[Federal Register Volume 65, Number 126 (Thursday, June 29, 2000)]
[Notices]
[Pages 40146-40151]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-16417]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-24544; File No. 812-12048]
Investment Company Act of 1940; Potomac Insurance Trust, et al.
June 22, 2000.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for an order of exemption under section
6(c) of the Investment Company Act of 1940 (``1940 Act'') for exemption
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 pursuant to section
6(c) of the 1940 Act for exemptions from the provisions of sections
9(a), 13(a) and 15(b) of the 1940 Act and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) thereunder to the extent necessary to permit shares of any
current or future series of the Fund and shares of any other investment
company that is designed to fund variable insurance products and for
which Rafferty Asset Management, LLC (``Rafferty''), or any of its
affiliates, may serve now or in the future, as investment adviser (the
Fund and such other investment companies referred to collectively as
the ``Insurance Products Funds'') to be offered and sold to, and held
by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated insurance companies (``Participating
insurance Companies''), qualified pension and retirement plans outside
of the separate account context (``Qualified Plans''), and Rafferty or
any of its affiliates (representing seed money investments in the
insurance Products Funds)(``Order'').
Applicants: Potomac Insurance Trust (``Fund'') and Rafferty Asset
Management, LLC (``Rafferty'')
Filing Date: This application was filed on March 24, 2000.
Hearing of Notification of Hearing: An Order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing is the application or ask to be notified
if a hearing is ordered. Any requests must be received by the
Commission by 5:30 p.m. on July 17, 2000. You may request a hearing in
writing, giving the nature of your interest, the reason for your
request, and the issues you contest, and accompany such request with
proof of service on the Applicants in the form of an affidavit or, for
lawyers, a certificate of service. Persons who wish to be notified of a
hearing may request notification by writing to the Commission's
Secretary.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW., Washington, DC 20549. Applicants, Daniel D. O'Neill, Esq.,
Managing Director, Rafferty Asset Management, LLC, 1311 Mamaroneck
Avenue, White Plains, New York 10605.
FOR FURTHER INFORMATION CONTACT: Lorna MacLeod, Senior Counsel, or
Keith Carpenter, 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
Commission's Public Reference Branch, 450 Fifth Street, NW.,
Washington, DC 20549-0102 (tel. (202) 942-8090).
Applicants' Representations
1. The Fund is a Massachusetts business trust registered under the
1940 Act as an open-end management company. The Fund currently is
comprised of thirteen separately managed series, each of which has its
own investment objective and policies.\1\ Each series offers Class A
and Class B shares, each of which have a different expense structure.
Additional series could be added in the future.
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\1\ The Fund's series are: Potomac OTC Plus Fund, Potomac OTC/
Short Fund, Potomac 30 Plus Fund, Potomac 30/Short Fund, Potomac
Small Cap Plus Fund, Potomac Small Cap/Short Fund, Potomac Internet
Plus Fund, Potomac Internet/Short Fund, Potomac U.S. Plus Fund,
Potomac U.S./Short Fund, Potomac Japan Plus Fund, Potomac Japan/
Short Fund and Potomac Money Market Fund.
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2. Rafferty is registered under the Investment Advisers Act of 1940
and serves as the investment adviser for the Fund.
3. Shares of the Insurance Products Funds are or will be offered to
separate accounts of Participating Insurance Companies to serve as
investment vehicles for variable annuity and variable life insurance
contracts (including single, premium, scheduled premium, modified
single premium and flexible premium contracts) (collectively,
``Variable Contracts''). These separate accounts either will be
registered as investment companies under the 1940 Act or will be exempt
from such registration. Shares of the Insurance Product Funds also are
or will be offered to Qualified Plans.
4. The Participating Insurance Companies establish their own
separate accounts and design their own Variable Contracts. Each
Participating Insurance Company will have the legal obligation of
satisfying all applicable requirements under the federal securities
laws. The role of the Insurance Products Funds will be limited to that
of offering their shares to separate accounts of Participating
Insurance Companies and to Qualified Plans and fulfilling the
conditions set forth in the application and described later in this
notice. Each Participating Insurance Company will enter into a fund
participating agreement with the Insurance Products Fund in which the
Participating Insurance Company invests.
