to be sold to and held by: (i)
Variable annuity and variable life insurance separate accounts of both
affiliated and unaffiliated life insurance companies; (ii) qualified
pension and retirement plants (``Qualified Plans'' or ``Plans'')
outside of the separate account context; and (iii) the Trusts'
investment adviser (representing seed money investments in the Trusts).
Applicants: Barr-Rosenberg Variable Trust (the ``Trust'') and
Rosenberg Institutional Equity Management (``RIEM'').
Filing Date: The application was originally filed on March 24,
1998, and amended and restated on June 23, 1998.
Hearing or Notification of Hearing: An order granting the
application will be issued unless the Commission orders a hearing.
Interested persons may request a hearing on this application by writing
to the Secretary of the Commission and serving Applicants with a copy
of the request, personally or by mail. Hearing requests must be
received by the Commission by 5:30 p.m. on August 25, 1998, and should
be accompanied by proof of services on the Applicants in the form of an
affidavit or, for lawyers, a certificate of service. Hearing requests
should state the nature of the interest, the reason for the request and
the issues contested. Persons may request notification of the date of a
hearing by writing to the Secretary of the Commission.
ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC
20549. Applicants, c/o Edward H. Lyman, Esq., Rosenberg Institutional
Equity Management, 4 Orinda Way, Building E, Orinda, California 94563.
FOR FURTHER INFORMATION CONTACT: Ethan D. Corey, 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 is available for a fee from the
Public Reference Branch of the Commission, 450 Fifth Street, NW.,
Washington, DC (tel. (202) 942-8090).
Applicants' Representations
1. The Trust, a Massachusetts business trust, is registered under
the Act as an open-end, management investment company. The Trust
currently consists of one investment portfolio (the ``Fund'').
2. RIEM serves as the investment manager to the Trust. RIEM is
registered with the Commission as an investment adviser pursuant to the
Investment Advisers Act of 1940.
3. The Trust may offer each series of its shares to separate
accounts (``Participating Separate Accounts'') registered under the Act
as unit investment trusts (``UITs'') of various life insurance
companies (``Participating Insurance Company'') and to Plans qualified
under Section 401(a) of the Internal Revenue Code of 1986, as amended
(the ``Code''). Certain Participating Separate Accounts (``VLI
Accounts'') support variable life insurance contracts (``VLI
Contracts''). Other Participating Separate Accounts (``VA Accounts'')
support variable annuity contracts (``VA Contracts,'' together with VLI
Contracts, ``Variable Contracts'').
Applicants' Legal Analysis
1. Applicants request an order pursuant to Section 6(c) of the Act
exempting them from Section 9(a), 13(a), 15(a), and 15(b) of the Act,
and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent
necessary to permit shares of the Trusts to be offered and sold to, and
held by: (a) VA Accounts and VLI Accounts of the same life insurance
company or of any affiliated life insurance company (``mixed
funding''); (b) VA Accounts and VLI Accounts of unaffiliated life
insurance companies (``shared funding''); (c) trustees of Qualified
Plans; and (d) the Trusts' investment adviser (representing seed money
investments in the Trust or Future Trust).
2. Rule 6e-2(b)(15) under the Act provides partial exemptions from:
(a) Section 9(a), which makes it unlawful for certain individuals and
companies to act in certain capacities with respect to registered
investment companies; and (b) Sections 13(a), 15(a), and 15(b) of the
Act to the extent that those sections might be deemed to require
``pass-through'' voting with respect to the
[[Page 42466]]
shares of a registered management investment company underlying a UIT
(an ``underlying fund'') to VLI Accounts supporting scheduled premium
VLI Contracts and to their life insurance company depositors,
investment advisers, and principal underwriters. The exemptions granted
by the Rule are available, however, only if an underlying fund offers
its shares exclusively to VLI Accounts of a single Participating
Insurance Company or an affiliated insurance company, and then, only if
scheduled premium VLI Contracts are issued through such VLI Accounts.
Therefore, the relief granted by Rule 6e-2(b)(15) is not available with
respect to a scheduled premium VLI Account that owns shares of an
underlying fund that engages in mixed funding by also offering its
shares to a VA Account or to a flexible premium VLI Account of the same
company or of any affiliated life insurance company. In addition, the
relief granted by Rule 6e-2(b)(15) is not available if the underlying
fund engages in shared funding by offering its shares to VA Accounts
and VLI Accounts of unaffiliated life insurance companies. Furthermore,
Rule 6e-2(b)(15) does not contemplate that shares of the underlying
fund might also be sold to Qualified Plans.
