[Federal Register Volume 62, Number 238 (Thursday, December 11, 1997)]
[Notices]
[Pages 65293-65298]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-32365]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22926; File No. 812-10782]
PBHG Insurance Series Fund, Inc., et al.; Notice of Application
December 4, 1997.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the
``Commission'').
ACTION: Notice of application for an order pursuant to Section 6(c) of
the Investment Company Act of 1940 (the ``1940 Act'').
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SUMMARY OF APPLICATION: Applicants seek an order pursuant to Section
6(c) of the 1940 Act for exemptions from the provisions of Sections
9(a), 13(a), 15(a) and 15(b) of the 1940 Act and Rules 6e-2(b)(15) and
6e-3(T)(b)(15) thereunder to the extent necessary to permit shares of
any current or future series of the Fund and shares of any other
investment company that is designed to fund variable insurance products
and for which the Adviser, or any of its affiliates, may serve now or
in the future, as investment adviser, administrator, manager, principal
underwriter or sponsor (the Fund and such other investment companies
referred to collectively as the ``Insurance Products Funds'') to be
offered and sold to, and held by variable annuity and variable life
insurance separate accounts of both affiliated and unaffiliated life
insurance companies (``Participating Insurance Companies'') and
qualified pension and retirement plans outside of the separate account
context (``Qualified Plans'' or ``Plans'').
APPLICANTS: PBHG Insurance Series Fund, Inc. (the ``Fund'') and Pilgrim
Baxter & Associates, Ltd. (the ``Adviser'').
FILING DATE: The application was filed on September 15, 1997.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing on this application by writing to the
Secretary of the SEC and serving Applicants with a copy of the request,
in person or by mail. Hearing requests must be received by the
Commission by 5:30 p.m. on December 29, 1997, and 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 requester's interest, the reason for the request and the
issues contested. Persons who wish to be notified of a hearing may
request notification by writing to the Secretary of the SEC.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, 1255 Drummers Lane, Suite 300, Wayne, PA 19087-1590.
FOR FURTHER INFORMATION CONTACT:
Megan L. Dunphy, Attorney, or Mark Amorosi, Branch Chief, Office of
Insurance Products, Division of Investment Management, at (202) 942-
0670.
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the Public
Reference Branch of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549 (tel. (202) 942-8090).
Applicants' Representations
1. The Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940 and serves as the investment adviser
for the Fund.
2. The Fund, an open-end management investment company, is a
Maryland corporation. The Fund currently consists of six separate
series and may in the future issue shares of additional series.
3. Shares of the Fund are currently offered to separate accounts of
Participating Insurance Companies to serve as investment vehicles for
variable annuity and variable life insurance contracts (including
single premium, scheduled premium, modified single premium and flexible
premium contracts) (collectively, ``Variable Contracts''). These
separate accounts either will be registered as investment companies
under the 1940 Act or will be exempt from such registration.
4. The Participating Insurance Companies will establish their own
[[Page 65294]]
separate accounts and design their own Variable Contracts. Each
Participating Insurance Company will have the legal obligation of
satisfying all applicable requirements under the federal securities
laws. The role of the Insurance Products Funds will be limited to that
of offering their shares to separate accounts of Participating
Insurance Companies and to Qualified Plans and fulfilling the
conditions set forth in the application and described later in this
notice. Each Participating Insurance Company will enter into a fund
participation agreement with the Insurance Products Fund in which the
Participating Insurance Company invests.
Applicants' Legal Analysis
1. Applicants request that the Commission issue an order under
Section 6(c) of the 1940 Act granting exemptions from Sections 9(a),
13(a), 15(a) and 15(b) thereof and Rules 6e-2(b)(15) and 6e-3(T)(b)(15)
thereunder, to the extent necessary to permit shares of the Insurance
Products Funds to be offered and sold to, and held by (1) variable
annuity and variable life insurance separate accounts of the same life
insurance company or of any affiliated life insurance company (``mixed
funding''); (2) separate accounts of unaffiliated life insurance
companies (including both variable annuity and variable life separate
accounts) (``shared funding''); and (3) qualified pension and
retirement plans outside the separate account context.