Applicants' Legal Analysis
1. Applicants request that the Commission issue an order under
section 6(c) of the 1940 Act granting exemptions from sections 9(a),
13(a), 15(a) and 15(b) thereof and Rules 6e-2(b)(15) and 6e-3(T)(b)(15)
thereunder, to the extent necessary to permit shares of the Insurance
Products Funds to be offered and sold to, and held by (a) variable
annuity and variable life insurance separate accounts of the same life
insurance company or of any affiliated life insurance company (``mixed
funding''); (b) separate accounts of unaffiliated life insurance
companies (including both variable annuity and variable life separate
accounts) (``shared funding''); (c) qualified pension and retirement
plans outside the separate account context; and (d) the Adviser or any
of its affiliates (representing seed money investments in the Insurance
Products Funds).
2. In connection with the funding of scheduled premium variable
life insurance contracts issued through a separate account registered
under the 1940 Act as a unit investment trust, Rule 6e-2(b)(15)
provides partial exemptions from section 9(a), 13(a), 15(a) and 15(b)
of the 1940 Act. These
[[Page 40147]]
exemptions are available only where all of the assets of the separate
account consists of the shares of one or more registered management
investment companies which offer their shares exclusively to variable
life insurance separate accounts of the life insurer of any affiliated
life insurance company. Therefore, the relief granted by Rule 6e-
2(b)(15) is not available if the scheduled premium variable life
insurance separate account owns shares of a management investment
company that also offers its shares to a variable annuity separate
account of the same insurance company or an affiliated insurance
company. In addition, the relief granted by Rule 6e-2(b)(15) is not
available if the scheduled premium variable life insurance separate
account owns shares of an underlying management investment company that
also offers its shares to separate accounts funding variable contracts
of one or more unaffiliated life insurance companies. The relief
granted by Rule 6e-2(b)(15) also is not available if the shares of the
Insurance Products Funds also are sold to Qualified Plans.
3. In connection with the funding of flexible premium variable life
insurance contracts issued through a separate account registered under
the 1940 Act as a unit investment trust, Rule 6e-3(T)(b)(15) provides
partial exemptions from sections 9(a), 13(a), 15(a) and 15(b) of the
1940 Act. These exemptions are available only where all of the assets
of the separate account consists of the shares of one or more
registered management investment companies which offer their shares
exclusively to separate accounts of the life insurer, or any affiliated
life insurance company, offering either scheduled premium variable life
insurance contracts or flexible premium variable life insurance
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. Therefore, the exemptions provided by Rule 6e-
3(T)(b)(15) are available if the underlying fund is engaged in mixed
funding, but are not available if the fund is engaged in shared funding
or if the fund sells its shares to Qualified Plans.
4. Applicants state that the current tax law permits the Insurance
Products Funds to increase their assets base through the sale of shares
to Qualified Plans. Section 817(h) of the Internal Revenue Code of
1986, as amended (the ``Code''), imposes certain diversification
standards on the underlying assets of Variable 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) during which the investments are not adequately diversified in
accordance with regulations prescribed by the Treasury Department.
Treasury regulations provide that, to meet the diversification
requirements, all of the beneficial interests in an investment company
must be held by the segregated assets accounts of one or more insurance
companies. The regulations do contain certain exceptions to this
requirement, however, one of which permits shares of an investment
company to be held by the trustee of a qualified pension or retirement
plan without adversely affecting the ability of shares in the same
investment company also to be held by the separate accounts of
insurance companies in connection with their variable annuity and
variable life contracts (Treas. Reg. 1.817.5(f)(3)(iii)).
5. Applicants state that the promulgation of Rules 6e-2 and 6e-3(T)
preceded the issuance of these Treasury regulations. Applicants assert
that, given the then current tax law, the sale of shares of the same
underlying fund to separate accounts and to Plans could not have been
envisioned at the time of the adoption of rules 6e-2(b)(15) and 6e-
3(T)(b)(15).
6. Applicants request relief for a class or classes of persons and
transactions consisting of Participating Insurance Companies and their
scheduled premium variable life insurance separate accounts and
flexible premium variable life insurance separate accounts (and, to the
extent necessary, any investment adviser, principal underwriter and
depositor of such separate accounts) investing in any of the Insurance
Products Funds.