3. Rule 6e-3(T)(b)(15) under the Act provides partial exemptions
from Sections 9(a), 13(a), 15(a), and 15(b) of the Act to VLI Accounts
supporting flexible premium variable life insurance contracts and their
life insurance company depositors, investment advisers and principal
underwriters. The exemptions granted by the Rule are available,
however, only where the Trust offers its shares exclusively to separate
accounts of the Participating Insurance Company, or of any affiliated
insurance company, offering either scheduled premium contracts or
flexible premium contracts, or both, or which also offer their shares
to VA Accounts of the Participating Insurance Company or of an
affiliated life insurance company. Therefore, Rule 6e-3(T)(b)(15)
permits mixed funding with respect to a flexible premium VLI Account,
subject to certain conditions. However, Rule 6e-3(T)(b)(15) does not
permit shared funding because the relief granted is not available with
respect to a VLI Account that owns shares of an underlying fund that
also offers its shares to separate accounts (including VA Accounts and
flexible premium and scheduled premium VLI Accounts) of unaffiliated
Participating Insurance Companies. Also, Rule 6e-3(T)(b)(15) does not
contemplate that shares of the underlying fund might also be sold to
Qualified Plans.
4. Applicants state that current tax law permits the Trust to sell
its shares directly to Qualified Plans. Section 817(h) of the Code
imposes certain diversification standards on the assets underlying
Variable Contracts, such as those in the Trust. The Code provides that
Variable Contracts will not be treated as annuity contracts or life
insurance contracts, as the case may be, for any period (or any
subsequent period) for which the underlying assets are not adequately
diversified in accordance with regulations issued by the Treasury
Department. On March 1, 1989, the Treasury Department adopted
regulations (Treas. Reg. 1.817-5) (the ``Regulations'') which
established specific diversification requirements for investment
portfolios underlying Variable Contracts. The Regulations generally
provide that, in order to meet these diversification requirements, all
of the beneficial interests in the investment company must be held by
the segregated asset accounts of one or more life insurance companies.
Notwithstanding this, the Regulations also contain an exception to this
requirement that permits trustees of a Qualified Plan to hold shares of
an investment company, the shares of which are also held by insurance
company segregated asset accounts, without adversely affecting the
status of the investment company as an adequately diversified
underlying investment for Variable Contracts issued through such
segregated asset accounts (Treas. Reg. 1.817-5(f)(3)(iii)).
5. Applicants also note that the promulgation of Rules 6e-2(b)(15)
and 6e-3(T)(b)(15) preceded the issuance of the Regulations. Thus, the
sale of shares of the same investment company to both Participating
Separate Accounts and Qualified Plans was not contemplated at the time
of the adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15), and,
therefore, Applicants assert that the restrictions of such Rules do not
evidence an intent of the Commission to prevent extended mixed funding.
6. Section 9(a)(3) of the Act provides that it is unlawful for any
company to serve as investment adviser 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). Rule 6e-2(b)(15) and Rule 6e-3(T)(b)(15) limit the
application of the eligibility restrictions of Section 9(a) to
affiliated persons of a life insurance company that directly
participate in the management of the underlying registered management
investment company under certain circumstances, subject to limitations
on mixed and shared funding. The relief provided by Rule 6e-2(b)(15)(i)
and Rule 6e-3(T)(b)(15)(i) permits persons who are affiliated persons
of a life insurance company or its affiliates who otherwise would be
disqualified under Section 9(a) to serve as an officer, director, or
employee of an underlying fund, so long as any such person does not
participate directly in the management or administration of such
underlying fund. In addition, Rule 6e-2(b)(15)(ii) and Rule 6e-
3(T)(b)(15)(ii) permit a Participating Insurance Company to serve as
the underling fund's investment adviser or principal underwriter,
provided that none of the insurance company's personnel who are
ineligible pursuant to Section 9(a) of the Act participate in the
management or administration of the underlying fund.
7. Applicants assert that the partial relief provided by Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) from the requirements of Section 9 limits
the amount of monitoring of a Participating Insurance Company's
personnel that is necessary to ensure compliance with Section 9 to that
which is appropriate in light of the policy and purposes of Section 9.
