[Federal Register Volume 60, Number 228 (Tuesday, November 28, 1995)]
[Notices]
[Pages 58707-58710]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28927]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21526; File No. 812-7659]
Vanguard Variable Insurance Fund, et al.
November 20, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (``1940 Act'').
-----------------------------------------------------------------------
APPLICANTS: Vanguard Variable Insurance Fund (``Fund'') and The
Vanguard Group, Inc. (``Vanguard'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) for
exemptions from Sections 9(a), 13(a), 15(a), and 15(b) and Rules 6e-
2(b)(15) and 6e-3(T) (b) (15) thereunder.
SUMMARY OF APPLICATION: Applicants seek an order to permit shares of
the Fund to be sold to and held by variable annuity and variable life
separate accounts of both affiliated and unaffiliated life insurance
companies.
FILING DATE: The application was filed on December 20, 1990 and amended
on July 23, 1991, August 11, 1995, November 1, 1995 and November 6,
1995.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing on the application by writing to the
Secretary of the SEC and serving Applicants with a copy of the request,
personally or by mail. Hearing requests must be received by the SEC by
5:30 p.m. on December 15, 1995, and should be accompanied by proof of
service on the Applicants, in the form of an affidavit or, for lawyers,
a certificate of service. Hearing requests should state the nature of
the writer's interest, the reason for the request, and the issues
contested. Persons may request notification of the date of the hearing
by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants: P.O. Box 2600, Valley Forge, Pennsylvania 19482.
FOR FURTHER INFORMATION CONTACT:
Joyce Merrick Pickholz, Senior Counsel, or Wendy Finck Friedlander,
Deputy Chief, on (202) 942-0670, Office of Insurance Products, Division
of Investment Management.
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the SEC's Public
Reference Branch.
Applicants' Representations
1. The Fund, a Pennsylvania business trust registered under the
1940 Act as an open-end management investment company, currently
consists of seven series, each with its own investment objective and
policies. The Fund is a member of The Vanguard Group of Investment
Companies (``The Vanguard Group''), a family of over 32 investment
companies. The Fund and the other funds in The Vanguard Group obtain
virtually all of their corporate management, administrative,
shareholding accounting and distribution services at cost through their
jointly owned subsidiary, The Vanguard Group, Inc. Vanguard Marketing
Corporation (``VMC''), a broker-dealer subsidiary of The Vanguard
Group, Inc., markets the shares of the investment companies in the
Vanguard Group. An order granting the exemptive relief necessary to
implement this arrangement (``Vanguard Order'') was issued by the
Commission on February 25, 1981 (IC-11645) and amended on December 29,
1992 (IC-19184).
2. The Fund presently sells its shares only to separate accounts of
Providian Life & Health Insurance Company (formerly, National Home Life
Assurance Company) and First Providian Life & Health Insurance Company
(formerly, National Home Life Assurance Company of New York) to fund
variable annuity contracts. The annuity contracts are distributed
without the imposition of a sales load. Vanguard, through VMC, is the
sole distributor of the contracts and bears all expenses related to the
distribution of such contracts. As a member of the Vanguard Group, the
Fund contributes to the cost of VMC's distribution efforts in
accordance with provisions of the Vanguard Order.
3. As a member of The Vanguard Group, the Fund contributes to
distribution expenses of VMC under the Vanguard Modified Formula
(``VMF'') on the same basis as the other funds in The Vanguard Group.
The Fund currently accrues for such costs an amount of approximately
.02% of assets annually to cover its share of the cost of distributing
shares of the investment companies in The Vanguard Group. Applicants
state that this amount is one tenth of the .20% limit contained in the
Vanguard Order. Applicants represent that no part of this fee is paid
to the Providian companies nor will they receive any other payments
from either Vanguard or the Fund.