7. Section 6(c) authorizes the Commission to grant exemptions from
the provisions of the 1940 Act, and rules thereunder, if and to the
extent that an 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.
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.
8. Section 9(a)(3) of the 1940 Act provides that it is unlawful for
any company to act as investment adviser to or principal underwriter of
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). Rules 6e-2(b)(15)(i) and (ii), and 6c-3(T)(b)(15)(i)
and (ii) provide partial exemptions from section 9(a) under certain
circumstances, subject to the limitations on mixed and shared funding.
These exemptions limit the application of eligibility restrictions to
affiliated individuals or companies that directly participate in the
management or administration of the underlying investment company.
9. Applicants state that the relief from section 9(a) provided by
Rules 6e-2(b)(15) and 6c-3(T)(b)(15), in effect, limits the amount of
monitoring necessary to ensure compliance with section 9 to that which
is appropriate in light of the policy and purposes of Section 9.
Applicants assert 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 who do not directly participate in the administration or
management of the Insurance Products Funds, who are employed by the
various unaffiliated insurance companies (or affiliated companies of
Participating Insurance Companies) that may utilize the Insurance
Products Funds as the funding medium for Variable Contracts. Applicants
do not expect the Participating Insurance Companies to play any role in
the management or administration of the Insurance Products Funds.
Applicants assert, therefore, that applying the restrictions of section
9(a) to individuals employed by Participating Insurance Companies
serves no regulatory purpose.
10. Applicants state that the relief requested should not be
affected by the proposed sale of Insurance Products Funds to Qualified
Plans because such plans are not investment companies and will not be
deemed affiliates solely by virtue of their shareholdings.
11. Applicants submit that Rule 6e-2(b)(15)(iii) and 6e-
3(T)(b)(15)(iii) assume the existence of a ``pass-through voting''
requirement with respect to management investment company shares held
by a separate account. Applicants state that Rule 6e-2(b)(15)(iii) and
6e-3(T)(b)(15)(iii) provide exceptions from the pass-through voting
requirements in limited situations, assuming the limitations on mixed
and shared funding imposed by the 1940 Act and the rules thereunder are
observed. More specifically, Rules 6e-2(b)(15)(iii)(A) and 6e-
3(T)(b)(15)(iii)(A) provide that the insurance company may disregard
the voting instructions of its contract owners in connection with the
voting of shares of an underlying investment company if such
instructions would
[[Page 40148]]
require such shares to be voted to cause an underlying investment
company to make, or refrain from making, certain investments which
would result in changes in the sub-classification or investment
objectives of such company, or to approve or disapprove any contract
between an investment company and its investment adviser, when required
to do so by an insurance regulatory authority. In addition, Rules 6e-
2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(B) provide that an insurance
company may disregard contract owners' voting instructions with regard
to changes initiated by the contract owners in the investment company's
investment policies, principal underwriter or investment adviser,
provided that disregarding such voting instructions is based on
specific good faith determinations.
12. Shares of the Insurances Products funds sold to Qualified Plans
will be held by the trustees of such plans as required by section
403(a) of the Employee Retirement Income Security Act of 1974
(``ERISA''). Section 403(a) also provides that the trustees 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 trustees are subject to the direction of a named
fiduciary who is not a trustee, in which case the trustees are subject
to proper directions made in accordance with the terms of the 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 two exceptions stated in section 403(a) applies, the
Qualified Plan trustees have exclusive authority and responsibility for
voting proxies. Where a named fiduciary appoints an investment manager,
the investment manager has the responsibility to vote the shares held
unless the right to vote such shares is reserved to the trustees or the
named fiduciary. The Qualified Plans may have their trustees or other
fiduciaries exercise voting rights attributable to investment
securities held by the Qualified Plans in their discretion. Where a
Qualified Plan does not provide its participants with the right to give
voting instructions, Applicants state that they do not see any
potential for irreconcilable material conflicts of interest between or
among Variable Contract holders and Plan participants with respect to
voting of the respective Insurance Products Funds shares. Accordingly,
Applicants note that, unlike the case with insurance company separate
accounts, the issue of the resolution of material irreconcilable
conflicts with respect to voting is not present with respect to
Qualified Plans since such plans are not entitled to pass-through
voting privileges. Even if a Qualified Plan were to hold a controlling
interest in an insurance Products Fund, the Applicants do not believe
that such control would disadvantage other investors in such Insurance
Products Fund to any greater extent than is the case when any
institutional shareholder holds a majority of the voting securities of
any open-end management investment company. In this regard, the
Applicants submit that investment in an Insurance Products Fund by a
Qualified Plan will not create any of the voting complications
occasioned by mixed funding or shared funding.