Applicants state that Rules 6e-2(b)(15) and 6e-3(T)(b)(15) recognize
that applying the provisions of Section 9 to the many individuals in a
large insurance company complex, most of whom typically will have no
involvement in matters pertaining to investment companies funding the
Participating Separate Accounts, is not necessary or appropriate in the
public interest nor is it necessary for the protection of investors or
the purposes fairly intended by the policy and provisions of the Act.
Moreover, applicants assert that disallowing the relief permitted by
Rule 6e-2(b)(15) and Rule 6e-3(T)(b)(15) because the Trusts will sell
their shares to Qualified Plans would serve no regulatory purpose.
Applicants assert that the sale of shares of an underlying fund to
Qualified Plans does not change the fact that the purposes of the Act
are not advanced by applying the prohibitions of Section 9(a) to
individuals who may be involved in a life insurance complex but have no
involvement in the underlying fund.
8. Rule 6e-2(b)(15)(iii) and Rule 6e-3(T)(b)(15)(iii) provide
partial exemptions from Sections 13(a), 15(a), and 15(b) of the Act to
the extent that those sections might be deemed to require ``pass-
through'' voting with respect to the shares of an underlying fund, by
allowing an issuance company to disregard the voting instructions of
contract owners with respect to several
[[Page 42467]]
significant matters, assuming the limitations on mixed and shared
funding are observed. Rules 6e-2(b)(15)(iii)(A) and 6e-
3(T)(b)(15)(iii)(A) permit a Participating Insurance Company to
disregard the voting instructions of its contract owners if such
instructions would require an underlying fund's shares to be voted to
cause such underlying fund to make (or to refrain from making) certain
investments which would result in changes in the subclassification or
investment objectives of such underlying fund or to approve or
disapprove any contract between such underlying fund and an 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
the Rules). Rules 6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2)
permit a Participating Insurance Company to disregard contract owners'
voting instructions if the contract owners initiate any change in the
underlying fund's investment objectives, principal underwriter or any
investment adviser (provided that disregarding such voting instructions
is reasonable and subject to the other provisions of paragraph
(b)(5)(ii)and (b)(7)(ii) (B) and (C) of the Rules). Applicants assert
that these rights do not raise any issues different from those raised
by the authority of state insurance administrators over separate
accounts.
9. Applicants assert that the reason the Commission did not grant
more extensive relief in the area of mixed and shared funding when it
adopted Rule 6e-3(T) is because of the Commission's uncertainty in this
area with respect to such issues as conflicts of interest. Applicants
believe that Commission concern is not warranted in the context of
permitting shared funding or permitting Qualified Plans to invest in
the Trust and that the addition of owners of Variable Contracts
supported by separate accounts of unaffiliated life insurance companies
and Qualified Plans as eligible shareholders will not increase the risk
of material irreconcilable conflicts among shareholders.
10. Voting rights of shares sold to Qualified Plans are expressly
reserved to certain specified persons and are not required to be passed
through to Qualified Plan participants. Under Section 403(a) of the
Employee Retirement Income Security Act (``ERISA''), shares of an
underlying fund sold to a Qualified Plan must be held by the trustee(s)
of the Qualified Plan, and such trustee(s) must have exclusive
authority and discretion to manage and control the Qualified Plan with
two exceptions: (a) When the Qualified Plan expressly provides that the
trustee(s) are subject to the direction of a named fiduciary who is not
a trustee, in which case the trustee(s) are subject to proper
directions made in accordance with the terms of the Qualified Plan and
not contrary to ERISA, and (b) when the authority to manage, acquire or
dispose of assets of the Qualified Plan is delegated to one or more
investment managers pursuant to Section 402(c)(3) of ERISA. Unless one
of the above two exceptions stated in Section 403(a) applies, the
exclusive authority and responsibility for voting shares of an
underlying fund is vested in the plan trustees. Some of the Qualified
Plans, however, may provide for the trustee(s), an investment adviser
(or advisers) or another named fiduciary to exercise voting rights in
accordance with instructions from participants.
11. 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 Plans may have their
trustee(s) or other fiduciaries exercise voting rights attributable to
investment securities held by the Qualified Plans in their discretion.
Some of the Qualified Plans, however, may provide for the trustee(s),
an investment adviser (or advisers) or another named fiduciary to
exercise voting rights in accordance with instructions from
participants.
