[Federal Register: February 14, 2003 (Volume 68, Number 31)]
[Notices]
[Page 7625-7632]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14fe03-159]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-25930; File No. 812-12865]
TCW Premier Funds, et al.
February 10, 2003.
AGENCY: The Securities and Exchange Commission (``SEC'' or
``Commission'').
ACTION: Notice of Application for an Order of Exemption under Section
6(c) of the Investment Company Act of 1940,
[[Page 7626]]
as amended (``1940 Act'') from sections 9(a), 13(a), 15(a), and 15(b)
of the 1940 Act and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder.
-----------------------------------------------------------------------
Applicants: TCW Premier Funds (``Trust'') and TCW Investment Management
Company (``TCW'') (collectively, ``Applicants'').
Summary of Application: Applicants seek an order to permit shares of
the Trust and shares of any other existing or future investment company
that is designed to fund insurance products and for which TCW, or any
of its affiliates, may serve as investment manager, investment adviser,
subadviser, administrator, manager, principal underwriter or sponsor
(the Trust and such other investment companies being hereinafter
referred to, collectively, as ``Insurance Trusts''), or permit shares
of any current or future series of any Insurance Trust (``Insurance
Fund''), to be sold to and held by: (1) Separate accounts funding
variable annuity and variable life insurance contracts issued by both
affiliated and unaffiliated life insurance companies; (2) qualified
pension and retirement plans outside of the separate account context
(``Qualified Plans'' or ``Plans''); (3) any investment manager to an
Insurance Fund and affiliates thereof that is permitted to hold shares
of an Insurance Fund consistent with the requirements of Treasury
Regulation 1.817-5 (collectively, the ``Manager''); and (4) any
insurance company that is permitted to hold shares of an Insurance Fund
consistent with the requirements of Treasury Regulation 1.817-5
(``General Accounts'').
Filing Date: The Application was filed on August 9, 2002 and was
amended and restated on October 18, 2002.
Hearing or Notification of Hearing: An order granting the Application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing on the Application by writing to the
Secretary of the SEC and serving Applicants with a copy of the request,
personally or by mail. Hearing requests must be received by the SEC by
5:30 p.m. on March 6, 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
writer's interest, the reason for the request, and the issues
contested. Persons may request notification of the date of the hearing
by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549-
0690. Applicants, c/o Philip K. Holl, Esq., Senior Vice President and
Associate General Counsel, TCW Investment Management Company, 865 South
Figueroa Street, Suite 1800, Los Angeles, California 90017.
FOR FURTHER INFORMATION CONTACT: Leland B. Erickson, Attorney, or
Zandra Y. Bailes, Branch Chief, Office of Insurance Products, Division
of Investment Management at (202) 942-0670.
SUPPLEMENTARY INFORMATION: The following is a summary of the
Application. The complete Application is available for a fee from the
SEC's Public Reference Branch, 450 Fifth Street, NW., Washington, DC
20549-0102 (202-942-8090).
Applicants' Representations
1. The Trust is a Delaware business trust organized on July 16,
2002 and is registered as an open-end management investment company
under the 1940 Act. The initial series of the Trust are TCW Premier
Opportunity Fund and TCW Premier Value Opportunities Fund (the
``Funds''). Additional series of the Trust and classes of the Funds and
additional Insurance Funds may be established in the future.
2. TCW serves as the Trust's investment adviser. TCW was organized
in 1987 as a wholly-owned subsidiary of The TCW Group, Inc.
Soci[eacute]t[eacute] G[eacute]n[eacute]rale Asset Management, S.A. may
be deemed to be a control person of TCW by reason of its ownership of
more than 25% of the outstanding voting stock of the TCW Group, Inc.
Soci[eacute]t[eacute] G[eacute]n[eacute]rale Asset Management, S.A., is
a wholly-owned subsidiary of Soci[eacute]t[eacute]
G[eacute]n[eacute]rale, S.A.
3. The Insurance Trusts intend to offer shares of the Insurance
Funds to (a) separate accounts of affiliated and unaffiliated insurance
companies in order to fund variable annuity contracts and variable life
insurance contracts (collectively, ``Separate Accounts''); (b)
Qualified Plans; (c) any investment manager to an Insurance Fund and
affiliates thereof that is permitted to hold shares of an Insurance
Fund consistent with the requirements of Treasury Regulation 1.817-5
(collectively, the ``Manager''); and (d) any insurance company that is
permitted to hold shares of an Insurance Fund consistent with the
requirements of Treasury Regulation 1.817-5 (``General Accounts'').
4. Insurance companies whose Separate Account(s) may now or in the
future own shares of the Insurance Funds are referred to herein as
``Participating Insurance Companies.'' The Participating Insurance
Companies will establish their own separate accounts and design their
own contracts. Each Participating Insurance Company will have the legal
obligation to satisfy all applicable requirements under both state and
federal law. It is anticipated that Participating Insurance Companies
will rely on Rules 6e-2 and 6e-3(T), although some Participating
Insurance Companies, in connection with variable life insurance
contracts, may rely on individual exemptive orders as well.
