[Federal Register Volume 76, Number 63 (Friday, April 1, 2011)]
[Notices]
[Pages 18265-18274]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-7695]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-29619; File No. 812-13854]
Fairholme VP Series Fund, Inc. and Fairholme Capital Management
LLC
March 28, 2011.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for an order pursuant to Section 6(c) of
the Investment Company Act of 1940, as amended, (the ``Act'') granting
relief from the provisions of Section 9(a), 13(a), 15(a) and 15(b) of
the Act and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder.
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APPLICANTS: Fairholme VP Series Fund, Inc. (the ``Fund'') and Fairholme
Capital Management LLC. (``FCM'') (together the ``Applicants'').
FILING DATE: The application was filed on December 23, 2010, and an
amended and restated application was filed on March 22, 2011.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Commission's Secretary
and serving Applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on April 22, 2011 and should be accompanied by proof of service on
Applicants, in the form of an affidavit, or, for lawyers, a certificate
of service. Hearing requests should state the nature of the writer's
interest, the reason for the request, and the issues contested. Persons
who wish to be notified of a hearing may request notification by
writing to the Secretary of the Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street,
NE., Washington, DC 20549. Applicants: Bruce R. Berkowitz Fairholme
Capital Management, LLC, 4400 Biscayne Blvd., Miami, FL 33137, with a
copy to Paul M. Miller, Esq., Seward & Kissel LLP, 1200 G Street, NW.,
Washington, DC 20005.
FOR FURTHER INFORMATION CONTACT: Patrick Scott, Senior Counsel, at 202-
551-6763, or Zandra Bailes, Branch Chief, Office of Insurance Products,
Division of Investment Management, Commission SEC at (202) 551-6975.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch, 100 F Street, NE., Washington, DC
20549 (tel. (202) 551-8090).
SUMMARY OF APPLICATION: Applicants seek exemption of each life
insurance company separate account supporting variable life insurance
contracts (``VLI Accounts'') (and its insurance company depositor) that
may invest in shares of the Fund or a ``future fund'' as defined below,
from the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the Act
and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) (or any comparable provisions
of a permanent rule that replaces Rule 6e-3(T)(b)(15)) thereunder to
the extent necessary to permit such VLI Accounts to hold shares of the
Fund or a future fund when one or more of the following other types of
investors also hold shares of the Fund or a future fund: (1) Life
insurance company separate accounts supporting variable annuity
contracts (``VA Accounts''), whether or not the life insurance company
is an affiliated person of the insurance company depositor of any VLI
Account, (2) VLI Accounts supporting scheduled or flexible premium
variable life insurance contracts, whether or not the life insurance
company is an affiliated person of the insurance company depositor of
any other VLI Account, (3) general accounts of insurance company
depositors of VA Accounts and/or VLI Accounts, (4) the Fund's
investment adviser or future fund's investment adviser (or an
affiliated person of the investment adviser), or (5) qualified group
pension plans and group retirement plans (``Plans'') in accordance with
Section 817(h) of the Internal Revenue Code (the ``Code'') outside the
separate account context. A ``future fund'' is any investment company
(or investment portfolio or series thereof), other than the Fund,
shares of which are sold to VLI Accounts and to which NYLIM or its
affiliates may in the future serve as investment adviser, investment
subadviser, investment manager, administrator, principal underwriter or
sponsor. Investment portfolios or series of the Fund or any future fund
are referred to herein as ``Insurance Funds.''
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, 100 F Street, NE.,
Washington, DC 20549, (202) 551-8090.
Applicants' Representations
1. The Fund was formed as a Maryland corporation on October 14,
2010. The Fund is registered under the Act as an open-end management
investment company (Reg. File No. 811-22490). The Fund is a series
investment company as defined by Rule 18f-2 under the Act and is
currently comprised of three series (the ``Portfolios''): (1) Fairholme
VP Portfolio, (2) Fairholme VP Focused Income Portfolio and (3)
Fairholme VP Allocation Portfolio. The Fund issues a separate series of
shares of common stock for each Existing Fund and intends to file a
registration statement under the Securities Act of 1933 (the ``1933
Act'') on Form N-1A to register such shares. The Fund may establish
additional Portfolios in the future and additional classes of shares
for such Insurance Funds.
2. The Fund may offer its shares to both VLI Accounts and VA
Accounts (together, ``Accounts'') of life insurance companies in
reliance on an order from the Commission. Applicants seek relief so
that the Fund (and future funds) may offer each series of their shares
to: (a) VLI Accounts and VA Accounts of both affiliated and
unaffiliated life insurance companies; (b) insurance company depositors
of VLI Accounts and/or VA Accounts investing in one or more Insurance
Funds through their general accounts; (c) FCM and any other investment
advisers to one or more
[[Page 18266]]
Insurance Funds (or their affiliates); and (d) Plans.
3. Each VLI Account and VA Account is or will be established as a
segregated asset account by an insurance company affiliated or not
affiliated with FCM (life insurance companies affiliated with FCM and
life insurance companies not affiliated with FCM are each referred to
as a ``Participating Insurance Company'' and collectively as the
``Participating Insurance Companies'') pursuant to the insurance law of
the insurance company's state of domicile. As such, the assets of each
will be the property of the Participating Insurance Company, and that
portion of the assets of such an Account equal to the reserves and
other contract liabilities with respect to the Account will not be
chargeable with liabilities arising out of any other business that the
insurance company may conduct. The income, gains and losses, realized
or unrealized from such an Account's assets will be credited to or
charged against the Account without regard to other income, gains or
losses of the Participating Insurance Company. If a VLI Account or VA
Account is registered as an investment company, it will be a ``separate
account'' as defined by Rule 0-1(e) (or any successor rule) under the
Act and will be registered as a unit investment trust. For purposes of
the Act, the life insurance company that establishes such a registered
VLI Account or VA Account is the depositor and sponsor of the Account
as those terms have been interpreted by the Commission with respect to
variable life insurance and variable annuity separate accounts.
4. FCM serves as the investment manager to the Fund and each of its
Portfolios. FCM is a Delaware limited liability company and is
registered as an investment manager under the Investment Advisers Act
of 1940. Under the supervision of the Fund's board of directors, FCM is
responsible for all investment decisions for the Funds.
