[Federal Register: October 15, 2003 (Volume 68, Number 199)]
[Notices]
[Page 59424-59432]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15oc03-116]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-26203; File No. 812-12981]
MLIG Variable Insurance Trust and Roszel Advisors, LLC; Notice of
Application
October 8, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an order pursuant to Section 6(c) of
the
[[Page 59425]]
Investment Company Act of 1940, as amended, (the ``Act'') granting
relief 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) thereunder.
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Applicants: MLIG Variable Insurance Trust (the ``Trust'') and Roszel
Advisors, LLC (``Roszel Advisors'').
Summary of Application: Applicants seek exemptions to permit life
insurance company separate accounts supporting variable life insurance
contracts (and their insurance company depositors) to invest in shares
of the Trust or a ``future trust'' when the following other types of
investors also hold shares of the Trust or a future trust: (1) A
variable life insurance (``VLI'') account of a life insurance company
that is not an affiliated person of the insurance company depositor of
any other VLI account, (2) the Trust's or future trust's investment
adviser (representing seed money investments in the Trust or future
trust), (3) a life insurance company separate account supporting
variable annuity contracts (a ``VA account''), or (4) a qualified
pension or retirement plan. A ``future trust'' is any investment
company (or investment portfolio or series thereof), other than the
Trust, shares of which are to be sold to VLI accounts and to which
applicants or their affiliates may in the future serve as investment
advisers, investment sub-advisers, investment managers, administrators,
principal underwriters or sponsors.
Filing Date: The application was filed on May 29, 2003 and was amended
and restated on September 26, 2003.
Hearing or Notification of Hearing: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing on this application by writing to the
Secretary of the Commission and serving applicants with a copy of the
request, in person or by mail. Hearing requests should be received by
the Commission by 5:30 p.m. on November 3, 2003, and should be
accompanied by proof of service on the applicants, in the form of an
affidavit or, for lawyers, a certificate of service. Hearing requests
should state the nature of the requestor'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 Edward W.
Diffin, Jr., Esq., Vice President and Senior Counsel, Merrill Lynch
Insurance Group, Inc., 1300 Merrill Lynch Drive, Pennington, New Jersey
08534. Copy to David S. Goldstein, Esq., Sutherland Asbill & Brennan
LLP, 1275 Pennsylvania Avenue NW., Washington, DC 20004-2415.
FOR FURTHER INFORMATION CONTACT: H. Yuna Peng, Attorney, at (202) 942-
0676, or Lorna J. MacLeod, Branch Chief, at (202) 942-6070, Office of
Insurance Products, Division of Investment Management.
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 5th Street NW.,
Washington, DC 20549 (tel. (202) 942-8090).
Applicants Representations
1. The Trust is a business trust organized under the laws of
Delaware on February 14, 2002. It is registered under the Act as an
open-end management investment company and is a series investment
company as defined by Rule 18f-2 under the Act. It is currently
comprised of twenty-four investment portfolios. It issues a separate
series of shares of beneficial interest in connection with each
investment portfolio (each, a ``Portfolio''). It may offer each series
of its shares to VLI accounts and VA accounts of various life insurance
companies (``participating insurance companies'') and to pension and
retirement plans qualified under Section 401(a) of the Internal Revenue
Code of 1986, as amended (the ``Code'') (``plans'').
2. Each VLI account and VA account will be established as a
segregated asset account by a participating insurance company pursuant
to the insurance law of the insurance company's state of domicile. As
such, the assets of each will be the property of the participating
insurance company and that portion of the assets of such 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 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.
3. The plans will be pension or retirement plans intended to
qualify under Sections 401(a) and 501(a) of the Code. Many of the plans
will include a cash or deferred arrangement (permitting salary
reduction contributions) intended to qualify under Section 401(k) of
the Code. The plans will also be subject to, and will be designed to
comply with, the provisions of the Employee Retirement Income Security
Act of 1974 (``ERISA'') applicable to either defined benefit or to
defined contribution profit-sharing plans.
