SEC Division of Investment Management staff letter: College Retirement Equities Fund Real Estate Account — SEC — US

--

PUBLiè JUL 2 2 1993

RESPONSE OF THE OFFICE OF Our Ref. No. IP-6-93 INSURACE PRODUCTS CREF Real Estate Account DIVISION OF INVESTMENT MANAGEMENT Your letters of June 26, 1991 and December 18, 1990, as

supplemented by your letter of October 15, 1992 and discussions

with the staff on October 16, 1992 and August 14, 1991, request

assurance that we would not recommend enforcement action to the

Commission against the College Retirement Equities Fund

("CREF") l. if CREF establishes a portfolio that invests

primarily in real property (the "RE Account") without registering

the portfolio under the Investment Company Act of 1940 (the

"Investment Company Act"). Y As explained in your letters, the

RE Account will be part of the CREF corporate entity and will be

managed by CREF' s Board of Trustees. You intend, however, to

provide for the legal segregation of the assets held in the RE

Account from the assets held in CREF' s other portfol ios. 1/

For a variety of reasons, you propose establ ishing the RE

Account as an unregistered portfolio under CREF rather than as

1/ CREF is a nonprofit membership corporation subject to the

Not-For-Profit corporation Law of New York State. It was

established by a special act of the New York State Legislature

and was formed for the purpose of providing retirement benefits

for the employees of certain nonprofit organizations. CREF is

registered under the Investment Company Act as an open-end

diversified management investment company.

Y Your request to establish an unregistered real estate portfolio raised a number of fundamental concerns regarding

investment company regulation which you addressed over a period

of two years. As you offered new and additional arguments for

your position, we attempted to incorporate these arguments in our

continuing analysis of the issues over this period.

Understandably, this has been a lengthy process.

1/ At our October 15, 1992 meeting, the staff expressed its

concern that assets held in CREF' s existing accounts may be

subject to the claims of the RE Account. s unsecured creditors.

In response, you proposed amending CREF' s Charter and

Constitution to reflect the addition of the following sentence:

with respect to the establishment of a fund which

invests primarily in real property or direct or

indirect interests therein, including without

limitation, income-producing real estate, participating

and non-participating mortgage loans and real property

sale-leaseback transactions (the "Real Estate

Account"), the corporation may provide in the

applicable agreements that income and both unrealized

gains or losses from the Real Estate Account's assets

will be credited to or charged against the Real Estate

Account without regard to the income, gains and losses

of the corporation's other funds.

part of the Teachers Insurance and Annuity Association of America

("TIM") !/ or as an independent legal entity. Among other

things, you assert that establ ishing the RE Account as part of

TIM would significantly increase the level of mortality and

expense risk charges participants in the RE Account must pay.

You further explain that the alternative of creating a separate

investment company would require the RE Account to have its own

tax exempt status under the Internal Revenue Code, a procedure

you assert is time consuming and very costly.

We are unable to assure you that we would not recommend

enforcement action to the Commission if CREF proceeds as

proposed. We are not persuaded by your arguments that a _

registered investment company, consistent with the Investment Company Act and the rules thereunder, may create a real estate

investment portfolio. You have offered no precedent to support

this argument nor considered whether it would be appropriate for

any other registered investment company to establish an

unregistered investment portfolio. In addition, your arguments

concerning the administrative and financial costs of establishing

the RE Account, either as a separate legal entity or as a

separate account of TIM, do not justify the relief you request.

We are also not convinced that CREF may insulate the RE

Account from its investment company operations to the same extent

insurance companies insulate their separate accounts under state

law. The amendments you propose to CREF' s Charter and

Constitution do not provide us with enough assurance that CREF's

existing accounts will not be chargeable with liabilities arising

from the RE Account.

The Commission and the staff in the past have considered

CREF's unique structure and history in connection with CREF' s

requests for relief from the Investment Company Act. In those

si tuations, however, failure to grant the requested reI ief would

have been inimical to CREF' s established operations and the

interests of! contract owners. CREF' s proposal to establ ish an

unregisteredi real estate portfolio, in our view, does not present

the same concerns.

A/~c.ß~
Thomas E. Bisset

Senior Attorney

Office of Insurance Products

!/ TIM is a companion organization of CREF. Like CREF, TIM

offers fixed annuity contracts and insurance benefits to

employees of certain nonprofit organizations.