4. The Fund intends to sell its shares to separate accounts of
Ameritas Life Insurance Corp. (``ALIC'') and separate accounts of other
unaffiliated insurance companies (together with ALIC and Providian,
``Participating Insurance Companies'') to serve as the investment
vehicle for variable annuity contracts, scheduled premium variable life
insurance contracts and flexible premium variable life insurance
contracts (collectively, ``Variable Contracts'').
5. Although ALIC may offer variable annuity products in the future,
it currently plans to offer and distribute, through Ameritas Investment
Corp. its principal underwriter, variable life insurance contracts
utilizing the Fund as their underlying funding vehicle. These variable
life insurance contracts will not be subject to a sales load,
contingent deferred sales charge, or a surrender charge. The contracts
will be subject, however, to a 3.5% premium charge (guaranteed not to
exceed 5%) to reimburse ALIC for premium taxes and the expense of
deferring the tax deduction of policy acquisition costs (``DAC Tax'').
According to the Applicants, ALIC has applied for a Commission order
that would permit the imposition of the DAC Tax charge without treating
such charge as sales load. Applicants represent that no part of the VMF
fee paid by the Fund to Vanguard is paid to ALIC nor will ALIC receive
any other payments from either Vanguard or the Fund.
[[Page 58708]]
6. Applicants propose to sell shares only to Participating
Insurance Companies which offer their Variable Contracts utilizing the
Fund as their underlying funding vehicle, without the imposition of a
sales load, contingent deferred sales charge, or surrender charge.
Applicants represent that, if such Participating Insurance Companies
anticipate imposing a DAC Tax charge, they will have received the
appropriate exemptive order from the Commission before imposing such
charge. Applicants affirm that no portion of the Fund's contribution to
Vanguard for distribution expenses will be paid to the Participating
Insurance Companies, nor will such Participating Insurance Companies
receive any other payments from either Vanguard or the Fund. Any
participation agreement between the Fund and a Participating Insurance
Company will include the requirements contained in this paragraph as
conditions to such agreement.
Applicants' Legal Analysis
1. In connection with scheduled premium variable life insurance
contracts issued through a separate account registered under the 1940
Act as a unit investment trust, Rule 6e-2(b)(15) provides partial
exemption from Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act.
The exemptions granted to a separate account (and any investment
adviser, principal underwriter and depositor thereof) by Rule 6e-
2(b)(15), however, are not available with respect to a scheduled
premium variable life insurance separate account that owns shares of an
investment company that also offers its shares to a variable annuity
separate account of the same or of any affiliated or unaffiliated
insurance company (``mixed funding''). In addition, the relief granted
by Rule 6e-2(b)(15) is not available if shares of the underlying
investment company are offered to variable annuity or variable life
insurance separate accounts of unaffiliated insurance companies
(``shared funding''). Accordingly, Applicants seek an order exempting
scheduled premium variable life insurance separate accounts (and, to
the extend necessary, any investment adviser, principal underwriter and
depositor of such an account) from Sections 9(a), 13(a), 15(a) and
15(b) of the 1940 Act, and Rule 6e-2(b)(15) thereunder, to the extent
necessary to permit shares of the Fund to be offered and sold in
connection with both mixed funding and shared funding.
2. In connection with flexible premium variable life insurance
contracts issued through a separate account registered under the 1940
Act as a unit investment trust, Rule 6e-3(T)(b)(15) provides partial
exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act.
The exemptions granted to a separate account (and to any investment
adviser, principal underwriter and depositor thereof) by Rule 6e-
3(T)(b)(15) permit mixed funding of flexible premium variable life
insurance but preclude shared funding. Accordingly, Applicants seek an
order exempting flexible premium variable life insurance separate
accounts (and, to the extent necessary, any investment adviser,
principal underwriter and depositor of such an account) from Sections
9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and Rule 6e-3(T)(b)(15)
(and any comparable permanent rule) thereunder, to the extent necessary
to permit shares of the Fund to be offered and sold to separate
accounts in connection with shared funding.