4. Roszel Advisors is a Delaware limited liability company
organized on April 5, 2002. Roszel Advisors is registered as an
investment adviser under the Investment Advisers Act of 1940. Roszel
Advisors is a wholly-owned subsidiary of Merrill Lynch Insurance Group,
Inc., and is an ``affiliated person'' of the Trust as defined in
Section 2(a)(3) of the Act. Roszel Advisors serves as the investment
adviser to the Trust and each of the Portfolios. Roszel Advisors, under
the direction of the Trust's board of trustees, is responsible for the
overall business management of the Trust and for retaining investment
subadvisers (``Subadvisers'') to manage the assets of each Portfolio.
Pursuant to an order under Section 6(c) of the Act granting exemption
from Section 15(a) of the Act and Rule 18f-2 under the Act, Roszel
Advisors uses a ``manager of managers'' approach to selecting and
supervising Subadvisers to manage the assets of the Portfolios.
5. The Trust proposes to offer and sell its shares to VLI accounts
and VA accounts of various participating insurance companies to serve
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 Trust will only sell its shares to
registered VLI accounts and registered VA accounts if each
participating insurance company sponsoring such a VLI account or VA
account enters into a participation agreement with the Trust. The
participation agreements will define the relationship between the Trust
and each
[[Page 59426]]
participating insurance company and 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 account 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.
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 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 insurance companies that
are not affiliated persons of each other, is referred to herein as
``shared funding.''
7. The Trust may sell its shares directly to the plans. Federal tax
law permits investment companies such as the Trust to increase their
net assets by selling shares to qualified pension and retirement plans
such as the plans. Section 817(h) of the Code imposes certain
diversification standards on the assets underlying variable contracts,
such as those in each Portfolio of the Trust. 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,
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, in order 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)).
8. As a result of this exception to the general diversification
requirement, qualified pension and retirement plans, such as the plans,
may hold Trust shares and select a Portfolio or an investment portfolio
of any future trust as an investment option without endangering the tax
status of variable contracts as life insurance or annuities,
respectively. Trust shares sold to the plans would be held by the
trustees of the plans as required by Section 403(a) of ERISA. The
trustees or other fiduciaries of the plans may vote Trust shares held
by their plans in their own discretion or, if the applicable plan so
provides, vote such shares in accordance with instructions from
participants in such plans. The use of a common management investment
company (or investment portfolio thereof) as an investment medium for
VLI accounts, VA accounts and plans, is referred to herein as
``extended mixed funding.''
Applicants' Legal Analysis
9. 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 the Trust 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
Trust 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.
10. 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 the Trust offers its shares
exclusively to VLI accounts (through which either scheduled premium or
flexible premium 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 Trust 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.
11. In general, Section 9(a) of the Act disqualifies any person
convicted of certain offenses, and any company affiliated with that
person, from acting or serving in various capacities with respect to a
registered investment company. More specifically, paragraph (3) of
Section 9(a) provides that it is unlawful for any company to serve as
investment adviser or principal underwriter for 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).
12. Subject to the limitations described above, Rule 6e-2(b)(15)(i)
and (ii) and Rule 6e-3(T)(b)(15)(i) and (ii) provide exemptions from
Section 9(a) to VLI accounts and their affiliates under certain
circumstances and subject to certain conditions that would limit the
application of the eligibility restrictions to affiliated individuals
or companies that directly participate in the management of the Trust.
The relief provided by Rule 6e-2(b)(15)(i) and Rule 6e-3(T)(b)(15)(i)
permits a person disqualified under Section 9(a) to serve as an
officer, director, or employee of a
[[Page 59427]]
participating insurance company, or any of the insurance company's
affiliates, as long as that person does not participate directly in the
management or administration of the Trust. The relief provided by Rule
6e-2(b)(15)(ii) and Rule 6e-3(T)(b)(15)(ii) permits a participating
insurance company to serve as the Trust's investment adviser or
principal underwriter, provided that none of its personnel who are
ineligible pursuant to Section 9(a) of the Act are participating in the
management or administration of the Trust.
13. The partial relief provided by Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) limits, in effect, the amount of monitoring of personnel
that a participating insurance company and its affiliates would
otherwise have to conduct to ensure compliance with Section 9 to that
which is appropriate in light of the policy and purposes of Section 9.
