[Federal Register: May 8, 2003 (Volume 68, Number 89)]
[Notices]
[Page 24766-24775]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08my03-98]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-26041; File No. 812-12900]
Manufacturers Investment Trust, et al.; Notice of Application
May 1, 2003.
AGENCY: Securities and Exchange Commission (the ``Commission'' or
``SEC'').
ACTION: Notice of Application pursuant to section 6(c) of the
Investment Company Act of 1940 (the ``Act'') for an order granting
exemption from the provisions of sections 9(a), 13(a), 15(a) and 15(b)
of the Act and Rules 6e-2(b)(l5) and 6e-3(T)(b)(15) thereunder.
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APPLICANTS: Manufacturers Investment Trust (``MIT'') and Manufacturers
Securities Services, LLC (``MSS'' or the ``Adviser'') (collectively,
``Applicants'').
SUMMARY OF APPLICATION: Applicants seek exemptive relief to the extent
necessary to permit shares of existing series of MIT (``Existing
Funds'') and shares of Future Funds (as defined below) to be sold to
and held by: (1) Separate accounts (``separate accounts'') funding
variable life insurance contracts and variable annuity contracts
(collectively, ``variable contracts'') issued by both affiliated and
unaffiliated life insurance companies; (2) qualified pension and
retirement plans (``Qualified Plans'') (as defined below) outside of
the separate account context; (3) the investment adviser or any
subadviser to an Existing Fund or Future Fund (each, a ``Fund'';
collectively, the ``Funds''), certain affiliated persons of each such
adviser or subadviser and all other persons described in Treasury
Regulation 1.817-5(f)(3)(ii) (collectively, ``Other Investors''); and
(4) the general account of any Participating Insurance Company (as
defined below), certain affiliated persons of each such Participating
Insurance Company and all other persons described in Treasury
Regulation 1.817-5(f)(3)(i) (collectively, the ``General Accounts'').
FILING DATE: The Application was filed on November 12, 2002 and amended
on April 11, 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 by writing to the Secretary of the
Commission and serving Applicants with a copy of the request,
personally or by mail. Hearing requests should be received by the
Commission by 5:30 p.m. on May 29, 2003, and should be accompanied by
proof of service on Applicants in the form of an affidavit or, for
lawyers, a certificate of service. Hearing requests should state the
nature of the writer's interests, 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, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicants, c/o John W. Blouch, Esq., Jones & Blouch L.L.P., 1025
Thomas Jefferson St., NW., Suite 410 East, Washington, DC 20007-5252;
copy to Betsy A. Seel, Esq., Assistant Vice President and Senior
Counsel, Manulife Financial, 73 Tremont St., Boston, MA 02108-3915.
FOR FURTHER INFORMATION CONTACT: Mark Cowan, Senior Counsel, or Zandra
Y. Bailes, Branch Chief, at (202) 942-0670 (Division of Investment
Management, Office of Insurance Products).
SUPPLEMENTARY INFORMATION: The following is a summary of the
Application. The complete Application is available for a fee from the
Commission's Public Reference Branch, 450 Fifth St., NW., Washington,
DC 20549 (tel. (202) 942-8090).
Applicants' Representations
1. As used herein: (a) A ``Future Fund'' is any investment company
(or series thereof), other than an Existing Fund, that is designed to
be sold to separate accounts and for which MSS or any affiliated person
of MSS serves as investment adviser, subadviser, manager,
administrator, principal underwriter or sponsor; (b) a ``Qualified
Plan'' means any trust, plan, account, contract or annuity described in
sections 401(a), 403(a), 403(b), 408(a), 408(b), 408(p), 408A, 414(d),
457(b), 408(k), or 501(c)(18) of the Internal Revenue Code of 1986, as
amended (the ``Code''), and any other trust, plan, account, contract or
annuity that is determined to be within the scope of Treasury
Regulation 1.817-5(f)(3)(iii); and (c) a ``Participating Insurance
Company'' means any insurance company that purchases or will purchase
shares of the Funds to serve as the investment media for variable
contracts issued through its separate accounts.
2. MIT is a Massachusetts business trust that is registered as an
open-end management investment company under the Act. Under
Massachusetts law and MIT's Agreement and Declaration of Trust, MIT is
managed by its Board of Trustees. MIT is a series trust comprising
sixty-seven Existing Funds, each of which has its own investment
objectives and policies. MIT may add additional Funds in the future.
Shares of MIT are registered under the Securities Act of 1933, as
amended (the ``1933 Act''). Shares of MIT are not offered directly to
the public but only to separate accounts of The Manufacturers Life
Insurance Company (U.S.A.) (``Manulife USA''), a Michigan stock life
insurance company, and The Manufacturers Life Insurance Company of New
York (``Manulife New York''), a New York stock life insurance company
(collectively, the ``Insurance Companies''), as the underlying
investment media for variable contracts issued by such companies. The
Insurance Companies are indirect, wholly-owned subsidiaries of The
Manufacturers Life Insurance Company, a stock insurance company
organized under the laws of Canada (``Manulife''). Manulife Financial
Corporation (``MFC''), a publicly-traded company based in Toronto,
Canada, is the holding company of Manulife and its subsidiaries,
collectively known as
[[Page 24767]]
Manulife Financial. The separate accounts of the Insurance Companies
include both separate accounts that are registered as investment
companies under the Act (``registered separate accounts'') and separate
accounts that are not registered as investment companies under the Act
in reliance on the exemption provided by section 3(c)(11) of the Act.
3. MSS is a Delaware limited liability company that is registered
as an investment adviser under the Investment Advisers Act of 1940 (the
``Advisers Act''). MSS is an indirect, wholly-owned subsidiary of
Manulife USA. MSS currently serves as the investment adviser to MIT
with respect to each of the Existing Funds. Pursuant to investment
subadvisory agreements, MSS has retained a subadviser for each of the
Existing Funds. Each such subadviser is registered as an investment
adviser under the Advisers Act.
4. Applicants propose that the Existing Funds and Future Funds be
authorized to offer their shares to separate accounts of Participating
Insurance Companies in order to serve as the investment media for
variable contracts issued through such separate accounts. Each separate
account is or will be established as a segregated asset account by a
Participating Insurance Company pursuant to the insurance law of such
company's domicile. As such, the assets of each are or 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 is not or will not be
chargeable with liabilities arising from any other business that the
Participating Insurance Company may conduct. The income, gains and
losses, realized or unrealized, from such an account's assets are or
will be credited to or charged against the account without regard to
other income, gains or losses of the Participating Insurance Company.
If a separate account is a registered separate account, it will be a
``separate account'' as defined in 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 Participating Insurance Company that
establishes a registered separate account is the depositor or sponsor
of the account as those terms have been interpreted by the Commission
with respect to variable life insurance and variable annuity separate
accounts.
