SEC Division of Investment Management staff letter: American Council of Life Insurance

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 20549

ACT ~ ol--40
,
DIVISION OF
SECTION
INVESTMENT MANAGEMENT
RULE :i~.. - --
PUBLIC C"
AVAILABILIT G ~. J

June 20, 1995
Carl B. Wilkerson, Esq.
Senior Counsel
American Council of Life Insurance
1001 Pennsylvania Avenue, N.W.

Washington, D.C. 20004-2599

Re: Payment of Filing Fees Under the Securities. Act of 1933 by Investment Companies Funding Variable Insurance Contracts Dear Mr. Wilkerson:

Enclosed is our response to your letter of April 14, 1995. By incorporating our answer into the enclosed photocopy of your letter, we avoid having to recite or summarize the facts involved. In any future correspondence on this matter, please refer to our Reference No. IP-3-95. Sincerely, ,4¡J~.tø:cu/ i Brenda D. Sneed

Assistant Director

Enclosures

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RESPONSE OF THE OFFICE OF Our Ref. No. IP-3-95

American Council of INSURANCE PRODUCTS
DIVISION OF INVESTMENT MANAGEMENT Life Insurance Your letter dated April '4, , 995 asks the Division to clarify the application of Rule 24f-2 under the Investment Company Act of 1940 (" 1940 Act") to certain two tier arrangements used in offering variable insurance contracts for sale to investors. ii Variable insurance contracts typically are offered through two tier

arrangements in which contract premiums are pooled in an insurance company separate account. organized as a unit investment trust ("UIT"). The UIT separate

account. which is not actively managed and acts as a conduit, invests these assets in an underlying management investment company ("Underlying Fund"). Both the UIT separate account and the Underlying Fund register as investment companies

under the '940 Act. Interests in the UIT and the Underlying Fund are registered under the Securities Act of 1933 ("1933 Act"). You state that, in addition to sellng shares to affilated registered separate accounts, Underlying Funds also may sell shares to: (1) separate accounts of unaffilated insurance companies; (2) separate accounts that are exempt from registration under the , 940 Act, or whose interests are exempt from registration under the 1933 Act, or both; 21 and (3) pension plans. ~I Based on the facts presented, the Division would not object if an Underlying Fund calculates and pays 1933 Act registration fees pursuant to Rule 24f-2 under the 1940 Act based on all of its sales and redemptions of securities during the ii Rule 24f-2 under the 1940 Act permits an investment company offering its

shares continuously (such as a management investment company or a unit investment trust) to register an indefinite number of securities under the 1933 Act at the time of filng an initial registration statement. Thereafter, the company must of its securities by filing an annual Rule 24f-2 notice under the '940 Act stating the securities sold in the past fiscal year. With the annual register a definite amount

notice, the company must pay the appropriate filing fee calculated as prescribed by
section 6(b) of the 1933 Act.
21 Separate accounts may be exempt from registration under the 1940 Act if they are excluded from the definition of an investment company under either Section

3(c)(1) or Section 3(c)(11) of the 1940 Act. Section 3(c)(1) of the 1940 Act excludes private investment companies, and Section 3(c)(1 1) of the 1940 Act excludes certain stock bonus, pension and profit sharing trusts, from the definition of an investment company. Interests in separate accounts may be exempt from registration. pursuant to Section 3(a) of the 1933 Act if the interest is issued under an insurance company contract offered in connection with certain stock bonus, pension, profit sharing, or annuity plans qualified under certain provisions of the

Internal Revenue Code.
3,1 Underlying Funds offering interests to insurance company separate accounts are permitted to offer interests to trustees of qualified pension or retirement plans

adversely affecting the status of the insurance contracts as annuity, life insurance or endowment contracts under Federal tax laws. Treas. Reg. § 1.817 5(f)(3)(iii) (1989).

without

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Underlying Fund's previous fiscal year 41 exceot sales to and redemptions from insurance company separate accounts that issued securities on which registration fees were paid to the Commission pursuant to Section 6(b) of the 1933 Act. Our position is expressly limited to facts and circumstances involving variable

insurance contracts offered through a two tier arrangement, as discussed in your letter. Different facts or representations may require a different conclusion.

~t!~
Assistant Direètor

June 20, 1995
4/ We note that Rule 241-2 does not contain a minimum $100 fee requirement, as does Section 6(b) of the 1933 Act.

