[Federal Register Volume 79, Number 201 (Friday, October 17, 2014)]
[Notices]
[Pages 62482-62488]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-24877]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-31268A; File No. 812-14250]
Managed Portfolio Series, et al.; Notice of Application
October 15, 2014.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application under section 6(c) of the Investment
Company Act of 1940 (``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: Managed Portfolio Series (the ``Trust''), U.S. Bancorp
Fund Services, LLC (``USBFS''), and Tortoise Capital Advisors, L.L.C.
(``Tortoise'').
Summary of Application: Applicants request an order under 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) (or any comparable provisions of a permanent rule that
replaces rule 6e-3(T)) thereunder to permit an existing series of the
Trust, Tortoise VIP MLP & Pipeline Portfolio (``Existing Variable
Fund''), and/or any Future Variable Fund \1\ to be sold to and held by:
(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 variable
life insurance contracts (``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) (each an ``Adviser'') to a
Variable Fund for the purpose of providing seed capital to a series of
a Variable Fund; and (iv) general accounts (``General Accounts'') of
insurance company depositors of VA Accounts and/or VLI Accounts.
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\1\ As used herein, a ``Future Variable Fund'' is any investment
company (or investment portfolio or series thereof), other than the
Existing Variable Fund, designed to be sold to VA Accounts or VLI
Accounts and for which USBFS or any of its affiliates serves in the
future as investment adviser, subadviser, manager, administrator,
principal underwriter, or sponsor. The Existing Variable Fund and
any Future Variable Fund is referred to herein as a ``Variable
Fund,'' and collectively, as the ``Variable Funds.''
DATES: Filing Date: The application was filed on December 13, 2013, and
amended on July 23, 2014 and September 11, 2014.
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 by mail. Hearing requests should be received by the
Commission by 5:30 p.m. on October 31, 2014 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: Angela Pingel, Esq., U.S.
Bancorp Fund Services, LLC, 615 East Michigan Street, Milwaukee, WI
53202.
FOR FURTHER INFORMATION CONTACT: Courtney S. Thornton, Senior Counsel,
or David P. Bartels, Branch Chief (Division of Investment Management,
Chief Counsel's Office) at 202-551-6821.
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 Trust was organized as a Delaware statutory trust on January
27, 2011, and is registered under the Act as an open-end management
investment company (Reg. File No. 811-22525). The Trust is a series
investment company as defined by Rule 18f-2 under the Act and currently
is comprised of 24 series (including the Existing Variable Fund)
managed by 16 different advisers and two sub-advisers. The Trust has
registered two classes of shares of the Existing Variable Fund under
the Securities Act of 1933 (the ``1933 Act'') (Reg. File No. 333-
172080) on Form N-1A. The Trust may establish Future Variable Funds and
additional classes of shares for any of the Variable Funds. Shares of
the Variable Funds will not be offered to the general public. The
application seeks exemptive relief only for the Existing Variable Fund
and any Future Variable Fund, as defined herein, but does not seek
exemptive relief for the remaining 23 current series because they are
not designed to be sold to VA Accounts and/or VLI Accounts.
2. Tortoise is the investment adviser to the Existing Variable Fund
as well as the investment adviser to three other series of the Trust.
Tortoise is a Delaware limited liability company and is registered as
an investment adviser under the Investment Advisers Act of 1940
(``Advisers Act''). Subject to the authority of the Board of Trustees
of the Trust (``Board''), Tortoise will oversee
[[Page 62483]]
the investment operations of the Existing Variable Fund, including the
purchase, retention and disposition of securities in accordance with
the Existing Variable Fund's investment objective.
3. USBFS is a Wisconsin limited liability company. Subject to the
supervision of the Board, USBFS provides administration, fund
accounting and transfer agent services to the existing series of the
Trust, and is proposed to provide the same services to the Existing
Variable Fund and Future Variable Funds of the Trust. USBFS may provide
individuals to serve as officers of the Trust, which officers may be
directors, officers or employees of USBFS or its affiliates. USBFS is
paid a fee for its services, which may consist of a base fee, a per
account fee and/or an asset based fee.