5. The Insurance Trusts intend to offer shares of the Insurance
Funds directly to Qualified Plans outside of the separate account
context. Qualified Plans may choose any of the Insurance Funds that are
offered 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. Shares of any of the
Insurance Funds sold to such Qualified Plans would be held or deemed to
be held by the trustee(s) of said Plans. Certain Qualified Plans,
including section 403(b)(7) Plans and section 408(a) Plans, may vest
voting rights in Plan participants instead of Plan trustees. Exercise
of voting rights by participants in any such Qualified Plans, as
opposed to the trustees of such Plans, cannot be mandated by the
Applicants. Each Plan must be administered in accordance with the terms
of the Plan and as determined by its trustee or trustees.
6. Shares of each Insurance Fund also may be offered to the Manager
or to General Accounts, in reliance on regulations issued by the
Treasury Department (Treas. Reg. 1.817-5) that established
diversification requirements for variable annuity and variable life
insurance contracts (``Treasury Regulations''). Treasury Regulation
1.817-5(f)(3)(ii) permits such sales as long as the return on shares
held by the Manager or General Accounts is computed in the same manner
as for shares held by the Separate Accounts, and the Manager or the
General Accounts do not intend to sell to the public shares of the
Insurance Trust that they hold. An additional restriction is imposed by
the Treasury Regulations on sales to the Manager, who may hold shares
only in connection with the creation or management of the Insurance
Trust. Applicants anticipate that sales in reliance on these provisions
of the Treasury Regulations generally will be made to the Manager for
the purpose of providing necessary capital required by section 14(a) of
the 1940 Act.
[[Page 7627]]
Applicants' Legal Analysis
1. Applicants request that the Commission issue an order pursuant
to section 6(c) of the 1940 Act granting exemptions from the provisions
of sections 9(a), 13(a), 15(a), and 15(b) of the 1940 Act and Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) thereunder (including any comparable
provisions of a permanent rule that replaces Rule 6e-3(T)), to the
extent necessary to permit shares of each Insurance Trust to be offered
and sold to, and held by: (1) Separate Accounts funding variable
annuity contracts and scheduled premium and flexible premium variable
life insurance contracts issued by both affiliated and unaffiliated
life insurance companies; (2) Qualified Plans; (3) any Manager to an
Insurance Fund; and (4) General Accounts.
2. Section 6(c) authorizes the Commission to exempt any person,
security, or transaction or any class or classes of persons,
securities, or transactions from any provision or provisions of the
1940 Act and/or of any rule 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 1940 Act.
3. In connection with the funding of scheduled premium variable
life insurance contracts issued through a separate account organized as
a unit investment trust (``Trust Account''), Rule 6e-2(b)(15) provides
partial exemptions from Sections 9(a), 13(a), 15(a), and 15(b) of the
1940 Act. The exemptions granted to a separate account by Rule 6e-
2(b)(15) are available only where each registered management investment
company underlying the Trust Account (``underlying fund'') offers its
shares ``exclusively to variable life insurance separate accounts of
the life insurer or of any affiliated life insurance company * * *.''
(emphasis added). Therefore, the relief granted by Rule 6e-2(b)(15) is
not available with respect to a scheduled premium variable life
insurance separate account that owns shares of an underlying fund that
also offers its shares to a variable annuity separate account of the
same company or of any affiliated life insurance company. The use of a
common underlying fund as the underlying investment medium for both
variable annuity and variable life insurance separate accounts of the
same life insurance company or of any affiliated life insurance company
is referred to herein as ``mixed funding.'' In addition, the relief
granted by Rule 6e-2(b)(15) is not available with respect to a
scheduled premium variable life insurance separate account that owns
shares of an underlying fund that also offers its shares to separate
accounts funding variable contracts of one or more unaffiliated life
insurance companies. The use of a common underlying fund as the
underlying investment medium for variable life insurance separate
accounts of one insurance company and separate accounts funding
variable contracts of one or more unaffiliated life insurance companies
is referred to herein as ``shared funding.'' Moreover, because the
relief under Rule 6e-2(b)(15) is available only where shares are
offered exclusively to variable life insurance separate accounts,
additional exemptive relief may be necessary if the shares of the
Insurance Trusts are also to be sold to Qualified Plans, the Manager or
General Accounts.
4. In connection with the funding of flexible premium variable life
insurance contracts issued through a Trust Account, Rule 6e-3(T)(b)(15)
provides partial exemptions from sections 9(a), 13(a), 15(a) and 15(b)
of the 1940 Act to the extent that those sections have been deemed by
the Commission to require ``pass-through'' voting with respect to an
underlying fund's shares. The exemptions granted to a separate account
by Rule 6e-3(T)(b)(15) are available only where all of the assets of
the separate account consist of the shares of one or more underlying
funds which offer their shares ``exclusively to separate accounts of
the life insurer, or of any affiliated life insurance company, offering
either scheduled contracts or flexible contracts, or both; or which
also offer their shares to variable annuity separate accounts of the
life insurer or of an affiliated life insurance company'' (emphasis
added). Therefore, Rule 6e-3(T) permits mixed funding with respect to a
flexible premium variable life insurance separate account, subject to
certain conditions. However, Rule 6e-3(T) does not permit shared
funding because the relief granted by Rule 6e-3(T)(b)(15) is not
available with respect to a flexible premium variable life insurance
separate account that owns shares of an underlying fund that also
offers its shares to separate accounts (including variable annuity and
flexible premium and scheduled premium variable life insurance separate
accounts) of unaffiliated life insurance companies. The relief provided
by Rule 6e-3(T) is not relevant to the purchase of shares of the
Insurance Trusts by Qualified Plans, the Manager or General Accounts.