5. The Fund proposes to offer and sell its shares (and a future
fund would offer and sell its shares) to VLI Accounts and VA Accounts
of various Participating Insurance Companies as an investment medium to
support variable life insurance contracts (``VLI Contracts'') and
variable annuity contracts (``VA Contracts'') (together, ``Variable
Contracts'') issued through such Accounts. As described more fully
below, the Fund (or a future fund) will only sell its shares to
registered VLI Accounts and registered VA Accounts if each
Participating Insurance Company sponsoring such a VLI or VA Account
enters into a participation agreement with the Insurance Fund (or a
future fund). The participation agreements define or will define the
relationship between each Insurance Fund and each Participating
Insurance Company and memorialize or will memorialize, among other
matters, the fact that, except where the agreement specifically
provides otherwise, the Participating Insurance Company will remain
responsible for establishing and maintaining any VLI or VA Account
covered by the agreement and for complying with all applicable
requirements of state and federal law pertaining to such Accounts and
to the sale and distribution of variable contracts issued through such
Accounts. The participation agreements also memorialize or will
memorialize, among other matters, the fact that, unless the agreement
specifically states otherwise, the Fund (or a future fund) will remain
responsible for establishing and maintaining any Insurance Fund covered
by the agreement, for complying with all applicable requirements of
state and federal law pertaining to such Insurance Funds and to the
offer and sale of its shares to VLI Accounts and VA Accounts covered by
the agreement, and for compliance with the conditions stated in the
application.
6. The use of a common management investment company (or investment
portfolio thereof) as an investment medium for both VLI Accounts and VA
Accounts of the same Participating Insurance Company, or of two or more
insurance companies that are affiliated persons of each other, is
referred to herein as ``mixed funding.'' The use of a common management
investment company (or investment portfolio thereof) as an investment
medium for VLI Accounts and/or VA Accounts of two or more Participating
Insurance Companies that are not affiliated persons of each other, is
referred to herein as ``shared funding.''
7. The Insurance Fund (or a future fund) may sell its shares
directly to the Plans. As described below, federal tax law permits
investment companies such as the Insurance Funds to increase their net
assets by selling shares to Plans.
8. Section 817(h) of the Code imposes certain diversification
standards on the assets underlying Variable Contracts, such as those in
each Insurance 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 adequately diversified. On March 2, 1989, the
Treasury Department issued regulations (Treas. Reg. 1.817-5) that
established diversification requirements for Variable Contracts, which
require the separate accounts upon which these Contracts are based to
be diversified as provided in the Treasury Regulations. In the case of
separate accounts that invest in underlying investment companies, the
Treasury Regulations provide a ``look through'' rule that permits the
separate account to look to the underlying investment company for
purposes of meeting the diversification requirements, provided that the
beneficial interests in the investment company are held only by the
segregated asset accounts of one or more insurance companies. However,
the Treasury Regulations also contain certain exceptions to this
requirement, one of which permits shares in an investment company to be
held by a Plan without adversely affecting the ability of shares in the
same investment company to also be held by separate accounts funding
Variable Contracts (Treas. Reg. Section 1.817-5(f)(3)(iii)). Another
exception allows the investment adviser of the investment company (and
certain companies related to the investment adviser) to hold shares of
the investment company.
9. Plans may invest in shares of an investment company as the sole
investment under the Plan, or as one of several investments. Plan
participants may or may not be given an investment choice depending on
the terms of the Plan itself. The trustees or other fiduciaries of a
Plan may vote investment company shares held by the Plan in their own
discretion or, if the applicable Plan so provides, vote such shares in
accordance with instructions from participants in such Plans.
Applicants have no control over whether trustees or other fiduciaries
of Plans, rather than participants in the Plans, have the right to vote
under any particular Plan. Each Plan must be administered in accordance
with the terms of the Plan and as determined by its trustees or other
fiduciaries. To the extent permitted under applicable law, FCM or an
affiliated person of FCM may act as investment adviser or trustee to
Plans that purchase shares of any Insurance Fund.
10. Applicants propose that any Insurance Fund also be permitted to
sell shares to its investment adviser or an affiliate. The Treasury
Regulations permit such sales as long as the return on shares held by
the adviser or affiliate is computed in the same manner as shares held
by VLI Accounts and VA Accounts, the adviser or affiliate does not
intend to sell the shares to the public, and sales to an adviser or
affiliate are only made in connection with the creation of the
Insurance Fund.
[[Page 18267]]
11. Applicants propose that any Insurance Fund also be permitted to
sell shares to the general account of a Participating Insurance
Company. The Treasury Regulations also permit such sales as long as the
return on shares held by general accounts are computed in the same
manner as shares held by VLI Accounts and VA Accounts, and the
Participating Insurance Company does not intend to sell the shares to
the public.
12. The promulgation of Rules 6e-2(b)(15) and 6e-3(T)(b)(15)
preceded the issuance of the Treasury Regulations permitting the shares
of Insurance Funds to be held by a Plan, an adviser for the Insurance
Fund, or the general account of a Participating Insurance Company
without adversely affecting the ability of the VLI Account to also hold
shares.
13. The use of a common management investment company (or
investment portfolio thereof) as an investment medium for VLI Accounts,
VA Accounts, Plans, investment advisers and general accounts of
Participating Insurance Companies is referred to herein as ``extended
mixed funding.''
Applicants' Legal Analysis
1. Section 9(a)(2) of the Act makes it unlawful for any company to
serve as an investment adviser or principal underwriter of any
investment company, including a unit investment trust, if an affiliated
person of that company is subject to disqualification enumerated in
Section 9(a)(1) or (2) of the Act. Sections 13(a), 15(a), and 15(b) of
the Act have been deemed by the Commission to require ``pass-through''
voting with respect to an underlying investment company's shares.
2. Rule 6e-2(b)(15) under the Act provides partial exemptions from
Sections 9(a), 13(a), 15(a), and 15(b) of the Act to VLI Accounts
supporting scheduled premium VLI Contracts and to their life insurance
company depositors. The exemptions granted by the Rule are available,
however, only where an Insurance Fund offers its shares exclusively to
VLI Accounts of the same Participating Insurance Company and/or of
Participating Insurance Companies that are affiliated persons of the
same Participating Insurance Company and then, only where scheduled
premium VLI Contracts are issued through such VLI Accounts. Therefore,
VLI Accounts, their depositors and their principal underwriters may not
rely on the exemptions provided by Rule 6e-2(b)(15) if shares of the
Insurance Fund are held by a VLI Account through which flexible premium
VLI Contracts are issued, a VLI Account of an unaffiliated
Participating Insurance Company, an unaffiliated investment adviser,
any VA Account or a Plan. In other words, Rule 6e-2(b)(15) does not
permit a scheduled premium VLI Account to invest in shares of a
management investment company that serves as a vehicle for mixed
funding, extended mixed funding or shared funding.
3. Accordingly, Applicants request an order of the Commission
granting exemptions from Sections 9(a), 13(a), 15(a), and 15(b) of the
Act, and Rule 6e-2(b)(15) thereunder, to the extent necessary to permit
a scheduled premium VLI Account to hold shares of Insurance Funds when
one or more of the following types of investors also hold shares of the
Insurance Funds: (1) VA Accounts, (2) VLI Accounts supporting flexible
premium VLI Contracts, (3) VA Accounts or VLI Accounts of Participating
Insurance Companies that are not affiliated persons of the depositor of
the scheduled premium VLI Account, (4) general accounts of
Participating Insurance Companies, (5) investment advisers (or
affiliated persons of an investment adviser) of an Insurance Fund, or
(6) Plans.