2. In connection with the funding of scheduled premium variable
life insurance contracts issued through a separate account registered
under the 1940 Act as a unit investment trust, Rule 6e-2(b)(15)
provides partial exemptions from Section 9(a), 13(a), 15(a) and 15(b)
of the 1940 Act. These exemptions are available only where all of the
assets of the separate account consist of the shares of one or more
registered management investment companies which offer their shares
exclusively to variable life insurance separate accounts of the life
insurer or any affiliated life insurance company. Therefore, the relief
granted by Rule 6e-2(b)(15) is not available if the scheduled premium
variable life insurance separate account owns shares of a management
investment company that also offers it shares to a variable annuity
separate account of the same insurance company or an affiliated
insurance company. The relief granted by Rule 6e-2(b)(15) is not
available if the scheduled premium variable life insurance separate
account owns shares of an underlying management investment company that
also offers its shares to a variable annuity separate account of the
same insurance company or an affiliated insurance company or to
separate accounts funding variable contracts of one or more
unaffiliated life insurance companies. The relief granted by Rule 6e-
2(b)(15) also is not available if the shares of the Insurance Products
Funds also are sold to Qualified Plans.
3. In connection with the funding of flexible premium variable life
insurance contracts issued through a separate account registered under
the 1940 Act as a unit investment trust, Rule 6e-3(T)(b)(15) provides
partial exemptions from Sections 9(A), 13(a), 15(a) and 15(b) of the
1940 Act. These exemptions are available only where all of the assets
of the separate account consist of the shares of one or more registered
management investment companies which offer their shares exclusively to
separate accounts of the life insurer, or of any affiliated life
insurance company, offering either scheduled premium variable life
insurance contracts or flexible premium variable life insurance
contracts, or both; or which also offer their shares to variable
annuity separate accounts of the life insurer or of an affiliated life
insurance company. Therefore, the exemptions provided by Rule 6e-
3(T)(b)(15) are available if the underlying fund is engaged in mixed
funding, but are not available if the fund is engaged in shared funding
or if the fund sells its shares to Qualified Plans.
4. Applicants state that the current tax permits the Insurance
Products Funds to increase their asset base through the sale of shares
to Plans. Section 817(h) of the Internal Revenue Code of 1986, as
amended (the ``Code''), imposes certain diversification standards on
the underlying assets of Variable Contracts. The Code provides that
such contracts shall not be treated as an annuity contract or life
insurance contract for any period (and any subsequent period) during
which the investments are not adequately diversified in accordance with
regulations prescribed by the Treasury Department. Treasury regulations
provide that, to meet the diversification requirements, all of the
beneficial interests in an investment company must be held by the
segregated asset accounts of one or more insurance companies. The
regulations do contain certain exceptions to this requirement, however,
one of which permits shares of an investment company to be held by the
trustee of a qualified or retirement plan without adversely affecting
the ability of shares in the same investment company also to be held by
the separate accounts of insurance companies in connection with their
variable annuity and variable life contracts (Treas. Reg. Sec. 1.817.-
5(f)(3)(iii)).
5. Applicants state that the promulgation of Rules 6e-2 and 6e-3(T)
preceded the issuance of these Treasury regulations. Applicants assert
that, given the then current tax law, the sale of shares of the same
underlying fund to separate accounts and to Plans could not have been
envisioned at the time of the adoption of Rules 6e-2(b)(15) and 6e-
3(T)(b)(15).
6. Applicants request relief for a class or classes of persons and
transactions consisting of Participating Insurance Companies and their
scheduled premium variable life insurance separate accounts and
flexible premium variable life insurance separate accounts (and, to the
extent necessary, any investment adviser, principal underwriter and
depositor of such separate accounts) investing in any of the Insurance
Products Funds.
7. Section 6(c) authorizes the Commission to grant exemptions from
the provisions of the 1940 Act, and rules thereunder, if and to the
extent that an exemption is necessary or appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940 Act.
Applicants assert that the requested exemptions are appropriate in
the public interest and consistent with the protection of investors and
the purposes fairly intended by the policy and provisions of the 1940
Act.
Disqualification
8. Section 9(a)(3) of the 1940 Act provides that it is unlawful for
any company to act as investment adviser to or principal underwriter of
any registered opened 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 6e-3(T)(b)(15(i) and
(ii) provide partial exemptions from Section 9(a) under certain
circumstances, subject to the limitations on mixed and shared funding.
These exemptions limit the application of eligibility restrictions to
affiliated individuals or companies that directly participate in the
management or administration of the underlying investment company.