AL:'l / ~ r.- U-l / '"7 -y U

SECTION , .1 (a,lJ ..~,!"~~ d''L~ í:/l" "='"
RULE !i: It,. Pi UNITED STATES r~ \V;l ~ ~(~:~l SECURITIES AND EXCHANGE CRlTY ¿) )-~d -9¿f ~. WASHINGTON. D.C. 20549 July 22, 1993

steven B. Boehm, Esq.

Sutherland, Asbill & Brennan

1275 Pennsylvania Avenue, N.W.

Washington, D. C. 20004-2404

Re: CREF Real Estate Account

Enclosed is our response to your letters of October 15,

1992, June 26, 1991 and December 18, 1990. By incorporating our

answer into the enclosed photocopies of your letters, we avoid

having to recite or summarize the facts involved.

In any future correspondence on this matter, please refer to our Reference No. IP-6-93. Sincerely, ~ ll.)~ ..t-, A ~l\ L ~ Q...-'- ;. '\

Wendell M. Far~"
Deputy Chief
Off ice of Insurance Products

Enclosure

SUTHERLAND, ASBILL & BRENNAN
1275 PENNSYLVANIA AVENUE, N. W.
CABLE; SUTAB WASHINGTON 'WASHIXGTOX, D. C. 2004-2404 999 PEACHTREE STREET. N.E. TELEX; 89-501 ATLANTA, GEORGIA 30309-3996

FACSIMILE: (202) 383-0100 14041853-8000 12021637-3593 PAUL J. MASON DIRECT LINE: (202) 383-0147

October 15, 1992

BY MESSENGER

/i .-1: / /,' /~;'_d;':c; J
Clifford E. Kirsch, Esquire / / .IJ.. . ,. /G;.
Assistant Director (/.,.//",

Division of Investment Management

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D. C. 20549
Re: College Retirement Equities Fund -- Proposed Real

Estate Account

Dear Mr. Kirsch:
As we discussed, this letter provides some background

as to the no-action letter request of the College Retirement

Equities Fund concerning the addition of an investment portfolio

that invests primarily in real property (the "RE Account" or

"Account"). As you will recall, CREF is seeking to establish and

operate the Account outside the definition of an investment

company in Section 3 of the Investment Company Act of 1940 (the

"1940 Act") and to not treat the Account as being part of its

regulated investment company operations. As you know, there are

practical reasons why a real estate fund cannot operate subject

to the 1940 Act and to the best of our knowledge, there are no

such funds that do.

On December 18, 1990, we initially submitted a no-

action letter request on behalf of CREF in connection with its

proposed implementation of the RE Account. In its letter of

February 27, 1991, the Staff responded by outlining certain

preliminary concerns and questions it had about the operation of

the proposed Account. We, in turn, responded to the specific

comments in that letter in a letter dated June 26, 1991.

On August 14, 1991, Charles stamm and Peter Clapman of

CREF, and Steve Boehm and I, met with you, Heidi Stam, Barry

Miller and Tom Bisset to further discuss the proposed RE Account.

At that time, it was acknowledged that the issues being raised

were novel, and that even the indirect precedent in the area was

not particularly relevant. We explained that CREF was choosing

this unique approach (rather than, for example, utilizing a

Clifford E. Kirsch, Esquire

October 15, 1992

separate account, of TIM) to enable CRF to pursue its policy of providing benefits at the lowest cost possible. We pointed out

that under the RE Account approach, CREF could provide this investment al ternati ve with a level of aggregate fees that was lower than virtually anyone else's in the industry. It was

explained further that if a TIM separate account approach were

utilized, TIM would be required under New York insurance law to

impose a mortality expense risk-type charge, which necessarily

would be more costly to participants than CREF' s current approach

based on actual mortality experience, and does not involve

additional mortality charges against assets during either the

accumulation or the annuity phase. We also briefly explained

that CREF carefully studied other possible structures and found

each to be inappropriate for one material reason or another.

At our earlier meeting, the Staff expressed concern

about the issue of the insulation that participants in CREF' s

investment company accounts would have vis-a-vis the RE Account

even if it were not deemed part of CREF' s investment company

operation. You indicated that the Staff needed some level of

assurance that insulation existed similar to that provided under

separate account statutes. We indicated at that time that CREF

believed that an opinion of counsel could be obtained from a

major New York law firm to the effect that changes to certain of

CREF's governing documents, appropriately worded, together with

action by the New York State Insurance Department (the

"Department"), would have that effect.

After some discussion, you indicated that if action

were taken with respect to this issue by the Department, and such

an opinion could be obtained, the Staff would be in a position to

more favorably consider our request for relief.

Subsequent to that meeting, CREF commenced a dialogue

wi th the Department concerning the proposed RE Account.