4. Rule 6e-3(T)(b)(15) under the Act provides partial exemptions
from Sections 9(a), 13(a), 15(a), and 15(b) of the Act to VLI Accounts
supporting flexible premium variable life insurance contracts and their
life insurance company depositors. The exemptions granted by the Rule
are available, however, only where an Insurance Fund offers its shares
exclusively to VLI Accounts (through which either scheduled premium or
flexible premium VLI Contracts are issued) of the same Participating
Insurance Company and/or of Participating Insurance Companies that are
affiliated persons of the same Participating Insurance Company, VA
Accounts of the same Participating Insurance Company or of affiliated
Participating Insurance Companies, or the general account of the same
Participating Insurance Company or of affiliated Participating
Insurance Companies. Therefore, VLI Accounts, their depositors and
their principal underwriters may not rely on the exemptions provided by
Rule 6e-3(T)(b)(15) if shares of the Insurance Fund are held by a VLI
Account of an unaffiliated Participating Insurance Company, a VA
Account of an unaffiliated Participating Insurance Company, the general
account of an unaffiliated Participating Insurance Company, an
unaffiliated investment adviser, or a Plan. In other words, Rule 6e-
3(T)(b)(15) permits VLI Accounts supporting flexible premium VLI
Contracts to invest in shares of a management investment company that
serves as a vehicle for mixed funding but does not permit such a VLI
Account to invest in shares of a management investment company that
serves as a vehicle for extended mixed funding or shared funding.
5. Accordingly, Applicants request an order of the Commission
granting exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the
Act and Rule 6e-3(T)(b)(15) (and any comparable permanent rule)
thereunder, to the extent necessary to permit a flexible premium VLI
Account to hold shares of Insurance Funds when one or more of the
following types of investors also hold shares of the Insurance Funds:
(1) VA Accounts or VLI Accounts of Participating Insurance Companies
that are not affiliated persons of the depositor of the flexible
premium VLI Account, (2) general accounts of Participating Insurance
Companies, (3) investment advisers (or affiliated persons of an
investment adviser) of an Insurance Fund, or (4) Plans.
6. As explained below, Applicants maintain that there is no public
policy reason why VLI Accounts and their Participating Insurance
Company depositors (or principal underwriters) should not be able to
rely on the exemptions provided by Rules 6e-2(b)(15) and 6e-3(T)(b)(15)
just because shares of Insurance Funds held by the VLI Accounts are
also held by an Insurance Fund's investment adviser (or affiliated
person), the general account of the Participating Insurance Company (or
another Participating Insurance Company), or a Plan (``Eligible 817(h)
Purchasers''). Rather, Applicants assert that the proposed sale of
Insurance Fund shares to Plans may allow for the development of larger
pools of assets, resulting in the potential for greater investment and
diversification opportunities and decreased expenses at higher asset
levels. Similarly, Applicants believe that the proposed sale of
Insurance Fund shares to investment advisers (or their affiliates) and
to general accounts of Participating Insurance Companies may result in
the creation of more Insurance Funds as investment options for certain
VA Contracts and VLI Contracts than would otherwise be the case.
7. Applicants understand that the reason the Commission did not
grant more extensive relief in the area of mixed and shared funding
when it adopted Rule 6e-3(T) is because of the Commission's uncertainty
in this area with respect to issues such as conflicts
[[Page 18268]]
of interest. Applicants believe, however, that the Commission's concern
in this area is not warranted here. For the reasons explained below,
Applicants have concluded that investment by Eligible 817(h) Purchasers
in the Insurance Funds should not increase the risk of material
irreconcilable conflicts between owners of VLI Contracts and other
types of investors or between owners of VLI Contracts issued by
unaffiliated Participating Insurance Companies.
8. Consistent with the Commission's authority under Section 6(c) of
the Act to grant exemptive orders to a class or classes of persons and
transactions, Applicants request exemptions for a class of parties
consisting of VLI Accounts, their Participating Insurance Company
depositors and their principal underwriters. There is ample precedent,
in a variety of contexts, for the Commission to grant exemptions to a
carefully defined class of persons or parties where the specific
identities of all such persons or parties cannot be ascertained at the
time an application for the exemptions is filed. Likewise, there is
ample precedent for parties not seeking to rely on the exemptions to
apply for such exemptions in order to further their reasonable business
purposes.
9. In the context of mixed funding, extended mixed funding and
shared funding, the Commission has granted numerous orders of exemption
covering a class composed of registered VLI Accounts, their insurance
company depositors and principal underwriters. The order sought is
largely identical to these precedents with respect to the scope of the
exemptions and the conditions proposed by the Applicants. Applicants
believe that the same policies and considerations that led the
Commission to grant such exemptions to other similarly situated
applicants are present here.
10. Section 6(c) of the Act provides, in part, that the Commission,
by order upon application, may conditionally or unconditionally exempt
any person, security or transaction, or any class or classes of
persons, securities or transactions, from any provision or provisions
of the Act, or any rule or regulation thereunder, if and to the extent
that such exemption is necessary or appropriate in the public interest
and consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the Act. The Applicants submit
that the exemptions requested are appropriate in the public interest
and consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the Act.
11. Section 9(a)(3) of the Act provides, among other things, that
it is unlawful for any company to serve as investment adviser or
principal underwriter of any registered open-end investment company if
an affiliated person of that company is subject to a disqualification
enumerated in Sections 9(a)(1) or (2). Rules 6e-2(b)(15)(i) and (ii)
and Rules 6e-3(T)(b)(15)(i) and (ii) under the Act provide exemptions
from Section 9(a) under certain circumstances, subject to the
limitations discussed above on mixed funding, extended mixed funding
and shared funding. These exemptions limit the application of the
eligibility restrictions to affiliated individuals or companies that
directly participate in management of the underlying investment
company.
12. The relief provided by Rules 6e-2(b)(15)(i) and 6e-
3(T)(b)(15)(i) permits a person that is disqualified under Sections
9(a)(1) or (2) of the Act to serve as an officer, director, or employee
of the life insurance company, or any of its affiliates, as long as
that person does not participate directly in the management or
administration of the underlying investment company. The relief
provided by Rules 6e-2(b)(15)(ii) and 6e-3(T)(b)(15)(ii) under the Act
permits the life insurance company to serve as the underlying
investment company's investment manager or principal underwriter,
provided that none of the insurer's personnel who are ineligible
pursuant to Section 9(a) participates in the management or
administration of the investment company.
