[Federal Register Volume 78, Number 189 (Monday, September 30, 2013)]
[Notices]
[Pages 59985-59991]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-23687]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-30700; File No. 812-14108]
Variable Insurance Trust, et al.; Notice of Application
September 24, 2013.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an exemption pursuant to Section 6(c)
of the Investment Company Act of 1940, as amended (the ``Act''),
seeking exemptions 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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Applicants: Variable Insurance Trust (the ``Fund'') and MFund Services
LLC (``MFund'') (collectively, ``Applicants'').
SUMMARY: Summary of Application: Applicants request an order pursuant
to Section 6(c) of the Act granting exemptions from the provisions of
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 in cases where a life insurance company
separate account supporting variable life insurance contracts (``VLI
Accounts'') holds shares of an existing portfolio of the Fund or any
other ``Insurance Fund,'' as defined below (collectively, the
``Insurance Funds''), and one or more of the following other types of
investors also hold shares of the Insurance Funds: (i) Separate
accounts registered as investment companies or separate accounts that
are not registered as investment companies under the Act pursuant to
exemptions from registration under Section 3(c) of the Act that fund
variable annuity contracts (``VA Accounts'') and VLI Accounts (VA
Accounts and VLI Accounts together ``Separate Accounts'') issued by
both affiliated life insurance companies and unaffiliated life
insurance companies (``Participating Insurance Companies''); (ii)
trustees of qualified group pension or group retirement plans
(``Qualified Plans'') outside the Separate Account context; (iii)
investment adviser(s) or affiliated person(s) of the investment
adviser(s) to a series of an Insurance Fund (the ``Adviser''), for the
purpose of providing seed capital to a series of an Insurance Fund; and
(iv) any general account of an insurance company depositor of VA
Accounts and/or VLI Accounts (``General Accounts''). An Insurance Fund
is any investment company (or investment portfolio or series thereof),
including an existing portfolio of the Fund, designed to be sold to VA
Accounts and/or VLI Accounts and to which an Applicant or its
affiliates serve or may serve in the future as investment advisers,
investment subadvisers, investment managers, administrators, principal
underwriters or sponsors.
DATES: Filing Date: The application was filed on January 7, 2013, and
amended and restated on July 23, 2013.
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 by writing to the Secretary of the
Commission and serving Applicants with a copy of the request,
personally or
[[Page 59986]]
by mail. Hearing requests should be received by the Commission by 5:30
p.m. on October 21, 2013, and should be accompanied by proof of service
on Applicants, in the form of an affidavit or, for lawyers, a
certificate of service. Hearing requests should state the nature of the
writer's interest, the reason for the request, and the issues
contested. Persons may request notification of a hearing by writing to
the Secretary of the Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street
NE., Washington, DC 20549-1090. Applicants: Jerry Szilagyi, MFund
Services LLC, 22 High Street, Huntington, NY 11743 and Jerry Szilagyi,
Variable Insurance Trust, 5 Abbington Drive, Lloyd Harbor, NY 11743.
Copy to JoAnn Strasser, Esq., Thompson Hine LLP, 41 South High Street,
Suite 1700, Columbus, OH 43215.
FOR FURTHER INFORMATION CONTACT: Mark Cowan, Senior Counsel, or Michael
Kosoff, Branch Chief, Insured Investments Office, Division of
Investment Management at (202) 551-6795.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or for an
applicant using the Company name box, at http://www.sec.gov/search.htm,
or by calling (202) 551-8090.
Applicants' Representations
1. The Fund is registered under the Act as an open-end management
investment company (File No. 811-22512) and is currently comprised of
four portfolios, one of which, the Vice Fund Portfolio, is registered
under the Securities Act of 1933 on Form N-1A. The Fund may establish
additional portfolios and classes of shares of each portfolio in the
future. Shares of the Fund will not be offered to the general public.
2. MFund provides management and administrative services to the
Fund and other portfolios, subject to the supervision of the applicable
Board.