9. Applicants state that the relief from Section 9(a) provided by
Rules 6e-2(b)(15) and 6e-3(T)(b)(15), in effect, limits the amount of
monitoring necessary to ensure compliance with Section 9 to that which
is appropriate in light of the policy and purposes of Section 9.
Applicants assert that it is not necessary for the protection of
investors
[[Page 65295]]
or the purposes fairly intended by the policy and provisions of the
1940 Act to apply the provisions of Section 9(a) to the many
individuals who do not directly participate in the administration or
management of the Insurance Products Funds, who are employed by the
various unaffiliated insurance companies (or affiliated companies of
Participating Insurance Companies) that may utilize the Insurance
Products Funds as the funding medium for Variable Contracts. Applicants
do not expect the Participating Insurance Companies to play any role in
the management or administration of the Insurance Products Funds.
Applicants assert, therefore, that applying the restrictions of Section
9(a) to individuals employed by Participating Insurance Companies
serves no regulatory purpose.
10. Applicants state that the relief requested should not be
affected by the proposed sale of Insurance Products Funds to Qualified
Plans because the Plans are not investment companies and will not be
deemed affiliates solely by virtue of their shareholdings.
Pass-Through Voting
11. Applicants submit that Rule 6e-2(b)(15)(iii) and 6e-
3(T)(b)(15)(iii) assume the existence of a ``pass-through voting''
requirement with respect to management investment company shares held
by a separate account. Applicants state that Rule 6e-2(b)(15)(iii) and
6e-3(T)(b)(15)(iii) provide exemptions from the pass-through voting
requirements in limited situations, assuming the limitations on mixed
and shared funding imposed by the 1940 Act and the rules thereunder are
observed. More specifically, Rules 6e-2(b)(15)(iii)(A) and 6e-
3(T)(b)(15)(iii)(A) provide that the insurance company may disregard
the voting instructions of its contract owners in connection with the
voting of shares of an underlying investment company if such
instructions would require such shares to be voted to cause an
underlying investment company to make, or refrain from making, certain
investments which would result in changes in the subclassification or
investment objectives of such company, or to approve or disapprove any
contract between an investment company and its investment adviser, when
required to do so by an insurance regulatory authority. In addition,
Rules 6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(B) provide that an
insurance company may disregard contract owners' voting instructions
with regard to changes initiated by the contract owners in the
investment company's investment policies, principal underwriter or
investment adviser, provided that disregarding such voting instructions
is based on specific good faith determinations.
12. Shares of the Insurance Products Funds sold to Qualified Plans
will be held by the trustees of such Plans as required by Section
403(a) of the Employee Retirement Income Security Act of 1974
(``ERISA''). Section 403(a) also provides that the trustees must have
exclusive authority and discretion to manage and control the Plan with
two exceptions: (a) When the Qualified Plan expressly provides that the
trustees are subject to the direction of a named fiduciary who is not a
trustee, in which case the trustees are subject to proper directions
made in accordance with the terms of the Plan and not contrary to
ERISA; and (6) when the authority to manage, acquire or dispose of
assets of the Qualified Plan is delegated to one or more investment
managers pursuant to Section 402(c)(3) of ERISA. Unless one of the two
exceptions stated in Section 403(a) applies, the Qualified Plan
trustees have exclusive authority and responsibility for voting
proxies. Where a named fiduciary appoints an investment manager, the
investment manager has the responsibility to vote the shares held
unless the right to vote such shares is reserved to the trustees or the
named fiduciary. The Qualified Plans may have their trustees or other
fiduciaries exercise voting rights attributable to investment
securities held by the Qualified Plans in their discretion. Where a
Qualified Plan does not provide Qualified Plan participants with the
right to give voting instructions, Applicants state that they do not
see any potential for irreconcilable material conflicts of interest
between or among Variable Contract holders and Plan participants with
respect to voting of the respective Insurance Products Fund's shares.
Accordingly, Applicants note that, unlike the case with insurance
company separate accounts, the issue of the resolution of material
irreconcilable conflicts with respect to voting is not present with
respect to Qualified Plans since the Plans are not entitled to pass-
through voting privileges. Even if a Qualified Plan were to hold a
controlling interest in an Insurance Products Fund, the Applicants do
not believe that such control would disadvantage other investors in
such Insurance Products Fund to any greater extent than is the case
when any institutional shareholder holds a majority of the voting
securities of any open-end management investment company. In this
regard, the Applicants submit that investment in an Insurance Products
Fund by a Qualified Plan will not create any of the voting
complications occasioned by mixed funding or shared funding.