12. If a Qualified Plan does not provide participants with the
right to give voting instructions, the Applicants submit that there is
no potential for material irreconcilable conflicts of interest between
or among owners of Variable Contracts and participants in Qualified
Plans with respect to voting of an underlying fund's shares.
Accordingly, unlike the case with Participating Separate Accounts, the
issue of the resolution of material irreconcilable conflicts with
respect to voting is not present with respect to such Qualified Plans
because the Qualified Plans are not entitled to pass-through voting
privileges.
13. Applicants further note that there is no reason to believe that
participants in Qualified Plans which provide participants with the
right to give voting instructions 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
Variable Contract owners. Applicants, therefore, submit that the
purchase of shares of the Trusts by Qualified Plans that provide voting
rights does not present any complications not otherwise occasioned by
mixed or shared funding.
14. Applicants state that the presence of both VLI Accounts and VA
Accounts as shareowners of an underlying fund will not lead to a
greater probability of material irreconcilable conflicts than if the
underlying fund did not engage in mixed funding. Similarly, shared
funding does not present any issues that do not already exist where an
underlying fund sells its shares to a single insurance company which
sells contracts in several states. A state insurance regulatory body in
one state could require action that is inconsistent with the
requirements of other states in which the insurance company offers its
policies. The fact that unaffiliated insurers may be domiciled in
different states does not create a significantly different or enlarged
problem.
15. Applicants assert that shared funding by unaffiliated insurers,
in this respect, is no different than the use of the same investment
company as the funding vehicle for affiliated insurers, which Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) under the Act permit under various
circumstances. Affiliated insurers may be domiciled in different states
and be subject to differing state law requirements. Affiliation does
not reduce the potential for differences in state regulatory
requirements. Applicants state that the conditions summarized below are
designed to safeguard against, and provide procedures for resolving,
any adverse effects that differences among state regulatory
requirements may produce. For instance, if a particular state insurance
regulator's decision conflicts with the majority of other state
regulators, then the affected insurer may be required to withdraw its
Participating Separate Account's investment in the Trusts. This
requirement will be provided for in agreements that will be entered
into by Participating Insurance Companies with respect to their
participation in the relevant Trust.
16. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the Act give the
insurance company the right to disregard the voting instructions of the
contract owners. Applicants assert that this right 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 contract owner voting
instructions only with respect to certain specified items and under
certain specified conditions. Requiring that only affiliated insurance
[[Page 42468]]
companies invest in the Trust does not eliminate the potential, if any
exists, for divergent judgments as to the advisability or legality of a
change in investment policies, principal underwriter, or investment
adviser initiated by contract owners. Moreover, the potential for
disagreement is limited by the requirements in Rules 6e-2 and 6e-3(T)
that an insurance company's disregard of voting instructions be
reasonable and based on specific good faith determinations.
17. A particular Participating Insurance Company's disregard of
voting instructions, nevertheless, could conflict with the majority of
contract owner's voting instructions. The insurer's action possibly
could be different than the determination of all or some of the other
Participating Insurance Companies (including affiliated insurers) that
the voting instructions of contract owners should prevail, and either
could preclude a majority vote approving the change or could represent
a minority view. If the insurer's judgment represents a minority
position or would preclude a majority vote, then the insurer may be
required, at the election of the relevant Fund, to withdraw its
Participating Separate Account's investment in such Fund, and no charge
or penalty will be imposed as a result of such withdrawal. This
requirement will be provided for in the agreements entered into with
respect to participation by the Participating Insurance Companies in
the Trust.
18. Applicants assert that there is no reason why the investment
policies of the Portfolios would or should be materially different from
what these policies would or should be if the Portfolios funded only VA
Contracts or VLI Contracts. Each type of insurance product is designed
as a long-term investment program. The Fund will be managed in the same
manner as any other mutual fund and there is no incentive for the
Fund's investment manager to invest to benefit a particular class of
shareholders. In addition, the Board of Trustees has a fiduciary duty
to oversee the Trusts' investment adviser and ensure that the Trusts
are managed in a way that does not discriminate against any Trust
shareholders.
19. Furthermore, Applicants assert that no one investment strategy
can be identified as appropriate to particular insurance product. Each
pool of VA and VLI Contract owners is composed of individuals of
diverse financial status, age, insurance, and investment goals. A
Portfolio supporting even one type of insurance product must
accommodate these diverse factors in order to attract and retain
purchasers. Permitting mixed and shared funding as well as permitting
sales of Qualified Plans will provide benefits to the Trusts'
shareholders. Among other things, Participating Insurance Companies and
Variable Contract owners will benefit from a greater variety of
investment options with lower costs.