13. In effect, the partial relief granted in Rules 6e-2(b)(15) and
6e-3(T)(b)(15) under the Act from the requirements of Section 9 of the
Act 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. Those rules recognize that it is not necessary
for the protection of investors or the purposes fairly intended by the
policy and provisions of the Act to apply the provisions of Section
9(a) to all individuals in a large insurance complex, most of whom will
have no involvement in matters pertaining to investment companies in
that organization. Applicants assert that it is also unnecessary to
apply Section 9(a) of the Act to the many individuals in various
unaffiliated insurance companies (or affiliated companies of
Participating Insurance Companies) that may utilize the Insurance Funds
as investment vehicles for VLI Accounts and VA Accounts. There is no
regulatory purpose served in extending the monitoring requirements to
embrace a full application of Section 9(a) eligibility restrictions
because of mixed funding, extended mixed funding or shared funding. The
Participating Insurance Companies and Plans are not expected to play
any role in the management of the Insurance Funds. Those individuals
who participate in the management of the Insurance Funds will remain
the same regardless of which VA Accounts, VLI Accounts, Plans or other
Eligible 817(h) Purchasers invest in the Insurance Funds. Applying the
monitoring requirements of Section 9(a) of the Act because of
investment by VLI Accounts would be unjustified and would not serve any
regulatory purpose. Furthermore, the increased monitoring costs could
reduce the net rates of return realized by owners of VLI Contracts and
Plan participants.
14. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) under the Act
provide exemptions from pass-through voting requirements with respect
to several significant matters, assuming the limitations on mixed
funding, extended mixed funding and shared funding are observed. Rules
6e-2(b)(15)(iii)(A) and 6e-3(T)(b)(15)(iii)(A) provide that the
insurance company may disregard the voting instructions of its variable
life insurance contract owners with respect to the investments of an
underlying investment company, or any contract between such an
investment company and its investment adviser, when required to do so
by an insurance regulatory authority (subject to the provisions of
paragraphs (b)(5)(i) and (b)(7)(ii)(A) of Rules 6e-2 and 6e-3(T)).
15. Rules 6e-2(b)(l5)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2) provide
that an insurance company may disregard the voting instructions of
owners of its variable life insurance contracts if such owners initiate
any change in an underlying investment company's investment policies,
principal underwriter or any investment adviser (provided that
disregarding such voting instructions is reasonable and subject to the
other provisions of paragraphs (b)(5)(ii), (b)(7)(ii)(B) and
(b)(7)(ii)(C) of Rules 6e-2 and 6e-3(T)).
16. In the case of a change in the investment policies of the
underlying investment company, the insurance company, in order to
disregard contract owner voting instructions, must make a good faith
determination that such a change either would: (1) Violate state law,
or (2) result in investments that either (a) would not be consistent
with the investment objectives of its separate account, or (b) would
vary from the general quality and nature of investments and investment
techniques
[[Page 18269]]
used by other separate accounts of the company, or of an affiliated
life insurance company with similar investment objectives.
17. Both Rule 6e-2 and Rule 6e-3(T) generally recognize that a
variable life insurance contract is primarily a life insurance contract
containing many important elements unique to life insurance contracts
and subject to extensive state insurance regulation. In adopting
subparagraph (b)(15)(iii) of these Rules, the Commission implicitly
recognized that state insurance regulators have authority, pursuant to
state insurance laws or regulations, to disapprove or require changes
in investment policies, investment advisers, or principal underwriters.
18. The sale of Insurance Fund shares to Plans will not have any
impact on the provisions of Rules 6e-2 and 6e-3(T) relating to pass-
through voting and an insurance company's ability to disregard voting
instructions in certain circumstances. Shares sold to Plans will be
held by such Plans, not insurance companies. The exercise of voting
rights by Plans, whether by trustees, other fiduciaries, participants,
beneficiaries, or investment managers engaged by the Plans, does not
raise the type of issues respecting disregard of voting rights that are
raised by VLI Accounts. With respect to Plans, which are not registered
as investment companies under the 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. For example, for many Plans, under
Section 403(a) of the Employee Retirement Income Security Act of 1974
(``ERISA''), shares of a portfolio of an investment company sold to a
Plan must be held by the trust(s) funding the Plan. Section 403(a) also
provides that the trustee(s) of such trusts 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 trustee(s) 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. For such Plans, unless one of the above two
exceptions stated in Section 403(a) applies, Plan trustees have the
exclusive authority and responsibility for voting investment company
shares (or related proxies) held by their Plan.
19. If a named fiduciary to a 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 trustee(s) or
another named fiduciary. The Plans may have their trustee(s) or other
fiduciaries exercise voting rights attributable to investment
securities held by the Plans in their discretion. Some 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 Plan participants.
20. Where a 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 the
Variable Contract owners and Plan participants with respect to voting
of the respective Fund shares. Accordingly, unlike the circumstances
surrounding VLI Accounts and VA Accounts, because Plans are not
required to pass through voting rights to participants, the issue of
resolution of material irreconcilable conflicts of interest should not
arise with respect to voting Insurance Fund shares.
21. In addition, if a Plan were to hold a controlling interest in
an Insurance Fund, Applicants do not believe that such control would
disadvantage other investors in such Insurance Fund to any greater
extent than is the case when any institutional shareholder holds a
majority of the shares of any open-end management investment company.
In this regard, Applicants submit that investment in an Insurance Fund
by a Plan will not create any of the voting complications occasioned by
VLI Account investments in the Insurance Fund. Unlike VLI Account
investments, Plan voting rights cannot be frustrated by veto rights of
Participating Insurance Companies or state insurance regulators.
22. Where a Plan provides participants with the right to instruct
the trustee(s) as to how to vote Insurance Fund shares, Applicants see
no reason why such participants generally or those in a particular
Plan, either as a single group or in combination with participants in
other Plans, would vote in a manner that would disadvantage VLI
Contract owners. The purchase of shares by Plans that provide voting
rights does not present any complications not otherwise occasioned by
mixed or shared funding.
23. Similarly, an investment adviser to an Insurance Fund (or its
affiliates) and the general accounts of Participating Insurance
Companies are not subject to any pass-through voting requirements.
Accordingly, unlike the circumstances surrounding VLI Account and VA
Account investments in Insurance Fund shares, investment in such shares
by Eligible 817(h) Purchasers should not raise issues of resolution of
material irreconcilable conflicts of interest with respect to voting.
24. Applicants recognize that the Commission's primary concern with
respect to mixed funding, extended mixed funding and shared funding
issues is the potential for irreconcilable conflicts between the
interests of owners of variable life insurance contracts and those of
other investors in an open end investment company serving as an
investment vehicle for such contracts. The prohibitions on mixed and
shared funding might reflect concern regarding possible different
investment motivations among investors. When Rule 6e-2 was first
adopted, variable annuity separate accounts could invest in mutual
funds whose shares were also offered to the general public. Therefore,
the Commission staff may have been concerned with the potentially
different investment motivations of public shareholders and owners of
variable life insurance contracts. There also may have been some
concern with respect to the problems of permitting a state insurance
regulatory authority to affect the operations of a publicly available
mutual fund and the investment decisions of public shareholders.