13. Applicants state that some of the Qualified Plans may provide
for the trustee(s), an investment adviser(s) or another named fiduciary
to exercise voting rights in accordance with instructions from
Qualified Plan participants. Applicants state that, in such cases, the
purchase of shares by such Qualified Plans does not present any
complications not otherwise occasioned by mixed or shared funding.
Conflicts of Interest
14. Applicants state that no increased conflict of interest would
be presented by the granting of the requested relief. Applicants that
shared funding does not present any issues that do not already exist
where a single insurance company is licensed to do business in several
states. In this regard, Applicants note that when different
Participating Insurance Companies are domiciled in different states, it
is possible that the state insurance regulatory body in a state in
which one Participating Insurance Company is domicile could require
action that is inconsistent with the requirements of other insurance
regulators in one or more other states in which other Participating
Insurance Companies are domiciled. The possibility, however, is not
different or greater than exists when a single insurer and its
affiliates offer their insurance products in several states, as is
currently permitted.
15. Applicants state that affiliation does not reduce the
potential, if any exists, for differences in state regulatory
requirements. In any event, the conditions set forth in the application
and later in this notice (which are adapted from the conditions
included in Rule 63-3(T)(b)(15)) are designed to safeguard against 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, the affected
insurer may be required to withdraw its separate account's investment
in the relevant Insurance Products Funds.
16. Applicant's also assert that affiliation does not eliminate the
potential, if any exists, for divergent judgments as to when a
Participating Insurance Company could disregard Variable Contract owner
voting instructions. The potential for disagreement is limited by the
requirements that disregarding voting instructions be reasonable and
based on
[[Page 65296]]
specified good faith determinations. However, if the Participating
Insurance Company's decision to disregard Variable Contract owner
voting instructions represents a minority position or would preclude a
majority vote approving a particular change, such Participating
Insurance Company may be required, at the election of the relevant
Insurance Products Fund, to withdraw its separate account's investment
in that Insurance Products Fund and no charge or penalty will be
imposed upon the Variable Contract owners as a result of such
withdrawal.
17. Applicants submit that there is no reason why the investment
policies of an Insurance Products Fund with mixed funding would or
should be materially different from what those policies would or should
be if such Insurance Products Fund or series thereof funded only
variable annuity or variable life insurance contracts. In this regard,
Applicants note that a fund's adviser is legally obligated to manage
the fund in accordance with the fund's investment objectives, policies
and restrictions as well as any guidelines established by the fund's
Board. Applicants submit that no one investment strategy can be
identified as appropriate to a particular insurance product or to a
Plan. Each pool of variable annuity and variable life insurance
contract owners is composed of individuals of diverse financial status,
age, insurance and investment goals. A fund supporting even one type of
insurance product must accommodate these diverse factors in order to
attract and retain purchasers. Applicants submit that permitting mixed
and shared funding will provide economic support for the continuation
of the Insurance Products Funds. In addition, permitting mixed and
shared funding also will facilitate the establishment of additional
series of Insurance Products Funds serving diverse goals.
18. As noted above, Section 817(h) of the Code imposes certain
diversification standards on the underlying assets of variable annuity
contracts and variable life insurance contracts held in the portfolios
of management investment companies. Treasury Regulation Sec. 1.817-
5(f)(3)(iii), which established diversification requirements for such
portfolios, specifically permits, among other things, ``qualified
pension or retirement plans'' and insurance company separate accounts
to share the same underlying investment company. Therefore, Applicants
assert that neither the code, nor the Treasury regulations, nor the
revenue rulings thereunder present any inherent conflicts of interest
if the Qualified Plans, variable annuity separate accounts, and
variable life insurance separate accounts all invest in the same
management investment company.
19. While there are differences in the manner in which
distributions are taxed for variable annuity contracts, variable life
insurance contracts and Plans, Applicants state that the tax
consequences do not raise any conflicts of interest. When distributions
are to be made, and the separate account of the Participating Insurance
Company or Qualified Plan cannot net purchase payments to make the
distributions, the separate account or Qualified Plan will redeem
shares of the Insurance Products Funds at their respective net asset
values. The Qualified Plan will then make distributions in accordance
with the terms of the Plan and the Participating Insurance Company will
make distributions in accordance with the terms of the Variable
Contract.