3. The Fund proposes, and other Insurance Funds may in the future,
offer and sell Shares to Separate Accounts of various Participating
Insurance Companies as an investment medium to support variable life
contracts (``VLI Contracts'') and variable annuity contracts (``VA
Contracts'') (collectively, ``Variable Contracts'') issued through such
Separate Accounts. Each Separate Account is, or will be, established as
a segregated asset account by a Participating Insurance Company
pursuant to the insurance law of the insurance company's state of
domicile. If a Separate Account is registered as an investment company
under the Act, or is exempt from such registration under Section 3(c)
of the Act, it will be a ``separate account'' as defined in Rule 0-1(e)
(or any successor rule) under the Act. For purposes of the Act, the
Participating Insurance Company that establishes such a Separate
Account is the depositor and sponsor of the account as those terms have
been interpreted by the Commission with respect to variable life
insurance and variable annuity separate accounts. Each Participating
Insurance Company may rely on Rule 6e-2 or Rule 6e- 3(T) under the Act.
4. The Insurance Funds will sell shares to Separate Accounts only
if each Participating Insurance Company sponsoring a Separate Account
enters into a participation agreement (a ``Participation Agreement'')
with such Insurance Fund. The Participation Agreement will govern
participation by the Participating Insurance Company in such Insurance
Fund and will memorialize, among other matters, the fact that the
Participating Insurance Company will remain responsible for
establishing and maintaining any Separate Account covered by the
Participation Agreement and for complying with all applicable
requirements of state and federal law pertaining to such accounts and
to the sale and distribution of Variable Contracts issued through such
accounts. The role of the Insurance Funds under this arrangement
insofar as federal securities laws are applicable, will consist of
offering shares to the Separate Accounts and fulfilling any conditions
that the Commission may impose upon granting the requested order.
5. The use of a common management investment company (or investment
portfolio thereof) as an investment medium for both VLI Accounts and VA
Accounts of the same Participating Insurance Company, or of two or more
insurance companies that that are affiliated persons of each other, is
referred to as ``mixed funding.'' The use of a common management
investment company (or investment portfolio thereof) as an investment
medium for VLI Accounts and/or VA Accounts of the two or more
Participating Insurance Companies that are not affiliated persons of
each other, is referred to as ``shared funding.''
6. Applicants propose that the Insurance Funds also be permitted to
offer and/or sell Shares directly to Qualified Plans and to the
Insurance Fund's Adviser or General Account of Participating Insurance
Companies.
8. The use of a common management investment company (or investment
portfolio thereof) as an investment medium for VLI Accounts, VA
Accounts, investment advisers, a General Account and Qualified Plans is
referred to herein as ``extended mixed funding.''
Applicants' Legal Analysis
1. Section 9(a)(2) of the Act makes it unlawful for any company to
serve as an investment adviser or principal underwriter of any
investment company, including a unit investment trust, if an affiliated
person of that company is subject to disqualification enumerated in
Section 9(a)(1) or (2) of the Act. Sections 13(a), 15(a), and 15(b) of
the Act have been deemed by the Commission to require ``pass-through''
voting with respect to an underlying investment company's shares.
2. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the Act provide
partial exemptions from Sections 9(a), 13(a), 15(a), and 15(b) of the
Act to VLI Accounts supporting certain VLI Contracts and to their life
insurance company depositors under limited circumstances, as described
in the application. VLI Accounts, their depositors and their principal
underwriters may not rely on the exemptions provided by Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) if shares of the Fund are held by a VLI
Account through which certain VLI Contracts are issued, a VLI Account
of an unaffiliated Participating Insurance Company, an unaffiliated
Adviser, any VA Account, a Qualified Plan or a General Account.
Accordingly, Applicants request an order of the Commission granting
exemptions 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, in cases where VLI
Account holds Shares of an Insurance Fund and one or more of the
following types of investors also hold such Shares: (i) VA Accounts and
VLI Accounts issued by both affiliated and unaffiliated Participating
Insurance Companies; (ii) Qualified Plans; (iii) a portfolio's Adviser
for the purpose of providing seed capital to a portfolio; and (iv)
General Accounts.