However, because the relief granted by Rule 6e-3(T)(b)(15) is available
only where shares of the underlying fund are offered exclusively to
separate accounts, or to life insurers in connection with the operation
of a separate account, additional exemptive relief may be necessary if
the shares of the Insurance Trusts are also to be sold to Qualified
Plans, the Manager or General Accounts.
5. The relief provided by Rule 6e-3(T) is not relevant to the
purchase of shares of the Insurance Trusts by Qualified Plans, the
Manager or General Accounts. However, because the relief granted by
Rule 6e-3(T)(b)(15) is available only where shares of the underlying
fund are offered exclusively to separate accounts, or to life insurers
in connection with the operation of a separate account, additional
exemptive relief may be necessary if the shares of the Insurance Trusts
are also to be sold to Qualified Plans, the Manager or General
Accounts. None of the relief provided for in Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) relates to Qualified Plans, the Manager or General
Accounts, or to an underlying fund's ability to sell its shares to such
purchasers. It is only because some of the Separate Accounts that may
invest in the Insurance Trusts may themselves be investment companies
that rely upon Rules 6e-2 and 6e-3(T) and wish to continue to rely upon
the relief provided in those Rules, that the Applicants are applying
for the requested relief. If and when a material irreconcilable
conflict arises in the context of the Application between the Separate
Accounts or between Separate Accounts on the one hand and Qualified
Plans, the Manager or General Accounts on the other hand, the
Participating Insurance Companies, Qualified Plans, the Manager and the
General Accounts must take whatever steps are necessary to remedy or
eliminate the conflict, including eliminating the Insurance Funds as an
eligible investment option. Applicants have concluded that investment
by the Manager or the inclusion of Qualified Plans and General Accounts
as eligible shareholders should not increase the risk of material
irreconcilable conflicts among shareholders. However, Applicants
further assert that even if a material irreconcilable conflict
involving the Qualified Plans or General Accounts arose, the Qualified
Plans or General Accounts, unlike the Separate Accounts, can simply
redeem their shares and make alternative investments. By contrast,
insurance companies cannot simply redeem their separate accounts out of
one fund and
[[Page 7628]]
invest in another. Time consuming, complex transactions must be
undertaken to accomplish such redemptions and transfers. Applicants
thus argue that allowing the Manager, General Accounts or Qualified
Plans to invest directly in the Insurance Trusts should not increase
the opportunity for conflicts of interest.
6. Applicants assert that the Treasury Regulations made it possible
for shares of an investment company to be held by a Qualified Plan, the
investment company's investment manager or its affiliates or General
Accounts without adversely affecting the ability of shares in the same
investment company to also be held by separate accounts of insurance
companies in connection with their variable life insurance contracts.
Section 817(h) of the Internal Revenue Code of 1986 (``Code'') imposes
certain diversification standards on the underlying assets of separate
accounts funding variable annuity contracts and variable life
contracts. In particular, the Code provides that such contracts shall
not be treated as an annuity contract or life insurance contract for
any period (and any subsequent period) for which the separate account
investments are not, in accordance with regulations prescribed by the
Treasury Department, adequately diversified. The Treasury Regulations
provide that, in order to meet the diversification requirements, all of
the beneficial interests in the investment company must be held 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 allows shares in an investment company to be
held by the trustee of a qualified pension or retirement plan without
adversely affecting the ability of shares in the same investment
company to also be held by the separate accounts of insurance companies
in connection with their variable annuity and variable life contracts
(Treas. Reg. Sec. 1.817-5(f)(3)(iii)).
7. Applicants also assert that the Treasury Regulations contain
another exception that permits the Insurance Funds to sell shares to
General Accounts or the Manager subject to certain conditions (Treas.
Reg. Sec. 1.817-5(f)(3)(i), (ii)).
8. The promulgation of Rules 6e-2(b)(15) and 6e-3(T)(b)(15)
preceded the issuance of the Treasury Regulations which made it
possible for shares of an investment company to be held by a Qualified
Plan, the investment company's investment manager or its affiliates or
General Accounts without adversely affecting the ability of shares in
the same investment company to also be held by the separate accounts of
insurance companies in connection with their variable life insurance
contracts. Thus, the sale of shares of the same investment company to
separate accounts through which variable life insurance contracts are
issued, to Qualified Plans, to the investment company's investment
manager and its affiliates or General Accounts (collectively,
``eligible shareholders'') could not have been envisioned at the time
of the adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15), given the
then-current tax law.