These 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 the many hundreds
of individuals in a large insurance company complex, most of whom
typically have no involvement in matters pertaining to investment
companies affiliated with such an organization. These Rules also
recognize that, in connection with the Trust, there exists no necessity
to apply Section 9(a) to individuals in various participating insurance
companies who would have no relationship to the Trust other than that
their employer utilizes the Trust to support variable contracts. No
regulatory purpose would be served in extending the Section 9(a)
monitoring requirements because of mixed funding, extended mixed
funding or shared funding. Participating insurance companies and plans
are not expected to play any significant role in the management of the
Trust. Those individuals at Roszel Advisors who would participate in
the management of the Trust will do so regardless of which VLI
accounts, VA accounts and plans invest in the Trust. The increased
expense of extending the Section 9(a) monitoring requirements to
participating insurance companies or plans could reduce the net return
realized by investors in VLI accounts, VA accounts or plans and would
not provide any material benefit to such investors.
14. Rule 6e-2(b)(15)(iii) and Rule 6e-3(T)(b)(15)(iii) provide
partial exemptions from Sections 13(a), 15(a) and 15(b) of the Act to
the extent that those Sections have been deemed by the Commission to
require ``pass-through'' voting with respect to management investment
company shares held by an insurance company separate account, in order
to permit the insurance company to disregard the voting instructions of
its VLI contract owners (``VLI owners'') in certain limited
circumstances. Because the Commission has deemed Sections 13(a), 15(a)
and 15(b) to require a participating insurance company to vote all
shares of the Trust held by a VLI account in accordance with
instructions from VLI owners, the partial exemption from these sections
provided by subparagraph (b)(15)(iii)(A)(1) of the Rules 6e-2 and 6e-
3(T) would permit a participating insurance company to disregard the
voting instructions of such VLI owners when required to do so by any
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)), if following
such instructions would cause the insurance company to: (1) make (or
refrain from making) certain investments that would result in changes
in the subclassification or investment objectives of the Trust, or (2)
approve or disapprove any contract between the Trust and Roszel
Advisors (or another investment adviser or subadviser).
15. Subparagraph (b)(15)(iii)(B) of Rule 6e-2 and subparagraph
(b)(15)(iii)(A)(2) of Rule 6e-3(T) would permit a participating
insurance company to disregard the voting instructions of such VLI
owners if the owners initiate any change in the Trust's investment
policies, principal underwriter, or 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. Because the Commission has deemed Sections 13(a), 15(a) and
15(b) to require any participating insurance company to vote all shares
of the Trust held by the insurer's VLI accounts in accordance with
instructions from owners of variable life insurance contracts issued
through such account, the partial exemption from these sections
provided by subparagraph (b)(15)(iii) of Rule 6e-2 and subparagraph
(b)(15)(iii)(A)(1) of the Rule 6e-3(T) is one that almost all VLI
accounts and their participating insurance companies may need to rely
on.
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. Applicants assert
that 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. If the Trust serves as an investment vehicle for mixed funding,
extended mixed funding or shared funding, the exemptions otherwise
provided by Rule 6e-2(b)(15) would not be available to VLI accounts and
their participating insurance company depositors and principal
underwriters. Likewise, if the Trust serves as an investment vehicle
for extended mixed funding or shared funding, the exemptions otherwise
provided by Rule 6e-3(T)(b)(15) would not be available to VLI accounts
and their participating insurance companies and principal underwriters.
19. Applicants maintain that VLI owners and VA owners, as investors
in the Trust, would have substantially identical interests. Likewise,
owners of scheduled premium VLI contracts and flexible premium VLI
contracts would, as investors in the Trust, have virtually identical
interests.
20. Each Portfolio is, or 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 variable contract. Applicants assert that there is no reason to
believe that the different features of various types of variable
contracts, including any ``minimum death benefit'' guarantee under
certain VLI contracts, will lead to different investment policies for
different types of variable contracts. To the extent that the degree of
risk may differ between VLI contracts and VA contracts, the different
insurance charges imposed, in effect, adjust any such differences and
equalize the insurers' exposure to risk in either case.
21. Furthermore, no single investment strategy is appropriate to
one particular type of variable contract but not another. Each pool of
VLI owners and VA owners is composed of individuals of diverse
financial status, age, and insurance and investment goals. A Portfolio
supporting one type of variable contract must accommodate these diverse
factors in order to attract and retain owners of other types of
variable contracts. Permitting mixed funding will facilitate the
success of each Portfolio and will broaden the base of VLI owners and
VA owners and encourage the Trust to add additional Portfolios.