20. Applicants do not believe that the sale of the shares of the
Trusts to Qualified Plans will increase the potential for material
irreconcilable conflicts of interest between or among different types
of investors. Applicants assert that there are either no conflicts of
interest or that there exists the ability by the affected parties to
resolve the issues without harm to the contract owners in the
Participating Separate Accounts or to the participants under the
Qualified Plans.
21. As noted above, Section 817(h) of the Code imposes certain
diversification standards on the underlying assets of variable annuity
contracts and variable life insurance contracts held in the portfolios
of management investment companies. The Code provides that a variable
contract shall not be treated as an annuity contract or life insurance,
as applicable, for any period (and any subsequent period) for which the
investments are not, in accordance with the Regulations, adequately
diversified.
22. The Regulations provide that, in order to meet the statutory
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. The Regulations, however, contain certain
exceptions to this requirement, one of which allows shares in an
underlying mutual fund to be held by the trustees of a Qualified Plan
without adversely affecting the ability of shares in the underlying
fund also to be held by separate accounts of insurance companies in
connection with their variable contracts (Treas. Reg. 1.817-
5(f)(3)(iii)). Thus, the Regulations specifically permit Qualified
Plans and separate accounts to invest in the same portfolio of an
underlying fund. For this reason, Applicants assert that neither the
Code, nor the Regulations, nor the Revenue Rulings thereunder, present
any inherent conflicts of interest.
23. Applicants note that while there are differences in the manner
in which distributions from Variable Contracts and Qualified Plans are
taxed, the differing tax consequences do not raise any conflicts of
interest. If the Participating Separate Account or the Qualified Plan
cannot net purchase payments to make the distributions, the
Participating Separate Account or the Qualified Plan will redeem shares
of the Fund at their net asset value. The Qualified Plan then will make
distributions in accordance with the terms of the Qualified Plan and
the Participating Insurance Company will make distributions in
accordance with the terms of the Variable Contract. Therefore,
distributions and dividends will be declared and paid by the Fund
without regard to the character of the shareholder.
24. Applicants that state it is possible to provide an equitable
means of giving voting rights to Variable Contract owners and to the
trustees of Qualified Plans. The transfer agent for the Fund will
inform each Participating Insurance Company of its share ownership in
each Participating Separate Account, as well as inform the trustees of
Qualified Plans of their holdings. Each Participating Insurance Company
then will solicit voting instructions in accordance with Rules 6e-2 and
6e-3(T), as applicable, and its participation agreement with the
relevant 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 the Trusts will be no different from
the voting rights that are provided to Qualified Plans with respect to
shares of funds sold to the general public.
25. Applicants submit that the ability of the Trusts to sell their
shares directly to Qualified Plans does not create a ``senior
security,'' as such term is defined under Section 18(g) of the Act,
with respect to any contract owner as opposed to a participant under a
Qualified Plan. Regardless of the rights and benefits of Variable
Contract owners or participants under the Qualified Plans, the
Qualified Plans and the Participating Separate Accounts have rights
only with respect to their respective shares of the Trusts. They can
only redeem such shares at their net asset value. No shareholder of the
Trusts will have any preference over any other shareholder with respect
to distribution of assets or payment of dividends.
26. Applicants assert that the veto power of state insurance
commissioners over an underlying fund's investment objectives does not
create any inherent conflicts of interest between the contract owners
of the Participating Separate Accounts and Qualified Plan participants.
Applicants note that the basic premise of corporate democracy and
shareholder voting is that not all shareholders may agree with a
particular proposal. Although the interests and opinions of
shareholders may differ, this does not mean that inherent conflicts of
interest exist
[[Page 42469]]
between or among such shareholders. 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 such redemptions and
transfers.
27. In contrast, the trustees of Qualified Plans or the
participants in participant-directed Qualified Plans can make the
decision quickly and redeem their interest in the Funds and reinvest in
another funding vehicle without the same regulatory impediments faced
by separate accounts or, as is the case with most Qualified Plans, even
hold cash pending suitable investment.
28. Applicants also assert that the investment of seed capital in
the Trust presents no potential for irreconcilable conflicts of
interest. Seed capital for the trust will be provided by the Trust's
investment adviser or by Participating Insurance Companies.