9. Paragraph (3) of section 9(a) provides, among other things, that
it is unlawful for any company to serve as investment adviser to 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 (a)(2). Rule 6e-2(b)(15)(i) and (ii)
and Rule 6e-3(T)(b)(15)(i) and (ii) provide exemptions from section
9(a) under certain circumstances, subject to the limitations discussed
above on mixed and shared funding. These exemptions limit the
application of the eligibility restrictions to affiliated individuals
or companies that directly participate in the management of the
underlying management investment company. The relief provided by Rules
6e-2(b)(15)(i) and 6e-3(T)(b)(15)(i) permits a person disqualified
under section 9(a) to serve as an officer, director, or employee of the
life insurer, or any of its affiliates, so long as that person does not
participate directly in the management or administration of the
underlying fund. The relief provided by Rules 6e-2(b)(15)(ii) and 6e-
3(T)(b)(15)(ii) permits the life insurer to serve as the underlying
fund's investment manager or principal underwriter, provided that none
of the insurer's personnel who are ineligible pursuant to section 9(a)
are participating in the management or administration of the fund. The
partial relief granted in Rules 6e-2(b)(15) and 6e-3(T)(b)(15) from the
requirements of section 9 limits, in effect, the amount of monitoring
of an insurer's personnel that would otherwise be 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 1940 Act to apply the
provisions of section 9(a) to the many individuals in an insurance
company complex, most of whom typically 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 1940 Act to the many individuals in various unaffiliated insurance
companies (or affiliated companies of Participating Insurance
Companies) that may utilize the Insurance Funds as the funding medium
for variable contracts. There is no regulatory purpose in extending the
monitoring requirements to embrace a full application of section 9(a)'s
eligibility restrictions because of mixed funding or shared funding and
sales to Qualified Plans, the Manager or General Accounts. Those
Participating Insurance Companies are not expected to play any role in
the management or administration of the Insurance Funds. Those
individuals who participate in the management or administration of the
Insurance Funds will remain the same regardless of which separate
accounts, insurance companies, Qualified Plans or General Accounts use
the Insurance Funds. Therefore, applying the monitoring requirements of
section 9(a) because of investment by separate accounts of other
Participating Insurance Companies would not serve any regulatory
purpose. Furthermore, the increased monitoring costs would reduce the
net rates of return realized by contract owners and Plan participants.
Moreover, the relief requested should not be affected by the sale of
shares of the Insurance Trusts to Qualified Plans, the Manager or
General Accounts. The insulation of the Insurance Trusts from those
individuals who are disqualified under the 1940 Act remains in place.
Because Qualified Plans, the Manager and General Accounts are not
investment companies and will not be deemed affiliates solely by virtue
of their shareholdings, no additional relief is necessary.
10. Sections 13(a), 15(a), and 15(b) of the 1940 Act have been
deemed by the Commission to require ``pass-through'' voting with
respect to underlying fund shares held by a separate account. Rules 6e-
2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) under the 1940 Act provide
partial exemptions from those sections to permit the insurance company
to disregard the voting instructions of its contract owners in certain
limited circumstances. Rules 6e-2(b)(15)(iii)(A) and 6e-
3(T)(b)(15)(iii)(A)(1) under the 1940 Act provide that the insurance
company may disregard the voting instructions of its contract owners in
connection with the voting of shares of an underlying fund if such
instructions would require such shares to be voted
[[Page 7629]]
to cause such underlying funds to make (or refrain from making) certain
investments that would result in changes in the subclassification or
investment objectives of such underlying funds or to approve or
disapprove any contract between an underlying fund and its investment
manager, 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
such Rules). Rules 6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2)
under the 1940 Act provide that the insurance company may disregard
contract owners' voting instructions if the contract owners initiate
any change in such underlying fund's investment policies, principal
underwriter, or any investment manager (provided that disregarding such
voting instructions is reasonable and subject to the other provisions
of paragraphs (b)(5)(ii) and (b)(7)(ii)(B) and (C) of Rules 6e-2 and
6e-3(T)).
11. Rule 6e-2 recognizes that a variable life insurance contract is
an insurance contract; it has important elements unique to insurance
contracts; and it is subject to extensive state regulation of
insurance. In adopting Rule 6e-2(b)(15)(iii), the Commission expressly
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.
The Commission also expressly recognized that state insurance
regulators have authority to require an insurer to draw from its
general account to cover costs imposed upon the insurer by a change
approved by contract owners over the insurer's objection. The
Commission therefore deemed such exemptions necessary ``to assure the
solvency of the life insurer and performance of its contractual
obligations by enabling an insurance regulatory authority or the life
insurer to act when certain proposals reasonably could be expected to
increase the risks undertaken by the life insurer.'' In this respect,
flexible premium variable life insurance contracts are identical to
scheduled premium variable life insurance contracts; therefore, Rule
6e-3(T)'s corresponding provisions presumably were adopted in
recognition of the same factors. State insurance regulators have much
the same authority with respect to variable annuity separate accounts
as they have with respect to variable life insurance separate accounts.
Insurers generally assume both mortality and expense risks under
variable annuity contracts. Therefore, variable annuity contracts pose
some of the same kinds of risks to insurers as variable life insurance
contracts. The Commission staff has not addressed the general issue of
state insurance regulators' authority in the context of variable
annuity contracts, and has not developed a single comprehensive
exemptive rule for variable annuity contracts.