5. The Funds will sell their shares to registered separate accounts
only if the Participating Insurance Company sponsoring such a separate
account enters into a participation agreement with the Fund. The
participation agreements will define the relationship between each Fund
and each Participating Insurance Company and provide that, except where
the agreement specifically provides otherwise, the Participating
Insurance Company will remain responsible for establishing and
maintaining any separate account covered by the agreement and for
complying with all applicable requirements of federal and state laws
pertaining to such separate accounts and to the sale and distribution
of variable contracts issued through such separate accounts. The
participation agreements will also provide that the obligations of the
Funds with regard to compliance with the federal securities laws will,
unless the agreement specifically provides otherwise, relate solely to
offering and selling their shares to the separate accounts covered by
the agreements.
6. The use of a common management investment company (or series
thereof) as an investment medium for both variable life insurance and
variable annuity contracts 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 series thereof) as an investment medium for
variable life insurance and variable annuity contracts of two or more
unaffiliated insurance companies is referred to herein as ``shared
funding.''
7. Applicants propose that Existing Funds and Future Funds be
authorized to offer and sell their shares directly to Qualified Plans,
Other Investors and General Accounts. As stated above, Qualified Plans
are pension or retirement plans within the scope of Treasury Regulation
1.817-5(f)(3)(iii). Other Investors will be persons described in
Treasury Regulation 1.817-5(f)(3)(ii) which purchase Fund shares in
connection with advances made in connection with the operation of
separate accounts. General Accounts will be persons described in
Treasury Regulation 1.817-5(f)(3)(i) which, if insurance companies,
hold Fund shares in their general accounts.
8. Applicants state that they expect that most of the Qualified
Plans will be pension or retirement plans intended to qualify under
sections 401(a) and 501(a) of the Code and that many of these Plans
will include a cash or deferred arrangement (permitting salary
reduction contributions) intended to qualify under section 401(k) of
the Code. The Plans that qualify under sections 401(a) and 501(a) of
the Code will also be subject to, and will be designed to comply with,
the provisions of the Employee Retirement Income Security Act of 1974,
as amended (``ERISA''), applicable to either defined benefit or defined
contribution profit sharing plans, specifically ``Title I--Protection
of Employee Benefit Rights.'' These Plans will thus be subject to
regulatory provisions under the Code and ERISA regarding, for example,
reporting and disclosure, participation and vesting, funding, fiduciary
responsibility and enforcement. Fund shares sold to Qualified Plans
will be held by the trustees of such plans as required by section
403(a) of ERISA. Applicants state that pass-through voting is generally
not required to be provided to participants in Qualified Plans pursuant
to ERISA. Applicants note state that some of the Qualified Plans will
not be subject to ERISA. These include governmental plans within the
meaning of sections 414(d) or 457(b) of the Code, custodial accounts
described in section 403(b) of the Code, and regular and Roth
individual retirement accounts (``IRAs'') described in sections 408(a)
and 408A of the Code, respectively. Generally, Fund shares sold to
governmental plans will be held by trustees, those sold to custodial
accounts will be held by custodians, and those sold to IRAs will be
held by custodians or trustees on behalf of individual plan owners.
Applicants state that pass-through voting is generally not required to
be provided to participants in governmental plans, and voting rights in
the case of custodial accounts and IRAs are generally exercised by
individual participants or owners.
9. Applicants state that the current federal tax law permits the
Funds to sell their shares to Qualified Plans, Other Investors and
General Accounts. Section 817(h) of the Code imposes certain
diversification standards on the underlying assets of variable
contracts held in segregated asset accounts. The Code provides that a
variable contract shall not be treated as an annuity or life insurance
contract for any period (and any subsequent period) for which the
investments, in accordance with regulations prescribed by the Treasury
Department, are not adequately diversified. The Treasury Department has
issued regulations (Treas. Reg. 1.817-5) (the ``Treasury Regulations'')
that establish diversification requirements for the investment
portfolios underlying variable contracts. The Treasury Regulations
provide that, in order to rely on certain look-through
[[Page 24768]]
provisions of the diversification requirements, all of the beneficial
interests in the underlying investment company must be held by the
segregated asset accounts of one or more insurance companies. The
Treasury Regulations, however, also contain certain exceptions to this
requirement. One exception allows shares in the 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 also to be held by insurance company separate
accounts. (Treas. Reg. 1.817-5(f)(3)(iii)). A second exception allows
shares in the investment company also to be held by the investment
manager of the investment company, and certain companies related to the
investment manager, in connection with the creation or management of
the investment company. (Treas. Reg. 1.817-5(f)(3)(ii)). Finally, a
third exception allows shares in the investment company also to be held
by the general account of a life insurance company that holds or will
hold such shares in a separate account, and by certain companies
related to the life insurance company. (Treas. Reg. 1.817-5(f)(3)(i)).
These latter two exceptions are available only if: (1) The return on
such shares held by the investment manager, the general account or the
related company is computed in the same manner as the return on shares
held by the separate accounts; and (2) the investment manager, the
general account and the related company do not intend to sell such
shares to the public. Applicants anticipate that the Other Investors
and General Accounts will comply with the provisions of the Treasury
Regulations when they purchase and hold shares of the Funds.
10. Applicants state that, as a result of these exceptions to the
general diversification requirement, Qualified Plans may select the
Funds as investment options, and the Other Investors and General
Accounts may also hold shares of the Funds, without endangering the tax
status of variable contracts issued through the separate accounts of
Participating Insurance Companies.
11. The use of a common management investment company (or series
thereof) as an investment medium for variable life insurance and
variable annuity separate accounts and for Qualified Plans is referred
to herein as ``extended mixed and shared funding.''
Applicants' Legal Analysis
1. In connection with the funding of scheduled premium variable
life insurance contracts issued through a separate account registered
under the Act as a unit investment trust, 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. Section 9(a) provides that it is unlawful for any
company to serve as an investment adviser or principal underwriter of
any registered open-end investment company if an affiliated person of
that company is subject to a disqualification enumerated in sections
9(a)(1) or (2). Rules 6e-2(b)(15)(i) and (ii) provide partial
exemptions from section 9(a), and Rule 6e-2(b)(15)(iii) provides a
partial exemption from sections 13(a), 15(a), and 15(b) to the extent
those sections have been deemed by the Commission to require ``pass-
through'' voting with respect to an underlying fund's shares.
2. The exemptions granted to a registered variable life insurance
separate account by Rule 6e-2(b)(15) are available only when all of the
assets of the separate account consist of the shares of one or more
registered management investment companies which offer their shares
``exclusively to variable life insurance separate accounts of the life
insurer, or of any affiliated life insurance company'', and then only
when scheduled premium variable life insurance contracts are issued
through variable life insurance separate accounts. 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 management company that also offers its shares
(i) to a separate account of the same or an affiliated insurance
company to fund variable annuity contracts or flexible premium variable
life insurance contracts or (ii) to any separate account of an
unaffiliated life insurance company. Furthermore, Rule 6e-2(b)(15) does
not contemplate that shares of the underlying fund might also be sold
to Qualified Plans, Other Investors and General Accounts.