[[Page 59428]]
22. Applicants maintain that qualified retirement plan investors in
the Trust would have substantially the same interests as do VLI owners
and VA owners. Like VLI and VA owners, qualified retirement plan
investors are long-term investors. Therefore, most can be expected not
to withdraw their assets from the plans.
23. In addition, neither VLI and VA owners on the one hand, nor
plan investors on the other, would be taxed on the investment return of
their respective investments in the Trust. Therefore, they would share
a strong interest in the Trust operating in a manner that preserves
this tax status. For example, material conflicts between these two
groups of investors regarding capital transactions would be unlikely to
occur. In this regard, ERISA imposes general diversification
requirements on qualified pension or retirement plan investments that
are wholly consistent with those required of each Portfolio under
Section 817(h) of the Code.
24. VLI accounts, VA accounts and the plans are governed in similar
ways. Plan committees (and other plan fiduciaries) have a fiduciary
duty to participants that is similar to the obligations that a
participating insurance company has to look after the interests of its
VLI owners and VA owners. In this respect, applicants note that
participating insurance companies and their VLI accounts would not
require any exemptions from the Act other than those necessary for
mixed funding and shared funding if participants in certain qualified
pension and retirement plans invest indirectly in the Trust when their
plan purchases a variable annuity contract offered by participating
insurance company in the qualified plan market. The various plans may
or may not offer an annuity option.
25. In light of the fact that plan investors would have beneficial
interests in the Trust very similar to those of VLI owners and VA
owners, applicants assert that, provided that they (and VLI accounts
and participating insurance companies) comply with the conditions
explained below, the addition of the plans as shareholders of the Trust
and the addition of participants as persons having beneficial interests
in the Trust should not increase the risk of material irreconcilable
conflicts among and between investors. Applicants further assert that
even if a material irreconcilable conflict involving the plans, or
participants arose, the trustees (or other fiduciaries) of the plans,
unlike participating insurance companies, can, if their fiduciary duty
to the participants requires it, redeem the shares of the Trust held by
the plans and make alternative investments without obtaining prior
regulatory approval. Similarly, most, if not all, of the plans, unlike
the VLI accounts or the VA accounts, may hold cash or other liquid
assets pending their reinvestment in a suitable alternative investment.
26. Applicants maintain that VLI owners and VA owners would benefit
from the expected increase in net assets of the Portfolios occasioned
by participant investments. Not only should such additional investments
not increase the likelihood of material irreconcilable conflicts of
interests between or among different types of investors, but such
additional investments should reduce some of the costs of investing for
variable contract owners. In particular, additional investments would
promote economies of scale, permit increased safety through greater
portfolio diversification, provide each Portfolio's investment adviser
with greater flexibility due to a larger portfolio and make the
addition of future new Portfolios more feasible.
27. When the Commission last revised Rule 6e-3(T) in 1987, the
Treasury Department had not issued the current regulations (Treas. Reg.
1.817-5) which make it possible for the Trust to sell shares to
qualified pension or retirement plans without adversely affecting the
tax status of VLI contracts and VA contracts. Applicants submit that,
although proposed regulations had been published, the Commission did
not envision this possibility when it last examined paragraph (b)(15)
of the Rule and might well have broadened the exclusivity provision of
that paragraph at that time to include plans such as the plans had this
possibility been apparent. In this regard, the Commission has recently
issued a number of orders under Section 6(c) granting the same
exemptions requested herein to other applicants in very similar
circumstances.
28. In light of the fact that the proposed plan investments in the
Trust should not increase the likelihood of material irreconcilable
conflicts and would otherwise benefit VA owners and VLI owners and in
light of the recent supporting precedent, applicants believe that the
Commission should grant the requested exemptions.
29. Applicants do not believe that plan investments in the Trust
would increase the potential for material irreconcilable conflicts of
interest between or among different types of investors. Section 403(a)
of ERISA provides that the trustee(s) of a plan 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 event 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 advisers pursuant to
Section 402(c)(3) of ERISA. Absent one of these exceptions, the
trustee(s) of the plans would have the exclusive authority and
responsibility for exercising voting rights attributable to their
plan's investment securities. Where a named fiduciary appoints an
investment adviser, the adviser has the authority and responsibility to
exercise such voting rights unless the authority and responsibility is
reserved to the trustee(s) or a non-trustee fiduciary.