12. The Insurance Trusts' sale of shares to Qualified Plans, the
Manager or General Accounts will not have any impact on the relief
requested herein in this regard. Shares of the Insurance Funds sold to
Qualified Plans would be held by the trustees of such Plans. The
exercise of voting rights by Qualified Plans, whether by the trustees,
by participants, by beneficiaries, or by investment managers engaged by
the Plans, does not present the type of issues respecting the disregard
of voting rights that are presented by variable life separate accounts.
With respect to the Qualified Plans, which are not registered as
investment companies under the 1940 Act, there is no requirement to
pass through voting rights to Plan participants. Similarly, the Manager
and General Accounts are not subject to any pass-through voting
requirements. Accordingly, unlike the case with insurance company
separate accounts, the issue of the resolution of material
irreconcilable conflicts with respect to voting is not present with
Qualified Plans, the Manager or General Accounts.
13. Applicants assert that shared funding by unaffiliated insurance
companies does not present any issues that do not already exist where a
single insurance company is licensed to do business in several or all
states. A particular state insurance regulatory body could require
action that is inconsistent with the requirements of other states in
which the insurance company offers its policies. The fact that
different Participating Insurance Companies may be domiciled in
different states does not create a significantly different or enlarged
problem.
14. Applicants further assert that shared funding by unaffiliated
Participating Insurance Companies is, in this respect, no different
than the use of the same investment company as the funding vehicle for
affiliated Participating Insurance Companies, which Rules 6e-2(b)(15)
and 6e-3(T)(b)(15) permit under various circumstances. Affiliated
Participating Insurance Companies 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 discussed below
are designed to safeguard against and provide procedures for resolving
any adverse effects that differences among state regulatory
requirements may produce.
15. Applicants assert that the right under Rules 6e-2(b)(15) and
6e-3(T)(b)(15) of an insurance company to disregard contract owners'
voting instructions does not raise any issues different from those
raised by the authority of state insurance administrators over separate
accounts. Under Rules 6e-2(b)(15) and 6e-3(T)(b)(15), an insurer can
disregard contract owner voting instructions only with respect to
certain specified items and under certain specified conditions.
Affiliation does not eliminate the potential, if any exists, for
divergent judgments as to the advisability or legality of a change in
investment policies, principal underwriter, or investment adviser
initiated by contract owners. The potential for disagreement is limited
by the requirements in Rules 6e-2 and 6e-3(T) that the insurance
company's disregard of voting instructions be reasonable and based on
specific good faith determinations. However, a particular Participating
Insurance Company's disregard of voting instructions nevertheless could
conflict with the majority of contract owner voting instructions. The
Participating Insurance Company's action could arguably be different
than the determination of all or some of the other Participating
Insurance Companies (including affiliated insurers) that the contract
owners' voting instructions should prevail, and could either 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, the Participating Insurance
Company may be required, at an Insurance Trust's election, to withdraw
its separate account's investment in that Insurance Trust, and no
charge or penalty would be imposed as a result of such withdrawal.
16. With respect to voting rights, it is possible to provide an
equitable means of giving such voting rights to contract owners and to
Qualified Plans, the Manager or General Accounts. The transfer agent(s)
for the Insurance Trusts will inform each shareholder, including each
separate account, each Qualified Plan, the Manager and each General
Account, of its share ownership, in an Insurance Trust. Each
Participating
[[Page 7630]]
Insurance Company will then solicit voting instructions in accordance
with the ``pass-through'' voting requirement. Investment by Qualified
Plans or General Accounts in any Insurance Trust will similarly present
no conflict. The likelihood that voting instructions of insurance
company contract owners will ever be disregarded or the possible
withdrawal referred to immediately above is extremely remote and this
possibility will be known, through prospectus disclosure, to any
Qualified Plan or General Account choosing to invest in an Insurance
Fund. Moreover, even if a material irreconcilable conflict involving
Qualified Plans or General Accounts arises, the Qualified Plans or
General Accounts may simply redeem their shares and make alternative
investments. Votes cast by the Qualified Plans or General Accounts, of
course, cannot be disregarded but must be counted and given effect.
17. Applicants assert that there is no reason why the investment
policies of an Insurance Fund would or should be materially different
from what they would or should be if such Insurance Fund funded only
variable annuity contracts or variable life insurance policies, whether
flexible premium or scheduled premium policies. Each type of insurance
product is designed as a long-term investment program. Similarly, the
investment strategy of Qualified Plans and General Accounts (i.e.,
long-term investment) coincides with that of variable contracts and
should not increase the potential for conflicts. Each of the Insurance
Funds will be managed to attempt to achieve its investment objective,
and not to favor or disfavor any particular Participating Insurance
Company or type of insurance product or other investor. There is no
reason to believe that different features of various types of contracts
will lead to different investment policies for different types of
variable contracts. The sale and ultimate success of all variable
insurance products depends, at least in part, on satisfactory
investment performance, which provides an incentive for the
Participating Insurance Company to seek optimal investment performance.
18. Furthermore, Applicants assert that no one investment strategy
can be identified as appropriate to a particular insurance product.
