[Federal Register Volume 64, Number 205 (Monday, October 25, 1999)]
[Notices]
[Pages 57493-57499]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27730]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-24089; File No. 812-11722]
SEI Insurance Products Trust, et al.; Notice of Application
October 18, 1999.
AGENCY: Securities and Exchange Commission (the ``Commission'').
ACTION: Notice of application for an order under Section 6(c) of the
Investment Company Act of 1940 (``1940 Act'') granting exemptive relief
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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SUMMARY OF APPLICATION: Applicants seek exemptive relief to the extent
necessary to permit shares of the SEI Insurance Products Trust (the
``Trust'') and shares of any other investment company or portfolio that
is designed to fund insurance products and for which SEI Investments
Management Corporation (``SIMC''), or any of its affiliates, may serve
in the future, as investment adviser, administrator, manager, principal
underwriter, or sponsor (``Future Trusts'', together with Trust,
``Trust'') to be sold to and held by (i) separate accounts funding
variable annuity and variable life insurance contracts issued by both
affiliated and unaffiliated life insurance companies, (ii) qualified
pension and retirement plans outside of the separate account context,
(iii) separate accounts that are not registered as investment companies
under the 1940 Act pursuant to exemptions from registration under
Section 3(c) of the 1940 Act, and (iv) SIMC or any of its affiliates
(representing seed money in any of the Trusts).
APPLICANTS: The Trust and SIMC.
FILING DATE: The application was filed on July 26, 1999, and amended
and restated on October 7, 1999. Applicants represent that they will
file an amended and restated application during the notice period to
conform to the representations set forth herein.
HEARING OF NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request hearing by writing to the Secretary of the
Commission and serving Applicants with copy of the request, personally
or by mail. Hearing requests must be received by the Commission by 5:30
p.m. on November 12, 1999, and must 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, 450 Fifth
Street, NW, Washington, DC 20549-0609. Applicants c/o Todd B.
Cipperman, Esq., SEI Investments Management Corporation, Oaks,
Pennsylvania 19546.
FOR FURTHER INFORMATION CONTACT: Keith E. Carpenter, Senior Counsel, or
Kevin M. Kirchoff, Branch Chief, Office
[[Page 57494]]
of Insurance Products, Division of Investment Management, at (202) 942-
0670.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application; the complete application is available for a fee from the
Public Reference Branch of the Commission, 450 Fifth Street, NW
Washington, DC (tel (202) 942-8090).
Applicants' Representations
1. The Trust is a Massachusetts business trust and is registered
under the 1940 Act as an open-end management investment company. The
Trust currently consists of 13 separate portfolio (``Funds''). Each
Fund has its own investment objective or objectives, and policies.
2. SIMC serves as the investment manager to the Trust, and operates
as a ``manager of managers.'' SIMC is registered as an investment
adviser under the Investment Advisers Act of 1940, and is a wholly
owned subsidiary of SEI Investments Company.
3. Applicants state that, upon the granting of the exemptive relief
requested by the Application, the Trust intends to offer shares
representing interests in each Fund, and any other portfolio
established by the Trust (``Future Portfolio'') (Fund, together with
Future Portfolios, ``Portfolios'' or each a ``Portfolio''), to separate
accounts of both affiliated and unaffiliated insurance companies to
serve as the investment vehicle for variable annuity contracts and
variable life insurance contracts (collectively referred to herein as
``Variable Contracts''). The Insurance Companies that elect to purchase
shares of one or more Portfolios are collectively referred to herein as
``Participating Insurance Companies.'' The Participating Insurance
Companies will establish their own separate accounts (``Separate
Accounts'') and design their own variable contracts. Applicants also
propose that the Trust offer and sell shares representing interests in
its Portfolios directly to qualified pension and retirement plans
(``Qualified Plans'' or ``Plans'') outside of the separate account
context.
Applicants' Legal Analysis
1. Applicants request an order pursuant to Section 6(c) of the 1940
Act exempting them from Sections 9(a), 13(a), 15(a), and 15(b) of the
1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the
extent necessary to permit shares of the Trusts to be offered and sold
to, and held by: (1) Both 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 separate accounts and variable life insurance separate
accounts) (``shared funding''); (3) trustees of Qualified Plans; (4)
separate accounts that are not registered as investment companies under
the 1940 Act pursuant to exemptions from registration under Section
3(c) of the 1940 Act, and (5) SIMC or any of its affiliates
(representing seed money in any of the Trusts).