13. Applicants state that some of the Qualified Plans may provide
for the trustee(s), an investment adviser(s) or another named fiduciary
to exercise voting rights in accordance with instructions from
Qualified Plan participants. Applicants state that, in such cases, the
purchase of shares by such Qualified Plans does not present any
complications not otherwise occasioned by mixed or shared funding.
14. Applicants state that no increased conflict of interest would
be presented by the granting of the requested relief. Applicants submit
that shared funding does not present any issues that do not already
exist where a single insurance company is licensed to do business in
several states. In this regard, Applicants note that when different
Participating Insurance Companies are domiciled in different states, it
is possible that the state insurance regulatory body in a state in
which one Participating Insurance Company is domiciled could require
action that is inconsistent with the requirements of other insurance
regulators in one or more other states in which other Participating
Insurance Companies are domiciled. The possibility however, is no
different or greater than exists when a single insurer and its
affiliates offer their insurance products in several states, as is
currently permitted.
15. Applicants state that affiliation does not reduce the potential
if any exists, for differences in state regulatory requirements. In any
event, the conditions set forth in the application and later in this
notice (which are adapted from the conditions included in Rule 6e-
3(T)(b)(5)) are designed to safeguard against any adverse effects that
differences among state regulatory requirements may produce. If a
particular sate insurance regulator's decision conflicts with the
majority of other state regulators, the affected insurer may be
required to withdraw its separate account's investment in the relevant
Insurance Products Funds.
16. Applicants also assert that affiliation does not eliminate the
potential, if any exists, for divergent judgments as to when a
Participating Insurance Company could disregard Variable Contract owner
voting instructions. The potential for disagreement is limited by the
requirements that disregarding voting instructions be reasonable and
based on specified good faith determinations. However, if the
Participating Insurance Company's decision to disregard Variable
Contract owner voting instructions represents a minority position or
would preclude a majority vote approving a particular change, such
Participating Insurance Company may be required, at the election of the
relevant Insurance Products Fund, to withdraw its separate account's
investment in that Insurance Products Fund and no charge or penalty
will be imposed upon the Variable Contract owners as a result of such
withdrawal.
17. Applicants submit that there is no reason why the investment
policies of an Insurance Products Fund with mixed funding would or
should be materially different from what those policies would or should
be if such Insurance Products Fund or series thereof funded only
variable annuity or variable life insurance contracts. In this regard,
Applicants note that a fund's adviser is legally obligated to manage
the fund in accordance with the fund's investment objectives, policies
and restrictions as well as any guidelines established by the fund's
board. Applicants submit that no one investment strategy can be
identified as appropriate to a particular insurance product or to a
Plan. Each pool of variable annuity and variable life insurance
contract owners 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. Applicants submit that permitting mixed
and shared funding will provide economic support for the continuation
of the Insurance Products Funds. In addition, permitting mixed and
shared funding also will facilitate the establishment of additional
series of Insurance Product Funds serving diverse goals.
18. As noted above, section 817(h) of the Code imposes certain
diversification standards on the underlying assets of variable annuity
contracts and variable
[[Page 40149]]
life insurance contracts held in the portfolios of management
investment companies. Treasury Regulation 1.817-5(f)(3)(iii), which
established diversification requirements for such portfolios,
specifically permits, among other things, ``qualified pension or
retirement plans'' and insurance company separate accounts to share the
same underlying investment company. Therefore, Applicants assert that
neither the Code, nor the Treasury regulations, nor the revenue rulings
thereunder present any inherent conflicts of interest if the Qualified
Plans, variable annuity separate accounts, and variable life insurance
separate accounts all invest in the same management investment company.