3. In connection with flexible premium variable life insurance
contracts issued through a separate account registered under the Act as
a unit investment trust, Rule 6e-3(T)(b)(15) under the Act provides
partial exemptions from section 9(a), and 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 an
underlying fund's shares. The exemptions granted to a separate account
by Rule 6e-3(T)(b)(15) are available only when all of the assets of the
separate account consist of the shares of one or more registered
management investment companies which offer their shares ``exclusively
to separate accounts of the life insurer, or of any affiliated life
insurance company offering either scheduled [premium variable life
insurance] contracts or flexible [premium variable life insurance]
contracts, or both; or which also offer their shares to variable
annuity separate accounts of the life insurer or of an affiliated life
insurance company, or which offer their shares to any such life
insurance company in consideration solely for advances made by the life
insurer in connection with the operation of the separate account.''
Therefore, Rule 6e-3(T) permits mixed funding with respect to a
flexible premium variable life insurance separate account, subject to
certain conditions. Rule 6e-3(T), however, 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 a management company that also
offers its shares to separate accounts (including variable annuity and
flexible premium and scheduled premium life insurance separate
accounts) of unaffiliated life insurance companies. In addition, Rule
6e-3(T) does not contemplate sales to Qualified Plans or Other
Investors or, except in limited circumstances, General Accounts.
4. Applicants maintain, as discussed below, that there is no policy
reason why the sale of Fund shares to Qualified Plans, Other Investors
or General Accounts should prohibit or otherwise limit a Participating
Insurance Company from relying on the relief provided by Rules 6e-
2(b)(15) and 6e-3(T)(B)(15). Nonetheless, each of Rules 6e-2 and 6e-
3(T) specifically provides that the relief granted thereunder is
available only where shares of the underlying fund are offered
exclusively to insurance company separate accounts (and, in the case of
Rule 6e-3(T), to insurance companies for advances made in connection
with separate account operations). In this regard, Applicants request
exemptive relief to the extent necessary to permit shares of the Funds
to be sold to Qualified Plans, Other Investors and General Accounts
while allowing the variable life insurance separate accounts of the
Participating Insurance Companies to enjoy the benefits of the relief
granted by Rules 6e-2(b)(15) and 6e-3(T)(b)(15).
5. Applicants submit that, if the Funds were to sell their shares
only to Qualified Plans, Other Investors or General Accounts, no
exemptive relief
[[Page 24769]]
under Rules 6e-2 and 6e-3(T) would be necessary. The relief provided
for under Rules 6e-2(b)(15) and 6e-3(T)(b)(15) does not relate to
Qualified Plans, Other Investors, General Accounts or to a registered
investment company's ability to sell its shares to such purchasers.
Applicants note that 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 the
trustee of a Qualified Plan, by Other Investors or by General Accounts
without adversely affecting the ability of shares of the same
investment company also to be held by separate accounts of insurance
companies in connection with their variable contracts. Applicants
submit that the sale of shares of the same investment company both to
separate accounts and to Qualified Plans, Other Investors and General
Accounts (other than, as permitted by Rule 6e-3(T), for advances in
connection with separate account operations) was not contemplated at
the time of the promulgation of Rules 6e-2(b)(15) and 6e-3(T)(b)(15).
6. Applicants are not aware of any reason for excluding separate
accounts and investment companies engaged in shared funding from the
exemptive relief provided under Rules 6e-2(b)(15) and 6e-3(T)(b)(15),
or for excluding separate accounts and investment companies engaged in
mixed funding from the exemptive relief provided under Rule 6e-
2(b)(15). Similarly, Applicants are not aware of any reason for
excluding separate accounts from the exemptive relief requested because
the Funds may also sell their shares to Qualified Plans, Other
Investors and General Accounts.
7. Applicants recognize that the reason the Commission did not
grant broader relief in the area of mixed and shared funding when the
Commission adopted Rule 6e-3(T) is because of the Commission's
uncertainty in this area with respect to such issues as conflicts of
interest. Applicants believe that the Commission's concern in this area
is not warranted. Applicants have concluded that the addition of
Qualified Plans, Other Investors and General Accounts as eligible
shareholders in the Funds does not increase the risk of material
irreconcilable conflicts among the shareholders. Applicants have
further concluded that, even if a material irreconcilable conflict
involving the Qualified Plans, Other Investors or General Accounts
arose, such shareholders, unlike the separate accounts, could simply
redeem their shares and make alternative investments.
8. Consistent with the Commission's authority under section 6(c) of
the Act to grant exemptive orders to a class or classes of persons and
transactions, Applicants request relief for the class consisting of
Applicants, the Participating Insurance Companies and their separate
accounts investing in the Existing Funds and Future Funds and, to the
extent necessary, investment advisers, subadvisers, principal
underwriters, managers, administrators and sponsors of the Funds.
9. The Commission has previously granted the exemptive relief
requested herein, including the class relief, in the context of mixed
and shared funding and extended mixed and shared funding. The
Commission has also granted such relief to permit sales of fund shares
to investment managers and their affiliates (i.e., Other Investors) and
to the general accounts of life insurance companies holding fund shares
in their separate accounts and the affiliates of such insurance
companies (i.e., General Accounts).
10. Section 9(a) of the Act provides that it is unlawful for any
company to serve as investment adviser or principal underwriter of any
registered open-end investment company if an affiliated person of that
company is subject to a disqualification enumerated in sections 9(a)(1)
or (2). Rules 6e-2(b)(15)(i) and (ii) and Rules 6e-3(T)(b)(15)(i) and
(ii) 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 company.
11. Rules 6e-2(b)(15)(i) and 6e-3(T)(b)(15)(i) provide, in effect,
that the fact that an individual disqualified under section 9(a)(1) or
section 9(a)(2) is an officer, director, or employee of an insurance
company, or any of its affiliates, would not, by virtue of section
9(a)(3) of the Act, disqualify the insurance company or any of its
affiliates from serving in any capacity with respect to an underlying
investment company, provided that the disqualified individual did not
participate directly in the management or administration of the
underlying investment company.
12. Similarly, Rules 6e-2(b)(15)(ii) and 6e-3(T)(b)(15)(ii)
provide, in effect, that the fact that any company disqualified under
section 9(a)(1) or section 9(a)(2) is affiliated with the insurance
company would not, by virtue of section 9(a)(3), disqualify the
insurance company from serving in any capacity with respect to an
underlying investment company, provided that the disqualified company
did not participate directly in the management or administration of the
investment company.
13. 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. 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 individuals in a large
insurance company complex, most of whom will have no involvement in
matters pertaining to investment companies funding separate accounts.