3. Applicants maintain that there is no policy reason for the sale
of Shares to Qualified Plans, Advisers and General Accounts to prohibit
or otherwise limit a VLI Account and its Participating Insurance
Company depositor from relying on the relief provided by Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) just because Shares are held
[[Page 59987]]
by Qualified Plans, Advisers or General Accounts. Notwithstanding, Rule
6e-2 and Rule 6e-3(T) each specifically provide that the relief granted
thereunder is available only where shares of the underlying fund are
offered exclusively to insurance company separate accounts. In this
regard, Applicants request exemptive relief to the extent necessary to
permit Shares to be sold to Qualified Plans, Advisers and General
Accounts while allowing Participating Insurance Companies and their VA
Accounts and VLI Accounts to enjoy the benefits of the relief granted
under Rule 6e-2(b)(15) and Rule 6e-3(T)(b)(15). Applicants note that if
the Insurance Funds were to sell their shares only to Qualified Plans,
exemptive relief under Rule 6e-2 and Rule 6e-3(T) would not be
necessary. The relief provided for under Rule 6e-2(b)(15) and Rule 6e-
3(T)(b)(15) does not relate to qualified pension and retirement plans
or to a registered investment company's ability to sell its shares to
such plans.
4. Applicants are not aware of any reason for excluding separate
accounts and investment companies engaged in shared funding from the
exemptive relief provided under Rules 6e-2(b)(15) and 6e-3(T)(b)(15),
or for excluding separate accounts and investment companies engaged in
mixed funding from the exemptive relief provided under Rule 6e-
2(b)(15). Similarly, Applicants are not aware of any reason for
excluding Participating Insurance Companies from the exemptive relief
requested because the Insurance Funds also may sell their Shares to
Qualified Plans, Advisers and General Accounts. Rather, Applicants
assert that the proposed sale of Shares to these purchasers, in fact,
may allow for the development of larger pools of assets resulting in
the potential for greater investment and diversification opportunities,
and for decreased expenses at higher asset levels resulting in greater
cost efficiencies.
5. Applicants have concluded, as explained in more detail below,
that investment by Qualified Plans, Advisers and General Accounts in
the Insurance Funds should not increase the risk of material
irreconcilable conflicts between owners of VLI Contracts and other
types of investors or between owners of VLI Contracts issued by
unaffiliated Participating Insurance Companies.
6. Consistent with the Commission's authority under Section 6(c) of
the Act to grant exemptive orders to a class or classes of persons and
transactions, Applicants request exemptions for a class consisting of
VLI Accounts investing in shares of existing and future portfolios of
Insurance Funds, their Participating Insurance Company depositors and
their principal underwriters that currently invest in or in the future
will invest in the Fund.
7. Section 6(c) of the Act provides, in part, that the Commission,
by order upon application, may conditionally or unconditionally exempt
any person, security or transaction or class or classes of any person,
security or transaction from any provision or provisions of the 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 Act. The Applicants submit
that the exemptions requested are appropriate and in the public
interest, consistent with the protection of investors, and consistent
with the purposes fairly intended by the policy and provisions of the
Act.
8. Section 9(a)(3) of the Act provides, among other things, that it
is unlawful for any company to serve as investment adviser or principal
underwriter of any registered open-end investment company if an
affiliated person of that company is subject to disqualification
enumerated in Sections 9(a)(1) or (2). Rules 6e-2(b)(15)(i) and (ii)
and Rules 6e-3(T)(b)(15)(i) and (ii) under the Act provide exemptions
from Section 9(a) under certain circumstances, subject to the
limitations discussed above on mixed funding, extended mixed funding
and shared funding. These exemptions limit the application of the
eligibility restrictions to affiliated individuals or companies that
directly participate in management of the underlying investment
company.
9. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) under the Act
provide exemptions from pass-through voting requirements with respect
to several significant matters, assuming the limitations on mixed
funding, extended mixed funding and shared funding are observed. 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 variable
life insurance contract owners with respect to the investments of an
underlying investment company, or any contract between such an
investment company 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 Rules 6e-2 and 6e-3(T)).
10. The Applicants represent that the sale of Shares to Qualified
Plans, the Adviser or General Account will not have any impact on the
exemptions requested herein regarding the disregard of pass-through
voting rights. Shares sold to Qualified Plans will be held by such
Plans, not insurance companies. The exercise of voting rights by
Qualified Plans, whether by trustees, other fiduciaries, participants,
beneficiaries, or investment managers engaged by the Qualified Plans,
does not raise the type of issues respecting disregard of voting rights
that are raised by VLI Accounts. With respect to Qualified Plans, which
are not registered as investment companies under the Act, there is no
requirement to pass through voting rights to Qualified Plan
participants. Indeed, to the contrary, applicable law expressly
reserves voting rights associated with Qualified Plan assets to certain
specified persons as discussed in the application.