4. The Existing Variable Fund proposes, and Future Variable Funds
will propose, to offer their shares to Separate Accounts of
Participating Insurance Companies to serve as investment media to
support variable life insurance contracts (``VLI Contracts'') and
variable annuity contracts (``VA Contracts,'' together with VLI
Contracts, ``Variable Contracts'') issued through such accounts.\2\
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. As such, the assets
of each will be the property of the Participating Insurance Company,
and that portion of the assets of such Separate Account equal to the
reserves and other contract liabilities with respect to the Separate
Account will not be chargeable with liabilities arising out of any
other business that the insurance company may conduct. The income,
gains and losses, realized or unrealized from such Separate Account's
assets will be credited to or charged against the Separate Account
without regard to other income, gains or losses of the Participating
Insurance Company. If a VLI Account or VA Account is registered as an
investment company, it will be a ``separate account'' as defined by
Rule 0-1(e) (or any successor rule) under the Act and will be
registered as a unit investment trust. For purposes of the Act, the
Participating Insurance Company that establishes such a registered VLI
Account or VA Account is the depositor and sponsor of the Separate
Account as those terms have been interpreted by the Commission with
respect to variable life insurance and variable annuity separate
accounts.
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\2\ There is currently only one participating insurance company,
a variable annuity separate account.
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5. The Variable Funds will sell their shares to Separate Accounts
only if each Participating Insurance Company sponsoring such Separate
Account enters into a participation agreement with the Variable Funds
(``Participation Agreement''). The Participation Agreements define or
will define the relationship between each Variable Fund and each
Participating Insurance Company and memorialize or will memorialize,
among other matters, the fact that, except where the agreement
specifically provides otherwise, the Participating Insurance Company
will remain responsible for establishing and maintaining any Separate
Account covered by the 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
Separate Accounts. The role of the Variable Funds under this
arrangement, with regard to the federal securities laws, will consist
of offering and selling shares of the Variable Funds to the Separate
Accounts and fulfilling any conditions that the Commission may impose
in granting the requested order.
6. The use of a common management investment company (or series
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 are affiliated persons of each other, is
referred to herein 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 two or more Participating
Insurance Companies that are not affiliated persons of each other is
referred to herein as ``shared funding.''
7. Applicants propose that the Existing Variable Fund and any
Future Variable Funds may offer their shares directly to Qualified
Plans, the respective Variable Fund's Adviser, and the General Accounts
of Participating Insurance Companies.
8. The use of a common management investment company (or series
thereof) as an investment medium for VLI Accounts, VA Accounts,
Qualified Plans, Advisers and General Accounts is referred to herein as
``extended mixed funding.''
Applicants' Legal Analysis
1. Section 9(a) of the 1940 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 1940 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 organized as unit investment trusts (``UITs'')
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
investment 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) (and any comparable
permanent rule) thereunder to permit shares of a Variable Fund to be
sold to and held by: (i) VA Accounts and VLI Accounts issued by both
affiliated and unaffiliated Participating Insurance Companies; (ii)
trustees of Qualified Plans; (iii) a Variable Fund's Adviser for the
purpose of providing seed capital to the Variable Fund; and (iv)
General Accounts.
3. Applicants maintain that there is no policy reason for the sale
of Variable Fund shares to Qualified Plans, Advisers or General
Accounts to prohibit or otherwise limit a Participating Insurance
Company from relying on the relief provided by Rules 6e-2(b)(15) and
6e-3(T)(b)(15). Nonetheless, Rule 6e-2 and Rule 6e-3(T) each
specifically provides 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 of the
Variable Funds 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-
[[Page 62484]]
3(T)(b)(15). Applicants note that if the Variable 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
Plans, Advisers, or General Accounts or to a registered investment
company's ability to sell its shares to such purchasers.
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 Variable Funds may also sell their shares to
Qualified Plans, Advisers and General Accounts. Rather, applicants
submit that the proposed sale of shares of the Variable Funds to these
purchasers 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. For the reasons explained below, Applicants have concluded that
investment by Qualified Plans, Advisers and General Accounts in the
Variable 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
Participating Insurance Companies and their separate accounts investing
in the Existing Variable Fund and Future Variable Funds, as well as
their principal underwriters, that currently invest, or in the future
will invest, in the Variable Funds.
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 any class or classes of
persons, securities or transactions, from any provision or provisions
of the Act, or any rule or regulation 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. Applicants submit
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.
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 a 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. Applicants represent that the sale of Variable Fund shares to
Qualified Plans, Advisers or General Accounts 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 Qualified Plans. The exercise of voting rights by Qualified Plans,
whether by trustees, 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 disclosed in
the application.