20. Applicants submit that the ability of the Insurance Products
Funds to sell their respective shares directly to Qualified Plans does
not create a ``senior security,'' as such term is defined under Section
18(g) of the 1940 Act, with respect to any Variable Contract owner as
opposed to a participant under a Qualified Plan. As noted above,
regardless of the rights and benefits of participants under the
Qualified Plans, or Variable Contract owners under their Variable
Contracts, the Qualified Plans and the separate accounts of
Participating Insurance Companies have rights only with respect to
their respective shares of the Insurance Products Funds. They can
redeem such shares at their net asset value. No shareholder of any of
the Insurance Products Funds has any preference over any other
shareholder with respect to distribution of assets or payments of
dividends.
21. Applicants assert that there are no conflicts between the
Variable Contract owners and the Plan participants with respect to
state insurance commissioners' veto powers over investment objectives.
The basic premise of shareholder voting is that not all shareholders
may agree with a particular proposal. While time-consuming, complex
transactions must be undertaken to accomplish redemptions and transfers
by separate accounts, trustees of Qualified Plans can quickly redeem
shares from Insurance Products Funds and reinvest in other funding
vehicles without the same regulatory impediments or, as in the case
with most qualified plans, even hold cash or other liquid assets
pending suitable alternative investment. Applicants maintain that even
if there should arise issues where the interests of Variable Contract
owners and the interests of participants in Plans are in conflict, the
issues can be almost immediately resolved because the trustees of the
Plans can, on their own, redeem shares out of the Insurance Products
Funds.
22. Applicants submit that mixed and shared funding should provide
benefits to Variable Contract owners by eliminating a significant
portion of the costs of establishing and administering separate funds.
Participating Insurance Companies will benefit not only from the
investment and administrative expertise of the Adviser and the
Subadvisers, but also from the cost efficiencies and investment
flexibility afforded by a larger pool of assets. Mixed and shared
funding also would permit a greater amount of assets available for
investment by the Insurance Products Funds, thereby promoting economies
of scale, by permitting increased safety through greater
diversification and by making the addition of new series more feasible.
Therefore, making the Insurance Products Funds available for mixed and
shared funding will encourage more insurance companies to offer
Variable Contracts, and this should result in increased competition
with respect to both Variable Contract design and pricing, which can be
expected to result in more product variation and lower charges.
23. Applicants assert that there is no significant legal impediment
to permitting mixed and shared funding. Separate accounts organized as
unit investment trusts historically have been employed to accumulate
shares of mutual funds which have not been affiliated with the
depositor or sponsor of the separate account. Applicants do not believe
that mixed and shared funding, and sales to Qualified Plans, will have
any adverse federal income tax consequences.
Applicants' Conditions
Applicants have consented to the following conditions:
1. A majority of each Insurance Products Fund's Board of Trustees
or Directors (each, a ``Board'') shall consist of persons who are not
``interested persons'' thereof, as defined by Section 2(a)(19) of the
1940 Act and the rules thereunder and as modified by any applicable
orders of the Commission, except that if this condition is not met by
reason of the death, disqualification, or bona fide resignation of any
Board member, then the operation of this condition shall be suspended:
(a) For a period of 45 days, if the vacancy or
[[Page 65297]]
vacancies may be filled by the Board; (b) for a period of 60 days, if a
vote of shareholders is required to fill the vacancy or vacancies; or
(c) for such longer period as the Commission may prescribe by order
upon application.
2. Each Insurance Products Fund's Board will monitor the fund for
the existence of any material irreconcilable conflict between and among
the interests of the Variable Contract owners of all separate accounts
and of Plan participants and Qualified Plans investing in the Insurance
Products Funds, and determine what action, if any, should be taken in
response to such conflicts. A material irreconcilable conflict may
arise for a variety of reasons, including: (a) An action by any state
insurance regulatory authority; (b) a change in applicable federal or
state insurance, tax, or securities laws or regulations, or a public
ruling, private letter ruling, no-action or interpretive letter, or any
similar action by insurance, tax, or securities regulatory authorities;
(c) an administrative or judicial decision in any relevant proceeding;
(d) the manner in which the investments of the funds are being managed;
(e) a difference in voting instructions given by variable annuity
contract owners, variable life insurance contract owners and trustees
of the Plans; (f) a decision by a Participating Insurance Company to
disregard the voting instructions of Variable Contract owners; or (g)
if applicable, a decision by a Qualified Plan to disregard the voting
instructions of Plan participants.