These rules further recognize that it is also unnecessary to apply
section 9(a) to individuals in various unaffiliated insurance companies
(or affiliated companies of Participating Insurance Companies) that may
utilize the Funds as funding media for variable contracts.
14. Applicants submit that there is no regulatory purpose in
extending the section 9(a) monitoring requirements because of mixed or
shared funding. The Participating Insurance Companies are not expected
to play any role in the management or administration of the Funds.
Those individuals who participate in the management or administration
of the Existing Funds and, it is expected, of any Future Fund, will
remain the same regardless of which separate accounts, insurance
companies or Qualified Plans use such Funds. Applying the monitoring
requirements of section 9(a) because of investment by separate accounts
of other insurers would be unjustified and would not serve any
regulatory purpose. Furthermore, the increased monitoring costs would
reduce the net rates of return realized by contract owners. With
respect to Qualified Plans, they, unlike separate accounts, are not
themselves investment companies and therefore are not subject to
section 9(a) of the Act. Furthermore, it is not anticipated that a
Qualified Plan would be an affiliated person of a Fund except by virtue
of its holding 5% or more of a Fund's shares. Finally, the relief
requested should not be affected by the sale of shares of the Funds to
Other Investors or to General Accounts. The eligibility restrictions of
section 9(a) will still apply to any officers, directors or employees
of Other Investors or Participating Insurance
[[Page 24770]]
Companies who participate directly in the management or administration
of the Funds.
15. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) assume the
existence of a pass-through voting requirement with respect to
management investment company shares held by a registered separate
account. Pass-through voting privileges will be provided by
Participating Insurance Companies with respect to all variable contract
owners so long as the Commission interprets the Act to require pass-
through voting privileges for variable contract owners.
16. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) provide
exemptions from the pass-through voting requirement with respect to
several significant matters, assuming the limitations discussed above
on mixed and shared funding are observed. Rules 6e-2(b)(15)(iii)(A) and
6e-3(T)(b)(15)(iii)(A) provide that the insurance company may disregard
the voting instructions of its contract owners with respect to the
investments of an underlying fund, or any contract between a fund and
its investment adviser, when required to do so by an insurance
regulatory authority (subject to the provisions of paragraphs (b)(5)(i)
and (b)(7)(ii)(A) of Rules 6e-2 and 6e-3(T)). Rules 6e-2(b)(15)(iii)(B)
and 6e-3(T)(b)(15)(iii)(A)(2) provide that, with respect to registered
management investment companies whose shares are held by a registered
separate account of an insurance company, the insurance company may
disregard voting instructions of contract owners if the contract owners
initiate any change in such investment company's investment policies,
principal underwriter, or any investment adviser (provided that
disregarding such voting instructions is reasonable and subject to the
other provisions of paragraphs (b)(5)(ii), (b)(7)(ii)(B), and
(b)(7)(ii)(C) of the Rules).
17. Rules 6e-2 and 6e-3(T) recognize that a variable life insurance
contract, as an insurance contract, has important elements unique to
insurance contracts and 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 has 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, the
corresponding provisions of Rule 6e-3(T) (which apply to flexible
premium insurance contracts and which permit mixed funding) undoubtedly
were adopted in recognition of the same considerations.
18. Applicants state that, in addition, sales of shares of the
Funds to Qualified Plans, Other Investors and General Accounts will not
have any impact on the relief requested with respect to pass-through
voting. Qualified Plans are not registered as investment companies
under the Act, and there is no requirement to pass through voting
rights to plan participants. For those Qualified Plans covered by
ERISA, applicable law expressly reserves voting rights associated with
the assets of most Plans to certain specified persons. Under section
403(a) of ERISA, shares of a fund sold to a Qualified Plan covered by
ERISA must be held by the trustees of the Plan. Section 403(a) also
provides that the trustees must have exclusive authority and discretion
to manage and control the Plan with two exceptions: (1) When the Plan
expressly provides that the trustees are subject to the direction of a
named fiduciary who is not a trustee, in which case the trustees are
subject to proper directions made in accordance with the terms of the
plan and not contrary to ERISA; and (2) when the authority to manage,
acquire, or dispose of assets of the plan is delegated to one or more
investment managers pursuant to section 402(c)(3) of ERISA. Unless one
of the two exceptions stated in section 403(a) applies, Qualified Plan
trustees have the exclusive authority and responsibility for voting
proxies.
19. When a named fiduciary appoints an investment manager, the
investment manager has the responsibility to vote the shares held by
the Plan unless the right to vote such shares is reserved to the
trustees or the named fiduciary. The Qualified Plans may have their
trustees or other fiduciaries exercise voting rights attributable to
investment securities held by the Plans in their discretion. Some
ERISA-covered Qualified Plans, however, may provide for the trustees,
an investment adviser or another named fiduciary to exercise voting
rights in accordance with instructions from participants. For Qualified
Plans that are not covered by ERISA, voting rights attributable to
investment securities held by the Plans are exercised in accordance
with the terms of governing plan documents. Such voting rights may be
exercised, as under ERISA-covered Qualified Plans, by plan trustees in
their discretion or pursuant to instructions from participants, or, in
the case of custodial accounts or IRAs, by individual participants or
plan owners.
20. When a Qualified Plan does not provide participants with the
right to give voting instructions, Applicants do not see any potential
for material irreconcilable conflicts of interest between or among
variable contract owners and plan investors with respect to voting a
Fund's shares. Accordingly, unlike the case with insurance company
separate accounts, the issue of the resolution of material
irreconcilable conflicts of interest with respect to voting is not
present with respect to such Qualified Plans since the Qualified Plans
are not entitled to pass-through voting privileges.
21. Even if a Qualified Plan were to hold a controlling interest in
a Fund, Applicants do not believe that such control would disadvantage
other investors in the Fund to any greater extent than is the case when
any institutional shareholder holds a majority of the voting securities
of any open-end management investment company. In this regard,
Applicants submit that investment in a Fund by a Qualified Plan will
not create any of the voting complications occasioned by mixed and
shared funding. Unlike mixed and shared funding, plan investor voting
rights cannot be frustrated by veto rights of insurers or state
regulators.
22. When a Qualified Plan does afford plan participants rights to
give voting instructions, Applicants see no reason to believe that such
participants generally or those in a particular Qualified Plan, either
as a single group or in combination with participants in other Plans,
would vote in a manner that would disadvantage variable contract
holders.
23. Other Investors and General Accounts similarly are not subject
to any pass-through voting requirements. Accordingly, unlike the case
with insurance company separate accounts, the issue of the resolution
of any material irreconcilable conflicts with respect to voting is not
present with respect to Other Investors and General Accounts.