11. Similarly, the Adviser to an Insurance Fund and the General
Accounts of Participating Insurance Companies are not subject to any
pass-through voting requirements. Accordingly, unlike the circumstances
surrounding VLI Account and VA Account investments in portfolio shares,
Applicants represent that investment in such shares by Qualified Plans
would not raise issues respecting resolution of material irreconcilable
conflicts of interest with respect to voting. Consequently, the Funds
may not sell their shares to the public.
12. Applicants assert that the rights of an insurance company on
its own initiative or on instructions from a state insurance regulator
to disregard the voting instructions of owners of Variable Contracts is
not inconsistent with either mixed funding or shared funding.
Applicants state that The National Association of Insurance
Commissioners Variable Life Insurance Model Regulation (the ``NAIC
Model Regulation'') suggests that it is unlikely that insurance
regulators would find an underlying fund's investment policy,
investment adviser or principal underwriter objectionable for one type
of Variable Contract but not another type.
13. Applicants assert that shared funding by unaffiliated insurance
companies 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 contracts. However,
[[Page 59988]]
the fact that different insurers may be domiciled in different states
does not create a significantly different or enlarged problem. 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. Applicants note that affiliated insurers 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. In any event, the
conditions set forth below are designed to safeguard against, and
provide procedures for resolving, any adverse effects that differences
among state regulatory requirements may produce. If a particular state
insurance regulator's decision conflicts with the majority of other
state regulators, then the affected Participating Insurance Company
will be required to withdraw its separate account investments in the
relevant portfolio. This requirement will be provided for in the
Participation Agreement that will be entered into by Participating
Insurance Companies with an Insurance Fund.
14. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the Act give
Participating Insurance Companies the right to disregard the voting
instructions of VLI Contract owners in certain circumstances. This
right derives from the authority of state insurance regulator over VLI
Accounts and VA Accounts. Under Rules 6e-2(b)(15) and 6e-3(T)(b)(15), a
Participating Insurance Company may disregard VLI Contract owner voting
instructions only with respect to certain specified items. Applicants
state that affiliation does not eliminate the potential, if any exists,
for divergent judgments as to the advisability or legality of a change
in investment policies, principal underwriter or investment adviser
initiated by such contract owners. The potential for disagreement is
limited by the requirements in Rules 6e-2 and 6e-3(T) under the Act
that the Participating Insurance Company's disregard of voting
instructions be reasonable and based on specific good faith
determinations.
15. Applicants state that a particular Participating Insurance
Company's disregard of voting instructions, nevertheless, could
conflict with the voting instructions of a majority of VLI Contract
owners. The Participating Insurance Company'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 VLI Contract owners should prevail, and
either could 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, then the Participating Insurance Company may be required, at the
Insurance Fund's election, to withdraw its VLI Accounts and VA
Accounts' investments in the relevant portfolio. No charge or penalty
will be imposed as a result of such withdrawal. This requirement will
be provided for in the Participation Agreement entered into between the
Participating Insurance Company and the Insurance Fund.
16. Applicants assert that there is no reason why the investment
policies of a portfolio would or should be materially different from
what these policies would or should be if the portfolio supported only
VLI Accounts or VA Accounts, whether flexible premium or scheduled
premium VLI Contracts.
17. Applicants represent that each portfolio will be managed to
attempt to achieve its specified investment objective, and not favor or
disfavor any particular Participating Insurance Company or type of
insurance contact. There is no reason to believe that different
features of various types of Variable Contracts will lead to different
investment policies for each or for different Separate Accounts. The
sale of all Variable Contracts and ultimate success of all Separate
Accounts depends, at least in part, on satisfactory investment
performance, which provides an incentive for each Participating
Insurance Company to seek optimal investment performance.
18. Furthermore, Applicants state that no single investment
strategy can be identified as appropriate to a particular Variable
Contract. Each ``pool'' of VLI Contract and VA Contract owners is
composed of individuals of diverse financial status, age, insurance
needs and investment goals. A portfolio supporting even one type of
Variable Contract must accommodate these diverse factors in order to
attract and retain purchasers. Permitting mixed and shared funding will
provide economic support for the continuation of the portfolios. Mixed
and shared funding will broaden the base of potential Variable Contract
owners, which may facilitate the establishment of additional portfolios
serving diverse goals.