25. For reasons unrelated to the Act, however, Revenue Ruling 81-
225 (Sept. 25, 1981) effectively deprived variable annuity contracts
funded by publicly available mutual funds of their tax-benefited
status. The Tax Reform Act of 1984 codified the prohibition against the
use of publicly available mutual funds as an investment vehicle for
both variable annuity contracts and variable life insurance contracts.
In particular, Section 817(h) of the Code, in effect, requires that the
investments made by both variable annuity and variable life insurance
separate accounts be ``adequately diversified.'' If such a separate
account is organized as part of a ``two-tiered'' arrangement where the
account invests in shares of an underlying open-end investment company
(i.e., an underlying fund), the diversification test will be applied to
the underlying fund (or to each of several underlying funds), rather
than to the separate account itself, but only if ``all of the
beneficial interests'' in the underlying fund ``are held by one or more
insurance companies (or affiliated companies) in their general account
or in segregated asset accounts.''
[[Page 18270]]
Accordingly, a separate account that invests in a publicly available
mutual fund will not be adequately diversified for these purposes. As a
result, any underlying fund, including any Fund that sells shares to VA
Accounts or VLI Accounts, would, in effect, be precluded from also
selling its shares to the public. Consequently, the Insurance Funds may
not sell their shares to the public.
26. The rights of an insurance company or a state insurance
regulator to disregard the voting instructions of owners of Variable
Contracts is not inconsistent with either mixed funding or shared
funding. The National Association of Insurance Commissioners Variable
Life Insurance Model Regulation (the ``NAIC Model Regulation'')
suggests that it is unlikely that insurance regulators would find an
underlying fund's investment policy, investment adviser or principal
underwriter objectionable for one type of Variable Contract but not
another type. The NAIC Model Regulation has long permitted the use of a
single underlying fund for different separate accounts. Moreover, the
NAIC Model Regulation does not distinguish between scheduled premium
and flexible premium variable life insurance contracts. The NAIC Model
Regulation, therefore, reflects the NAIC's apparent confidence that
such combined funding is appropriate and that state insurance
regulators can adequately protect the interests of owners of all
variable contracts.
27. Shared funding by unaffiliated insurance companies does not
present any issues that do not already exist where a single insurance
company is licensed to do business in several or all states. A
particular state insurance regulator could require action that is
inconsistent with the requirements of other states in which the
insurance company offers its contracts. However, the fact that
different insurers may be domiciled in different states does not create
a significantly different or enlarged problem.
28. Shared funding by unaffiliated insurers, in this respect, is no
different than the use of the same investment company as the funding
vehicle for affiliated insurers, which Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) permit. Affiliated insurers may be domiciled in different
states and be subject to differing state law requirements. Affiliation
does not reduce the potential, if any exists, for differences in state
regulatory requirements. In any event, the conditions set forth below
are designed to safeguard against, and provide procedures for
resolving, any adverse effects that differences among state regulatory
requirements may produce. If a particular state insurance regulator's
decision conflicts with the majority of other state regulators, then
the affected Participating Insurance Company will be required to
withdraw its separate account investments in the relevant Insurance
Fund. This requirement will be provided for in the Participation
Agreement that will be entered into by Participating Insurance
Companies with the relevant Insurance Fund.
29. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) give the Participating
Insurance Company the right to disregard the voting instructions of VLI
Contract owners in certain circumstances. This right derives from the
authority of state insurance regulators over VLI Accounts and VA
Accounts. Under Rules 6e-2(b)(15) and 6e-3(T)(b)(15), a Participating
Insurance Company may disregard VLI Contract owner voting instructions
only with respect to certain specified items. Affiliation does not
eliminate the potential, if any exists, for divergent judgments as to
the advisability or legality of a change in investment policies,
principal underwriter or investment adviser initiated by such Contract
owners. The potential for disagreement is limited by the requirements
in Rules 6e-2 and 6e-3(T) that the Participating Insurance Company's
disregard of voting instructions be reasonable and based on specific
good faith determinations.
30. A particular Participating Insurance Company's disregard of
voting instructions, nevertheless, could conflict with the voting
instructions of a majority of VLI Contract owners. The Participating
Insurance Company's action possibly could be different than the
determination of all or some of the other Participating Insurance
Companies (including affiliated insurers) that the voting instructions
of VLI Contract owners should prevail, and either could preclude a
majority vote approving the change or could represent a minority view.
If the Participating Insurance Company's judgment represents a minority
position or would preclude a majority vote, then the Participating
Insurance Company may be required, at the relevant Insurance Fund's
election, to withdraw its VLI Accounts' and VA Accounts' investments in
the relevant Insurance Fund. No charge or penalty will be imposed as a
result of such withdrawal. This requirement will be provided for in the
Participation Agreement entered into by the Participating Insurance
Companies with the relevant Insurance Fund.
31. There is no reason why the investment policies of an Insurance
Fund would or should be materially different from what these policies
would or should be if the Insurance Fund supported only VA Accounts or
VLI Accounts, whether flexible premium or scheduled premium VLI
Contrasts. Each type of insurance contract is designed as a long-term
investment program.
32. Each Insurance Fund will be managed to attempt to achieve its
specified investment objective, and not favor or disfavor any
particular Participating Insurance Company or type of insurance
contract. There is no reason to believe that different features of
various types of Variable Contracts will lead to different investment
policies for each or for different VLI Accounts and VA Accounts. The
sale of Variable Contracts and ultimate success of all VA Accounts and
VLI Accounts depends, at least in part, on satisfactory investment
performance, which provides an incentive for each Participating
Insurance Company to seek optimal investment performance.
33. Furthermore, no single investment strategy can be identified as
appropriate to a particular Variable Contract. Each ``pool'' of VLI
Contract and VA Contract owners is composed of individuals of diverse
financial status, age, insurance needs and investment goals. An
Insurance Fund supporting even one type of Variable Contract must
accommodate these diverse factors in order to attract and retain
purchasers. Permitting mixed and shared funding will provide economic
support for the continuation of the Insurance Funds. Mixed and shared
funding will broaden the base of potential Variable Contract owner
investors, which may facilitate the establishment of additional
Insurance Funds serving diverse goals.
34. Applicants do not believe that the sale of the shares to 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 those
that would otherwise exist between owners of VLI Contracts and VA
Contracts. Applicants submit that either there are no conflicts of
interest or that there exists the ability by the affected parties to
resolve such conflicts consistent with the best interests of VLI
Contract owners, VA Contract owners and Plan participants.
35. Applicants considered whether there are any issues raised under
the Code, Treasury Regulations, or Revenue Rulings thereunder, if
Plans, VA Accounts, and VLI Accounts all invest
[[Page 18271]]
in the same Insurance Fund. Section 817(h) of the Code is the
culmination of a series of Revenue Rulings aimed at the control of
investments by owners of Variable Contracts. Section 817(h) is the only
Section of the Code that discusses insurance company separate accounts.