3. Section 9(a) of the 1940 Act provides that it is unlawful for
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 Section 9(a) (1)
or (2). However, Rule 6e-2(b)(15) (i) and (ii) and Rule 6e-3(T)(b)(15)
(i) and (ii) provide partial exemptions from Section 9(a) under certain
circumstances, subject to the limitation discussed above on mixed and
shared funding. These exemptions limit the disqualification to
affiliated individuals or companies that directly participate in the
management or administration of the underlying investment company.
Applicants assert that although costs would increase, no regulatory
benefit would result from the application of Section 9(a) to the many
employees of Participating Insurance Companies who are not involved in
the management or administration of the separate account. Applicants
submit that Section 9(a) would still apply to those persons who should
remain disqualified under the 1940 Act.
4. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) provide partial
exemptions from Section 13(a), 15(a), and 15(b) of the 1940 Act to the
extent that those sections have been deemed by the Commission to
require ``pass-through'' voting with respect to management investment
company shares held by a separate account, to permit the insurance
company to disregard the voting instructions of its contractowners in
certain limited circumstances when required to do so by a state
insurance regulatory authority. Paragraph (b)(15) of both Rules 6e-2
and 63-3(T) provides that the insurance company may disregard voting
instructions if its contractowners initiate any change in such
company's investment policies, principal underwriter or any investment
adviser, provided that disregarding such voting instructions is
reasonable and subject to certain other provisions in the Rules.
However, a particular insurer's disregard of voting instructions could
conflict with the majority of contractowner voting instructions.
Applicants state that if a particular insurance company's disregard of
voting instructions conflicted with a majority of the contractowner's
voting instructions, or precluded a majority vote, the Fund may require
the insurer to withdraw its separate account's investment in the Fund.
5. 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 some or all
states. In this regard, Applicants state that a particular state
insurance regulatory body could require action that is inconsistent
with the requirements of insurance regulators in other states in which
Participating Insurance Companies may be domiciled. Applicants submit
that this possibility is no different or no greater than that which
exists where a single insurer and its affiliates offer their insurance
products in several states. Applicants state that there is no reason
why the Fund's investment policies would or should be materially
different from what they would or should be if it funded only variable
annuity contracts or only variable life insurance contracts. Further,
there is no reason to believe that different features of various types
of contracts will led to different investment policies for different
types of variable contracts. Applicants represent that the Fund will
not be managed to favor or disfavor any particular Participating
Insurance Company or type of insurance product. Applicants submit that
there is no significant legal impediment to permitting mixed and shared
funding and they note that separate accounts organized as unit
investment trusts have historically been employed to accumulate shares
of mutual funds which have not been affiliated with the depositor or
sponsor of the separate account. Finally, Applicants assert that mixed
and shared funding will have no adverse federal income tax
consequences.
6. Applicants argue that mixed and shared funding should benefit
variable contractowners by: (1) Eliminating a significant portion of
the costs of
[[Page 58709]]
establishing and administering separate funds; (2) allowing for the
development of larger pools of assets resulting in greater cost
efficiencies; and (3) encouraging more insurance companies to offer
variable contracts, which should result in increased competition and
lower contract costs. Applicants assert that the Fund's series will not
be managed to favor or disfavor any particular insurer or type of
insurance contract.
7. Finally, Applicants state that, as a member of The Vanguard
Group, the Fund receives the same benefits and advantages offered to
the other funds in The Vanguard Group. As discussed in the application
and the Vanguard Order, such benefits include the name recognition,
growth of complex-wide assets, and reduced per share expenses resulting
from Vanguard's complex-wide and individual fund marketing and
advertising. Applicants submit that VMC incurs costs and obligations to
make such benefits available and it would not be fair to the other
funds in The Vanguard Group, or permissible under the Vanguard Order,
to free the Fund of its share of such costs, since it participates in
the benefits of such efforts.