[[Page 24771]]
24. The prohibitions on mixed and shared funding might reflect
concern regarding possible different investment motivations among
investors. When Rule 6e-2 was adopted, variable annuity separate
accounts could invest in mutual funds whose shares also were offered to
the general public. At the time of the adoption of Rule 6e-2,
therefore, the Commission staff contemplated underlying funds with
public shareholders as well as variable life insurance separate account
shareholders. The Commission staff may have been concerned with the
potentially different investment motivations of public shareholders and
variable life insurance contract owners. There also may have been some
concern with respect to the problems of permitting a state insurance
regulatory authority to affect the operations of a publicly-available
mutual fund and to affect the investment decisions of public
shareholders.
25. For reasons unrelated to the Act, however, Internal Revenue
Service Revenue Ruling 81-225 (September 25, 1981) effectively deprived
most variable annuities funded by publicly-available mutual funds of
their tax-benefited status. The Tax Reform Act of 1984 codified the
prohibition against the use of publicly-available mutual funds as
investment media for variable contracts (including variable life
contracts). Section 817(h) of the Code, in effect, requires that the
investments made by variable annuity and variable life insurance
separate accounts be ``adequately diversified.'' If a separate account
is organized as a unit investment trust that invests in a single fund
or series, then the separate account will not be diversified. In this
situation, however, section 817(h) of the Code, in effect, provides
that the diversification test will be applied at the underlying fund
level, rather than at the separate account level, but only if ``all of
the beneficial interests'' in the underlying fund ``are held by one or
more insurance companies (or affiliated companies) in their general
account or in segregated asset accounts.'' Accordingly, a unit
investment trust separate account that invests solely in a publicly-
available mutual fund will not be adequately diversified. In addition,
any underlying mutual fund, including any fund that sells shares to
separate accounts, in effect, would be precluded from selling its
shares to the public. Consequently, there will be no public
shareholders of the Funds.
26. Applicants state that shared funding by unaffiliated insurance
companies does not present any issues that do not already exist when a
single insurance company is licensed to do business in several or all
states. When insurers are domiciled in different states, it is possible
that the particular state insurance regulatory body in a state in which
one insurance company is domiciled could require action that is
inconsistent with the requirements of insurance regulators in other
states in which other insurance companies are domiciled. The fact that
a single insurer and its affiliates offer their insurance products in
different states does not create a significantly different or enlarged
problem.
27. Applicants further state that shared funding by unaffiliated
insurers is, in this respect, no different than the use of the same
investment company as the funding vehicle for affiliated insurers,
which Rules 6e-2(b)(15) and 6e-3(T)(b)(15) permit under various
circumstances. Affiliated insurers may be domiciled in different states
and be subject to differing state law requirements. Affiliation does
not reduce the potential, if any exists, for differences in state
regulatory requirements. In any event, the conditions set forth below
are designed to safeguard against, and provide procedures for
resolving, any adverse effects that differences among state regulatory
requirements may produce. For example, if a particular state insurance
regulator's decision conflicts with the majority of other state
regulators, the affected insurer(s) will be required to withdraw their
separate accounts' investment from the relevant Fund.
28. Applicants submit that the rights of an insurance company under
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) to disregard the voting
instructions of contract owners do not raise any issues different from
those raised by the authority of state insurance regulators over
separate accounts. Under Rules 6e-2(b)(15) and 6e-3(T)(b)(15), an
insurer may disregard the voting instructions of the contract owners
only with respect to certain specified items. Affiliation does not
eliminate the potential, if any exists, for divergent judgments as to
the advisability or legality of a change in investment policies,
principal underwriter or investment adviser initiated by contract
owners. The potential for disagreement is limited by the requirements
in Rules 6e-2 and 6e-3(T) that the insurance company's disregard of
voting instructions be reasonable and based on specific good-faith
determinations.
29. A particular insurer's disregard of voting instructions,
nevertheless, could conflict with the majority of contract owner voting
instructions. The insurer's action possibly could be different than the
determination of all or some of the other insurers (including
affiliated insurers) that the voting instructions of contract owners
should prevail, and could either preclude a majority vote approving the
change or represent a minority view. If the insurer's judgment
represents a minority position or would preclude a majority vote, then
the insurer may be required, at the affected Fund's election, to
withdraw its separate account's investment from the Fund, and no charge
or penalty would be imposed as a result of such withdrawal.
30. Applicants state that there is no reason why the investment
policies of the Funds would or should be materially different from what
these policies would or should be if the Funds funded only variable
annuity contracts or variable life insurance policies, whether flexible
or scheduled premium policies. Each type of insurance product is
designed as a long-term investment program. The Funds will not be
managed to favor or disfavor any particular Participating Insurance
Company or type of variable contract. There is no reason to believe
that different features of various types of contracts, including the
``minimum death benefit'' guarantee under certain variable life
insurance and variable annuity contracts, will lead to different
investment policies for different types of variable contracts. To the
extent that the degree of risk may differ as between variable annuity
contracts and variable life insurance policies, the differing insurance
charges imposed, in effect, adjust any such differences and equalize
the insurer's exposure in either case. 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 continuation of the Existing Funds and
will facilitate the establishment of Future Funds serving diverse
goals.
31. Applicants do not believe that the proposed sale of shares of
the Funds to Qualified Plans, Other Investors and General Accounts will
increase the potential for material irreconcilable conflicts of
interest between or among different types of investors. In considering
the appropriateness of the requested relief, Applicants have
[[Page 24772]]
analyzed a number of issues as discussed below to assure themselves
that there are either no conflicts of interest or that there will exist
the ability of affected parties to resolve the issues without harm to
the contract owners in the separate accounts, the participants under
the Qualified Plans, the Other Investors or the General Accounts.
32. Applicants considered whether any issues are raised under the
Code or the Treasury Regulations or Revenue Rulings thereunder if
Qualified Plans, Other Investors, General Accounts, variable annuity
separate accounts and variable life insurance separate accounts all
invest in the same underlying Fund. As discussed above, section 817(h)
of the Code imposes certain diversification standards on the underlying
assets of variable annuity contracts and variable life insurance
contracts held in an underlying mutual fund. The Code provides that a
variable contract shall not be treated as an annuity contract or life
insurance, as applicable, for any period (and any subsequent period)
for which the investments are not, in accordance with regulations
prescribed by the Treasury Department, adequately diversified.
33. Treasury Department Regulations issued under section 817(h)
provide that, in order to meet the statutory 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 Regulations contain certain exceptions to this
requirement, one of which permits shares in an underlying mutual fund
to be held by the trustees of a qualified pension or retirement plan
without adversely affecting the ability of shares in the underlying
fund also to be held by separate accounts of insurance companies in
connection with their variable contracts. (Treas. Reg. 1.817-
5(f)(3)(iii)). A second such exception permits the investment manager
and related companies also to invest in the underlying fund. (Treas.