3. The Adviser (or any other investment adviser of an Insurance
Products Fund), any Participating Insurance Company and any Qualified
Plan that executes a fund participation agreement upon becoming an
owner of 10% of more of the assets of an Insurance Products Fund
(collectively, ``Participants'') will report any potential or existing
conflicts to the Board of any relevant Insurance Products Fund.
Participants will be obligated to assist the appropriate Board in
carrying out its responsibilities under these conditions by providing
the Board with all information reasonably necessary for the Board to
consider any issues raised. This responsibility includes, but is not
limited to, an obligation 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 Qualified Plan to inform the Board whenever it has
determined to disregard Plan participant voting instructions. The
responsibility to report such information and conflicts and to assist
the Boards will be contractual obligations of all Participating
Insurance Companies and Qualified Plans investing in the Insurance
Products Funds under their respective agreements governing
participation in the Insurance Products Funds, and such agreements
shall provide that these responsibilities will be carried out with a
view only to the interests of Variable Contract owners and, if
applicable, Plan participants.
4. If a majority of an Insurance Products Fund's Board members, or
a majority of the disinterested Board members, determine that a
material irreconcilable conflict exists, the relevant Participating
Insurance Companies and Qualified Plans, at their expense and to the
extent reasonably practicable (as determined by a majority of the
disinterested Board members), shall take whatever steps are necessary
to remedy or eliminate the material irreconcilable conflict. Such steps
could include: (a) Withdrawing the assets allocable to some or all of
the separate accounts from the Insurance Products Fund or any of its
series and reinvesting such assets in a different investment medium,
which may include another series of the Insurance Products Fund or
another Insurance Products Fund; (b) in the case of Participating
Insurance Companies, 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., variable annuity or variable life insurance
contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected
Variable Contract owners the option of making such a change; and (c)
establishing a new registered management investment company or managed
separate account. If a material irreconcilable conflict arises because
of a decision by a Participating Insurance Company to disregard
Variable Contract owner voting instructions, and this decision
represents a minority position or would preclude a majority vote, the
Participating Insurance Company may be required, at the election of the
Insurance Products Fund, to withdraw its separate account's investment
in such fund, and no charge or penalty will be imposed as a result of
such withdrawal. If a material irreconcilable conflict arises because
of a Qualified Plan's decision to disregard 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 Products Fund, to withdraw
its investment in such fund, and no charge or penalty will be imposed
as a result of such withdrawal.
The responsibility to take remedial action in the event of a Board
determination of a material irreconcilable conflict and to bear the
cost of such remedial action shall be a contractual obligation of all
Participating Insurance Companies and Qualified Plans under their
agreements governing participation in the Insurance Products Funds and
these responsibilities shall be carried out with a view only to the
interests of the Variable Contract owners and, as applicable, Plan
participants.
For purposes of Condition 4, a majority of the disinterested
members of the applicable Board shall determine whether or not any
proposed action adequately remedies any material irreconcilable
conflict, but in no event will an Insurance Products Fund or the
Adviser (or any other investment adviser of the Insurance Products
Funds) be required to establish a new funding medium for any Variable
Contract. No Participating Insurance Company shall be required by
Condition 4 to establish a new funding medium for any Variable Contract
if a majority of Variable Contract owners materially affected by the
material irreconcilable conflict vote to decline such offer. No
Qualified Plan shall be required by Condition 4 to establish a new
funding medium for such Qualified Plan if (a) a majority of Plan
participants materially and adversely affected by the material
irreconcilable conflict vote to decline such offer or (b) pursuant to
governing plan documents and applicable law, the Plan makes such
decision without Plan participant vote.
5. Participants will be informed promptly in writing of a Board's
determination of the existence of an irreconcilable material conflict
and its implications.