29. Applicants state that various factors have kept more insurance
companies from offering variable annuity and variable life insurance
contracts than currently offer such contracts. 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 insurers as investment experts
with whom the public feels comfortable entrusting their investment
dollars. Use of a Trust as a common investment medium for variable
contracts would reduce or eliminate these concerns. Mixed and shared
funding also should provide several benefits to Variable Contract
owners by eliminating a significant portion of the costs of
establishing and administering separate funds. Participating Insurance
Companies will benefit not only from the investment and administrative
expertise of the Trusts' investment adviser, but also from the cost
efficiencies and investment flexibility afforded by a large pool of
funds. Mixed and shared funding also would permit a greater amount of
assets available for investment by a Portfolio, thereby promoting
economics of scale, by permitting increased safety through greater
diversification, or by making the addition of new Portfolios more
feasible. Applicants assert that the sale of shares of the Trusts to
Qualified Plans in addition to the Separate Accounts will result in an
increased amount of assets available for investment by such Trusts.
This may benefit variable contract owners by promoting economies of
scale, by permitting increased safety of investments through greater
diversification, and by making the addition of new Portfolios more
feasible.
30. Applicants assert that granting the exemptions requested by
Applicants will not compromise the regulatory purposes of Sections
9(a), 13(a), 15(a) and 15(b) of the Act or Rules 6e-2(b)(15) or 6e-
3(T)(b)(15) thereunder.
Applicants' Conditions
1. Applicants have consented to the following conditions:
a. A majority of the Board of each Trust will consist of persons
who are not ``interested persons'' of such Trust, as defined by Section
2(a)(19) of the 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 trustees, then the operation of this
condition will 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.
b. Each Board will monitor its respective Trust for the existence
of any material irreconcilable conflict between the interests of the
contract owners of all Separate Accounts and participants of all
Qualified Plans investing in such Trust, 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:
(i) An action by any state insurance regulatory authority; (ii) a
change in applicable Federal or state insurance tax, or securities laws
or regulations, or a public ruling, private letter ruling, no-action or
interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities; (iii) an administrative or judicial
decision in any relevant proceeding; (iv) the manner in which the
investments of such Trust are being managed; (v) a difference in voting
instructions given by VA contract owners, VLI contract owners, and Plan
investors or the trustees of a Qualified Plan that does not provide
voting rights to its investors; (vi) Participating Insurance Company to
disregard the voting instructions of contract owners; or (vii) if
applicable, a decision by a Qualified Plan to disregard the voting
instructions of Plan participants.
c. Each Trust will disclose in its prospectus that: (i) Shares of
such Trust may be offered to insurance company separate accounts of
both variable annuity and variable life insurance contracts and to
Qualified Plans; (ii) due to differences in tax treatment and other
considerations, the interests of various contract owners participating
in such Trust and the interests of Qualified Plans investing in such
Trust may conflict; and (iii) the Trust's Board of Trustees will
monitor events in order to identify the existence of any material
irreconcilable conflicts and to determine what action, if any, should
be taken in response to any such conflict. Each Trust shall also notify
the Qualified Plan trustees and Participating Insurance Companies that
similar prospectus disclosure may be appropriate in Participating
Separate Account prospectuses or any Plan prospectuses or other Plan
disclosure documents.
d. Each Trust will comply with all provisions of the Act requiring
voting by shareholders, including Sections 16(a), 16(b) (when
applicable) and 16(c) (even though the Trust is not a trust of the type
described therein).
e. RIEM will report any material irreconcilable conflicts or any
potential material irreconcilable conflicts between or among the
interests of VLI Contract owners, VA Contract owners and Plan
participants to the Trust's Board of Trustees and will assist the Board
in carrying out the Board's responsibilities under these conditions.
Such assistance will include, but not be limited to, providing the
Board, at least annually, with all information reasonably necessary for
the Board to consider any issues raised by such existing or potential
conflicts.
f. All reports sent by Participating Insurance Companies or
Qualified Plans to the Board of Trustees of a Trust or notices sent by
the Board of Trustees to Participating Insurance Companies or Qualified
Plans notifying the recipient of the existence of or potential for a
material irreconcilable conflict between the interests of VA Contract
owners, VLI Contract owners and Plan participants as well as Board
deliberations regarding such conflicts or such potential conflicts
shall be recorded in the board meeting minutes of the Trust or other
appropriate records, and such minutes or other records shall be made
available to the Commission upon request.