30. Applicants generally expect many of the plans to have their
trustees or other fiduciaries exercise voting rights attributable to
investment securities held by the plans in their discretion. Some of
the 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.
31. Where plans do provide participants with the right to give
voting instructions, applicants see no reason to believe that
participants in the plans 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 owners or VA
owners. The purchase of Trust shares by the plans that provide voting
rights does not present any complications not otherwise occasioned by
mixed funding or by shared funding.
32. Section 817(h) of the Code is the codification of certain
aspects of a series of published and unpublished rulings issued by the
Internal Revenue Service directed at the control of investments
supporting most VLI contracts and VA contracts. In light of Treasury
Regulation 1.817-5(f)(3)(iii) which specifically permits ``qualified
pension or retirement plans'' and separate accounts to share the same
underlying management investment company, applicants have concluded
that neither the Code, nor other Treasury Regulations or revenue
rulings thereunder, would create any inherent conflicts of interest
between or among plan investors, VLI owners and VA owners.
33. Although there are differences in the manner in which
distributions from
[[Page 59429]]
the plans and distributions from VLI and VA contracts are taxed,
applicants maintain that these differences will have no impact on the
Trust. VLI accounts, VA accounts, participating insurance companies and
the plans each will redeem Trust shares in the same manner and using
the same procedures. Each will purchase and redeem such shares at net
asset value in conformity with Rule 22c-1 under the Act.
34. Applicants do not see any greater potential for material
irreconcilable conflicts arising between the interests of plan
investors and other Trust investors from possible future changes in the
federal tax laws than that which already exists with regard to such
conflicts arising between VLI owners and VA owners.
35. Applicants assert that the holding of Trust shares by separate
accounts of unaffiliated insurance companies would not entail greater
potential for material irreconcilable conflicts arising between or
among the interests of VLI owners and VA owners than would mixed
funding. Likewise, the holding of Trust shares by separate accounts of
unaffiliated insurance companies would not entail greater potential for
material irreconcilable conflicts arising between or among the
interests of VLI owners, VA owners and plan investors than would
extended mixed funding where only separate accounts of affiliated
participating insurance companies held such shares.
36. A particular state insurance regulator could require action of
an insurer domiciled or licensed in its jurisdiction that conflicts
with or is inconsistent with the regulatory requirements of or actions
required by the regulator of another state where that insurer is
domiciled or licensed. The fact that different insurance companies are
domiciled in different states does not enlarge or create significantly
different issues in connection with conflicting state regulatory
requirements. Affiliation among or between such insurance companies
does not diminish the potential for such issues to arise nor, in light
of the source of such issues, does it dramatically increase the
likelihood of their being resolved.
37. Concern also has existed that material irreconcilable conflicts
between or among the interests of VLI owners and/or VA owners of
unaffiliated insurance companies were more likely to arise in the event
that such companies exercised their limited right to disregard VLI
owner voting instructions than would be the case between or among
affiliated companies. Applicants assert, however, that the right of an
insurance company to disregard VLI owner voting instructions does not
raise any issues different from those raised by the authority of
different state insurance regulators over separate accounts. Similarly,
affiliation between or among insurance companies does not diminish or
eliminate the potential for divergent judgments by such companies as to
the advisability or legality of a change in investment policies,
principal underwriter or investment adviser of a mutual fund in which
their separate account invests. Applicants believe that the potential
for disagreement between or among insurance companies is limited by
requirements in Rule 6e-2 and Rule 6e-3(T) that a company's disregard
of voting instructions be reasonable and based on specific good faith
determinations. Moreover, in the event that a decision by a
participating life insurance company to disregard VLI owners' voting
instructions represents a minority position or would preclude a
majority vote at a Trust shareholders meeting, the company could be
required by the Trust's board of trustees to withdraw from the Trust.
38. Various factors have discouraged a number of life insurance
companies from offering variable contracts. These factors include the
cost of organizing and operating a funding medium (such as the Trust),
the lack of expertise with respect to investment management
(principally with respect to equity investments and derivative
instruments) and the lack of name recognition by the public of many
such insurers as investment professionals with whom an investor can
feel comfortable entrusting their investment dollars. For example, a
number of smaller life insurance companies do not find it economically
feasible, or within their investment or administrative expertise, to
enter the variable contract business on their own. Use of the
Portfolios as a mixed funding and shared funding vehicle for variable
contracts would reduce or eliminate such concerns for small life
insurance companies.