Applicants' Conditions
Applicants consent to the following conditions if an order is
granted:
1. A majority of the Fund's Board of Trustees (``Board'') shall
consist of persons who are not ``interested persons'' of the Fund, as
defined by Section 2(a) (19) of the 1940 Act, except that if this
condition is not met by reason of death, disqualification, or bona fide
resignation of any trustee, then the operation of this condition shall
be suspended (a) For a period of 45 days if the vacancy or vacancies
may be filled by the Board; (b) for a period of 60 days if a vote of
shareholders is required to fill the vacancy or vacancies; or (c) for
such longer period as the Commission may prescribe by order upon
application.
2. The Board will monitor the Fund for the existence of any
material irreconcilable conflict between the interests of the
contractowners of all separate accounts investing in the Fund. An
irreconcilable material conflict may arise for a variety of reasons,
including: (i) An action by any state insurance regulatory authority;
(ii) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter
ruling, or any similar action by insurance, tax, or securities
regulatory authorities; (iii) an administrative or judicial decision in
any relevant proceeding; (iv) the manner in which the investments of
any series are being managed; (v) a difference in voting instructions
given by variable annuity contractowners and variable life insurance
contractowners or contractowners of different Participating Insurance
Companies; or (vi) a decision by an insurer to disregard the voting
instructions of contractowners.
3. Participating Insurance Companies and Vanguard will report any
potential or existing conflicts to the Board. Participating Insurance
Companies and Vanguard will be responsible for assisting the Board in
carrying out its responsibilities under these conditions by providing
the Board with all information reasonably necessary for the Board to
consider any issues raised. This includes, but is not limited to, an
obligation by each Participating Insurance Company to inform the Board
whenever contractowner voting instructions are disregarded. The
responsibility to report such information and conflicts and to assist
the Board will be contractual obligations of all Participating
Insurance Companies under their agreements governing participation in
the Fund and such agreements shall provide that such responsibilities
will be carried out with a view only to the interests of the
contractowners.
4. If it is determined by a majority of the Board, or a majority of
its disinterested trustees, that a material irreconcilable conflict
exists, the relevant Participating Insurance Companies shall, at their
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,
which could include: (i) Withdrawing the assets allocable to some or
all of the separate accounts from the Fund or any series thereof and
reinvesting such assets in a different investment medium (including
another series of the Fund) or submitting the question of whether such
segregation should be implemented to a vote of all affected
contractowners and, as appropriate, segregating the assets of any
appropriate group (i.e., annuity contractowners, life insurance
contractowners, or variable contractowners of one or more Participating
Insurance Companies) that votes in favor of such segregation, or
offering to the affected contractowners the option of making such a
change; and (ii) establishing a new registered management investment
company or managed separate account. If a material irreconcilable
conflict arises because of a Participating Insurance Company's decision
to disregard contractowner voting instructions and that decision
represents a minority position or would preclude a majority vote, the
Participating Insurance Company may be required, at the Fund's
election, to withdraw its separate account's investment in the Fund,
and no charge or penalty will be imposed as a result of such
withdrawal. The responsibility to take remedial action in the event of
a Board determination of a material irreconcilable conflict and to bear
the cost of such remedial action shall be a contractual obligation of
all Participating Insurance Companies under agreements governing their
participation in the Fund and these responsibilities will be carried
out with a view only to the interests of the contractowners.
For the purposes of this condition (4), a majority of the
disinterested members of the Board shall determine whether or not any
proposed action adequately remedies any irreconcilable conflict, but in
no event will the Fund be required to establish a new funding medium
for any variable contract. No Participating Insurance Company shall be
required by this condition (4) to establish a new funding medium for
any variable contract if an offer to do has been declined by a vote of
a majority of contractowners materially adversely affected by the
material irreconcilable conflict.
5. The Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known promptly in
writing to all Participating Insurance Companies.