Reg. 1.817-5(f)(3)(ii)). A third such exception permits the general
accounts of insurance companies, and related companies, also to invest
in the underlying fund. (Treas. Reg. 1.817-5(f)(3)(i)). Thus, Treasury
Regulations specifically permit qualified pension and retirement plans,
investment managers and certain affiliates, insurance companies and
certain affiliates and separate accounts to invest in the same
underlying fund. For this reason, Applicants have concluded that
neither the Code nor the Treasury Regulations or Revenue Rulings
thereunder present any inherent conflicts of interest if Qualified
Plans, Other Investors, General Accounts, variable annuity separate
accounts and variable life insurance separate accounts all invest in
the same management investment company.
34. Applicants note that, while there are differences in the manner
in which distributions are taxed for variable annuity contracts,
variable life insurance contracts and Qualified Plans, the tax
consequences of distributions from variable contracts and Qualified
Plans do not raise any conflicts of interest with respect to the use of
the Funds. When distributions are to be made, and the separate account
or the Qualified Plan cannot net purchase payments to make the
distributions, the separate account or the Qualified Plan will redeem
shares of the affected Funds at their respective net asset values. The
Qualified Plan then will make distributions in accordance with the
terms of the Qualified Plan. The life insurance company will surrender
values from the separate account in order to make distributions in
accordance with the terms of the variable contract.
35. Moreover, there is analogous precedent for a situation in which
the same funding vehicle was used for contract owners subject to
different tax rules, without any apparent conflicts. Prior to the Tax
Reform Act of 1984, a number of insurance companies offered variable
annuity contracts on both a qualified and non-qualified basis through
the same separate account. Underlying reserves of both qualified and
non-qualified contracts therefore were commingled in the same separate
accounts. A long-term capital gains tax was incurred in such separate
accounts with respect to the reserves underlying non-qualified
contracts but not with respect to the reserves underlying qualified
contracts. A tax reserve at the estimated tax rate was established in
the separate accounts affecting only the non-qualified reserves. To the
best of Applicants' knowledge, this practice was never found to have
violated any fiduciary standards. Accordingly, Applicants have
concluded that the tax consequences of distributions with respect to
separate accounts and Qualified Plans do not raise any material
irreconcilable conflicts of interest with respect to the use of a Fund.
36. Applicants considered whether, and believe that, it is possible
to provide an equitable means of giving voting rights to separate
account contract owners, Qualified Plans, Other Investors and General
Accounts. In connection with any meetings of shareholders, each Fund or
its transfer agent will inform each shareholder, including each
Participating Insurance Company (with respect to each of its separate
accounts and its general account), Qualified Plan, Other Investor and
General Account of its share ownership in the Fund. Each Participating
Insurance Company will then solicit voting instructions in accordance
with Rules 6e-2 and 6e-3(T), as applicable. So long as the Commission
interprets the Act as requiring Participating Insurance Companies to
pass-through voting privileges to variable contract owners whose
contracts are funded through registered separate accounts, each
Participating Insurance Company will vote shares of a Fund held in its
separate accounts in a manner consistent with voting instructions
timely-received from contract owners and will vote shares of the Fund
held in its separate accounts for which no voting instructions from
contract owners are timely-received, as well as shares of the Fund
which the Participating Insurance Company itself owns, in the same
proportion as those shares of the Fund for which voting instructions
from contract owners are timely-received. MSS and its affiliates will
vote their shares of a Fund in the same proportion as all variable
contract owners having voting rights with respect to the relevant Fund
or in such manner as may be required by the Commission or its staff.
Shares held by Qualified Plans will be voted in accordance with
applicable law. The voting rights that are provided to Qualified Plans
with respect to Fund shares would be no different from the voting
rights that are provided to Qualified Plans with respect to shares of
publicly-available funds.
37. Applicants considered whether a ``senior security,'' as such
term is defined under section 18(g) of the Act, is created with respect
to any variable contract owner as opposed to a plan participant under a
Qualified Plan, an Other Investor or a General Account. Applicants
concluded that the ability of the Funds to sell their shares directly
to Qualified Plans, Other Investors and General Accounts does not
create a senior security. A ``senior security'' is defined under
section 18(g) of the Act to include ``any stock of a class having
priority over any other class as to distribution of assets or payment
of dividends.'' Applicants submit that, regardless of the rights and
benefits of participants under Qualified Plans or contract owners under
variable contracts, the Qualified Plans, separate
[[Page 24773]]
accounts, Other Investors and General Accounts have rights only with
respect to their respective shares of the Fund. They only can redeem
such shares at net asset value. No shareholder of a Fund has any
preference over any other shareholder with respect to distribution of
assets or payment of dividends.
38. Applicants considered whether there are any conflicts between
the contract owners of separate accounts and the participants under
Qualified Plans, the Other Investors or the General Accounts with
respect to the state insurance commissioners' veto powers (direct with
respect to variable life and indirect with respect to variable
annuities) over investment objectives. The basic premise of shareholder
voting is that not all shareholders agree with a particular proposal.
This does not mean that there are any inherent conflicts of interest
between shareholders. The state insurance commissioners have been given
the veto power in recognition of the fact that insurance companies
cannot simply redeem their separate accounts out of one fund and invest
in another. Time-consuming, complex transactions must be undertaken to
accomplish such redemptions and transfers. On the other hand, the
trustees of Qualified Plans can quickly make the decision to redeem and
then implement the redemption of their plans' shares from the Funds and
reinvest in another funding vehicle without the same regulatory
impediments, or, as is the case with most Qualified Plans, even hold
cash pending suitable investment. Based on the foregoing, Applicants
have concluded that, even if there should arise issues where the
interests of contract owners and Qualified Plans are in conflict, these
issues can be resolved almost immediately in that the trustees of the
Qualified Plans can, on their own, redeem shares out of the Funds.
Other Investors and General Accounts can similarly redeem their shares
out of the Funds and make alternative investments at any time.
39. Finally, Applicants considered whether there is a potential for
future conflicts of interest between Participating Separate Accounts
and Qualified Plans created by future changes in the tax laws.
Applicants do not see any greater potential for material irreconcilable
conflicts arising between the interests of participants under Qualified
Plans and contract owners of Participating Separate Accounts from
possible future changes in the federal tax laws than that which already
exists between variable annuity contract owners and variable life
insurance contract owners.
40. Applicants submit that permitting the sales of a Fund's shares
to Other Investors and General Accounts in compliance with the Treasury
Regulations will enhance Fund management without raising significant
concerns regarding material irreconcilable conflicts. Section 14(a) of
the Act generally requires that an investment company have a net worth
of $100,000 upon making a public offering of its shares. Initial
capital may also be necessary in connection with the creation of new
series of shares and the voting of initial shares of such series on
matters requiring shareholder approval. Potential sources of initial
capital for a Fund are Other Investors or General Accounts. Any of
these entities may have an interest in making the capital expenditure
and in participating with the Fund in its organization. However, the
provision of seed capital or the purchase of Fund shares by Other
Investors or General Accounts may be deemed to violate the exclusivity
requirements of Rule 6e-2(b)(15) or Rule 6e-3(T)(b)(1) under the Act.