39. Permitting the Trust to serve as a mixed funding and shared
funding vehicle also should provide several benefits to variable
contract owners by eliminating a significant portion of the costs or
establishing and administering separate mutual funds. Participating
insurance companies would benefit not only from the investment and
administrative expertise of Roszel Advisors, but also from the cost
efficiencies and investment flexibility afforded by a large pool of
assets. Permitting the Trust to serve as a mixed and shared funding
vehicle also should make a greater amount of assets available for
investment by each Portfolio than would otherwise be the case and,
thereby, promote economies of scale, increase the safety of a Portfolio
by increasing diversification of investments, and/or make the addition
of new Portfolios more feasible. Therefore, making the Trust available
to serve as a vehicle for mixed funding and shared funding could
encourage more life insurance companies to offer variable contracts and
thereby increase competition in the variable contracts market. Such
competition, in turn, can be expected to result in more contract
variation and in lower fees and charges. Applicants also assert that
permitting the Trust to serve as a vehicle for extended mixed funding
will result in increased assets for the Portfolios. This also will
benefit owners of variable contracts by promoting economies of scale,
increasing the safety of Portfolios by increasing diversification of
investments, and/or make the addition of new Portfolios more feasible.
40. Applicants submit that regardless of the types of investors in
the Trust, they each will be contractually and otherwise obligated to
manage each Portfolio solely and exclusively in accordance with its
investment objective(s), policies and restrictions as well as any
additional guidelines established by trustees of the Trust. Roszel
Advisors manages (and the investment adviser of any future trust would
manage) each Portfolio, without regard to the identity of the investors
in such accounts. Thus, each Portfolio is managed in the same manner as
any other open-end management investment company.
41. Applicants see no legal impediment to permitting the Trust to
serve as a vehicle for mixed funding, extended mixed funding and shared
funding. 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 will not
compromise the regulatory purposes of Sections 9(a), 13(a), 15(a) or
15(b) of the Act or of Rules 6e-2 and 6e-3(T) thereunder.
42. Section 6(c) of the Act authorizes the Commission to exempt any
person, security, or transaction or any class of persons, securities,
or transactions from any provision or provisions of the Act and/or any
rule under it if, and to the extent that, such exemption is necessary
or appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the policy
and provisions of the Act. Applicants request an order of the
Commission that would exempt VLI
[[Page 59430]]
accounts and their participating insurance companies and principal
underwriters as a class from the provisions of Sections 9(a), 13(a),
15(a) and 15(b) of the Act and Rule 6e-2 or Rule 6e-3(T)(b)(15)
thereunder. The exemption of these classes of parties is 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
because all of the potential members of the class could obtain the
foregoing exemptions for themselves on the same basis as the
applicants, but only at a cost to each of them that is not justified by
any public policy purpose. As discussed below, the requested exemptions
would only extend to VLI accounts whose participating insurance
companies enter into participation agreements with the Trust; which
agreements would subject such VLI accounts to the conditions discussed
below. The Commission staff also would have the opportunity to review
compliance with these conditions by participating insurance companies
when it reviews the 1933 Act registration statements filed by each VLI
account and VA account before the account could issue any variable
contracts. The Commission has previously granted exemptions to classes
of similarly situated parties in various contexts and from a wide
variety of circumstances, including class exemptions in the context of
mixed funding, extended mixed funding and shared funding.
Applicants' Conditions
With regard to the conditions recited below, references to the
Trust include any future trust; references to a Portfolio include any
investment portfolio of a future trust; and references to Roszel
Advisors include any current or future Subadviser and any investment
adviser to a future trust or investment portfolio of a future trust.
Applicants consent to the following conditions if the exemptions
requested herein are granted:
1. A majority of the Trustees (the ``Board'') of the Trust and each
Portfolio will consist of persons who are not ``interested persons''
thereof, 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 the death,
disqualification or bona fide resignation of any trustee, then the
operation of this condition shall 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.