2. In addition to the foregoing conditions, Applicants consent to
the following conditions and represent and agree that if the exemptions
requested are granted, a Trust will not sell shares to any VLI Account
unless such
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Account's Participating Insurance Company enters into a participation
agreement with the Trust containing provisions that require the
following:
a. A majority vote of the disinterested trustees of a Trust shall
represent a conclusive determination as to the existence of a material
irreconcilable conflict between or among the interests of VLI Contract
owners, VA Contract owners and Qualified Plan investors. For the
purpose of subparagraph (e) below, a majority vote of the disinterested
trustees of that Trust shall represent a conclusive determination as to
whether any proposed action adequately remedies any material
irreconcilable conflict between or among the interests of VLI Contract
owners, VA Contract owners and Qualified Plan investors. The Trust
shall notify each Participating Insurance Company and Qualified Plan in
writing of any determination of the foregoing type.
b. Each Participating Insurance Company will monitor its operations
and those of the Trusts for the purpose of identifying any material
irreconcilable conflicts or potential material irreconcilable conflicts
between or among the interests of Qualified Plan investors, VA Contract
owners and VLI Contract owners.
c. Each Participating Insurance Company will report any such
conflicts or potential conflicts to a Trust's Board of Trustees and
will provide the Board, at least annually, with all information
reasonably necessary for the Board to consider any issues raised by
such existing or potential conflicts or by these conditions. Each
Participating Insurance Company will also assist the Board in carrying
out its responsibilities under these conditions including, but not
limited to: (i) Informing the Board whenever it disregards VLI Contract
owner or VA Contract owner voting instructions; and (ii) providing, at
least annually, such other information and reports as the Board may
reasonably request. Each Participating Insurance Company will carry out
these obligations with a view only to the interests of owners of its
VLI Contracts and VA Contracts.
d. Each Participating Insurance Company will provide ``pass-
through'' voting privileges to owners of registered VA Contracts and
registered VLI Contracts as long as the Act requires such privileges in
such cases. Accordingly, such Participating Insurance Companies, where
applicable, will vote Trust shares held in their Participating Separate
Accounts in a manner consistent with voting instructions timely
received from owners of such VLI and VA Contracts. Each Participating
Insurance Company will vote Trust shares owned by itself (i.e., that
are not attributable to VLI Contract or VLI Contract reserves) in the
same proportion as instructions received in a timely fashion from VA
Contract owners and VLI Contract owners and shall be responsible for
ensuring that it and other Participating Insurance Companies calculate
``pass-through'' votes for VLI Accounts and VA Accounts in a consistent
manner. Each Participating Insurance Company also will vote Trust
shares held in any registered VLI Account or registered VA Account for
which it has not received timely voting instructions in the same
proportion as instructions received in a timely fashion from VA
Contract owners and VLI Contract owners.
e. In the event that a material irreconcilable conflict of interest
arises between VA Contract owners or VLI Contract owners and Qualified
Plan participants, each Participating Insurance Company will, at its
own expense, take whatever action is necessary to remedy such conflict
as it adversely affects owners of its VA Contracts or VLI Contracts up
to and including: (i) Establishing a new registered management
investment company, and (ii) withdrawing assets attributable to
reserves for the VA Contracts or VLI Contracts subject to the conflict
from the Trust and reinvesting such assets in a different investment
medium (including another Fund of the Trust) or submitting the question
of whether such withdrawal should be implemented to a vote of all
affected VA Contract owners or VLI Contract owners, and, as
appropriate, segregating the assets supporting the contracts of any
group of such owners that votes in favor of such withdrawal, or
offering to such owners the option of making such a change. Each
Participating Insurance Company will carry out the responsibility to
take the foregoing action with a view only to the interests of owners
of its VA Contracts and VLI Contracts. Notwithstanding the foregoing,
each Participating Insurance Company will not be obligated to establish
a new funding medium for any group of VA Contracts or VLI Contracts if
an offer to do so has been declined by a vote of a majority of the VA
Contract owners or VLI Contract owners adversely affected by the
conflict.
f. If a material irreconcilable conflict arises because of a
Participating Insurance Company's decision to disregard the voting
instructions of VLI Contract owners or VA Contract owners and that
decision represents a minority position or would preclude a majority
vote at any Fund shareholder meeting, then, at the request of the
Trust's Board of Trustees, the Participating Insurance Company will
redeem the shares of the Trust to which the disregarded voting
instructions relate. No charge or penalty, however, will be imposed in
connection with such a redemption.