Ul timately, officials of the Department approved amendments to

CREF's charter and constitution that would provide for insulation

between the Account and the rest of CREF' s investment portfolios.

CREF could implement the appropriate changes to those governing

documents, but of course will not do so pending the outcome of

this request for relief.

Following its discussions with the Department, CREF

sought the opinion letter discussed at our August meeting. On

October 5, 1992, that letter was issued by the New York city

office of the law firm of Rogers & Wells. After reciting the

relevant facts and other considerations, that letter concludes that:

Clifford E. Kirsch, Esquire

October 15, 1992

(O)nce the (charter and constitution) Amendments become

effective, if (A) CREF files a statement of operations*

for the Real Estate Account with the Insurance

Department which is approved by the Insurance

Department and is not inconsistent with the exclusive

allocation of income, gains and losses on the Real

Estate Account l s assets to the Real Estate Account and (B) the contract 'with the participants in the Real

Estate Account so provides, then (i) income, gains and

losses from the Real Estate Account i s assets will be

credited to or charged against the Real Estate Account

wi thout regard to the income, gains and losses of CREF i s other investment accounts and (i i) the assets in

CREF's other investment accounts should not be liable

for losses incurred by participants in the Real Estate

Fund.
(* We would note that the Department, as part of the process

of considering these amendments, went through the issues

that are involved in connection with the statement of

operations and was satisfied that CREF would meet the

Department's standards.)
We believe that the foregoing developments are

responsive to the concerns raised by the Staff on the

"insulation" issue. We look forward to discussing this issue

further at our meeting on Friday.

Sincerely,
---- . . ~
Paul' J. Mason

cc: Peter C. Clapman, Esq.

Steven B. Boehm, Esq.

SUTHERLAND. ASBILL & BRENNAN
127S PENNSYLVANIA AVENUE. N. W.
CABLE: SUTAB WASHINGTON 'WASHIXGTOX, D. C. 2004-240-4 999 PEACHTREE STREET, N.£. TELEX: 89-501 ATLANTA. GEORGIA 30309-3996 FACSIMILE: (202) 383-0100 (4041 853-8000 (2021637-3593 STEVEN B. BOEHM DIRECT LINE: (202) 383-0176

October 16, 1992

Ii -f~/r,./) /1, /¿~?~~J (, /1 / /~/" ' ....~.,'~' j. BY MESSENGER

Clifford E. Kirsch, Esquire

Assistant Director

Division of Investment Management

Securities and Exchange Commission

450 Fifth Street, N. W.

Washington, D. C. 20549
Re: College Retirement Equities Fund ("CREF")

Dear Mr. Kirsch:
Pursuant to your request at our meeting this morning,

enclosed is a copy of the opinion letter issued by the law firm

of Rogers & Wells in connection with CREF' s proposed Real Estate

Account.
Please let us know if you require any additJonal information. S.lncerely"
."~i...._--~~::.." . /....
1; '. . / "-,..: /"
..¡ __)~.. ------\ - :tJ '-.. i
Steven B. Boehm

Enclosure cc: Peter C. Clapman, Esq.

Paul J., Mason, Esq.

W..e"ING':CN. ~C. 20=Oe-~au 17:1'7 M 5"'''&11'', N.W. &cy~ 47, "'VCNU!: ..0C:..1i 'lU""ON& (C02) 33'-"'00 75004l-....,.S. ,./I"'Hc;i: 'ACSI.41i.. (CC:Uli 3:1'-0_":1 'l!tL.C,h.O",£ ~3.'-47-e3-l1-00 'T1":X Z-_31l ........UA ~~ "..c:SI..'u: ~3.l--Z-O"'-eo-el 'lIEU: ..1..., ltl,~w ..~ ~ A/'~ 1'lJ1'6'ô-lJ1'.5~

ILL COl.IoAH STREET Tl:'-!:I"HCNI! (¡II; 11"'&-5000 i.O"OON !:C211 S.ii. !:NOI.NO 'l1Ci.&....ONC .--710018-0101 'ACSIMii.i; (1121 &70-S:l7!1

I"ACa.",i.£ ....71-e:ia.ioce

7'lCi.i:x 1~.oe3 ""WI,A 'l£I.£X ..ea USl.w 0 201 /OOAn. "10"&"0.. aTAI::-:
I.CII ..GIEi.s. CA. eooll!-l!iUll
Te:I.:....ONl: :21:1) '00-'000 W"'OI!NS'TA"'S~i: 37 0000 ""..,.iirullT/Io , "AC.,..,U ,lIS' 1I.0-ie~ TI!:L.&li ia_""a IOWI.6.. "COIU...i. IOCl'uai.lc; 0,. OE..,.......