TO 99429659 P.02 AM COC 1 L CF L1 FE 1 NS t?R-19~1995 16:25 FROM

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American Council of Ufe Insuranc
Carl 6. Witkarson
Senior Cou~l
April 14, 1995
Brenda D. Sneed, Assistant Director
Offce of Insurance Products

Division of Investment Management
Secunties and Exchange Conunission

450 5th Street N.W.
Washinl,l'on, D.C. 20549
Rule 24f-2 to Investment Company Shares Sold to Varable Contract Separate Accounts Organzed as Ullt Investment Truts RE: Application of

Dear Ms. Sneed:

Than you for inviting the COWlcils input on the development of new I p'rocedures for filing notices required by Rule 24f-2 under the Investment Company \ :~.. Äct of 1940. On Febniar 17 1995, tle Offce of Insurce Products anounced th~t the Çoinmission did not object to a propoaed action PY. an insurance comQaIY w1th vanable contract separate accoWlts organzed as unt investrent trts wmch invest in~i.nder1~g Ït1vestment companies to pay registrtion fees at only one tier of the two tier organizational strctue. TIie anouncement indicated that "the Division (of Investment Management) advised th~ COJlssion tl1at it believes 1.at the proposed ~ction (~y the insurce companylis consistent with the Conmss10n's practice ofmterpretig the fee requirements under the 1933 Act in analogous situtions to 'prevent registrants from paying multiple fees 011 the same amount l-aid by investors. AdditionålYJ the conunWlicwe indicated that the "compan'y~-lroposed action wil p'rovide consistent treatment for fees paid wider a two.tier UlT separate account unõerlying fud strcture and a one-tier separate account strcfue for funding varable insurce contracts. It wil also be consistent with the treatment afforded public fuds offered

in a two-tier master/feeder arrgement. tt The anOWlcement also recogned that other insurance companies "willollow the company's lead in paying registrtion fees under the 1933 Act as provided in Rule 24f.241 and limiteà the relieTto two.tier strctures where the underlying fud sells its shares exclusively to that compan's separate accowits. The life insurance industr greatly support the elimtion of duplicate registration fees as pennitted in the Februar 17 communque. In discussions with Division of Investment Management staf over the past 18 months, the Council and relief from payment several member comlanies recòrnended the development of

of registration fees a boil tiers ofa unt investment trst strctue. We commend 1001 PENNsvV,A1A AvtNVl. N.W. WAHINGTON. D.C. 20.25~

202/62¿.U1l FACMILE 202/62¿.2319

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-2- the.SEC's r~sponsiveness and fle,\ibiIty in addressing ths importt matter. The action pubhcized on F:ebru 17 IS a cçmstrctive fist step in providing treatment paralle to other two-tier structures subject to IDe federa secunties laws. . We recognize that the position anounced on Febni 17 was limted to the facts presef!ted to the SEC Comiissianers for revitw. .The efforts of your offce to develop relief from duphcate remstration fees for Situtions dierent from those :Qres~nted to the Conussiop wi1 make ths issae more fully. and eq\Utaly usefu. Our inclustr grtatly appreciates your efforts to interpret ana apply the fedet' secunties laws 111 ? reasonallle~ evenhanded marer in recognllon of evo1vig markets, competition orgaizatioiiai strctues, product design and system

develop.ments. The eommission's action p'roviaes a prudent regulatory position concordant with the SEC's application of the securties laws concernng two-tier master/feeder argements. A Revised Policy Position . The Febrvar 17. statçment evidenced an 9peratig principle, which we

interpret to be (i) a registration fee should be paid not more th once for each dollar going into a varable contract fuded by a i:~stered separe account, irespective of its orgaizationa stIptue, and (ii) a anÕIl reguatory 'polipy shpUld app'ly

unde~ the federal secunties laws concerng the paY.ent of r~tration fees by . fuctionally analogous entities. We also W1derstad that the Offce of Insurce ''''~:' Products staf inonnally clared that the position anounced on Febii 17 was $ i 00 fee for underlyig investment fuer interpreted to requie only the mium

companies that sell their shares exclusively to uir separate accounts of afiated insurance companies that fund varable insmance contracts. We also understad that the Februar 17 position is not affected if an investment compaÌy sells shares to