6. Participating Insurance Companies will provide pass-through
voting privileges to all variable contractowners for so long as the
Commission continues to interpret the 1940 Act as requiring passthrough
voting privileges for variable contractowners. Accordingly, the
Participating Insurance Companies will vote shares of the Fund held in
their separate accounts in a manner consistent with the voting
instructions timely received from contractowners. Participating
Insurance Companies will be responsible for assuring that each of their
separate accounts investing in the Fund calculates voting privileges in
a manner consistent with other Participating Insurance Companies. The
obligation to calculate voting privileges in a manner consistent with
all other separate accounts investing in the Fund shall be a
contractual obligation of all present and future Participating
Insurance Companies under their agreements governing participation in
the Fund. Each Participating Insurance Company also will vote shares of
the
[[Page 58710]]
Fund or series held in its separate accounts for which no timely voting
instructions are received, as well as shares it owns, in the same
proportion as those shares for which voting instructions are received.
7. The Fund will notify all Participating Insurance Companies that
separate account prospectus disclosure regarding potential risks of
mixed and shared funding may be appropriate. The Fund shall disclose in
its prospectus that (1) Its shares are offered to insurance company
separate accounts that fund both annuity and life insurance contracts,
(2) due to differences of tax treatment or other considerations, the
interests of various contractowners participating in the Fund might at
some time be in conflict, and (3) the Board will monitor for any
material conflicts and determine what action, if any, should be taken.
8. All reports received by the Board of potential or existing
conflicts, and all Board action with regard to determining the
existence of a conflict, notifying Participating Insurance Companies 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.
9. If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of
the 1940 Act, or the rules thereunder, with respect to mixed or shared
funding on terms and conditions materially different from any
exemptions granted in the order requested in this application, then the
Fund and/or the Participating Insurance Companies shall take such steps
as may be necessary to comply with Rule 6e-2 and Rule 6e-3(T), as
amended, and Rule 6e-3, as adopted, to the extent such rules are
applicable.
10. The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders (which, for these purposes, shall be
the persons having a voting interest in the shares of the Fund), and in
particular the Fund will either provide for annual meetings (except
insofar as the Commission may interpret Section 16 not to require such
meetings) or comply with Section 16(c) of the 1940 Act (although the
Fund is not a trust of the type specified in Section 16(c) of the 1940
Act) as well as with Sections 16(a) and, if and when applicable, 16(b).
Further, the Fund will act in accordance with the Commission's
interpretation of the requirements of Section 16(a) with respect to
periodic elections of trustees and with whatever rules the Commission
may promulgate with respect thereto.
11. The Participating Insurance Companies and/or Vanguard shall at
least annually submit to the Board such reports, materials or data as
the Board may reasonably request so that it may fully carry out the
obligations imposed upon it by the conditions contained in the
application and said reports, materials and data shall be submitted
more frequently if deemed appropriate by the Board. The obligations of
the Participating Insurance Companies to provide these reports,
materials and data to the Board when it so reasonably requests, shall
be a contractual obligation of all Participating Insurance Companies
under their agreements governing participation in the Fund.
12. The Fund will sell shares only to Participating Insurance
Companies which offer their variable annuity and variable life products
utilizing the Fund as their underlying funding vehicle, without the
imposition of a sales load, contingent deferred sales charge, or
surrender charge. If such Participating Insurance Companies anticipate
imposing a premium charge to reimburse them for the cost of deferring
the tax deduction of policy acquisition costs, they will have received
an appropriate exemptive order from the Commission before imposing such
charge. No portion of the Fund's contribution to Vanguard for
distribution expenses will be paid to the Participating Insurance
Companies, nor will such Companies receive any other payments from
either Vanguard or the Fund. Any participation agreement between the
Fund and a Participating Insurance Company will contain the above-
mentioned requirements as conditions of such agreement.
Conclusion
For the reason and upon the facts stated above, Applicants assert
that the requested exemptions are appropriate in the public interest
and consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-28927 Filed 11-27-95; 8:45 am]
BILLING CODE 8010-01-M