19. Applicants do not believe that the sale of the Shares to
Qualified Plans, Advisers or General Accounts will increase the
potential for material irreconcilable conflicts of interest between or
among different types of investors. In particular, Applicants see very
little potential for such conflicts beyond those that would otherwise
exist between owners of VLI Contracts and VA Contracts. Applicants
submit that either there are no conflicts of interest or that there
exists the ability by the affected parties to resolve potential
conflicts consistent with the best interests of Variable Contract
owners and participants in Qualified Plans.
20. Applicants considered whether there are any issues raised under
the Internal Revenue Code, Treasury Regulations, or Revenue Rulings
thereunder, if Qualified Plans, VLI Accounts, VA Accounts, Advisers and
General Accounts all invest in the same portfolio. Applicants have
concluded that neither the Code, nor the Treasury Regulations nor
Revenue Rulings thereunder, present any inherent conflicts of interest
if Qualified Plans, Advisers, General Accounts, VLI Accounts and VA
Accounts all invest in the same portfolio. Applicants note that, while
there are differences in the manner in which distributions from VLI
Accounts and Qualified Plans are taxed, these differences have no
impact on the portfolios.
21. Applicants considered whether it is possible to provide an
equitable means of giving voting rights to VLI Contract owners and to
Qualified Plans. In connection with any meeting of an Insurance Fund
shareholders, the relevant transfer agent will inform each
Participating Insurance Company, Adviser and Qualified Plan of their
share holdings and provide other information necessary for such
shareholders to participate in the meeting (e.g., proxy materials).
Each Participating Insurance Company then will solicit voting
instructions from owners of VLI Contracts and VA Contracts as required
by Rules 6e-2 and 6e-3(T), or Section 12(d)(1)(E)(iii)(aa) of the Act,
as applicable, and its Participation Agreement with an Insurance Fund.
Shares held by a General Account of a Participating Insurance Company
will be voted by the Participating Insurance Company in the same
proportion as shares for which it receives voting instructions from its
Variable Contract owners. Shares held by Qualified Plans will be voted
in accordance with applicable law. The voting rights provided to
Qualified Plans with respect to the shares would be no different from
the voting rights that are provided to Qualified Plans with respect to
shares of mutual funds sold to the general public. Furthermore, if a
material irreconcilable conflict arises because of a Qualified Plan's
[[Page 59989]]
decision to disregard Qualified 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 a
portfolio, and no charge or penalty will be imposed as a result of such
withdrawal.
22. Applicants do not believe that the ability of an Insurance Fund
to sell Shares directly to its Adviser, Qualified Plans, or a General
Account of a Participating Insurance Company gives rise to a senior
security. ``Senior Security'' is defined in Section 18(g) of the Act to
include ``any stock of a class having priority over any other class as
to distribution of assets or payment of dividends.'' As noted above,
regardless of the rights and benefits of participants under Qualified
Plans and owners of VLI Contracts, VLI Accounts, VA Accounts,
Participating Insurance Companies, Qualified Plans, General Accounts
and the Adviser, only have, or will only have, rights with respect to
their respective Shares. These parties can only redeem such Shares at
net asset value. No shareholder of a portfolio has any preference over
any other shareholder with respect to distribution of assets or payment
of dividends.
23. Applicants do not believe that the veto power of state
insurance commissioners over certain potential changes to portfolio
investment objectives approved by owners of VLI Contracts creates
conflicts between the interests of such owners and the interests of
Qualified Plan participants. Applicants note that a basic premise of
corporate democracy and shareholder voting is that not all shareholders
may agree with a particular proposal. Their interests and opinions may
differ, but this does not mean that inherent conflicts of interest
exist between or among such shareholders or that occasional conflicts
of interest that do occur between or among them are likely to be
irreconcilable.
24. Although Participating Insurance Companies may have to overcome
regulatory impediments in redeeming shares of a portfolio held by their
VLI Accounts, the Qualified Plans and the participants in participant-
directed Qualified Plans can make decisions quickly and redeem their
Shares and reinvest in another investment company or other funding
vehicle without impediments, or as is the case with most Qualified
Plans, hold cash pending suitable investment. As a result, conflicts
between the interests of VLI Contract owners and the interests of
Qualified Plans and Qualified Plan participants can usually be resolved
quickly since the Qualified Plans can, on their own, redeem their
Shares.