TIE .,... 0.. C ~V-eQ -07-37-1 1- 0 ,...C....,i. ~Q.O.-.7.1I.,.ii-33 October 5, 1992

BY~
Peter c. Clapman, tsg.

Senior Vice President and

Chief Counsel, Investments
College Retirament Equities Fud
730 Third Avenue

New York, New York 10017

Re: College Retirement Equities Fund _

Real Estate Account

Dear Peter:
The College Retirement Equities Fund (frOEFtI) anticipates

establishing and operating a new invest~ent fund that would invest

primarily in real property (the "Real Estate Accountfr). You have

requested our advice concerning the allocation of income, gains and

losses to the Real Estate Account. You have also requested our

. advice as to whether the assets in CRE?' s other investment accounts

would be liable for losses incurred by participants in the Real

Estate Account. SUbj ect to ~~e condi tiona described herein, it is

our opinion that similar to the treatment accorded to sQparate

accounts of New York life insurance companies (i) income, gains and

losses trom L~~ Real Estate Account's assets will be credited to or

charged against the Real Estate Account wit."iout regard to the income, gains and losses of CR' s other investment accounts and

( ii) the assets in CREF' s othsr investment accounts should not be

liable for losses incurred by par-ticipants in the Real Estate

Account.
CREF Was incorporated in 1952 under a special enactment

. of the New York State Legislature. Chapter 124 of the Laws of New

York of 1952 (the "CRF Act"). The CREF Act established the

Charter (the "Charter") of CREF, and provided for the adoption of

a Constitution (the "Constitu'tionlt) and By-laws for the regulation ACC06SF;. WPS

~&c~

Peter C. Clapman
2 October 5, 1992

of the affairs of CREF. CREP is a Tye B Corporation under the New

York Noi:-For-Profit Cor~oration Law (lfNPCtJ') and has elected pursuan~ to Section 103 (a) of ~~e NPCL to have the NPC~ apply to it

in all respects.

Under the CREF Act, as amended, CRY is subj ect to certain Aricles and Sec~ions (Art:icles 1, J, 25 and 74, and

Sections 1212,1217, 1411 and 4230) of the New York Insurance Law

(the "Insurance Lawn), to tho extent not inconsistent with the

Charter, but is exempt from most provisions of the !nsurance Law. Under ,t.i.e current statutory scheme, CREF is therefore not an II insurer" for most purposes of the Insurance Law. CUP is, "however, authorized under Section 8 of its Charter and Article VI,

Section 3 of its Constitution to establish funds with investment

objecti ves and limitations as described in such funds i statements

of operations filed wit.i., and approved by, the Insurance

Department.
CR? is registered with t."'e Securities and EXChange Commission (the "SEC") as an open-end investment company under t."'e Investment Company Act of 1940, as amended (the ni940 Act"), and

operates as a series fund oft.rinq investment options inCluding a

Stock Account, a Bond Market Account, a Money Market Account, a

Social Choice Account and a Global Equities Account (the lIEXistiID

Accounts"). Although the Existing Accounts are subj ect to the 1940 Act and applicable SEC regUlations, WQ understand that it would be

i~practicable for CR to offer its Real Estate Account as a par

ot this series fund becausQ of valuation and redem~tion

requirements under the 1940 Act. The Real Estate Account, howaver,

Would be subject to registration under the Securities Act of 1933

(requiring that the offering to participants b~ through a prospectus) and the reporting requirements of the Securities EXchange Act ot 1934 (governing periodic financial reporting to

account participants).

CUrrently, Section a of tbe Charter and Article VI,
Section J ot the Constitution permit CREF to establish funds with

investment objectives and limitations as described in a statement

of operations tiled wiL"', and approved by, the Insurance

Department. CRF has proposed amendments (the "Amendments") to these Sections of ths Char-car and Constitution to the New York

Insurance Department by addition of L~e following sentence:

t.i th respect to the establishment of a fund which invests primarily in real property or

direct or indirect interests therein,

inClUding without limitation, income-producing

real estate, partiCipating and nonparticipating mortgage loans and real property

sale-leaseback transactions (the "Real Estate

ACC06BFA. WPS

~&c~

Peter C. Clapman
3 October 5, 1992

Account..), -the corporation may provide in the applicable aqreement:s that income and both

realized and u.'"realized gains or loases from

the Real Estate Account · s assets will be

credited to or charged against tne Real Estate

Account wi tlout regar~ to the income, gains

and lOsses ot the corporation's other funds.