19. While there are differences in the manner in which
distributions are taxed for variable annuity contracts, variable life
insurance contracts and Qualified Plans, Applicants state that the tax
consequences do not raise any conflict of interests. When distributions
are to be made, and the separate account of the Participating Insurance
Company or Qualified Plan cannot net purchase payments to make the
distributions, the separate account or Qualified Plan will redeem
shares of the Insurance Products Funds at their respective net asset
values. The Qualified Plan will then 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.
20. Applicants submit that the ability of the Insurance Products
Funds to sell their respective shares directly to Qualified Plans does
not create a ``senior security,'' as such term is defined under section
18(g) of the 1940 Act, with respect to any Variable Contract owner as
opposed to a participant under a Qualified Plan. As noted above,
regardless of the rights and benefits of participants under the
Qualified Plans, or Variable Contract owners under their Variable
Contracts, the Qualified Plans and the separate accounts of
Participating Insurance Companies have rights only with respect to
their respective shares of the Insurance Products Funds. They can
redeem such shares at their net asset value. No shareholder of any of
the Insurance Products Funds has any preference over any other
shareholder with respect to distribution of assets or payments of
dividends.
21. Applicants assert that there are no conflicts between the
Variable Contract owners and the Plan participants with respect to
state insurance commissioners' veto powers over investment objectives.
The basic premise of shareholder voting is that not all shareholders
may agree with a particular proposal. While time-consuming, complex
transactions must be undertaken to accomplish redemptions and transfers
by separate accounts, trustees of Qualified Plans can quickly redeem
shares from Insurance Products Funds and reinvest in other funding
vehicles without the same regulatory impediments or, as in the case
with most Qualified Plans, even hold cash or other liquid assets
pending suitable alternative investment. Applicants maintain that even
if there should arise issues where the interest of Variable Contract
owners and the interests of participants in Plans are in conflict, the
issues can be almost immediately resolved because the trustees of the
Plans can, on their own, redeem shares out of the Insurance Products
Funds.
22. Applicants submit that mixed and shared funding should provide
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 Adviser and any sub-
advisers, but also from the cost efficiencies and investment
flexibility afforded by a larger pool of assets. Mixed and shared
funding also would permit a greater amount of assets available for
investment by the Insurance Products Funds, thereby promoting economics
of scale, by permitting increased safety through greater
diversification and by making the addition of new series more feasible.
Therefore, making the Insurance Products Funds available for mixed and
shared funding will 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 and lower charges.
Applicants' Conditions
To the extent required by the Commission, Applicants consent to the
following conditions.
1. A majority of each Insurance Products Fund's Board of Trustees
or Directors (each, a ``Board'') shall consist of persons who are not
``interested persons'' thereof, as defined by Section 2(a)(19) of the
1940 Act and the Rules thereunder, and as modified by any applicable
orders of the Commission, except that if this condition is not met by
reason of the death, disqualification, or bona fide resignation of any
Board member, then the operation of this condition shall be suspended:
(a) For a period of 45 days, if the vacancy or vacancies may be filled
by the Board; (b) for a period of 60 days, if a vote of shareholders is
required to fill the vacancy or vacancies; or (c) for such longer
period as the Commission may prescribe by order upon application.
2. Each Board will monitor its respective Insurance Products Funds
for the existence of any material irreconcilable conflict between and
among the interests of the Variable Contract owners of all
Participating Separate Accounts and Qualified Plans participants
investing in the Insurance Products Funds, and determine what action,
if any, should be taken in response to such conflicts. A material
irreconcilable conflict may arise for a variety of reasons, including:
(a) An action by any state insurance regulatory authority; (b) a change
in applicable federal or state insurance, tax, or securities laws or
regulations, or a public ruling, private letter ruling, no-action or
interpretive letter, or any similar action by insurance, tax, or
securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the
investments of the Insurance Products Funds are being managed; (e) a
difference in voting instructions given by variable annuity contract
owners and variable life insurance contract owners and trustees of the
Qualified Plans; (f) a decision by a Participating Insurance Company to
disregard the voting instructions of contract owners; or (g) if
applicable, a decision by a Qualified Plan to disregard the voting
instructions of its participants.