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 form Sections 9(a), 13(a), 15(a), and 15(b)
of the 1940 Act. These exemptions are available only if the separate
account is organized as a unit investment trust, all the assets of
which 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 of any
affiliated life insurer. Thus, the exemptions provided by Rule 6e-2 are
not available if a scheduled premium variable life insurance separate
account owns shares of an underlying fund that also offers its shares
(i) to a variable annuity separate account or a flexible premium
variable life insurance separate account of the same insurance company,
(ii) to an unaffiliated life insurance company, or (iii) to an
investment manager that is unaffiliated with a Participating Insurance
Company (representing seed money shares). In addition, the relief
granted by Rule 6e-2(b)(15) is not available if the scheduled premium
variable life insurance separate account owns shares of an underlying
fund that also offers its shares to Qualified Plans.
3. Rule 6e-3(T)(b)(15) provides similar partial exemptions in
connection with flexible premium variable life insurance contracts
issued through a separate account registered under the 1940 Act as a
unit investment trust. These exemptions, however, are available only if
all 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 contacts 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.'' Thus, 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, sells seed money shares to an unaffiliated person of a
Participating Insurance Company or sells shares to Qualified Plans.
4. Applicants state that current tax law permits the Trust to
increase its asset base through the sale of its shares to Qualified
Plans. Section 817(h) of the Internal Revenue Code of 1986, as amended
(the ``Code''), imposes certain diversification standards on the assets
underlying Variable Contracts, such as those in each Fund. The Code
provides that Variable Contracts will not be treated as annuity
contracts or life insurance contracts, as the case may be, for any
period (or any subsequent period) for which the underlying assets are
not, in accordance with regulations issued by the Treasury Department
(the ``Regulations''), adequately diversified. On March 2, 1989, the
Treasury Department issued regulations (Treas. Reg. 1.817-5) which
established specific diversification requirements for investment
portfolios underlying Variable Contracts. The Regulations generally
provide that, to meet these diversification requirements, all of the
beneficial interests in the investment company must be held by the
segregated asset accounts of one or more life insurance companies.
Notwithstanding this, the Regulations also contain an exception to this
requirement that permits trustees of a qualified pension or retirement
plan to hold shares of an investment company, the shares of which are
also held by insurance company segregated asset accounts, without
adversely affecting the status of the investment company as an
adequately diversified underlying investment for Variable Contracts
issued through such segregated asset accounts (Treas. Reg. 1.817-
5(f)(3)(iii)).
5. The promulgation of Rules 6e-2 and 6e-3(T) preceded the issuance
of these Regulations. Applicants state that, given the then-current tax
law, the sale of shares of the same investment company to both the
separate accounts of insurers and to Qualified Plans could not have
been envisioned at the time of the adoption of Rules 6e-2(b)(5) and 6e-
3(T)(b)(15).
6. Section 9(a)(3) of the 1940 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
[[Page 57495]]
person of that company is subject to a disqualification enumerated in
Sections 9(a)(1) or (2) of the 1940 Act. Rules 6e-2(b)(15)(i) and (ii)
and Rules 6e-3(T)(b)(15)(i) and (ii) under the 1940 Act provide
exemptions from Section 9(a) under certain circumstances, subject to
the limitations on mixed and shared funding imposed by the 1940 Act and
the rules thereunder. These exemptions limit the application of the
eligibility restrictions to affiliated individuals or companies that
directly participate in the management of the underlying management
company.
7. Applicants state that the partial relief granted in Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) from the requirements of Section 9 of the
1940 Act, 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 state that those
1940 Act rules recognize that it is not necessary for the protection of
investors or the purposes fairly intended by the policy and provisions
of the 1940 Act to apply the provisions of Section 9(a) to the many
individuals in a large insurance company complex, most of whom will
have no involvement in matters pertaining to investment companies in
that organization. Applicants state that it is unnecessary to apply
Section 9(a) to individuals in various unaffiliated Participating
Insurance Companies (or affiliated companies of Participating Insurance
Companies) that may utilize the Trusts as the funding medium for
Variable Contracts. According to Applicants, there is no regulatory
purpose in extending the Section 9(a) monitoring requirements because
of mixed or shared funding. The Participating Insurance Companies and
Qualified Plans are not expected to play any role in the management or
administration of the Trusts. Moreover, those individuals who
participate in the management or administration of the Trusts will
remain the same regardless of which Separate Accounts, or Qualified
Plans use the Trusts. Applicants argue that applying the monitoring
requirements of Section 9(a) because of investment by other insurers'
separate accounts would be unjustified and would not serve any
regulatory purpose. Further, the increased monitoring costs would
reduce the net rates of return realized by contract owners.