Thus, under the Charter and Const! tution if so amended,

CREF would be expressly authorized to establish the Real Estate

Account. However, the Real Estate Account can only be established atter a statement of operations has been tiled with, and approved by, the Insurance Department. The investment obj ecti ves' and limitations tor the Real Estate Account will be those set forth in

such statement of operations. Moreover l if so provided in the

agreements witl participants relating to the Real Estate Account,

t.~e income, gains and losses from the Real Estate Account's assets are to be only credited to or charqeå against the Real Estate

Account. The text of the proposed amendments requires that if the

agreement with the participant: so provides, 10s&.s from the Real

Estate Account will be charged against the Real Estate Account and

i t8 assets. This prohibits such losses froi the Real Estate

Account trom being used to reduce income from the Existing Accounts

(such losses being charged to the Real Estate Account "without

regard to the income, gains and losses of C CREF · s J other funds.") .

Simil~rly, because losses arising from costs, expenses or

liabilities relating to L~e Real Estate Account assets can only be

charged against the Real Estate Account, such losses cannot be

,charged against the assets of the Existing Accounts.

Section 6 of the Charter makes Article 74,

"Rehabilitation, Liquidation, Conservation and DiSSOlution of

Insurers", as amended, applicablQ to CREF flto the extent.. ,not inconsistent with the provisions of (the CREF ActJ ," The CREF Act

constitute.s the Charter. Therefore, the provisions of the proposed

Charter amendment would supersede any inconsistent provision of

ArtiCle 74 relating to the payment of liabilities ot CREF. For

example, the provisions ot the proposed Charter amendment

restricting the charges of losses trom Real Estate Account assets

to the Real Estate Account would supersede the provisions of

Section 7435 relating to priority of distribution ot claims trom

the estate of a lite insurance company in a rehabilitation,

liquidation, conservation O~ ¿issoiu~ion proceeding.