11. Similarly, Advisers and General Accounts are not subject to any
pass-through voting rights. Accordingly, unlike the circumstances
surrounding Separate Account investments in shares of the Variable
Funds, the issue of the resolution of any material irreconcilable
conflicts with respect to voting is not present with respect to
Advisers or General Accounts of Participating Insurance Companies.
12. Applicants recognize that the prohibitions on mixed and shared
funding might reflect concern regarding possible different investment
motivations among investors. When Rule 6e-2 was first adopted, variable
annuity separate accounts could invest in mutual funds whose shares
were also offered to the general public. However, now, under the
Internal Revenue Code of 1986 (``Code''), any underlying fund,
including the Variable Funds, that sells shares to VA Accounts or VLI
Accounts, would, in effect, be precluded from also selling its shares
to the public. Consequently, the Funds may not sell their shares to the
public.
13. Applicants assert that the rights of an insurance company or 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.
14. 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 regulator could require action
that is inconsistent with the requirements of other states in which the
insurance company offers its contracts. However, 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
[[Page 62485]]
company as the funding vehicle for affiliated insurers, which Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) permit. 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. Applicants state
that, 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 Variable Fund. This
requirement will be provided for in the Participation Agreement that
will be entered into by Participating Insurance Companies with the
relevant Variable Fund.
15. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) 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 regulators over Separate 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. 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 VLI Contract
owners. The potential for disagreement is limited by the requirements
in Rules 6e-2 and 6e-3(T) that the Participating Insurance Company's
disregard of voting instructions be reasonable and based on specific
good faith determinations.
16. 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 relevant Variable Fund's
election, to withdraw its Separate Accounts' investments in the
relevant Variable Fund. 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 by the Participating Insurance
Companies with the relevant Variable Fund.
17. Applicants assert that there is no reason why the investment
policies of a Variable Fund would or should be materially different
from what these policies would or should be if the Variable Fund
supported only VA Accounts or VLI Accounts supporting flexible premium
or scheduled premium VLI Contracts. Each type of insurance contract is
designed as a long-term investment program.
18. Each Variable Fund 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
contract. Applicants assert that 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 VLI Accounts
and VA Accounts. The sale of Variable Contracts and ultimate success of
all VA Accounts and VLI Accounts depends, at least in part, on
satisfactory investment performance, which provides an incentive for
each Participating Insurance Company to seek optimal investment
performance.
19. Furthermore, 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 Variable
Fund supporting even one type of Variable Contract must accommodate
these diverse factors in order to attract and retain purchasers.
Applicants state that permitting mixed and shared funding will provide
economic support for the continuation of the Variable Funds. Applicants
state further that mixed and shared funding will broaden the base of
potential Variable Contract owner investors, which may facilitate the
establishment of additional Variable Funds serving diverse goals.
20. 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 such conflicts
consistent with the best interests of VLI Contract owners, VA Contract
owners and Qualified Plan participants.
21. Applicants state that they considered whether there are any
issues raised under the Code, Treasury Regulations, or Revenue Rulings
thereunder, if Qualified Plans, Separate Accounts, Advisers and General
Accounts all invest in the same Variable Fund. Applicants have
concluded that neither the Code, nor the Treasury Regulations nor
Revenue Rulings thereunder present any inherent conflicts of interest
if Qualified Plans, VA Accounts, VLI Accounts, Advisers and General
Accounts all invest in the same Variable Fund.
22. Applicants note that, while there are differences in the manner
in which distributions from separate accounts and Qualified Plans are
taxed, these differences have no impact on the Variable Funds. When
distributions are to be made, and a Separate Account or Qualified Plan
is unable to net purchase payments to make distributions, the Separate
Account or Qualified Plan will redeem shares of the relevant Variable
Fund at its net asset values in conformity with rule 22c-1 under the
Act (without the imposition of any sales charge) to provide proceeds to
meet distribution needs. A Participating Insurance Company will then
make distributions in accordance with the terms of its Variable
Contracts, and a Qualified Plan will then make distributions in
accordance with the terms of the Qualified Plan.