25. Finally, Applicants considered whether there is a potential for
future conflicts of interest between Participating Insurance Companies
and Qualified Plans created by future changes in the tax laws.
Applicants do not see any greater potential for material irreconcilable
conflicts arising between the interests of participants in the
Qualified Plans and VLI Contract owners (or for that matter, VA
Contract owners) and Qualified Plan participants from future changes in
the federal tax laws than that which already exists between Variable
Contract owners.
26. Applicants believe that the discussion contained in the
application demonstrates that the sale of shares to Qualified Plans
does not increase the risk of material irreconcilable conflicts of
interest between the interests of Qualified Plan participants and VLI
Contract owners or other investors. Further, Applicants submit that the
use of a portfolio with respect to Qualified Plans is not substantially
dissimilar from each portfolio's current and anticipated use, in that
Qualified Plans, like VLI Accounts, are generally long-term investors.
27. Applicants assert that permitting an Insurance Fund to sell
Shares to its Adviser (for the purpose of obtaining seed capital) or to
the General Account of a Participating Insurance Company will enhance
management of the Insurance Fund without raising significant concerns
regarding material irreconcilable conflicts among different types of
investors.
28. Various factors have limited the number of insurance companies
that offer Variable Contracts. These factors include the costs of
organizing and operating a funding vehicle, certain insurers' lack of
experience with respect to investment management, and the lack of name
recognition by the public of certain insurers 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
a portfolio as a common investment vehicle for VLI Accounts would
reduce or eliminate these concerns. Mixed and shared funding should
also provide several benefits to VLI Contract owners by eliminating a
significant portion of the costs of establishing and administering
separate underlying funds.
29. Applicants state that Participating Insurance Companies will
benefit not only from the investment expertise of the Adviser, but also
from the potential cost efficiencies and investment flexibility
afforded by larger pools of funds. Mixed and shared funding also would
permit a greater amount of assets available for investment by a
portfolio, thereby promoting economies of scale, by permitting
increased safety through greater diversification, or by making the
addition of new portfolios more feasible. Therefore, making the
portfolios available for mixed and shared funding will encourage more
insurance companies to offer VLI Accounts. This should result in
increased competition with respect to both VLI Account design and
pricing, which can in turn be expected to result in more product
variety.
30. Applicants also submit that, regardless of the type of
shareholder in a portfolio, the Adviser is or would be contractually
and otherwise obligated to manage the portfolio solely and exclusively
in accordance with that portfolio's investment objectives, policies and
restrictions, as well as any guidelines established by the Board.
31. Applicants assert that sales of Shares as described above will
not have any adverse federal income tax consequences to other investors
in the portfolios.
32. In addition, Applicants assert that granting the exemptions
requested in the application is in the public interest and, as
discussed above, will not compromise the regulatory purposes of
Sections 9(a), 13(a), 15(a), or 15(b) of the Act or Rules 6e-2 or 6e-
3(T) thereunder.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions, which shall apply to each
Insurance Fund:
1. A majority of the Board will consist of persons who are not
``interested persons'' of an Insurance Fund, 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 death, disqualification or bona fide resignation
of any trustee or trustees, then the operation of this condition will
be suspended: (a) For a period of 90 days if the vacancy or vacancies
may be filled by the Board; (b) for a period of 150 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 or by future rule.
[[Page 59990]]
2. The Board will monitor an Insurance Fund for the existence of
any material irreconcilable conflict between and among the interests of
the owners of all VLI Contracts and VA Contracts and participants of
all Qualified Plans investing in the Insurance Fund, and determine what
action, if any should be taken in response to such conflicts. A
material irreconcilable conflict may arise for a variety of reasons,
including: (a) An action by any state insurance regulatory authority;
(b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretive letter, or any similar action by
insurance, tax or securities regulatory authorities; (c) an
administrative or judicial decision in any relevant proceeding; (d) the
manner in which the investments of an Insurance Fund are being managed;
(e) a difference in voting instructions given by VA Contracts owners,
VLI Contact owners, and Qualified Plans or Qualified Plan participants;
(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
Qualified Plan participants.