It is also clear that the Insurance Department

understands that the proposed Amendments res~rict Real Estate

Account losses to the assets of the Real Estate Account. In your

letter, dated September 13, 1991, to Mr. Terence Lennon requesting

approval of thG proposed Amendments, you clearly stated that the

Real Estate Account was intended to "operate as a distinct vehicle

ACC06SFA. WP5

~~~

Peter C. Clapman
4 october 5, 1992 and not have any effect on the investient experience ot other accounts witliin the CRF i series i that operate under the 1940 Act" and that such amendment was designed to "expressly provide for the intenàQd insulation of the Real Estate Account trom the 'series' accounts. II Wi th this understanding, and after reviewing and

discussing the proposed Amendments and their effects on the

relationships between the various CREF accounts, the Insurance

Department has found the proposed Amendments to be unobjectionable

(the language typically used by the New York Insurance Department

prior to its approval of CRF Charter and Constitution amendments) .

Thus, once the Amendments become effective, if (A) CRF

files a statement of operations for the Real Estate Account with the Insurance Depar'bent which is approved by the, Insurance Department and is not inconsistent with the exclusive allocation of

income, gains and losses on thè Real Estate Account i s assets to the Real Estate Account and (B) the contract with the participants in

the Real Estate Account so provides, then (i) income, gains and

losses from the Real Estate Account i s assets will be cred! ted to or

charged against the Real Estate Account without regard to the income, gains and losses ofCRF i s other investment accounts and . (1i) the assets in CRF's other investment accounts should not be

liable for losses incurred by participants in the Real Estate Fund.

Sincerely,
0/ if '-ka
ACC06BPA. WPS

SUTHERLA:KD, ASBILL & BREXXAX
1275 PENNSYLVANIA AVENUE. N. W.
CABLE; SUTA8 WASHINGTON 'L.sHI:-GTO:-, D. C. 2000-1-2-10"1. 999 PEACHTREE STREET. N.£. TELEX: 89-501 ATLANTA. GEORGIA 30309-3996 FACSIMILE; (202) 383-0100 1404' 853-8000 (202' 637-3593 STEVEN 8, 80EHM DIRECT LINE: (2021 383-0176

Thomas E. Bisset i Esquire

Off ice of Insurance Products

and Legal Compliance

Division of Investment Management

Securi ties and Exchange Commission

Room 10183
450 Fifth street, N.W.

Washington, D. C. 20549
Re: College Retirement Equities Fund Real Estate Account Dear Mr. Bisset:
This letter responds to your letter of February 27, 1991, which set forth certain concerns and questions regarding the no-action letter request of the College Retirement Equities Fund ("CREFri) concerning the addition of an investment portfolio that invests primarily in real property (the "RE Account" or "Account") . As you will recall, CREF is seeking to establish and operate the account outside the definition of an investment company in section 3 of the Investment Company Act of 1940 (the "1940 Act") and to not treat the account as being part of its regulated investment company operations. By this letter, we also

request the opportunity to meet with you and further discuss the

issues you raised and our responses to them.

The items below correspond to your specific comments.

Relationship of RE Account to Other CREF Accounts.

As the staff is aware, CREF is unique in a number of respects.

It issues variable annuities, but it is a free-standing entity

and not a separate account of an insurance company. In addition, since it is not an insurance company, it cannot create "separate

accounts" within the meaning of New York insurance law. Also, it

is not regulated by the New York Business Corporation Law, but

rather is subj ect to that state's Not-For-Profit Corporation Law

(the "NFPCL"). That law generally does not contemplate an investment-company type of operation like CREF' s, nor the issuance of a number of classes or series of stock. ( Indeed, that law is designed to regulate membership corporations, a common form of organization for nonprofit entities, and does not contemplate the issuance of any class of stock.) Accordingly, there are no relevant "state law provisions that control CREF's ability to establish the RE

Account as a separate series." CREF believes, however, that it

can establ ish and operate the RE Account so that: ( 1) income and both realized and unrealized gains or losses from the RE

Account's assets will be credited to or charged against the

Account without regard to the income, gains and losses of the

other CREF accounts; and (2) the other CREF accounts should be

protected from claims asserted by creditors of the RE Account.

CREF will seek to achieve this result as follows:

Thomas E. Bissett, 'Esquire

First, CREF will seek to amend its charter to indicate

that, from a corporate structural standpoint, the other CREF

accounts will be insulated from the investment activities of, and

any claims that might be raised against, the RE Account. To be

effecti ve, the charter amendment must be approved by the New York

state Insurance Department. If and when the required approval is

received, CREF will obtain an opinion of counsel to the effect

that the charter amendment and action by the Insurance Department

should have the effect of insulating the RE Account vis-a-vis the

other CREF accounts to the same extent as separate accounts of an

insurance company generally are insulated vis-a-vis the insurance

company by statute.

section 18 (f) Issues. As discussed in the no-

action letter request, CREF believes that, consistent with the

approach taken by the Third Circuit in Prudential Ins. Co. v.

securities and Exchange Commission, 326 F.2d 383, 387 (3rd Cir.

1963), a non-investment company can be carved out of an

investment company if the functional attributes of the structure

do not subvert the policies and provisions of the 1940 Act. That approach necessarily requires that the RE Account not be

considered part of CREF' s investment company operation. Under

that approach, then, CREF qua regul~ted investment company should