8. Applicants also state that in the case of Qualified Plans, the
Plans, unlike the Separate Accounts, are not themselves investment
companies, and therefore are not subject to Section 9 of the 1940 Act.
Furthermore, it is not anticipated that a Qualified Plan would be an
affiliated person of any of the Trusts by virtue of its shareholders.
9. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(iii) under the 1940 Act
provide exemptions from the pass-through voting requirement with
respect to several significant matters, assuming that the limitations
on mixed and shared funding imposed by the 1940 Act and the rules
promulgated thereunder are observed.
10. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act give
the Participating Insurance Companies the right to disregard voting
instructions of contract owners. Rules 6e-2(b)(15)(iii)(A) and 6e-
3(T)(b)(15)(iii)(A) each provide that the insurance company may
disregard the voting instructions of its contract owners with respect
to the investments of an underlying fund, or any contract between a
fund 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) under the 1940 Act). Rules
6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2) each provide that the
insurance company may disregard voting instructions of contract owners
if the contract owners initiate any change in the underlying investment
company's investment policies, principal underwriter, or any investment
adviser (subject to the provisions of paragraphs (b)(5)(ii),
(b)(7)(ii)(B), and (b)(7)(ii)(C) of Rules 6e-2 and 6e-3(T) under the
1940 Act). Applicants represent that these rights do not raise any
issues different from those raised by the authority of state insurance
administrators over separate accounts. Under Rules 6e-2(b)(15) and 6e-
3(T)(b)(15), an insurer can disregard voting instructions of contract
owners only with respect to certain specified items. Applicants also
note that the potential for disagreement among Separate Accounts is
limited by the requirements in Rules 6e-2 and 6e-3(T) that a
Participating Insurance Company's disregard of voting instructions be
reasonable and based on specific good faith determinations.
11. Applicants further represent that the offer and sale of
Portfolio shares to Qualified Plans will not have any impact on the
relief requested in this regard. With respect to the Qualified Plans,
which are not registered as investment companies under the 1940 Act,
there is no requirement to pass through voting rights to Plan
participants. Indeed, to the contrary, applicable law expressly
reserves voting rights associated with Plan assets to certain specified
persons. Under Section 403(a) of ERISA, shares of a portfolio of a fund
sold to a Qualified Plan must be held by the trustees of the Plan.
Section 403(a) also provides that the trustee(s) must have exclusive
authority and discretion to manage and control the Plan with two
exceptions: (1) When the Plan expressly provides that the trustee(s)
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
(2) when the authority to manage, acquire or dispose of assets of the
Plan is delegated to one or more investment managers pursuant to
Section 402(c)(3) of ERISA. Unless one of the above two exceptions
stated in Section 403(a) applies, Plan trustees have the exclusive
authority and responsibility for voting proxies.
Where a named fiduciary to a Qualified Plan 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
trustee(s) or other fiduciaries exercise voting rights attributable to
investment securities held by the Qualified Plans in their discretion.
Some of the Qualified Plans, however, may provide for the trustee(s),
an investment adviser (or advisers) or another named fiduciary to
exercise voting rights in accordance with instructions from
participants.
Where a Qualified Plan does not provide participants with the right
to give voting instructions, Applicants do not see any potential for
material irreconcilable conflicts of interest between or among variable
contract owners and Plan investors with respect to voting of the
respective Portfolio's shares. Accordingly, 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 such Qualified Plans since the Qualified Plans are not
entitled to pass-through voting privileges.
12. Some Qualified Plans, however, may provide participants with
the right to give voting instructions. Applicants note that there is no
reason to believe that participants in Qualified Plans generally or
those in a particular Plan, either as a single group or in combination
with participants in other Qualified Plans, would vote in a manner that
would disadvantage variable contract owners. Applicants, therefore,
submit that the purchase of shares of the Portfolios by Qualified Plans
that provide voting rights does not present
[[Page 57496]]
any complications not otherwise occasioned by mixed or shared funding.