3. Rafferty (or any other investment adviser of an Insurance
Products Fund), any Participating Insurance Company and any Qualified
Plan that executes a fund participating agreement upon becoming an
owner of 10% or more of an Insurance Product Fund (``Participants'')
will report any potential or existing conflicts to the Board of any
relevant Insurance Products Fund. Participants will be obligated to
assist the appropriate Board in carrying out its responsibilities under
these conditions by providing the Board with all information reasonably
necessary for the Board to consider any issues raised. This
responsibility includes, but is not limited to, an obligation of each
Participating Insurance Company to inform the Board whenever Variable
Contract owner voting instructions are disregarded and, if pass-through
voting is applicable, an obligation by each Qualified Plan to
[[Page 40150]]
inform the Board whenever it has determined to disregard Qualified Plan
participant voting instructions. The responsibilities to report such
information and conflicts and to assist the Boards will be contractual
obligations of all Participating Insurance Companies and Qualified
Plans investing in the Insurance Products Funds under their respective
agreements governing participation in the Insurance Products Funds, and
such agreements shall provide that these responsibilities will be
carried out with a view only to the interests of Variable Contract
owners and, if applicable, Qualified Plan participants.
4. If a majority of an Insurance Products Fund's Board members, or
a majority of the disinterested Board members, determine that a
material irreconcilable conflict exists, the relevant Participating
Insurance Companies and Qualified Plans, at their expense and to the
extent reasonably practicable (as determined by a majority of the
disinterested Board members), shall take whatever steps are necessary
to remedy or eliminate the material irreconcilable conflict, including:
(a) Withdrawing the assets allocable to some or all of the
Participating Separate Accounts from the Insurance Products Fund or any
series thereof and reinvesting such assets in a different investment
medium, which may include another series of an Insurance Products Fund;
(b) in the case of Participating Insurance Companies, submitting the
question of whether such segregation should be implemented to a vote of
all affected Variable Contract owners and, as appropriate, segregating
the assets of any appropriate group (i.e., variable annuity or variable
life insurance contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the
affected Variable Contract owners the option of making such a change,
and (c) establishing a new registered management investment company or
managed separate account. If a material irreconcilable conflict arises
because of a decision by a Participating Insurance Company to disregard
Variable Contract owner voting instructions, and that decision
represents a minority position or would preclude a majority vote, the
Participating Insurance Company may be required, at the election of the
Insurance Products Fund, to withdraw its separate account's investment
in such 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 Qualified Plan
participants' 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
Products Fund, to withdraw its investment in such 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 Products Funds and
these responsibilities shall be carried out with a view only to the
interests of the Variable Contract owners and, as applicable, Qualified
Plan participants.
For purposes of this Condition 4, a majority of the disinterested
members of the applicable Board shall determine whether or not any
proposed action adequately remedies any material irreconcilable
conflict, but in no event will the Insurance Products Fund or Rafferty
(or any other investment adviser of the Insurance Products Funds) be
required to establish a new funding medium for any Variable Contract.
No Participating Insurance Company shall be required by this Condition
4 to establish a new funding medium for any Variable Contract if a
majority of Variable Contract owners materially and adversely affected
by the material irreconcilable conflict vote to decline such offer. No
Qualified Plan shall be required by Condition 4 to establish a new
funding medium for such Qualified Plan if (a) a majority of Qualified
Plan participants materially and adversely affected by the material
irreconcilable conflict vote to decline such offer or (b) pursuant to
governing Qualified Plan documents and applicable law, the Qualified
Plan makes such decision without Qualified Plan participant vote.
5. Participants will be informed promptly in writing of a Board's
determination of existence of a material irreconcilable conflict and
its implications.
6. Participating Insurance Companies will provide pass-through
voting privileges to all Variable Contract owners so long as the
Commission interprets the 1940 Act to require pass-through voting for
Variable Contracts owners. Accordingly, such Participating Insurance
Companies, where applicable, will vote shares of the Insurance Products
Fund held in their Participating Separate Accounts in a manner
consistent with voting instructions timely received from Variable
Contract owners. In addition, each Participating Insurance Company will
vote shares of the Insurance Products Fund held in its Participating
Separate Account for which it has not received timely voting
instructions from Variable Contract owners, as well as shares it owns,
in the same proportion as those shares for which it has received voting
instructions. Participating Insurance Companies will be responsible for
assuring that each of their Participating Separate Accounts investing
in an Insurance Products Fund calculates voting privileges in a manner
consistent with all other Participating Insurance Companies. The
obligation to vote an Insurance Products Fund's shares and calculate
voting privileges in a manner consistent with all other separate
accounts investing in the Insurance Products Fund will be a contractual
obligation of all Participating Insurance Companies under the
agreements governing participating in the Insurance Products Fund. Each
Qualified Plan will vote as required by applicable law and governing
Qualified Plan documents.