an insurer or its affliates in cormection with obtaining seed money for establishi the investment company. Additional Fact Patterns That Should be Included Within the Scope of Interpretive Relief Bas~d upon the operåt.ing priciple evidence~ in the Fe~ru 17 staement. the followiag hst of factual situtions sl10uld be entitled to equivalent reguatol' relief. The 11st set fort below reflects the most common situations tht exist for separte accounts organized as unt investment trsts. These examp'les are not,

bowev~r. intepded to present an exclusive list. Lik~wise, whtlt we have used a . these fonnat involvinß five examples, we assume tht vaous conditions of

examples could- exist in coiiection with a single underlying fud. There may be other examples which we have not identified, or new situuons that wi evolve in the futUf.e that should be equally entitled to relief. In these cases, registrants will continue to be able to seek c1anfication for situtions that may deverop or for situations not encompassed in the factual situtions set fort below. ~

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1. Arangements.where.investment com,any shares are. sold to Ul sep'arte accounts fwidi.ng vanable contrcts, includiiig separte accounts excluded
   from th~ defimtion ofinvestment com~any puruat to either Section 3(0)(1) or Sectian 3( c)( 11) of the 1I1~estment Conmany Act of 1940 and exempt frm registration wider the Secunties Act of 1933.
2. Arangements where investment company shares are distrbuted dictly tó
   pensiop plans in addition to any of the arangements described iii item one above.
3. Argements where investment company shares are used to fud Ul .
   . separate accowits whether or not affliated with one another or the investment company sponsor.
4. Arngements where investment company shares which are used to fud UI
   separate accounts that are subject to registrtion fees under the 1933 Act but . are not themselves registered under the-Invesbnent Company Act.
5. Argements where investment company shares that are used to fud
   varable contract separate accounts tlat are not registered under the 1940 Act and where sOnie, but not all, of the interests i~ the separte acCOWlt are required to be registered wiaer the 1933 Act. ~~'i Equitable Solution We recommend a solution that would fairly accommodate these argements wit1un the spirt of the Februar 17 position and the priciple evidenced therein. We suggest that companies be pennitted to pay a $100 registration fee for investment comRany shares underlying registered separte accounts fwdig varable contrcts

together with an adcltionaf registration fee paY1ent totalig 1/29 of 1 % (or other fee reqwred under Section 6(b) of the 1933 Act) of the fud assets attbutable to shares that are issued in circwnstanceswhere no registration fee was paid on the fuds used lIt is the responsibilty of the underlying investment company to compile acurte infonnation regarding the number ofits shares attbutable to (i) parcipants whose interests ar registered under the 19~3 Act or 1940 Act. and (ii) pardcipants whose interests are not registered under the 1933 Act.

2The situation desribed arses, for exple. where Section 3 the 1933 Act exempts (a)(2) of

corporate pension plans frm registration under the 1933 Act, while HR 10 plan interests in such a separate accunt ar required to be regiered \lder the 1933 Act The responsbilty for

compilng informtion as d~cribed in footnote 1 would also apply to this fact pattern.

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TO 99429659 P.BS AM COIL OF LIFE INS .APR-1~1995 16:27 FR -4 to p'urchas~ the i!,vestment company shares. We believe this fee pavrent proposa stnkes a fair, rational balan~e consistent with the Febru 17 notlcé.) . ... TIian y'OU for invitig our input on t1s important mattr, and your attention to our views. The industr greatly appreciates the noteworty effort of the Offce of Insurance Products and tie Division of Investment Management to shepherd ths regulatory reliefthroucl to conclusion. If you have any questions concerning our sUbmlSSJOn, please calL. Sincerely, 'f~ 6. yY~'C.)

Carl B. Wilkerson
CBW ¡pm cc: Ms. Wendy Finck Friedlander

'Some of our members believe that by expanding the Februar 17th communque in tls . fasion the ComrsSÎon will have avoided a situation where a reguatory position related to the payment of its regstration fees could han investors. Without the expanded relic£: insurance companies may decde to restructure their underlying funds to exclude any shaeholder who would trier the payment of double registration fees for all shareholders. Tls contraction of the shareholder base would be inconsistent with the principles wruch motivated the Commission's staf to grant "mixed and shared" funding relie£: such as attaning economies of sce.