Treasury Regulation 1.817-5(f)(3)(iii), which establishes the
diversification requirements for underlying funds, specifically
permits, among other things, ``qualified pension or retirement plans,''
and separate accounts to invest in the same underlying fund. For this
reason, Applicants have concluded that neither the Code, nor the
Treasury Regulations nor Revenue Rulings thereunder, present any
inherent conflicts of interest if Plans, VLI Accounts, and VA Accounts
all invest in the same Insurance Fund.
36. Applicants note that, while there are differences in the manner
in which distributions from VLI Accounts and Plans are taxed, these
differences have no impact on the Insurance Funds. When distributions
are to be made, and a VLI Account or Plan is unable to net purchase
payments to make distributions, the VLI Account or Plan will redeem
shares of the relevant Insurance Fund at its net asset values in
conformity with Rule 22c-1 under the Act (without the imposition of any
sales charge) to provide proceeds to meet distribution needs. A
Participating Insurance Company will then make distributions in
accordance with the terms of its VLI Contract and a Plan will then make
distributions in accordance with the terms of the Plan.
37. Applicants considered whether it is possible to provide an
equitable means of giving voting rights to VLI Contract owners and
Plans. In connection with any meeting of Insurance Fund shareholders,
the Insurance Fund's transfer agent will inform each Participating
Insurance Company and other Eligible 817(h) Purchaser of their share
holdings and provide other information necessary for such shareholders
to participate in the meeting (e.g., proxy materials). Each
Participating Insurance Company then will solicit voting instructions
from owners of VLI Contracts and VA Contracts as required by either
Rules 6e-2 or 6e-3(T), or Section 12(d)(1)(E)(iii)(aa) of the Act, as
applicable, and its Participation Agreement with the relevant Insurance
Fund. Shares held by a Participating Insurance Company general account
will be voted by the Participating Insurance Company in the same
proportion of shares for which it receives voting instructions from its
Variable Contract owners. Shares held by Plans will be voted in
accordance with applicable law. The voting rights provided to Plans
with respect to the shares would be no different from the voting rights
that are provided to Plans with respect to shares of mutual funds sold
to the general public. Furthermore, if a material irreconcilable
conflict arises because of a 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 Insurance Fund,
to withdraw its investment in the Insurance Fund, and no charge or
penalty will be imposed as a result of such withdrawal.
38. Applicants do not believe that the ability of an Insurance Fund
to sell its shares to its investment adviser (or an affiliated person
of the adviser), to Plans, or to the general account of a Participating
Insurance Company gives rise to a senior security. ``Senior Security''
is defined in Section 18(g) of the Act to include ``any stock of a
class having priority over any other class as to distribution of assets
or payment of dividends.'' As noted above, regardless of the rights and
benefits of participants under Plans and owners of VLI Contracts, VLI
Accounts, VA Accounts, Participating Insurance Companies, Plans, and
investment advisers (or their affiliates), only have, or will only
have, rights with respect to their respective shares of an Insurance
Fund. These parties can only redeem such shares at net asset value. No
shareholder of an Insurance Fund has any preference over any other
shareholder with respect to distribution of assets or payment of
dividends.
39. Applicants do not believe that the veto power of state
insurance commissioners over certain potential changes to Fund
investment objectives approved by owners of VLI Contracts creates
conflicts between the interests of such owners and the interests of
Plan participants. Applicants note that a basic premise of corporate
democracy and shareholder voting is that not all shareholders may agree
with a particular proposal. Their interests and opinions may differ,
but this does not mean that inherent conflicts of interest exist
between or among such shareholders or that occasional conflicts of
interest that do occur between or among them are likely to be
irreconcilable.
40. Although Participating Insurance Companies may have to overcome
regulatory impediments in redeeming shares of an Insurance Fund held by
their VLI Accounts, the Plans and the participants in participant-
directed Plans can make decisions quickly and redeem their shares in an
Insurance Fund and reinvest in another investment company or other
funding vehicle without impediments, or as is the case with most Plans,
hold cash pending suitable investment. As a result, conflicts between
the interests of VLI Contract owners and the interests of Plans and
Plan participants can usually be resolved quickly since the Plans can,
on their own, redeem their Insurance Fund shares.
41. Finally, Applicants considered whether there is a potential for
future conflicts of interest between Participating Insurance Companies
and Plans created by future changes in the tax laws. Applicants do not
see any greater potential for material irreconcilable conflicts arising
between the interests of VLI Contract owners (or, for that matter, VA
Contract owners) and Plan participants from future changes in the
federal tax laws than that which already exists between VLI Contract
owners and VA Contract owners.
42. Applicants recognize that the foregoing is not an all-inclusive
list, but rather is representative of issues that they believe are
relevant to this Application. Applicants believe that the discussion
contained herein demonstrates that the sale of Insurance Fund shares to
Plans trustees would not increase the risk of material irreconcilable
conflicts between the interests of Plan participants and VLI Contract
owners or other investors. Further, Applicants submit that the use of
the Insurance Funds with respect to Plans is not substantially
dissimilar from each Insurance Fund's anticipated use, in that Plans,
like VLI Accounts, are generally long-term investors.
43. Applicants assert that permitting an Insurance Fund to sell its
shares to its investment adviser (or the adviser's affiliates) or to
the general account of a Participating Insurance Company will enhance
management of each Insurance Fund without raising significant concerns
regarding material irreconcilable conflicts among different types of
investors.
44. A potential source of initial capital is an Insurance Fund's
investment adviser or a Participating Insurance Company. Either of
these parties may have an interest in making a capital investment and
in assisting an Insurance Fund in its organization. However, provision
of seed capital or the purchase of shares in connection with the
management of an Insurance Fund by its investment adviser or by a
Participating Insurance Company may
[[Page 18272]]
be deemed to violate the exclusivity requirement of Rule 6e-2(b)(15)
and/or Rule 6e-3(T)(b)(15).
45. Given the conditions of Treasury Regulation 1.817-5(f)(3) and
the harmony of interest between an Insurance Fund, on the one hand, and
its investment adviser (or affiliates) or a Participating Insurance
Company, on the other, Applicants assert that little incentive for
overreaching exists. Furthermore, such investment should not implicate
the concerns discussed above regarding the creation of material
irreconcilable conflicts. Instead, permitting investments by an
investment adviser (or its affiliates), or by general accounts of
Participating Insurance Companies, will permit the orderly and
efficient creation and operation of an Insurance Fund, and reduce the
expense and uncertainty of using outside parties at the early stages of
the Insurance Fund's operations.