23. Applicants state that they considered whether it is possible to
provide an equitable means of giving voting rights to Variable Contract
owners, Qualified Plans, Advisers and General Accounts. In connection
with any meeting of Variable Fund shareholders, the Variable Fund will
inform each Participating Insurance Company (with respect to its
Separate Accounts and General Account), Adviser(s), and Qualified Plan
of its 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 in
accordance with rules 6e-2 or 6e-3(T), or section 12(d)(1)(E)(iii)(aa)
of the Act, as applicable, and its Participation
[[Page 62486]]
Agreement with the relevant Variable Fund. Shares of a Variable Fund
that are held by an Adviser or a General Account will generally be in
the same proportion as all votes cast on behalf of all Variable
Contract owners having voting rights. However, an Adviser or General
Account will vote its shares in such other manner as may be required by
the Commission or its staff. 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
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 relevant Variable Fund, to withdraw its investment
in the Variable Fund, and no charge or penalty will be imposed as a
result of such withdrawal.
24. Applicants do not believe that the ability of a Variable Fund
to sell its shares to a Qualified Plan, Adviser or General Account
gives rise to a senior security as defined by section 18(g) of the Act.
Regardless of the rights and benefits of participants under Qualified
Plans or owners of Variable Contracts, VLI Accounts, VA Accounts,
Qualified Plans, Advisers and General Accounts only have, or will only
have, rights with respect to their respective shares of a Variable
Fund. These parties can only redeem such shares at net asset value. No
shareholder of a class of the Variable Fund has any preference over any
other shareholder of the class with respect to distribution of assets
or payment of dividends.
25. Applicants do not believe that the veto power of state
insurance commissioners over certain potential changes to Variable Fund
investment objectives approved by Variable Contract owners creates
conflicts between the interests of such owners and the interests of
Qualified Plan participants, Advisers or General Accounts. 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.
26. Although Participating Insurance Companies may have to overcome
regulatory impediments in redeeming shares of a Variable Fund held by
their Separate Accounts, applicants state that the Qualified Plans and
participants in participant-directed Qualified Plans can make decisions
quickly and redeem their shares in a Variable Fund 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 Variable 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 Variable Fund
shares. Advisers and General Accounts can similarly redeem their shares
of a Variable Fund and make alternative investments at any time.
27. Finally, applicants state that they 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 Variable
Contract owners and Plan participants from future changes in the
federal tax laws than that which already exists between VLI Contract
owners and VA Contract owners.
28. Applicants recognize that the foregoing is not an all-inclusive
list, but rather is representative of issues that they believe are
relevant to this application. Applicants believe that the sale of
Variable Fund shares to Qualified Plans would not increase the risk of
material irreconcilable conflicts between the interests of Qualified
Plan participants and Variable Contract owners or other investors.
Further, applicants submit that the use of the Variable Funds with
respect to Qualified Plans is not substantially dissimilar from each
Variable Fund's current and anticipated use, in that Qualified Plans,
like Separate Accounts, are generally long-term investors.
29. Applicants assert that permitting a Variable Fund to sell its
shares to an Adviser for the purpose of obtaining seed money or to the
General Account of a Participating Insurance Company will enhance
management of each Variable Fund without raising significant concerns
regarding material irreconcilable conflicts among different types of
investors.
30. Applicants assert that 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
insurance companies as investment experts. In particular, some smaller
life insurance companies may not find it economically feasible, or
within their investment or administrative expertise, to enter the
Variable Contract business on their own. Applicants state that use of
the Variable Funds as a common investment vehicle for Variable
Contracts would reduce or eliminate these concerns. Mixed and shared
funding should also provide several benefits to owners of Variable
Contracts by eliminating a significant portion of the costs of
establishing and administering separate underlying funds.
31. Applicants state that the Participating Insurance Companies
will benefit not only from the investment and administrative expertise
of the Variable Fund's Adviser, but also from the potential cost
efficiencies and investment flexibility afforded by larger pools of
funds. Therefore, making the Variable Funds available for mixed and
shared funding will encourage more insurance companies to offer
Variable Contracts. This should result in increased competition with
respect to both Variable Contract design and pricing, which can in turn
be expected to result in more product variety. Applicants also assert
that sale of shares in a Variable Fund to Qualified Plans, in addition
to VLI Accounts and VA Accounts, will result in an increased amount of
assets available for investment in a Variable Fund.
32. Applicants also submit that, regardless of the type of
shareholder in a Variable Fund, an Adviser is or would be contractually
and otherwise obligated to manage the Variable Fund solely and
exclusively in accordance with the Variable Fund's investment
objectives, policies and restrictions, as well as any guidelines
established by the Variable Fund's Board.
33. Applicants assert that sales of Variable Fund shares, as
described above, will not have any adverse federal income tax
consequences to other investors in such a Variable Fund.