g. Each Participating Insurance Company and VLI Account will
continue to rely on Rule 6e-2(b)(15) and/or Rule 6e-3(T)(b)(15), as
appropriate, and to comply with all of the appropriate Rule's
conditions. In the event that rule 6e-2 and/or Rule 6e-3(T) is amended,
or any successor rule is adopted, each Participating Insurance Company
and VLI Account will instead comply with such amended or successor
rule.
h. Each Participating Insurance Company will maintain at its home
office available to the Commission a list of its officers, directors
and employees who participate directly in the management and
administration of any separate account organized at a UIT or of any
Fund. These individuals will continue to be subject to the automatic
disqualification provisions of Section 9(a).
3. In addition to the foregoing conditions, Applicants consent to
the following conditions and represent and agree that if the exemptions
requested are granted, the Trust will not sell shares of any Fund to a
Qualified Plan if such sale would result in the Qualified Plan owning
10% or more of that Fund's outstanding shares unless the Qualified Plan
first enters into a participation agreement with the Trust containing
provisions that require the following:
a. The trustees or plan committees of the Qualified Plan will: (i)
Monitor the Qualified Plan's operations and those of the Trusts for the
purpose of identifying any material irreconcilable conflicts or
potential material irreconcilable conflicts between or among the
interests of Qualified Plan participants, VA Contract owners and VLI
Contract owners; (ii) report any such conflicts or potential conflicts
to a Trust's Board of Trustees; (iii) provide the Board, at least
annually, with all information reasonably necessary for the Board to
consider any issues raised by such existing or potential conflicts and
any other information and reports that the Board may reasonably
request; (iv) inform the Board whenever it (or another fiduciary)
disregards the voting instructions of Qualified Plan participants (of a
Qualified Plan that provides voting rights to its participants); and
(v) ensure that the Qualified Plan votes Trust shares as
[[Page 42471]]
required by applicable law and governing Qualified Plan documents. The
trustees or plan committees of the Qualified Plan will carry out these
obligations with a view only to the interests of Qualified Plan
participants in its Qualified Plan.
b. In the event that a material irreconcilable conflict of interest
arises between Qualified Plan investors and VA Contract owners, VLI
Contract owners or other investors in the Trust, each Qualified Plan
will, at its own expense, take whatever action is necessary to remedy
such conflict as it adversely affects that Qualified Plan or
participants in that Qualified Plan up to and including: (i)
Establishing a new registered management investment company, and (ii)
withdrawing Qualified Plan assets subject to the conflict from the
Trusts and reinvesting such assets in a different investment medium
(including another Fund of the Trusts) or submitting the question of
whether such withdrawal should be implemented to a vote of all affected
Qualified Plan investors, and, as appropriate, segregating the assets
of any group of such participants that votes in favor of such
withdrawal, or offering to such participants the option of making such
a change. Each Qualified Plan will carry out the responsibility to take
the foregoing action with a view only to the interests of Qualified
Plan investors in its Qualified Plan. Notwithstanding the foregoing, no
Qualified Plan will be obligated to establish a new funding medium for
any group of participants or Qualified Plan investors if an offer to do
so has been declined by a vote of a majority of the Qualified Plan's
participants or Qualified Plan investors adversely affected by the
conflict.
c. If a material irreconcilable conflict arises because of a
Qualified Plan trustee's (or other fiduciary's) decision to disregard
the voting instructions of Qualified Plan participants (of a Qualified
Plan that provides voting rights to its participants) and that decision
represents a minority position or would preclude a majority vote at any
shareholder meeting, then, at the request of the Trust's Board of
Trustees, the Qualified Plan will redeem the shares of that Trust to
which the disregarded voting instructions relate. No charge or penalty,
however, will be imposed in connection with such a redemption.
4. Applicants also represent and agree that if the exemptions
requested are granted, a Trust will not sell shares of any Fund to a
Qualified Plan until the Qualified Plan executes an application
containing an acknowledgment of the condition that the Trust cannot
sell shares of any Fund to such Qualified Plan if such sale would
result in that Qualified Plan owning 10% or more of that Fund's
outstanding shares unless that Qualified Plan first enters into a
participation agreement as described above.
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 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 98-21172 Filed 8-6-98; 8:45 am]
BILLING CODE 8010-01-M