13. Applicants state that no increased conflicts of interest would
be presented by the granting of the requested relief. Shared funding by
unaffiliated insurance companies does not present any issues that do
not already exist where a single insurance company is licensed to do
business in several or all states. A particular state insurance
regulatory body could require action that is inconsistent with the
requirements of other states in which the insurance company offers its
policies. The fact that different insurers may be domiciled in
different states does not create a significantly different or enlarged
problem.
14. Applicants submit that shared funding by unaffiliated insurers,
in this respect, is no different that the use of the same investment
company as the funding vehicle for affiliated insurers, which Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act permit. Affiliated
insurers may be domiciled in different states and be subject to
differing state law requirements. Affiliated does not reduce the
potential, if any exists, for differences in state regulatory
requirements. In any event, Applicants state that 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 insurer will be required to withdraw its
Separate Account's investment in the Portfolios. This requirement will
be provided for in agreements that will be entered into by
Participating Insurance Companies with respect to their participation
in the relevant Portfolio.
15. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act give
the insurance company the right to disregard the voting instructions of
the contract owners. This right does not raise any issues different
from those raised by the authority of state insurance administrators
over separate accounts. Under Rules 6e-2(b)(15) and 6e-3(T)(b)(15), an
insurer can disregard 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 contract owners. The
potential for disagreement is limited by the requirements in Rules 6e-2
and 6e-3(T) under the 1940 Act that the insurance company's disregard
of voting instructions be reasonable and based on specific good-faith
determinations.
16. A particular insurer's disregard of voting instructions,
nevertheless, could conflict with the majority of contract owners'
voting instructions. The insurer's action possibly could be different
than the determination of all or some of the other insurers (including
affiliated insurers) that the voting instructions of contract owners
should prevail, and either could preclude a majority vote approving the
change or could represent a minority view. If the insurer's judgment
represents a minority position or would preclude a majority vote, then
the insurer may be required, at the relevant Trust's election, to
withdraw its Separate Account's investment in such Portfolio, and no
charge or penalty will be imposed as a result of such withdrawal. This
requirement will be provided for in the agreements entered into with
respect to participation by the Participating Insurance Companies in
the Portfolios.
17. Applicants submit that there is no reason why the investment
policies of the Portfolios would or should be materially different from
what these policies would or should be if the Portfolios funded only
variable annuity contracts or variable life insurance policies, whether
flexible premium or scheduled premium policies. Each type of insurance
product is designed as a long-term investment program. Each Portfolio
will be managed to attempt to achieve the investment objective or
objectives of such Portfolio, and not to favor or disfavor any
particular Participating Insurance Company or type of insurance
product.
18. Furthermore, Applicants assert that no one investment strategy
can be identified as appropriate to a particular insurance period. 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 Portfolio supporting even one type of insurance
product must accommodate these diverse factors in order to attract and
retain purchasers. Permitting mixed and shared funding will provide
economic justification for the continuation of the relevant Portfolio.
Mixed and shared funding will broaden the base of contract owners which
will facilitate the establishment of additional portfolios serving
diverse goals.
19. Applicants do not believe that the sale of the shares of the
Portfolios to Qualified Plans 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 that which would otherwise exist between variable
annuity and variable life insurance contract owners.
20. 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. The Code provides that a variable
contract shall not be treated as an annuity contract or life insurance,
as applicable, for any period (and any subsequent period) for which the
investments are not, in accordance with Regulations, adequately
diversified.
21. Regulations issued under Section 817(h) provide that, to meet
the statutory diversification requirements, all of the beneficial
investment company must be held by the segregated asset accounts of one
or more insurance companies. The Regulations, however, contain certain
exceptions to this requirement, one of which allows shares in an
underlying mutual fund to be held by the trustees of a qualified
pension or retirement plan without adversely affecting the ability of
shares in the underlying fund also to be held by separate accounts of
insurance companies in connection with their variable contracts.
(Treas. Reg. 1.817-5(f)(3)(iii)). Thus, the Regulations specifically
permit ``qualified pension or retirement plans'' and separate accounts
to invest in the same portfolio of an underlying fund. For this reason,
Applicants assert that neither the Code, nor the Regulations, nor the
Revenue Rulings thereunder, present any inherent conflicts of interest.