2. The Board will monitor the Portfolios for the existence of any
material irreconcilable conflict between and among the interests of VLI
owners and VA owners and of plan participants and plans investing in
the Portfolios and determine what action, if any, should be taken in
response to any 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 Portfolios are being
managed; (e) a difference in voting instructions given by VLI owners,
VA owners and plan investors; (f) a decision by a participating
insurance company to disregard the voting instructions of VLI owners or
VA owners; or (g) if applicable, a decision by a plan to disregard the
voting instructions of plan participants.
3. Roszel Advisors (or any ``investment adviser'' of a Portfolio),
any participating insurance company, and any plan that executes a
participation agreement upon becoming an owner of 10% or more of the
issued and outstanding shares of a Portfolio (such plans referred to
hereafter as ``participating plans'') will be required to report any
potential or existing conflicts to the Board. Roszel Advisors (or any
other investment adviser of a Portfolio), participating insurance
companies and participating plans will be responsible for assisting the
Board in carrying out its responsibilities under these conditions by
providing the Board with all information reasonably necessary for the
Board to consider any issues raised. This includes, but is not limited
to, an obligation by a participating insurance company to inform the
Board whenever it has determined to disregard VLI owner or VA owner
voting instructions, and, if pass-through voting is applicable, an
obligation by a participating plan to inform the Board whenever it has
determined to disregard plan participant voting instructions. The
responsibility to report such conflicts and information, and to assist
the Board will be contractual obligations of all participating
insurance companies and participating plans investing in the Portfolios
under their agreements governing participation in the Portfolios, and
such agreements, shall provide that these responsibilities will be
carried out with a view only to the interests of the VLI owners and VA
owners, and if applicable, plan participants.
4. If a majority of the Board, or a majority of its disinterested
trustees, determine that a material irreconcilable conflict exists, the
relevant participating insurance companies and participating plans, at
their expense and to the extent reasonably practicable (as determined
by a majority of the disinterested trustees), will be required to take
whatever steps are necessary to remedy or eliminate the material
irreconcilable conflict. Such steps could include: (a) Withdrawing the
assets allocable to some or all of the separate accounts from the
Portfolio and reinvesting such assets in a different investment medium,
which may include another Portfolio of the Trust; (b) in the case of
participating insurance companies, submitting the questions of whether
such segregation should be implemented to a vote of all affected owners
of all registered VA contracts or VLI contracts, and, as appropriate,
segregating the assets of any appropriate group (i.e., VA owners or VLI
owners of one or more participating insurance companies) that votes in
favor of such segregation, or offering to the affected variable
contract owners, the option of making such a change; and (c)
establishing a new registered management investment company. If a
material irreconcilable conflict arises because of a decision by a
participating insurance company to disregard VLI owners' or VA owners'
voting instructions and that decision represents a minority position or
would preclude a majority vote, the participating insurance company may
be required, at the election of the Portfolio, to withdraw its separate
account's investment in such Portfolio, with no charge or penalty
imposed as a result of such withdrawal. If a material irreconcilable
conflict arises because of a participating 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
participating plan may be required, at the election of the Portfolio,
to withdraw its investment in such Portfolio, with no charge or penalty
imposed as a result of such withdrawal. To the extent permitted by
applicable law, the responsibility of taking
[[Page 59431]]
remedial action in the event of a Board determination of a material
irreconcilable conflict and bearing the cost of such remedial action,
will be a contractual obligation of all participating insurance
companies and participating plans under their agreements governing
participation in the Portfolios, and these responsibilities will be
carried out with a view only to the interests of VLI owners, VA owners
and plan participants, as applicable.
For purposes of this Condition 4, a majority of the disinterested
trustees of the Board will determine whether or not any proposed action
adequately remedies any material irreconcilable conflict, but in no
event will a Portfolio, or Roszel Advisors be required to establish a
new funding medium for any VLI contracts or VA contracts. No
participating insurance company will be required by this Condition 4 to
establish a new funding medium for any VLI contracts or VA contracts if
a majority of VLI owners or VA owners materially and adversely affected
by the irreconcilable material conflict vote to decline such offer. No
participating plan shall be required by this Condition 4 to establish a
new funding medium for such plan if: (a) a majority of plan
participants materially and adversely affected by the irreconcilable
material conflict vote to decline such offer, or (b) pursuant to
governing plan documents and applicable law, the participating plan
makes such decision without a plan participant vote.