Each pool of variable annuity and variable life insurance contract
owners is composed of individuals of diverse financial status, age,
insurance and investment goals. A fund supporting even one type of
insurance product must accommodate these diverse factors in order to
attract and retain purchasers. Permitting mixed and shared funding will
provide economic justification for the growth of the Insurance Trust.
In addition, permitting mixed and shared funding will facilitate the
establishment of additional series serving diverse goals. The broader
base of contract owners and shareholders can also be expected to
provide economic justification for the creation of additional series of
each Insurance Trust with a greater variety of investment objectives
and policies.
19. Applicants note that section 817(h) of the Code is the only
section in the Code where separate accounts are discussed. Section
817(h) imposes certain diversification standards on the underlying
assets of variable annuity contracts and variable life contracts held
in the portfolios of management investment companies. Treasury
Regulation 1.817-5, which established diversification requirements for
such portfolios, specifically permits, in paragraph (f)(3), among other
things, ``qualified pension or retirement plans,'' ``the general
account of a life insurance company,'' ``the manager * * * of an
investment company'' and separate accounts to share the same underlying
management investment company. Therefore, neither the Code nor the
Treasury Regulations thereunder present any inherent conflicts of
interest if Qualified Plans, Separate Accounts, the Manager and General
Accounts all invest in the same underlying fund.
20. Applicants assert that the ability of the Insurance Trusts to
sell their respective shares directly to Qualified Plans, the Manager
or General Accounts does not create a ``senior security,'' as such term
is defined under section 18(g) of the 1940 Act, with respect to any
contract owner as opposed to a participant under a Qualified Plan, the
Manager or a General Account. As noted above, regardless of the rights
and benefits of contract owners or Plan participants, the Separate
Accounts, Qualified Plans, the Manager and the General Accounts have
rights only with respect to their respective shares of the Insurance
Trusts. They can only redeem such shares at net asset value. No
shareholder of any of the Insurance Trusts has any preference over any
other shareholder with respect to distribution of assets or payment of
dividends.
21. Applicants assert that permitting an Insurance Trust to sell
its shares to the Manager in compliance with Treas. Reg. 1.817-5 will
enhance Insurance Trust management without raising significant concerns
regarding material irreconcilable conflicts. Applicants assert that,
unlike the circumstances of many investment companies that serve as
underlying investment media for variable insurance products, the
Insurance Trusts may be deemed to lack an insurance company
``promoter'' for purposes of Rule 14a-2 under the Act. It is
anticipated that many other Insurance Trusts may lack an insurance
company promoter. Accordingly, Applicants assert that such Insurance
Trusts will be subject to the requirements of section 14(a) of the 1940
Act, which generally requires that an investment company have a net
worth of $100,000 upon making a public offering of its shares.
22. Applicants assert that given the conditions of Treas. Reg.
1.817-5(i)(3) and the harmony of interest between an Insurance Trust,
on the one hand, and its Manager or a Participating Insurance Company,
on the other, little incentive for overreaching exists. Applicants
assert that such investments should not implicate the concerns
discussed above regarding the creation of material irreconcilable
conflicts. Instead, Applicants assert that permitting investment by the
Manager will permit the orderly and efficient creation and operation of
Insurance Trusts, and reduce the expense and uncertainty of using
outside parties at the early stages of Insurance Trust operations.
23. Applicants assert that various factors have limited the number
of insurance companies that offer variable contracts. These factors
include the costs of organizing and operating a funding medium, the
lack of expertise with respect to investment management (principally
with respect to stock and money market investments) and the lack of
name recognition by the public of certain Participating 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 the Insurance Trusts as a common
investment medium for variable contracts, Qualified Plans and General
Accounts would help alleviate these concerns, because Participating
Insurance Companies, Qualified Plans and General Accounts will benefit
not only from the investment and administrative expertise of TCW, or
any other investment manager to an Insurance Fund, but also from the
cost efficiencies and investment flexibility afforded by a large pool
of funds. Therefore, making the Insurance Trusts available for mixed
and shared funding and permitting the purchase of Insurance Trust
shares by Qualified Plans and General Accounts may encourage more
insurance companies to offer variable contracts, and this should
[[Page 7631]]
result in increased competition with respect to both variable contract
design and pricing, which can be expected to result in more product
variation. Mixed and shared funding also may benefit variable contract
owners by eliminating a significant portion of the costs of
establishing and administering separate funds. Furthermore, granting
the requested relief should result in an increased amount of assets
available for investment by the Insurance Trusts. This may benefit
variable contract owners by promoting economies of scale, by reducing
risk through greater diversification due to increased money in the
Insurance Trusts, or by making the addition of new Insurance Funds more
feasible.
Applicants' Conditions
Applicants consent to the following conditions:
1. A majority of the Board of Trustees or Board of Directors
(``Board'') of each Insurance Trust shall consist of persons who are
not ``interested persons'' of the Insurance Trust, as defined by
section 2(a)(19) of the 1940 Act and the rules thereunder and as
modified by any applicable orders of the Commission, except that if
this condition is not met by reason of the death, disqualification, or
bona fide resignation of any trustee or director, then the operation of
this condition shall be suspended: (1) For a period of 90 days if the
vacancy or vacancies may be filled by the Board; (2) for a period of
150 days if a vote of shareholders is required to fill the vacancy or
vacancies; or (3) for such longer period as the Commission may
prescribe by order upon application.