7. As long as the Commission continues to interpret the 1940 Act as
requiring pass-through voting privileges for Variable Contract owners,
Rafferty (or any of its affiliates) will vote its shares in any series
of any Insurance Products Fund in the same proportion as all Variable
Contract owners having voting rights with respect to that series;
provided, however, that Rafferty (or any of its affiliates) shall vote
its shares in such other manner as may be required by the Commission or
its staff.
8. All reports of potential or existing conflicts received by a
Board, and all Board action with regard to (a) Determining the
existence of a conflict, (b) notifying Participants of a conflict and
(c) determining whether any proposed action adequately remedies a
conflict, will be properly recorded in the minutes of the meetings of
the appropriate Board or other appropriate records. Such minutes or
other records shall be made available to the Commission upon request.
9. Each Insurance Products Fund will notify all Participating
Insurance Companies that separate account prospectus disclosure
regarding the potential risks of mixed and shared funding may be
appropriate. Each Insurance Products Fund shall disclose in its
prospectus that: (a) Its shares may be offered to insurance company
separate accounts that fund both variable annuity and variable life
[[Page 40151]]
insurance contracts, and to Qualified Plans; (b) differences in tax
treatment or other considerations may cause the interests of various
Variable Contract owners participating in an Insurance Products Fund
and the interests of Qualified Plans investing in that Insurance
Product Fund to conflict; and (c) the Board will monitor the Insurance
Product Fund for any material conflicts and determine what action, if
any, should be taken.
10. Each Insurance Products fund will comply with all provisions of
the 1940 Act requiring voting by shareholders (for these purposes, the
persons having a voting interest in shares of the Insurance Products
Fund). In particular, each such Insurance Products Fund either will
provide for annual shareholder 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 none
of the Insurance Products Fund shall be one of the trusts described in
section 16(c) of the 1940 Act), as well as with sections 16(a) of the
1940 Act and, if and when applicable, section 16(b) of the 1940 Act.
Further, each insurance Products Fund will act in accordance with the
Commission's interpretation of the requirements of section 16(a) with
respect to periodic elections of Board members and with whatever rules
the Commission may promulgate with respect thereto.
11. If and to the extent that Rules 6e-2 and 6e-3(T) are amended,
or Rule 6e-3 under the 1940 Act is adopted, to provide exemptive relief
from any provision of the 1940 Act, or the rules promulgated
thereunder, with respect to mixed or shared funding, on terms and
conditions materially different from any exemptions granted in the
Order requested in this Application, then the Insurance Products Funds
and/or Participants, as appropriate, shall take such steps as may be
necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule
6e-3, as adopted, to the extent such Rules are applicable.
12. The Participants, at least annually, shall submit to the Board
such reports, materials, or data as the Board may reasonably request so
that such Board may fully carry out the obligations imposed upon them
by the conditions stated in this Application. Such reports, materials,
and data shall be submitted more frequently if deemed appropriate by
the applicable Board. The obligations of the Participants to provide
these reports, materials, and data to the Boards shall be a contractual
obligation of all Participants under the agreements governing their
participation in the Insurance Products Funds.
13. If a Qualified Plan or Qualified Plan participant should become
an owner of 10% or more of the assets of an Insurance Products Fund,
such Qualified Plan will execute a fund participation agreement which
includes the conditions set forth herein to the extent applicable. A
Qualified Plan or Qualified Plan participant will execute an
application containing an acknowledgment of this condition upon such
plan's initial purchase of shares of any Insurance Products Fund.
Conclusion
For the reasons stated above, Applicants believe that the requested
exemptions, in accordance with the standards of section 6(c) of the
1940 Act, 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. 00-16417 Filed 6-28-00; 8:45 am]
BILLING CODE 8010-01-M