6. Participating Insurance Companies will provide pass-through
voting privileges to all Variable Contract owners so long as the
Commission continues to interpret the 1940 Act as requiring pass-
through voting privileges for Variable Contract owners. Accordingly,
such Participating Insurance Companies, where applicable, will vote
shares of the Insurance Products Fund held in their separate accounts
in a manner consistent with voting instructions timely received from
Variable Contract owners. In addition, each Participating Insurance
Company will vote shares of the Insurance
[[Page 65298]]
Products Fund held in its separate accounts for which it has not
received timely voting instructions from contract owners, as well as
shares it owns, in the same proportion as those shares for which it has
received voting instructions. Participating Insurance Companies will be
responsible for assuring that each of their separate accounts investing
in an Insurance Products Fund calculates voting privileges in a manner
consistent with all other Participating Insurance Companies. The
obligation to vote an Insurance Products Fund's shares and calculate
voting privileges in a manner consistent with all other separate
accounts investing in the Insurance Products Fund will be a contractual
obligation of all Participating Insurance Companies under the
agreements governing participation in the Insurance Products Fund. Each
Plan will vote as required by applicable law and governing Plan
documents.
7. All reports of potential or existing conflicts received by a
Board, and all Board action with regard to (a) determining the
existence of a conflict, (b) notifying Participants of a conflict, and
(c) determining whether any proposed action adequately remedies a
conflict, will be properly recorded in the minutes of the meetings of
the appropriate Board or other appropriate records. Such minutes or
other records shall be made available to the Commission upon request.
8. Each Insurance Products Fund will notify all Participating
Insurance Companies that separate account prospectus disclosure
regarding potential risks of mixed and shared funding may be
appropriate. Each Insurance Products Fund shall disclose in its
prospectus that: (a) Its shares may be offered to insurance company
separate accounts that fund both variable annuity and variable life
insurance contracts, and to Qualified Plans; (b) differences in tax
treatment or other considerations may cause the interests of various
Variable Contract owners participating in the Insurance Products Fund
and the interests of Qualified Plans investing in the Insurance
Products Fund to conflict; and (c) the Board will monitor the Insurance
Products Fund for any material conflicts and determine what action, if
any, should be taken.
9. Each Insurance Products Fund will comply with all provisions of
the 1940 Act requiring voting by shareholders (for these purposes, the
persons having a voting interest in the shares of the Insurance
Products Funds). In particular, each such Insurance Products Fund
either will provide for annual shareholder meetings (except insofar as
the Commission may interpret Section 16 of the 1940 Act not to require
such meetings) or comply with Section 16(c) of the 1940 Act (although
more of the Insurance Products Funds shall be one of the trusts
described in Section 16(c) of the 1940 Act), as well as with Section
16(a) of the 1940 Act and, if and when applicable, Section 16(b) of the
1940 Act. Further, each Insurance Products Fund will act in accordance
with the Commission's interpretation of the requirements of Section
16(a) with respect to periodic elections of Board members and with
whatever rules the Commission may promulgate with respect thereto.
10. If and to the extent that Rule 6e-2 or Rule 6e-3(T) under the
1940 Act is amended, or Rule 6e-3 under the 1940 Act is adopted, to
provide exemptive relief from any provision of the 1940 Act, or the
rules promulgated thereunder, with respect to mixed or shared funding,
on terms and conditions materially different from any exemptions
granted in the order requested in the application, then the Insurance
Products Funds and/or the Participants, as appropriate, shall take such
steps as may be necessary to comply with Rule 6e-2 or Rule 6e-3(T), as
amended, or proposed Rule 6e-3 as adopted, to the extent such Rules are
applicable.
11. The Participants, at least annually, shall submit to each Board
such reports, materials or data as each Board may reasonable request so
that such Boards may fully carry out the obligations imposed upon them
by the conditions stated in the application. Such reports, materials
and data shall be submitted more frequently if deemed appropriate by
the Boards. The obligations of the Participants to provide these
reports, materials and data upon reasonable request of a Board shall be
a contractual obligation of all Participants under the agreements
governing their participation in the Insurance Products Funds.
12. If a Qualified Plan or Plan participant shareholder should
become an owner of 10% or more of the assets of an Insurance Products
Fund, such Plan will execute a participation agreement with such fund
which includes the conditions set forth herein to the extent
applicable. A Qualified Plan or Plan participant will execute an
application containing an acknowledgment of this condition upon such
Plan's initial purchase of the share of any Insurance Products Fund.
Conclusion
For the reasons summarized above, Applicants assert that the
requested exemptions are appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-32365 Filed 12-10-97; 8:45 am]
BILLING CODE 8010-01-M