46. Various factors have limited the number of insurance companies
that offer Variable Contracts. These factors include the costs of
organizing and operating a funding vehicle, certain insurers' lack of
experience with respect to investment management, and the lack of name
recognition by the public of certain insurance companies as investment
experts. In particular, some smaller life insurance companies may not
find it economically feasible, or within their investment or
administrative expertise, to enter the Variable Contract business on
their own. Use of an Insurance Fund as a common investment vehicle for
VLI Accounts would reduce or eliminate these concerns. Mixed and shared
funding should also provide several benefits to owners of VLI Contracts
by eliminating a significant portion of the costs of establishing and
administering separate underlying funds.
47. Participating Insurance Companies will benefit not only from
the investment and administrative expertise of FCM and its affiliates,
but also from the potential cost efficiencies and investment
flexibility afforded by larger pools of funds. Mixed and shared funding
also would permit a greater amount of assets available for investment
by an Insurance Fund, thereby promoting economies of scale, by
permitting increased safety through greater diversification, or by
making the addition of new Insurance Funds more feasible. Therefore,
making the Insurance Funds available for mixed and shared funding will
encourage more insurance companies to offer VLI Accounts. This should
result in increased competition with respect to both VLI Account design
and pricing, which can in turn be expected to result in more product
variety. Applicants also assert that sale of shares in an Insurance
Fund to Plans, in addition to VLI Accounts and VA Accounts, will result
in an increased amount of assets available for investment in an
Insurance Fund. This may benefit VLI Account owners by promoting
economies of scale, permitting increased safety of investments through
greater diversification, and making the addition of new Funds more
feasible.
48. Applicants also submit that, regardless of the type of
shareholder in an Insurance Fund, its investment adviser (and the
adviser's affiliates) are or would be contractually and otherwise
obligated to manage the Insurance Fund solely and exclusively in
accordance with that Insurance Fund's investment objectives, policies
and restrictions, as well as any guidelines established by its board of
directors or trustees (a ``Board''). Thus, each Insurance Fund will be
managed in the same manner as any other mutual fund.
49. Applicants see no significant legal impediment to permitting
mixed funding, extended mixed funding and shared funding. VLI Accounts
historically have been employed to accumulate shares of mutual funds
that are not affiliated with the depositor or sponsor of the VLI
Account. In particular, Applicants assert that sales of Insurance Fund
shares to Eligible 817(h) Purchasers, as described above, will not have
any adverse federal income tax consequences to other investors in such
an Insurance Fund.
50. In addition, Applicants note that the Commission has issued
numerous orders permitting mixed funding, extended mixed funding and
shared funding. Therefore, granting the exemptions requested herein is
in the public interest and, as discussed above, will not compromise the
regulatory purposes of Sections 9(a), 13(a), 15(a), or 15(b) of the Act
or Rules 6e-2 or 6e-3(T) thereunder.
Applicants' Conditions
Applicants agree that the Commission order requested herein shall
be subject to the following conditions which shall apply to the
Insurance Fund and any future trusts:
1. A majority of the Board of the Fairholme Corporation will
consist of persons who are not ``interested persons'' of the Insurance
Fund, as defined by Section 2(a)(19) of the Act, and the rules
thereunder, and as modified by any applicable orders of the Commission,
except that if this condition is not met by reason of death,
disqualification or bona fide resignation of any trustee or trustees,
then the operation of this condition will be suspended: (a) For a
period of 90 days if the vacancy or vacancies may be filled by the
Board, (b) for a period of 150 days if a vote of shareholders is
required to fill the vacancy or vacancies, or (c) for such longer
period as the Commission may prescribe by order upon application, or by
future rule.
2. The Board of each Insurance Fund will monitor the Insurance Fund
for the existence of any material irreconcilable conflict between and
among the interests of the owners of all VLI Contracts and VA Contracts
and participants of all Plans investing in the Insurance Fund, and
determine what action, if any, should be taken in response to such
conflicts. A material irreconcilable conflict may arise for a variety
of reasons, including: (a) An action by any state insurance regulatory
authority, (b) a change in applicable federal or state insurance, tax,
or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretive letter, or any similar action by
insurance, tax or securities regulatory authorities, (c) an
administrative or judicial decision in any relevant proceeding, (d) the
manner in which the investments of the Insurance Fund are being
managed, (e) a difference in voting instructions given by VA Contract
owners, VLI Contract owners, and Plans or Plan participants, (f) a
decision by a Participating Insurance Company to disregard the voting
instructions of contract owners; or (g) if applicable, a decision by a
Plan to disregard the voting instructions of Plan participants.
3. Participating Insurance Companies (on their own behalf, as well
as by virtue of any investment of general account assets in an
Insurance Fund), an adviser and its affiliates, and any Plan that
executes a Participation Agreement upon its becoming an owner of 10% or
more of the net assets of an Insurance Fund (collectively,
``Participants'') will report any potential or existing conflicts to
the Board of the Insurance Fund. Net assets of an Insurance Fund will
be defined and calculated in accordance with the prospectus and as
reflected in the financial statements of the Insurance Fund. Each
Participant will be responsible for assisting the Board in carrying out
the Board's responsibilities under these conditions by providing the
Board with all information reasonably necessary for the Board to
consider any issues raised. This responsibility includes, but is not
limited to, an obligation by each Participating Insurance Company to
inform the Board whenever Variable Contract owner
[[Page 18273]]
voting instructions are disregarded, and, if pass-through voting is
applicable, an obligation by each 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 Agreement with an
Insurance Fund, and these responsibilities will be carried out with a
view only to the interests of the Variable Contract owners. The
responsibility to report such information and conflicts, and to assist
the Board, also will be contractual obligations of all Plans under
their Participation Agreement with an Insurance Fund, 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 the Board of an Insurance
Fund, or a majority of the disinterested directors/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
directors/trustees), take whatever steps are necessary to remedy or
eliminate the material irreconcilable conflict, up to and including:
(a) Withdrawing the assets allocable to some or all of their VLI
Accounts or VA Accounts from the Insurance Fund and reinvesting such
assets in a different investment vehicle including another Insurance
Fund, (b) in the case of a Participating Insurance Company, submitting
the question as to whether such segregation should be implemented to a
vote of all affected Variable Contract owners and, as appropriate,
segregating the assets of any appropriate group (i.e., VA Contract
owners or VLI Contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the
affected Contract owners the option of making such a change, (c)
withdrawing the assets allocable to some or all of the Plans from the
affected Insurance Fund and reinvesting them in a different investment
medium, and (d) establishing a new registered management investment
company or managed separate account. If a material irreconcilable
conflict arises because of a decision by a Participating Insurance
Company to disregard Variable Contract owner voting instructions, and
that decision represents a minority position or would preclude a
majority vote, then the Participating Insurance Company may be
required, at the election of the Insurance Fund, to withdraw such
Participating Insurance Company's VA Account and VLI Account
investments in the Insurance Fund, and no charge or penalty will be
imposed as a result of such withdrawal. If a material irreconcilable
conflict arises because of a 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 Insurance Fund, to
withdraw its investment in the Insurance Fund, and no charge or penalty
will be imposed as a result of such withdrawal. The responsibility to
take remedial action in the event of a Board determination of a
material irreconcilable conflict and to bear the cost of such remedial
action will be a contractual obligation of all Participants under their
Participation Agreement with an Insurance Fund, and these
responsibilities will be carried out with a view only to the interests
of Variable Contract owners or, as applicable, Plan participants. For
purposes of this Condition 4, a majority of the disinterested
directors/trustees of the Board of each Insurance Fund will determine
whether or not any proposed action adequately remedies any material
irreconcilable conflict, but, in no event will the Insurance Fund or
its investment adviser be required to establish a new funding vehicle
for any Variable Contract or Plan. No Participating Insurance Company
will be required by this Condition 4 to establish a new funding vehicle
for any Variable Contract if any offer to do so has been declined by
vote of a majority of the Contract owners materially and adversely
affected by the material irreconcilable conflict. Further, no Plan will
be required by this Condition 4 to establish a new funding vehicle 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 Plan,
the Plan trustee makes such decision without a Plan participant vote.