22. Applicants note that while there are differences in the manner
in which distributions from Variable Contracts and Qualified Plans are
taxed, these differences will have no impact on the Trusts. When
distributions are to be made, and a Separate Account or a Qualified
Plan is unable to net purchase payments to make the distributions, the
Separate Account and Qualified Plan will redeem shares of the relevant
Portfolio at their respective net asset value in conformity with Rule
22c-1 under the 1940 Act (without the imposition of any sales charge)
to provide proceeds to meet distribution needs. A Participating
Insurance Company then will make distributions in accordance with the
terms of its Variable Contract, and a Qualified Plan then will make
distributions in accordance with the terms of the Plan.
23. Applicants state that it is possible to provide an equitable
means of giving
[[Page 57497]]
voting rights to contract owners in the Separate Accounts and to
Qualified Plans. In connection with any meeting of shareholders, the
Trusts will inform each shareholder, including each Separate Account
and Qualified Plan, of information necessary for the meeting, including
their respective share of ownership in the relevant Portfolio. Each
Participating Insurance Company then will solicit voting instructions
in accordance with Rule 6e-2 and 6e-3(T), as applicable, and its
participation agreement with the relevant Trust. Shares held by
Qualified Plans will be voted in accordance with applicable law. The
voting rights provided to Qualified Plans with respect to shares of the
Trusts would be no different from the voting rights that are provided
to Qualified Plans with respect to shares of funds sold to the general
public.
24. Applicants submit that the ability of the Portfolios to sell
their shares directly to Qualified Plans does not create a ``senior
security'' as such term is defined under Section 18(g) of the 1940 Act.
``Senior security'' is defined under Section 18(g) of the 1940 Act to
include ``any stock of a class having priority over any other class as
to distribution of assets or payment of dividends.'' As noted above,
regardless of the rights and benefits of participants under Qualified
Plans, or contract owners under Variable Contracts, the Qualified Plans
and the Separate Accounts only have rights with respect to their
respective shares of the Portfolios. They only can redeem such shares
at net asset value. No shareholder of the Portfolios has any preference
over any other shareholder with respect to distribution of assets or
payment of dividends.
25. Applicants assert that there are no conflicts between the
contract owners of the Separate Accounts and participants under the
Qualified Plans with respect to the state insurance commissioners' veto
powers over investment objectives. Applications note that the basic
premise of corporate democracy and shareholder voting is that not all
shareholders may agree with a particular proposal. Although the
interests and opinions of shareholders may differ, this does not mean
that inherent conflicts of interest exist between or among such
shareholders. State insurance commissioners have been given the veto
power in recognition of the fact that insurance companies usually
cannot simply redeem their separate accounts out of one fund and invest
in another . Generally, time-consuming, complex transactions must be
undertaken to accomplish such redemptions and transfers.
26. Conversely, the trustees of Qualified Plans or the participants
in participant-directed Qualified Plans can make the decision quickly
and redeem their interest in the Portfolios and reinvest in another
funding vehicle without the same regulatory impediments faced by
separate accounts or, as is the case with most Qualified Plans, even
hold cash pending suitable investment.
27. Applicants also assert that there is no greater potential for
material irreconcilable conflict arising between the interest of
participants in the Qualified Plans and contract owners of the Separate
Accounts from future changes in the federal tax laws than that which
already exist between variable annuity contract owners and variable
life insurance contract owners.
28. Applicants state that various factors have kept more insurance
companies from offering variable annuity and variable life insurance
contracts than currently offer such contracts. These factors include
the costs of organizing and operating a funding medium, the lack of
expertise with respect to investment management (principally with
respect to stock and money market investments), and the lack of name
recognition by the public of certain insurers as investment experts
with whom the public feels comfortable entrusting their investment
dollars. Use of a Portfolio as a common investment media for variable
contracts would reduce or eliminate these concerns. Mixed and shared
funding also should provide several 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 SIMC, but also from the cost efficiencies and investment
flexibility afforded by a large pool of funds. Mixed and shared funding
also would permit a greater amount of assets available for investment
by a Portfolio, thereby promoting economics of scale, by permitting
increased safety through greater diversification, or by making the
addition of new Portfolios more feasible. Therefore, making the
Portfolios available for mixed and shared funding will encourage more
insurance companies to offer variable contracts, and this should result
in increased competition with respect to both variable contract design
and pricing, which can be expected to result in more product variation
and lower charges. Applicants also assert that the sale of shares of
the Portfolios to Qualified Plans in addition to the Separate Accounts
will result in an increased amount of assets available for investment
by such Portfolios. This may benefit variable contract owners by
promoting economies of scale, by permitting increased safety of
investments through greater diversification, and by making the addition
of new Portfolios more feasible.