41. Applicants anticipate that such investment in a Fund by Other
Investors or General Accounts will be made in compliance with the
Treasury Regulations. Given the conditions of Treas. Reg. 1.817-5(f)(3)
and the harmony of interest between a Fund, on the one hand, and Other
Investors and General Accounts, on the other, Applicants submit that
little incentive for overreaching exists. Furthermore, such investment
should not implicate the concerns discussed above regarding the
creation of material irreconcilable conflicts. Rather, permitting
investment by Other Investors or General Accounts will permit the
orderly and efficient creation and operation of Funds.
42. Applicants state that various factors have limited the number
of insurance companies that offer variable annuity and variable life
insurance contracts. These factors include the costs of organizing and
operating a funding medium, the lack of expertise with respect to
investment management (principally with respect to stock and money
market investments), and the lack of name recognition by the public of
certain insurers as investment experts with whom members of the public
feel comfortable entrusting their investment dollars. For example, 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.
43. Applicants believe that the use of the Funds as common
investment media for variable contracts, as well as for Qualified
Plans, would reduce or eliminate these concerns. Mixed and shared
funding, including extended mixed and shared funding, also should
provide several benefits to variable contract owners by eliminating a
significant portion of the costs of establishing and administering
separate funds. Participating Insurance Companies and Qualified Plans
will benefit not only from the investment and administrative expertise
of the Funds' investment advisers and subadvisers, but also from the
cost efficiencies and investment flexibility afforded by a large pool
of funds. Therefore, making the Funds available for mixed and shared
funding will encourage more insurance companies to offer variable
contracts, and this should result in increased competition with respect
to both variable contract design and pricing, which can be expected to
result in more product variation and lower charges. Mixed and shared
funding, and extended mixed and shared funding, also will result in a
greater amount of assets available for investment by the Funds, thereby
benefiting contract owners through greater diversification and by
making the addition of Future Funds more feasible.
44. Applicants submit that, regardless of the type of shareholder
in any of the Funds, the investment advisers and subadvisers are or
will be contractually obligated to manage each Fund solely and
exclusively in accordance with that Fund's investment objectives and
restrictions as well as with any guidelines established by the Board of
Trustees of MIT, or by the board of directors or trustees of any Future
Fund that is not a series of MIT, as the case may be (each such board,
together with the Board of Trustees of MIT, a ``Board''). With respect
to each Fund, the investment advisers and subadvisers work with a pool
of money and do not take into account the identity of the shareholders.
Thus, the Existing Funds are, and any Future Fund will be, managed in
the same manner as any other mutual fund.
45. Applicants see no significant legal impediment to permitting
mixed and shared funding and extended mixed and shared funding.
Separate accounts organized as unit investment trusts historically have
been employed to accumulate shares of mutual funds which have not been
affiliated with the depositor or sponsor of the separate account, and
Applicants believe, as indicated above, that mixed and shared funding
and extended mixed and shared funding will have no adverse federal
income tax consequences.
[[Page 24774]]
46. Applicants note that the Commission has issued numerous orders
permitting mixed and shared funding and extended mixed and shared
funding as well as permitting sales of fund shares in such context to
investment advisers, the general accounts of insurance companies and
their affiliates. Applicants' proposal for mixed and shared funding and
extended mixed and shared funding as well as sales of fund shares in
such context to Other Investors and General Accounts complies in all
material respects with the same conditions consented to by the
applicants for such orders. Therefore, granting the exemptions
requested herein is in the public interest and, as discussed above,
will not compromise the regulatory purposes of sections 9(a), 13(a),
15(a), or 15(b) of the Act or Rules 6e-2 or 6e-3(T) thereunder.
Applicants' Conditions
Applicants consent to the following conditions if the Commission
considers them appropriate in granting the order requested herein:
1. A majority of the Board of each Fund will consist of persons
(``directors'') who are not ``interested persons'' of that Fund (the
``Disinterested Directors''), as defined by section 2(a)(19) of the
Act, and the rules thereunder, 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 director,
then the operation of this condition will be suspended: (a) For a
period of 90 days if the vacancy or vacancies may be filled by the
directors; (b) for a period of 150 days if a vote of shareholders is
required to fill the vacancy or vacancies; or (c) for such longer
period as the Commission may prescribe by order upon application or by
future rule.
2. Each Board will monitor each of its Funds for the existence of
any material irreconcilable conflict between and among the interests of
the contract owners of all separate accounts, the participants under
the Qualified Plans, the Other Investors and the General Accounts
investing in each such Fund and determine what action, if any, should
be taken in response to such conflict. A material irreconcilable
conflict may arise for a variety of reasons, including: (a) An action
by any state insurance regulatory authority; (b) a change in applicable
federal or state insurance, tax, or securities laws or regulations, or
a public ruling, private letter ruling, no-action or interpretative
letter, or any similar action by insurance, tax, or securities
regulatory authorities; (c) an administrative or judicial decision in
any relevant proceeding; (d) the manner in which the investments of the
Fund are being managed; (e) a difference in voting instructions given
by variable annuity contract owners, variable life insurance contract
owners and trustees of Qualified Plans; (f) a decision by a
Participating Insurance Company to disregard the voting instructions of
contract owners; or (g) if applicable, a decision by a Qualified Plan
to disregard the voting instructions of its participants.
3. In the event that a Qualified Plan ever should become an owner
of 10 percent or more of the assets of a Fund, such Qualified Plan will
execute a fund participation agreement with that Fund which will
include agreement to comply with the conditions set forth herein, to
the extent applicable. A Qualified Plan will execute an application
with each Fund that contains an acknowledgment of this condition at the
time of the Qualified Plan's initial purchase of shares of such Fund.
4. Any Participating Insurance Company (on behalf of itself, its
separate accounts, and any of its affiliates investing in a Fund), any
Qualified Plan that executes a fund participation agreement upon
becoming an owner of 10% or more of the assets of a Fund, and any
investment adviser or subadviser to a Fund which is an Other Investor
(each on behalf of itself and any of its affiliates (other than a
Participating Insurance Company) investing in the Fund) (collectively,
the ``Participants'') will report any potential or existing conflicts
to the Board of the relevant Fund. The Participants 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 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 to inform the Board whenever it has
determined to disregard plan participant voting instructions. The
responsibility to report such information and conflicts to and to
assist the Board will be a contractual obligation of all Participating
Insurance Companies and Qualified Plans investing in a Fund under their
agreements governing participation in the Funds, and these agreements
will provide that these responsibilities will be carried out with a
view only to the interests of the contract owners and plan
participants, as applicable.