5. The Board of each Insurance Fund's determination of the
existence of a material irreconcilable conflict and its implications
will be made known in writing promptly to all Participants.
6. Participating Insurance Companies will provide pass-through
voting privileges to all Variable Contract owners whose Contracts are
issued through registered VLI Accounts or registered VA Accounts for as
long as required by the Act as interpreted by the Commission. However,
as to Variable Contracts issued through VA Accounts or VLI Accounts not
registered as investment companies under the Act, pass-through voting
privileges will be extended to owners of such Contracts to the extent
granted by the Participating Insurance Company. Accordingly, such
Participating Insurance Companies, where applicable, will vote the
shares of each Insurance Fund held in their VLI Accounts and VA
Accounts in a manner consistent with voting instructions timely
received from Variable Contract owners. Participating Insurance
Companies will be responsible for assuring that each of their VLI and
VA Accounts investing in an Insurance Fund calculates voting privileges
in a manner consistent with all other Participating Insurance Companies
investing in that Fund. The obligation to calculate voting privileges
as provided in this Application shall be a contractual obligation of
all Participating Insurance Companies under their Participation
Agreement with the Insurance Fund. Each Participating Insurance Company
will vote shares of each Insurance Fund held in its VLI or VA Accounts
for which no timely voting instructions are received, as well as shares
held by its general account or otherwise attributed to it, in the same
proportion as those shares for which voting instructions are received.
Each Plan will vote as required by applicable law, governing Plan
documents and as provided in this application.
7. As long as the Act requires pass-through voting privileges to be
provided to Variable Contract owners or the Commission interprets the
Act to require the same, an Insurance Fund investment adviser (or its
affiliates) or any general account will vote their shares of the
Insurance Fund in the same proportion as all votes cast on behalf of
all Variable Contract owners having voting rights; provided, however,
that such an investment adviser (or affiliates) shall vote its shares
in such other manner as may be required by the Commission or its staff.
8. Each Insurance Fund will comply with all provisions of the Act
requiring voting by shareholders (which, for these purposes, shall be
the persons having a voting interest in its shares), and, in
particular, the Insurance Fund will either provide for annual meetings
(except to the extent that the Commission may interpret Section 16 of
the Act not to require such meetings) or comply with Section 16(c) of
the Act (although each Insurance Fund is not, or will not be, one of
those trusts of the type described in Section 16(c) of the
[[Page 18274]]
Act), as well as with Section 16(a) of the Act and, if and when
applicable, Section 16(b) of the Act. Further, each Insurance Fund will
act in accordance with the Commission's interpretations of the
requirements of Section 16(a) with respect to periodic elections of
directors/trustees and with whatever rules the Commission may
promulgate thereto.
9. An Insurance Fund will make its shares available to the VLI
Accounts, VA Accounts, and Plans at or about the time it accepts any
capital from its investment adviser (or affiliates) or from a general
account of a Participating Insurance Company.
10. Each Insurance Fund has notified, or will notify, all
Participants that disclosure regarding potential risks of mixed and
shared funding may be appropriate in VLI Account and VA Account
prospectuses or Plan documents. Each Insurance Fund will disclose, in
its prospectus that: (a) Shares of the Insurance Fund may be offered to
both VA Accounts and VLI Accounts and, if applicable, to Plans, (b) due
to differences in tax treatment and other considerations, the interests
of various Variable Contract owners participating in the Insurance Fund
and the interests of Plan participants investing in the Insurance Fund,
if applicable, may conflict, and (c) the Insurance Fund's Board will
monitor events in order to identify the existence of any material
irreconcilable conflicts and to determine what action, if any, should
be taken in response to any such conflicts.
11. If and to the extent Rule 6e-2 and Rule 6e-3(T) under the Act
are amended, or Rule 6e-3 under the Act is adopted, to provide
exemptive relief from any provision of the Act, or the rules
thereunder, with respect to mixed or shared funding, on terms and
conditions materially different from any exemptions granted in the
order requested in this Application, then each Insurance Fund and/or
Participating Insurance Companies, as appropriate, shall take such
steps as may be necessary to comply with Rules 6e-2 or 6e-3(T), as
amended, or Rule 6e-3, to the extent such rules are applicable.
12. Each Participant, at least annually, shall submit to the Board
of each Insurance Fund such reports, materials or data as the Board
reasonably may request so that the directors/trustees of the Board may
fully carry out the obligations imposed upon the Board by the
conditions contained in this Application. Such reports, materials and
data shall be submitted more frequently if deemed appropriate by the
Board of an Insurance Fund. The obligations of the Participants to
provide these reports, materials and data to the Board, when it so
reasonably requests, shall be a contractual obligation of all
Participants under their Participation Agreement with the Insurance
Fund.
13. All reports of potential or existing conflicts received by the
Board of each Insurance Fund, and all Board action with regard to
determining the existence of a conflict, notifying Participants of a
conflict and determining whether any proposed action adequately
remedies a conflict, will be properly recorded in the minutes of the
Board or other appropriate records, and such minutes or other records
shall be made available to the Commission upon request.
14. Each Insurance Fund will not accept a purchase order from a
Plan if such purchase would make the Plan an owner of 10 percent or
more of the net assets of the Insurance Fund unless the Plan executes
an agreement with the Insurance Fund governing participation in the
Insurance Fund that includes the conditions set forth herein to the
extent applicable. A Plan will execute an application containing an
acknowledgement of this condition at the time of its initial purchase
of shares.
15. Each Insurance Fund will make its shares available through an
Account at or about the same time that the Insurance Fund receives any
seed money from the general account of a Participating Insurance
Company.
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 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-7695 Filed 3-31-11; 8:45 am]
BILLING CODE 8011-01-P