2. Each Board will monitor the respective Insurance Trust for the
existence of any material irreconcilable conflict among and between the
interests of the contract owners of all Separate Accounts, participants
of Qualified Plans, the Manager or General Accounts investing in that
Insurance Trust, and determine what action, if any, should be taken in
response to such conflicts. A material irreconcilable conflict may
arise for a variety of reasons, including: (1) An action by any state
insurance regulatory authority; (2) a change in applicable federal or
state insurance, tax, or securities laws or regulations, or a public
ruling, private letter ruling, no-action or interpretative letter, or
any similar action by insurance, tax, or securities regulatory
authorities; (3) an administrative or judicial decision in any relevant
proceeding; (4) the manner in which the investments of any Insurance
Fund are being managed; (5) a difference in voting instructions given
by variable annuity contract owners, variable life insurance contract
owners, Plan trustees, or Plan participants; (6) a decision by a
Participating Insurance Company to disregard the voting instructions of
contract owners; or (7) if applicable, a decision by a Qualified Plan
to disregard the voting instructions of Plan participants.
3. Any Qualified Plan that executes a fund participation agreement
upon becoming an owner of 10% or more of the assets of an Insurance
Trust, any Participating Insurance Company (on their own behalf, as
well as by virtue of any investment of general account assets in all
Insurance Trusts), and the Manager (collectively, ``Participants'')
will report any potential or existing conflicts to the Board. Each of
the Participants 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 includes, but is not limited
to, an obligation by each Participating Insurance Company to inform the
Board whenever contract owner voting instructions are disregarded and,
if pass-through voting is applicable, an obligation by each Qualified
Plan that is a Participant 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 and Qualified Plans investing in an Insurance Trust
under their agreements governing participation in the Insurance Trust,
and such agreements shall provide that such responsibilities will be
carried out with a view only to the interests of the contract owners
or, if applicable, Plan participants.
4. If it is determined by a majority of the Board of an Insurance
Trust, or a majority of its disinterested trustees or directors, that a
material irreconcilable conflict exists, the relevant Participating
Insurance Companies and Qualified Plans shall, at their expense or, at
the discretion of a Manager to an Insurance Trust, at that Manager's
expense, and to the extent reasonably practicable (as determined by a
majority of the disinterested trustees or directors), take whatever
steps are necessary to remedy or eliminate the material irreconcilable
conflict, up to and including: (1) Withdrawing the assets allocable to
some or all of the Separate Accounts from the relevant Insurance Trust
or any series therein and reinvesting such assets in a different
investment medium (including another Insurance Fund, if any); (2) in
the case of Participating Insurance Companies, submitting the question
of whether such segregation should be implemented to a vote of all
affected contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., variable annuity contract owners or
variable life insurance contract owners of one or more Participating
Insurance Companies) that votes in favor of such segregation, or
offering to the affected contract owners the option of making such a
change; (3) withdrawing the assets allocable to some or all of the
Qualified Plans from the affected Insurance Trust or any Insurance Fund
and reinvesting those assets in a different investment medium; and (4)
establishing a new registered management investment company or managed
separate account. If a material irreconcilable conflict arises because
of a Participating Insurance Company's decision to disregard contract
owner voting instructions and that decision represents a minority
position or would preclude a majority vote, the Participating Insurance
Company may be required, at the Insurance Trust's election, to withdraw
its Separate Account's investment in the Insurance Trust, and no charge
or penalty will be imposed as a result of such withdrawal. If a
material irreconcilable conflict arises because of a Qualified Plan's
decision to disregard Plan participant voting instructions, if
applicable, and that decision represents a minority position or would
preclude a majority vote, the Qualified Plan may be required, at the
election of the Insurance Trust, to withdraw its investment in the
Insurance Trust, and no charge or penalty will be imposed as a result
of such withdrawal. The responsibility to take remedial action in the
event of a Board determination of a material irreconcilable conflict
and to bear the cost of such remedial action shall be a contractual
obligation of all Participating Insurance Companies and Qualified Plans
under their agreements governing participation in the Insurance Trust,
and these responsibilities will be carried out with a view only to the
interests of the contract owners or, as applicable, Plan participants.
For the purposes of this Condition (4), a majority of the
disinterested members of the Board shall determine whether or not any
proposed action adequately remedies any material irreconcilable
conflict, but in no event will the Insurance Trust or its Manager(s) be
required to establish a new funding medium for any variable contract.
No
[[Page 7632]]
Participating Insurance Company shall be required by this Condition (4)
to establish a new funding medium for any variable contract if an offer
to do so has been declined by vote of a majority of contract owners
materially adversely affected by the material irreconcilable conflict.
No Qualified Plan shall be required by this Condition (4) to establish
a new funding medium for such Qualified Plan if (a) a majority of Plan
participants materially and adversely affected by the material
irreconcilable conflict vote to decline such offer or (b) pursuant to
governing Plan documents and applicable law, the Plan makes such
decision without Plan participant vote.