5. If it is determined by a majority of the Board of a Fund, or a
majority of its Disinterested Directors, that a material irreconcilable
conflict exists with respect to that Fund, then the relevant
Participant, at its own expense and to the extent reasonably
practicable (as determined by a majority of the Disinterested
Directors), will take whatever steps are necessary to remedy or
eliminate the material irreconcilable conflict, including: (a) In the
case of a Participating Insurance Company, withdrawing the assets
allocable to some or all of its separate accounts from the Fund and
reinvesting such assets in a different investment medium, including
another Fund, or submitting the question as to whether such segregation
should be implemented to a vote of all affected contract owners and, as
appropriate, segregating the assets of any appropriate group (i.e.,
variable annuity contract owners or variable life insurance contract
owners of the Participating Insurance Company) that votes in favor of
such segregation, or offering to the affected contract owners the
option of making such a change; (b) in the case of a Qualified Plan,
withdrawing the assets allocable to the Plan from the Fund and
reinvesting such assets in a different investment medium, including
another Fund; and (c) establishing a new registered management
investment company or managed separate account. If a material
irreconcilable conflict arises because of a decision by a Participating
Insurance Company to disregard contract owner voting instructions, or,
if applicable, a decision by a trustee of a Qualified Plan to disregard
plan participant voting instructions, and that decision represents a
minority position or would preclude a majority vote, then the
Participating Insurance Company or Qualified Plan may be required, at
the Fund's election, to withdraw its investment in the Fund, and no
charge or penalty will be imposed as a result of such withdrawal. To
the extent permitted by applicable law, the responsibility to take
remedial action in the event of a Board determination of a material
irreconcilable conflict and to bear the cost of such remedial action
will be a contractual obligation of all Participating Insurance
Companies and Qualified Plans under their agreements governing
participation in the Funds, and such agreements will provide that these
responsibilities will be carried out with a view only to the interests
of contract owners and plan participants, as applicable.
[[Page 24775]]
For purposes of this Condition 5, a majority of the Disinterested
Directors will determine whether or not any proposed action adequately
remedies any material irreconcilable conflict, but, in no event will
MIT, any Fund or MSS (or any other investment adviser to a Fund), as
relevant, be required to establish a new funding medium for any
variable contract. No Participating Insurance Company will be required
by this Condition 5 to establish a new funding medium for any variable
contract if an offer to do so has been declined by the vote of a
majority of the contract owners materially and adversely affected by
the material irreconcilable conflict. Further, no Qualified Plan will
be required by this Condition 5 to establish a new funding medium for
the Plan if: (a) A majority of its participants materially and
adversely affected by the irreconcilable material conflict vote to
decline an offer to do so, or (b) pursuant to applicable law and
governing plan documents, the Qualified Plan makes such decision
without a vote of plan participants.
6. A Board's determination of the existence of a material
irreconcilable conflict and its implications will be made known in
writing promptly to all Participants.
7. Participating Insurance Companies will provide pass-through
voting privileges to all variable contract owners whose contracts are
funded through registered separate accounts so long as the Commission
continues to interpret the Act as requiring such pass-through voting
privileges. Accordingly, each Participating Insurance Company, where
applicable, will vote shares of a Fund held in its separate accounts in
a manner consistent with voting instructions timely-received from
contract owners. Each Participating Insurance Company will vote shares
of a Fund held in its separate accounts for which no voting
instructions from contract owners are timely-received, as well as
shares of a Fund which the Participating Insurance Company itself owns,
in the same proportion as those shares of the Fund for which voting
instructions from contract owners are timely-received. Each
Participating Insurance Company will be responsible for assuring that
each of its separate accounts investing in a Fund calculates voting
privileges in a manner consistent with other Participating Insurance
Companies investing in that Fund. The obligation to calculate voting
privileges in a manner consistent with all other separate accounts
investing in a Fund will be a contractual obligation of all
Participating Insurance Companies under their agreements governing
participation in that Fund. Trustees of Qualified Plans will vote
shares held by Qualified Plans in accordance with applicable law and
governing plan documents.
8. As long as the Commission continues to interpret the Act as
requiring pass-through voting privileges to be provided to variable
contract owners, MSS and any of its affiliates will vote their shares
of any Fund in the same proportion as all variable contract owners
having voting rights with respect to the relevant Fund or in such other
manner as may be required by the Commission or its staff.
9. Each Fund will comply with all provisions of the Act requiring
voting by shareholders (which for these purposes, will be the persons
having a voting interest in shares of the relevant Fund), and, in
particular, each Fund will either provide for annual meetings (except
to the extent that the Commission may interpret section 16 of the Act
not to require such meetings) or comply with section 16(c) of the Act
(although Existing Funds are not, and Future Funds will not be, the
type of trust described in the section 16(c) of the Act), as well as
with section 16(a) of the Act and, if and when applicable, section
16(b) of the Act. Further, each Fund will act in accordance with the
Commission's interpretation of the requirements of section 16(a) with
respect to periodic elections of directors and with whatever rules the
Commission may promulgate with respect thereto.
10. Each Fund will notify all Participating Insurance Companies and
all Qualified Plans investing in the Fund that disclosure in separate
account prospectuses or any Qualified Plan prospectuses or other Plan
disclosure documents regarding potential risks of mixed and shared
funding may be appropriate. Each Fund will disclose in its prospectus
that: (a) Shares of the Fund may be offered to insurance company
separate accounts for both variable annuity and variable life insurance
contracts and to Qualified Plans; (b) due to differences in tax
treatments and other considerations, the interests of various contract
owners participating in the Fund and the interests of Qualified Plans
investing in the Fund may conflict; and (c) the Fund's Board will
monitor events in order to identify the existence of any material
irreconcilable conflicts and determine what action, if any, should be
taken in response to any such conflict.
11. If, and to the extent that, Rule 6e-2 and Rule 6e-3(T) under
the Act are amended, or proposed 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 in this Application, then the Funds and/or the
Participating Insurance Companies, as appropriate, will take such steps
as may be necessary to comply with Rules 6e-2 or 6e-3(T) as amended, or
Rule 6e-3 as adopted, as such rules are applicable.
12. The Participants, at least annually, will submit to the Board
of each relevant Fund such reports, materials, or data as such Board
reasonably may request so that the Board may fully carry out the
obligations imposed upon it by the conditions contained in this
Application, and said reports, materials, and data shall be submitted
more frequently if deemed appropriate by the Board. The obligations of
the Participating Insurance Companies and Qualified Plans to provide
these reports, materials, and data to the Board will be a contractual
obligation under their agreements governing participation in the Funds.
13. All reports of potential or existing conflicts received by the
Board of a Fund, and all action by the Board 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 or other appropriate records
of the Board, and such minutes or other records shall be made available
to the Commission upon request.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-11412 Filed 5-7-03; 8:45 am]
BILLING CODE 8010-01-P