29. Applicants see 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. As noted above, Applicants assert that
mixed and shared funding will have any adverse Federal income tax
consequences.
Applicants' Conditions
Applicants have consented to the following conditions:\1\
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\1\ Applicants agree that in the event SEI Insurance Products
Trust, or any other Trust, operates as a ``feeder'' in a ``master/
feeder'' structure, such Trust shall insure that, to the extent
necessary, the ``master,'' as well as such Trust, will comply with
the conditions hereof.
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1. A majority of the Board of each Trust will consist of persons
who are not ``interested persons'' of such Trust, 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 trustee or trustees, then the operation of this
condition will be suspended: (a) For a period of 45 days if the vacancy
or vacancies may be filled by the Board; (b) for a period of 60 days if
a vote of shareholders is required to fill the vacancy or vacancies; or
(c) for such longer period as the Commission may prescribe by order
upon application.
2. Each Board will monitor its respective Trust for the existence
of any material irreconcilable conflict between the interests of the
contract owners of all Separate Accounts and participants of all
Qualified Plans investing in such Trust, 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
interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities; (c) an administrative or
[[Page 57498]]
judicial decision in any relevant proceeding; (d) the manner in which
the investments of such Trust 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 contract owners; or (g) if applicable, a decision by a
Qualified Plan to disregard the voting instructions of Plan
participants.
3. Participating Insurance Companies, SIMC or an affiliate, and any
Qualified Plan that executes a participation agreement upon becoming an
owner of 10 percent or more of the assets of any Portfolio
(collectively, the ``Participants'') will report any potential or
existing conflicts to the relevant Board. Participants will be
responsible for assisting the relevant 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 includes, but is not limited to, an obligation by
each Participating Insurance Company to inform the relevant Board
whenever 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 Board, will be a
contractual obligation of all Participating Insurance Companies under
their participation agreements with the Trusts, and these
responsibilities will be carried out with a view only to the interests
of the contract owners. The responsibility to report such information
and conflicts, and to assist the Board, also will be contractual
obligations of all Qualified Plans with participation agreements, and
such agreements will provide that these responsibilities will be
carried out with a view only to the interests of Plan participants.
4. If it is determined by a majority of a Board, or a majority of
the disinterested trustees of such Board, that a material
irreconcilable conflict exists, then the relevant Participant will, at
its expense and to the extent reasonably practicable (as determined by
a majority of the disinterested trustees), take whatever steps are
necessary to remedy or eliminate the material irreconcilable conflict,
up to and including: (a) Withdrawing the assets allocable to some or
all of the Separate Accounts from the relevant Portfolio and
reinvesting such assets in a different investment medium, including
another Portfolio, or in the case of insurance company participants
submitting the question as to whether such segregation should be
implemented to a vote of all affected contract owners and, as
appropriate, segregating the assets of any appropriate group (i.e.,
annuity contract owners or life insurance contract owners of one or
more Participating Insurance Company) that votes in favor of such
segregation, or offering to the affected contract owners the option of
making such a change; and (b) 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 contract owner voting instructions, and
that decision represents a minority position or would preclude a
majority vote, then the insurer may be required, at the election of the
relevant Trust, to withdraw such insurer's Separate Account's
investment in such Trust, 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 Plan may be
required, at the election of the relevant Trust, to withdraw its
investment in such Trust, 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 agreements
governing participation in the Trusts, and these responsibilities will
be carried out with a view only to the interests of contract owners and
Plan participants.
For purposes of this Condition 4, a majority of the disinterested
members of a Board will determine whether or not any proposed action
adequately remedies any material irreconcilable conflict, but, in no
event, will any Trust, SIMC, or SIMC's affiliate, as relevant, be
required to establish a new funding medium for any variable contract.