34. In addition, applicants assert that granting the exemptions
requested herein is in the public interest and, as discussed above,
will not compromise the regulatory purposes of sections 9(a),
[[Page 62487]]
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 Commission order requested herein shall
be subject to the following conditions:
1. A majority of the Board of each Variable Fund will consist of
persons who are not ``interested persons'' of the Variable 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.
2. The Board will monitor a Variable 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 Variable Fund, and determine what
action, if any, should be taken in response to such conflicts. A
material irreconcilable conflict may arise for a variety of reasons,
including: (a) an action by any state insurance regulatory authority;
(b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretive letter, or any similar action by
insurance, tax or securities regulatory authorities; (c) an
administrative or judicial decision in any relevant proceeding; (d) the
manner in which the investments of the Variable Fund are being managed;
(e) a difference in voting instructions given by VA Contract owners,
VLI Contract 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 Variable
Fund), the Advisers, and any Qualified Plan that executes a
participation agreement upon its becoming an owner of 10% or more of
the assets of a Variable Fund (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 a Variable 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 a Variable
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 the 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 Variable Fund and reinvesting such
assets in a different investment vehicle, including another Variable
Fund; (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 Contact 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
from the affected Variable Fund 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 Variable Fund, to withdraw such
Participating Insurance Company's VLI Account and VA Account
investments in the Variable 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 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
Variable Fund, to withdraw its investment in the Variable 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 will be a contractual obligation of all
Participants under their participation agreement with a Variable 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 the Variable Fund or its investment adviser 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)
[[Page 62488]]
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 Variable
Contracts are issued through registered VLI Accounts or registered VA
Accounts for as long as the Commission continues to interpret the Act
as requiring such pass-through voting privileges. However, as to
Variable Contracts issued through VA Accounts or VLI Accounts not
registered as investment companies under the Act, pass-through voting
privileges will be extended to owners of such Variable Contracts to the
extent granted by the Participating Insurance Company. Accordingly,
such Participating Insurance Companies, where applicable, will vote the
shares of each Variable Fund 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 each of their VLI and VA Accounts
investing in a Variable Fund calculates voting privileges in a manner
consistent with all other Participating Insurance Companies investing
in that Variable Fund.
7. 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 the
Variable Fund. Each Participating Insurance Company will vote shares of
each Variable Fund held in its Separate Accounts for which no timely
voting instructions are received, as well as shares held in its General
Account or otherwise attributed to it, in the same proportion as those
shares for which voting instructions are received. Each Qualified Plan
will vote as required by applicable law, governing Qualified Plan
documents and as provided in this application.
8. As long as the Commission continues to interpret the Act as
requiring that pass-through voting privileges be provided to Variable
Contract owners, a Variable Fund Adviser or any General Account will
vote its respective shares of the Variable Fund in the same proportion
as all votes cast on behalf of all Variable Contract owners having
voting rights; provided, however, that such Adviser or General Account
shall vote its shares in such other manner as may be required by the
Commission or its staff.
9. Each Variable 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, the Variable 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 the Trust 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 Variable 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 thereunder.
10. A Variable Fund will make its shares available to the VLI
Accounts, VA Accounts, and Qualified Plans at or about the time it
accepts any seed capital from its Adviser, or from the General Account
of a Participating Insurance Company.
11. Each Variable 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 Variable Fund will
disclose, in its prospectus that: (a) shares of the Variable Fund may
be offered to both VA Accounts and VLI Accounts 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 the Variable Fund and the interests of Qualified Plan
participants investing in the Variable Fund, if applicable, may
conflict; and (c) the Trust's 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.
12. If and to the extent 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
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 each Variable 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.
13. Each Participant, at least annually, shall submit to the Board
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 the Variable
Fund.
14. All reports of potential or existing conflicts received by a
Board, and all Board action with regard to determining the existence of
a conflict, notifying Participants of a conflict and determining
whether any proposed action adequately remedies a conflict, will be
properly recorded in the minutes of the Board or other appropriate
records, and such minutes or other records shall be made available to
the Commission upon request.
15. Each Variable 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 the Variable Fund unless the
Qualified Plan executes an agreement with the Variable Fund governing
participation in the Variable Fund that includes the conditions set
forth herein 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 of 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. 2014-24877 Filed 10-15-14; 4:15 pm]
BILLING CODE 8011-01-P