5. Roszel Advisors, all participating insurance companies with
respect to a Portfolio and participating plans with respect to a
Portfolio will be promptly informed in writing of any determination by
the Board of such Portfolio that a material irreconcilable conflict
exists and its implications.
6. Participating insurance companies will be required to provide
pass-through voting privileges to all owners of registered VLI
contracts and registered VA contracts so long as the Commission
interprets the Act to require pass-through voting privileges for such
VLI owners or VA owners. Accordingly, the participating insurance
companies will vote shares of a Portfolio held in their separate
accounts in a manner consistent with voting instructions timely
received from VLI owners or VA owners. Participating insurance
companies shall be responsible for assuring that each of their separate
accounts calculates voting privileges in a manner consistent with all
other participating insurance companies. The obligation to calculate
voting privileges in a manner consistent with all other separate
accounts investing in the fund will be a contractual obligation of all
participating insurance companies under the agreements governing
participation in the Portfolio. Each participating insurance company
will be required to vote shares for which it has not received voting
instructions as well as shares attributable to it, in the same
proportion as it votes shares for which it has received instructions.
Each participating plan will vote as required by applicable law
governing plan documents.
7. Roszel Advisors, and any person under common control with Roszel
Advisors, will vote shares held by them for their own benefit (i.e.,
shares representing seed money) in the same proportions as the shares
collectively voted by the various participating insurance companies.
8. All reports of potential or existing conflicts received by the
Board and all Board action with regard to determining the existence of
a conflict, notifying Roszel Advisors, participating insurance
companies and participating plans 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 will be made available to the Commission
upon request.
9. Each Portfolio will notify all participating insurance companies
and participating plans that disclosure in separate account
prospectuses or plan prospectuses or other plan disclosure documents
regarding potential risks of mixed and shared funding may be
appropriate. Each Portfolio will disclose in its prospectus that: (a)
Shares of the Portfolio may be offered to insurance company separate
accounts of both annuity and life insurance variable contracts, and to
plans; (b) due to differences of tax treatment and other
considerations, the interests of various variable contract owners
participating in the Portfolios and the interests of plans investing in
the Portfolios may conflict; and (c) the Board will monitor such
Portfolios for any material conflicts of interest and determine what
action, if any, should be taken.
10. Each Portfolio 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 the shares of the respective
Portfolio), and, in particular, each Portfolio will either provide for
annual meetings (except to the extent that the Commission may interpret
Section 16 of the Act not to require such meetings) or comply with
Section 16(c) of the Act (although the Portfolios are not within the
trusts described in Section 16(c) of the Act), as well as with Section
16(a), and, if applicable, Section 16(b) of the Act. Further, each
Portfolio will act in accordance with the Commission's interpretation
of the requirements of Section 16(a) with respect to periodic elections
of trustees and with whatever rules the Commission may promulgate with
respect thereto.
11. If and to the extent Rules 6e-2 and 6e-3(T) are amended (or
Rule 6e-3 under the Act is adopted) to provide exemptive relief from
any provision of the 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 by
Applicants, then the Portfolios shall and the participating insurance
companies, as appropriate, shall be required to take such steps as may
be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, or Rule
6e-3, as adopted, to the extent applicable.
12. No less than annually, Roszel Advisors, the participating
insurance companies and participating plans shall submit to the Board
such reports, materials or data as the Board may reasonably request so
that the Board may fully carry out obligations imposed upon them by the
conditions contained in the application. Such reports, materials and
data shall be submitted more frequently if deemed appropriate by the
Board. The obligations of Roszel Advisors, participating insurance
companies and participating plans to provide these reports, materials
and data to the Board, shall be a contractual obligation of Roszel
Advisors, all participating insurance companies and participating plans
under their agreements governing participation in the Portfolios.
13. If a plan or plan participant shareholder should become an
owner of 10% or more of the issued and outstanding shares of a
Portfolio, such plan will execute a participation agreement with such
Portfolio, including the conditions set forth herein to the extent
applicable. A plan or plan participant shareholder will execute an
application containing an acknowledgment of this condition at the time
of its initial purchase of shares of the Portfolio.
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
[[Page 59432]]
fairly intended by the policy and provisions of the Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-25973 Filed 10-14-03; 8:45 am]
BILLING CODE 8010-01-P