3. Participating Insurance Companies (on their own behalf, as well
as by virtue of any investment of General Account assets in a portfolio
of an Insurance Fund), an adviser and its affiliates, and any Qualified
Plan that executes a Participation Agreement upon becoming an owner of
10 percent or more of the assets of a portfolio (collectively,
``Participants'') will report any potential or existing conflicts to
the Board. Each Participant will be responsible for assisting the Board
in carrying out the Board's responsibilities under these conditions by
providing the Board with all information reasonably necessary for the
Board to consider any issues raised. This responsibility includes, but
is not limited to, an obligation by each Participating Insurance
Company to inform the Board whenever variable Contract owner voting
instructions are disregarded, and, if pass-through voting is
applicable, an obligation by each Trustee for a Qualified Plan to
inform the Board whenever it has determined to disregard Qualified Plan
participant voting instructions. The responsibility to report such
information and conflicts, and to assist the Board, will be a
contractual obligation of all Participating Insurance Companies under
their Participation Agreement with the relevant Insurance Fund, and
these responsibilities will be carried out with a view only to the
interests of the Variable Contract owners. The responsibility to report
such information and conflicts, and to assist the Board, also will be
contractual obligations of all Qualified Plans under their
Participation Agreement with the relevant Insurance Fund, and such
agreements will provide that these responsibilities will be carried out
with a view only to the interests of Qualified Plan participants.
4. If it is determined by a majority of the Board, or a majority of
the disinterested trustees of such Board, that a material
irreconcilable conflict exists, then the relevant Participant will, at
its expense and to the extent reasonably practicable (as determined by
a majority of the disinterested trustees), take whatever steps are
necessary to remedy or eliminate the material irreconcilable conflict,
up to and including: (a) Withdrawing the assets allocable to some or
all of their VLI Accounts or VA Accounts from the relevant portfolio
and reinvesting such assets in a different investment vehicle including
another portfolio, (b) in the case of a Participating Insurance
Company, submitting the question as to 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.,
VA Contract owners or VLI Contract owners of one or more Participating
Insurance Companies) that votes in favor of such segregation, or
offering to the affected Contract owners the option of making such a
change; (c) withdrawing the assets allocable to some or all of the
Qualified Plans or Separate Accounts from the affected portfolio or
Participating Insurance Company and reinvesting them in a different
investment medium and (d) 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, then the Participating Insurance Company may
be required, at the election of the Insurance Fund, to withdraw such
Participating Insurance Company's VLI Account and VA Account
investments in a portfolio, 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 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 portfolio, 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 will be a contractual obligation of all Participants under their
Participation Agreement with an Insurance Fund, and these
responsibilities will be carried out with a view only to the interests
of Variable Contract owners or, as applicable, Qualified Plan
participants.
For purposes of this Condition 4, a majority of the disinterested
trustees of the Board will determine whether or not any proposed action
adequately remedies any material irreconcilable conflict, but, in no
event, will an Insurance Fund or its Adviser, as relevant, be required
to establish a new funding vehicle for any Variable Contract or
Qualified Plan. No Participating Insurance Company will be required by
this Condition 4 to establish a new funding vehicle for any Variable
Contract if any offer to do so has been declined by vote of a majority
of the Variable Contract owners materially and adversely affected by
the material irreconcilable conflict. Further, no Qualified Plan will
be required by this Condition 4 to establish a new funding vehicle for
the Qualified Plan if: (a) A majority of the Qualified Plan
participants materially and adversely affected by the irreconcilable
material conflict vote to decline such offer, or (b) pursuant to
documents governing the Qualified Plan, the Qualified Plan trustee
makes such decision without a Qualified Plan participant vote.
5. The determination by the Board of the existence of a material
irreconcilable conflict and its implications will be made known in
writing promptly to all Participants.
6. Participating Insurance Companies will provide pass-through
voting privileges to all Variable Contract owners whose Contracts are
issued through registered VLI Accounts or registered VA Accounts for as
long as required by the Act as interpreted by the Commission. However,
as to Variable Contracts issued through VLI Accounts or VA Accounts,
not registered as investment companies under the Act, pass-through
voting privileges will be extended to Variable Contract owners to the
extent granted by the Participating Insurance Company. Accordingly,
such Participating Insurance Companies,
[[Page 59991]]
where applicable, will vote the shares of each portfolio held in their
VLI Accounts and VA Accounts in a manner consistent with voting
instructions timely received from Variable Contract owners.
Participating Insurance Companies will be responsible for assuring that
their VLI Accounts and VA Accounts investing in the relevant portfolio
calculate voting privileges in a manner consistent with all other
participants.