not be viewed as issuing a class of stock representing interests

in assets (i. e., the RE Account) that are not afforded the

protections of the 1940 Act. Stated differently, the RE Account

would not be another class or series of an investment company,

but would represent another part of CREF' s business, just as an

insurance company's general account would not be viewed as

another series of any registered separate account the insurance

company might maintain.

Comparison with Unreqistered Real Estate Separate

Accounts. Like interests in unregistered real estate separate accounts offered by life insurance companies ("Separate

Accounts"), interests in the RE Account will be subject to

registration under the Securities Act of 1933 (the "1933 Act").

Also, CREF, with respect to the RE Account, will be subject to

the periodic reporting requirements of the Securities Exchange

Act of 1934.

If the relief sought in the no-action letter is

granted, the RE Account would not be subj ect to regulation under

the 1940 Act. Likewise, Separate Accounts generally are not

subject to those requirements of the 1940 Act.

Separate Accounts, as part of an insurance company, are

subj ect to supervision and regulation by state insurance regulatory authorities. The RE Account, like the rest of CREF' s

operation, would be subject to regulation by the New York State

Insurance Department, as well as by the insurance regulatory

authorities of certain other states and jurisdictions.

The RE Account would also be subj ect to two layers of

regulation affecting CREF which generally are not applicable to

Separate Accounts. First, its operation would have to be

consistent with the requirements of the NFPCL. Second, it could

not operate in a manner that was inconsistent with CREF' s tax-

exempt status Under federal income tax law.

Disclosure Concerninq Status of RE Account. CREF

does not believe, as your comment suggests, that its status as a

registered investment company with respect to its existing four

accounts justifies a presumption that investors in the RE Account

will be misled with respect
'to the applicability of the protections of the 1940 Act. Indeed, CREF is in virtually the same position in this regard as any unregistered real estate

separate account of an insurance company that also offers

interests in registered separate aCCounts.

CREF believes that the disclosure it intends to include

in the registration statement covering interests in the RE

Account will make clear that participants allocating amounts to

the Account are not afforded the protections extended to the

other CREF accounts under the 1940 Act. Specifically, CREF

currently proposes t:o include a number of references in the

prospectus to the fact that, unlike the other accounts, the RE

Account is riot subject to the 1940 Act. In addition, specific

reference will be made to the fact that participants will have no

voting rights with respect to interests in the Account. Given

this disclosure, which the Staff will, of course, have an

opportuni ty to review, CREF believes that the risk of a recipient

of the RE Account prospectus being misled as to its regulatory

status is low. Obviously, CREF cannot guarantee that every

participant will read the prospectus. The 1933 Act does not,

however, impose that requirement on an issuer.

Feasibility of Separate Investment Companv. The

establishment of a CREF real estate account as a separate

investment company was, in fact, considered by CREF before a determination to follow the proposed approach was made. However,

the separate company approach raises two significant

administrative and legal concerns which would make it impractical

for CREF participants. First, and perhaps most significant, is

the fact that a separate entity would have to have its own tax-

exempt status recognized by the Internal Revenue Service. While

CREF believes that it could ultimately obtain a tax exemption for

such a separate real estate entity, the process can be, and often

is, time consuming.

Second, CREF has a unique organizational history (i. e. , it was formed by a special act of the New York State Legislature

in 1952, prior to the existence of variable annuity regulation).

The fact that there is now a long-standing body of state

regulation governing issuers of variable annuities raises

questions as to the appropriate form such a separate entity

should take. Reliance on CREF's existing structure by simply

adding a new real estate portfolio eliminates these concerns.

ThomasE . Bissett, Esquire

ERISA Fiduciary Issues. In our letter of December

18, 1990, we noted that the RE Account would be operating

according to applicable standards and requirements of ERISA. We

bel ieve that discussion remains relevant. However, in connection

with the development of more firm specifications for the Account,

CREF recently has reevaluated the status of the Account under

ERISA. It is now CREF' s expectation that, at least during the

early years following the establishment of the RE Account, it

will satisfy the conditions of a so-called "real estate operating

company" ("REOC") within the meaning of 29 C.F.R. §2510.3-101(e)

of the Department of Labor's regulations defining "plan assets"

for purposes of ERISA. To the extent (and for the time period) that the RE Account constitutes a REOC, it will not be considered to hold "plan assets," and therefore neither the RE Account nor the CREF Board of Trustees would be considered to be ERISA fiduciaries. To the extent (and for such time as) the RE Account does not qualify as a REOC, however, it is CREF' s expectation that the RE Account would be considered to hold "plan assets," so that:
(a) the CREF Board of Trustees (if exercising

discretionary management or control over the

assets in the RE Account), and

(b) any compensated investment adviser or manager of

the RE Account

would be considered to be plan fiduciaries of the ERISA plans

investing in the Account.

As we discussed in the no-action letter request,