5. The Board's determination of the existence of a material
irreconcilable conflict and its implications shall be made known
promptly in writing to all Participants.
6. Participating Insurance Companies will provide pass-through
voting privileges to all variable contract owners whose contracts are
funded through a registered Separate Account for so long as the
Commission continues to interpret the 1940 Act as requiring pass-
through voting privileges for variable contract owners. Accordingly,
such Participating Insurance Companies will vote shares of each
Insurance Fund held in their registered Separate Accounts in a manner
consistent with voting instructions timely received from such contract
owners. Each Participating Insurance Company will vote shares of each
Insurance Fund held in its registered Separate Accounts for which no
timely voting instructions are received, as well as shares held by its
General Accounts, in the same proportion as those shares for which
voting instructions are received. Participating Insurance Companies
shall be responsible for assuring that each of their Separate Accounts
investing in an Insurance Trust calculates voting privileges in a
manner consistent with all other Participating Insurance Companies. The
obligation to vote an Insurance Trust's shares and to calculate voting
privileges in a manner consistent with all other registered Separate
Accounts investing in an Insurance Trust shall be a contractual
obligation of all Participating Insurance Companies under their
agreements governing participation in the Insurance Trust. Each Plan
will vote as required by applicable law and governing Plan documents.
7. An Insurance Trust will notify all Participating Insurance
Companies and Qualified Plans that disclosure regarding potential risks
of mixed and shared funding may be appropriate in prospectuses for any
of the Separate Accounts and in Plan documents. Each Insurance Trust
shall disclose in its prospectus that: (1) Shares of the Insurance
Trust are offered to insurance company separate accounts which fund
both variable annuity and variable life insurance contracts, and to
Qualified Plans and General Accounts; (2) due to differences of tax
treatment or other considerations, the interests of various contract
owners participating in the Insurance Trust and the interests of
Qualified Plans or General Accounts investing in the Insurance Trust
might at some time be in conflict; and (3) the Board will monitor the
Insurance Trust for any material conflicts and determine what action,
if any, should be taken.
8. All reports received by the Board of potential or existing
conflicts, and all Board action with regard to determining the
existence of a conflict, notifying 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.
9. If and to the extent Rule 6e-2 and Rule 6e-3(T) under the 1940
Act are amended, or Rule 6e-3 is adopted, to provide exemptive relief
from any provision of the 1940 Act or the rules thereunder with respect
to mixed or shared funding on terms and conditions materially different
from any exemptions granted in the order requested in this Application,
then each Insurance Trust and/or the Participating Insurance Companies,
as appropriate, shall take such steps as may be necessary to comply
with Rule 6e-2 and Rule 6e-3(T), as amended, and Rule 6e-3, as adopted,
to the extent such rules are applicable.
10. Each Insurance Trust will comply with all provisions of the
1940 Act requiring voting by shareholders (which, for these purposes,
shall be the persons having a voting interest in the shares of that
Insurance Trust), and in particular each Insurance Trust will either
provide for annual meetings (except insofar as the Commission may
interpret section 16 of the 1940 Act not to require such meetings) or
comply with section 16(c) of the 1940 Act (although the Trust is not
one of the trusts described in section 16(c) of the 1940 Act) as well
as with section 16(a) of the 1940 Act and, if and when applicable,
section 16(b) of the 1940 Act. Further, each Insurance Trust will act
in accordance with the Commission's interpretation of the requirements
of section 16(a) of the 1940 Act with respect to periodic elections of
directors (or trustees) and with whatever rules the Commission may
promulgate with respect thereto.
11. As long as the Commission continues to interpret the 1940 Act
as requiring pass-through voting privileges for variable contract
owners, the Manager will vote its shares in the same proportion as all
contract owners having voting rights with respect to the relevant
Insurance Trust; provided, however, that the Manager or any General
Account shall vote their shares in such other manner as may be required
by the Commission or its staff.
12. The Participants shall at least annually submit to the Board of
an Insurance Trust such reports, materials or data as the Board may
reasonably request so that it may fully carry out the obligations
imposed upon it by the conditions contained in the Application and said
reports, materials and data shall be submitted more frequently, if
deemed appropriate, by the Board. The obligations of Participating
Insurance Companies and Participating Qualified Plans to provide these
reports, materials and data to the Board of the Insurance Trust when it
so reasonably requests, shall be a contractual obligation of the
Participating Insurance Companies and Participating Qualified Plans
under their agreements governing participation in each Insurance Trust.
13. If a Qualified Plan should become an owner of 10% or more of
the assets of an Insurance Trust, the Insurance Trust shall require
such Plan to execute a participation agreement with such Insurance
Trust which includes the conditions set forth herein to the extent
applicable. A Qualified Plan will execute an application containing an
acknowledgment of this condition upon such Plan's initial purchase of
the shares of any Insurance Trust.
Conclusion
For the reasons and upon the facts summarized above, Applicants
assert that the requested exemptions are appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-3717 Filed 2-13-03; 8:45 am]
BILLING CODE 8010-01-U