The obligation to calculate voting privileges as provided in this
Application shall be a contractual obligation of all Participating
Insurance Companies under their Participation Agreement with an
Insurance Fund. Each Participating Insurance Company will vote Shares
held in its VLI Accounts or VA Accounts for which it has not received
timely voting instructions, as well as Shares held in its General
Account or otherwise attributed to it, in the same proportion as those
shares for which it has received voting instructions. Each Qualified
Plan will vote as required by applicable law, governing Qualified Plan
documents and as provided in this application.
7. As long as the Act requires pass-through voting privileges to be
provided to Variable Contract owners or the Commission interprets the
Act to require the same, an Adviser or any General Account will vote
their respective Shares in the same proportion as all votes cast on
behalf of all Variable Contract owners having voting rights; provided,
however, that the Adviser or General Account will vote its shares in
such other manner as may be required by the Commission or its staff.
8. Each Insurance Fund will comply with all provisions of the Act
requiring voting by shareholders (which, for these purposes, shall be
the persons having a voting interest in its shares) and, in particular,
an Insurance Fund will either provide for annual meetings (except to
the extent that the Commission may interpret Section 16 of the Act not
to require such meetings) or comply with Section 16(c) of the Act
(although each Insurance Fund is not, or will not be, one of those
trusts of the type described in Section 16(c) of the Act), as well as
with Section 16(a) of the Act and, if and when applicable, Section
16(b) of the Act. Further, each Insurance Fund will act in accordance
with the Commission's interpretations of the requirements of Section
16(a) with respect to periodic elections of trustees and with whatever
rules the Commission may promulgate thereto.
9. An Insurance Fund will make available Shares under a Variable
Contract and/or Qualified Plan at or about the time it accepts any seed
capital from the Adviser or from a General Account of a Participating
Insurance Company.
10. Each Insurance Fund has notified, or will notify, all
Participants that disclosure regarding potential risks of mixed and
shared funding may be appropriate in VLI Account and VA Account
prospectuses or Qualified Plan documents. Each Insurance Fund will
disclose, in its prospectus that: (a) Shares may be offered to VLI
Accounts and VA Accounts funding both VA Contracts and VLI Contracts
and, if applicable, to Qualified Plans; (b) due to differences in tax
treatment and other considerations, the interests of various Variable
Contract owners participating in an Insurance Fund and the interests of
Qualified Plans investing in an Insurance Fund, if applicable, may
conflict; and (c) the Board will monitor events in order to identify
the existence of any material irreconcilable conflicts and to determine
what action, if any, should be taken in response to any such conflicts.
11. If and to the extent that Rule 6e-2 and Rule 6e-3(T) under the
Act are amended, or proposed Rule 6e-3 under the Act is adopted, to
provide exemptive relief from any provision of the 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 an Insurance Fund and/
or Participating Insurance Companies, as appropriate, shall take such
steps as may be necessary to comply with Rules 6e-2 or 6e-3(T), as
amended, or Rule 6e-3, to the extent such rules are applicable.
12. Each Participant, at least annually, shall submit to the Board,
on behalf of an Insurance Fund, such reports, materials or data as the
Board reasonably may request so that the trustees may fully carry out
the obligations imposed upon the Board by the conditions contained in
this Application. Such reports, materials and data shall be submitted
more frequently if deemed appropriate by the Board. The obligations of
the Participants to provide these reports, materials and data to the
Board, when it so reasonably requests, shall be a contractual
obligation of all Participants under their Participation Agreement with
an Insurance Fund.
13. All reports of potential or existing conflicts received by the
Board, on behalf of an Insurance Fund, 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.
14. Each Insurance Fund will not accept a purchase order from a
Qualified Plan if such purchase would make the Qualified Plan an owner
of 10 percent or more of the assets of a portfolio unless the Qualified
Plan executes an agreement with an Insurance Fund governing
participation in the portfolio that includes the conditions set forth
in the Application to the extent applicable. A Qualified Plan will
execute an application containing an acknowledgement of this condition
at the time of its initial purchase of shares.
Conclusion
Applicants submit, for all the reasons explained above, that the
exemptions requested 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.
Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2013-23687 Filed 9-27-13; 8:45 am]
BILLING CODE 8011-01-P