No Participating Insurance Company will be required by this Condition 4
to establish a new funding medium for any variable contract if any
offer to do so has been declined by vote of a majority of the 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 medium for the Plan if (a) a majority of
the Plan participants materially and adversely affected by the
irreconcilable material conflict vote to decline such offer, or (b)
pursuant to documents governing the Qualified Plan, the Plan makes such
decision without a Plan participant vote.
5. A Board's determination of the existence of a material
irreconcilable conflict and its implications will be made known in
writing promptly to all Participants.
6. As to Variable Contracts issued by Separate Accounts registered
under the 1940 Act, Participating Insurance Companies will provide
pass-through voting privileges to all contract owners as required by
the 1940 Act. However, as to Variable Contracts issued by unregistered
Separate Accounts, pass-through voting privileges will be extended to
contract owners to the extent granted by the issuing insurance company.
Accordingly, such Participants, where applicable, will vote shares of
the applicable Portfolio held in its Separate Accounts in a manner
consistent with voting instructions timely received from contract
owners. Participating Insurance Companies will be responsible for
assuring that each Separate Account investing in a Portfolio calculates
voting privileges in a manner consistent with other Participants. The
obligation to calculate voting privileges as provided in this
Application will be a contractual obligation of all Participating
Insurance Companies under their agreement with the Trusts governing
participation in a Portfolio. Each Participating Insurance Company will
vote shares for which it has not received timely voting instructions as
well as shares it owns in the same proportion as it votes those shares
for which it has received voting instructions. Each Qualified Plan will
vote as required by applicable law and governing Plan documents.
7. As long as the 1940 Act requires pass-through voting privileges
to be provided to variable contract owners, SIMC or any of its
affiliates will vote its shares of any Fund in the same proportion of
all variable contract owners having voting rights with respect to that
Fund; provided, however, that SIMC or any of its affiliates shall vote
its shares in such other manner as may be required by the Commission or
its staff.
8. Each Trust will comply with all provisions of the 1940 Act
requiring voting by shareholders, and, in particular, each Trust will
either provide for annual meetings (except to
[[Page 57499]]
the extent that 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 the Trusts are not one of the trusts described in the
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 Trust 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.
9. The Trusts will notify all Participants that separate account
prospectus disclosure regarding potential risks of mixed and shared
funding may be appropriate. Each Trust will disclose in its prospectus
that (a) Shares of such Trust may be offered to insurance company
separate accounts of both variable annuity and variable life insurance
contracts and to Qualified Plans, (b) due to differences in tax
treatment and other considerations, the interests of various contract
owners participating in such Trust and the interests of Qualified Plans
investing in such Trust may conflict, and (c) the Trust's Board of
Trustees 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 conflict.
10. If and to the extent that Rule 6e-2 and rule 6e-3(T) under the
1940 Act are amended, or proposed Rule 6e-3 under the 1940 Act is
adopted, to provide exemptive relief from any provision of the 1940
Act, or the rules promulgated thereunder, with respect to mixed or
shared funding, on terms and conditions materially different from any
exemptions granted in the Order requested in this Application, then the
Trusts and/or Participating Insurance Companies, as appropriate, shall
take such steps as may be necessary to comply with Rules 6e-2 and 6e-
3(T), or Rule 6e-3, as such rules are applicable.
11. The Participants, at least annually, will submit to the Board
of each Trust such reports, materials, or data as a Board reasonably
may request so that the trustees of the Board may fully carry out the
obligations imposed upon a Board by the conditions contained in this
Application, and said reports, materials, and data will be submitted
more frequently if deemed appropriate by a Board. The obligations of
the Participants to provide these reports, materials, and data to a
Board, when it so reasonably requests, will be a contractual obligation
of all Participants under their agreements governing participation in
the Portfolios.
12. 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 relevant Board or other
appropriate records, and such minutes or other records shall be made
available to the Commission upon request.
13. The Trusts will not accept a purchase order from a Qualified
Plan if such purchase would make the Plan shareholder an owner of 10
percent or more of the assets of such Portfolio unless such Plan
executes an agreement with the relevant Trust governing participation
in such Portfolio that includes the conditions set forth herein to the
extent applicable. A Plan will execute an application containing an
acknowledgment of this condition at the time of its initial purchase of
shares of any Portfolio.
Conclusion
For the reasons stated above, Applicants believe that the requested
exemptions, in accordance with the standards of Section 6(c), 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. 99-27730 Filed 10-22-99; 8:45 am]
BILLING CODE 8010-01-M