persons who are plan fiduciaries are subj ect to the fiduciary

duty provisions of ERISA, including the requirements that they

act prudently and solely in the interest of plan participants and

beneficiaries. Further, a fiduciary is prohibited from causing a

plan to engage in transactions with parties in interest with

respect to that plan in the absence of an applicable

administrative or statutory exemption.

Even though the RE Account would not be subj ect to ERISA during such time as it constitutes a REOC, CREF would be

willing to undertake that the RE Account will be operated by CREF

(and any compensated investment adviser or manager of the RE

Account) in a manner consistent with the general fiduciary

standards set forth in section 404 (a) (1) (A), (B) and (C) of ERISA. In other words, the RE Account would be managed solely in

the interest of the participants and beneficiaries of the

Account, and

(A) for the exclusive purpose of:

(i) providing benefits to participants and their

beneficiaries, and

(ii) defraying reasonable expenses of administering the

plans participating in the RE Account;

(B) with the care, skill, prudence and diligence under the

circumstances then prevailing that a prudent man acting in

a like capacity and familiar with such matters would use in

the conduct of an enterprise of a like character and with

like aims; and

minimize the risk of Iprge losses, unless under the

circumstances it is clearly prudent not to do so. 1/

As mentioned earlier; we would appreciate the

opportunity to meet with you and further discuss this matter. If

you have any questions or require any additional information,

please call the undersigned at (202) 383-0176.

c,-s_i'/~ce.:e,~j , _
"/ ,.-'~ "
I ' . . _ . -n_J.. ~ '~~~.
---- l ,
/
/ steven B. Boehm cc: Clifford Kirsch, Esquire

Peter C. Clapman, Esquire (TIAA-CREF)

Paul J. Mason, Esquire (SA&B)

Y The "solely in the interest" and "exclusive purpose"

standards would effectively preclude self-dealing, while the

prudence and diversification standards would require professional

fiduciary investment management for the RE Account. As to

diversification, CREF would indicate to each potential investor

in the RE Account that the Account is only one reasonable

component of his or her pension plan's diversification strategy,

and would suggest to institutions that no plan's assets should be

invested wholly in the Account.

SCTHERLAKD, ASBILL & BRE::' ::' 1275 PENNSYLVANIA AVENUE. N. W. CABLE: SUTAB WASHINGTON \_.SllI~(jTO~. D. C. 2000,'¡-~,'lOl 999 PEACHTREE STREET, N,£. TELEX: 89-501 ATLANTA. GEORGIA 30309-3996

FACSIMILE: 12021383-0100 '4041853-8000 '202' 637-3593 STEVEN B. BOEHM DIRECT LINE: '2021 383-0176 December 18, 1990

1940 Act Section 3 (a) VIA MESSENGER

Heidi Stam, Esquire

Special Counsel

Office of Insurance Products
RECE:'3,)
Dh.l.:!:::i of !::vo.::::.:mt M:''"1~:::::.t and Legal Compliance

Division of Investment Management Ute 18 l~~J Securities and Exchange Commission

450 Fifth Street, N.W.
".---.-.-,. C l .... Washington, D.C. 20549 O~CG ofl~'ñ:~"l~:-,:
c.~d Ld~:'t:~~"'.."'"",,,

Re: College Retirement Equities Fund - Real Estate Account

Dear Ms. stam:
We are writing on behalf of the College Retirement

Equities Fund ("CREF") to request that the staff of the Division of Investment Management (the "Division") advise us that

it will not recommend that the Securities and Exchange

Commission ("Commission") take any enforcement action under the

Investment Company Act of 1940 (the "Act") or the Securities

Act of 1933 (the "1933 Act") if CREF establishes and operates " an investment portfolio that invests primarily in real property

(the "RE Account") in a manner, as described below, so as to

place the RE Account outside the definition of an investment

company in Section 3 of the Act, and does not treat the RE

Account as part of its regulated investment company operations.

Heidi Stam, Esq.

Backqround
CREF is a nonprofit membership corporation subj ect to

the Not-For-Profit Corporation Law of New York state. It was

established by a special act of the New York state Legislature

which became effective on March 18# 1952, and was formed for

the purpose of providing retirement benefits suited to the

needs of fa cui ty and other employees of nonprofit organizations that are exempt from federal taxation under Section 501(c) (3) of the Internal Revenue Code of 1986, as amended (the "Code"),

or are publicly supported, and are engaged primarily in

education or research. CREF currently achieves its purpose by

issuing variable annuity certificates (the "Certificates") Y

that fund employer-sponsored pension plans and tax-deferred

1/ Currently, CREF issues two types of individual variable

annuity certificates, Retirement Annuity certificates (liRA

certificate") and Supplemental Retirement Annuity certificates

("SRA Certificate"), and another type of individual certificate

pursuant to a master group retirement annuity contract ("GRA

Certificate"). The RA certificate is d(~signed for use in

connection with retirement plans maintained pursuant to Section

401 (a), 403 (a), or 403 (b) of the Code or tax-deferred annuity plans maintained pursuant to Section 403 (b) of the Code. The SRA

Certificate is used primarily in connection with tax-deferred

annuity plans adopted pursuant to Section 403 (b) of the Code.

SRA Certificates are issued to individuals to permit them to

contribute amounts toward retirement or other financial goals in

addition to amounts accumulated under their institutions' basic

retirement plan. GRA Certificates are issued pursuant to master

group variable annuity contracts between CREF and U. S. Trust

Company and are intended to be used in connection with retirement

plans maintained pursuant to Section 401 (a), 403 (a), or 403 (b) of the Code.

Heidi Stam, Esq.

annuity programs. The Certificates permit the accumulation of

funds on their owners' (hereinafter "participants") behalf to

be paid out as annuities at retirement or at some other future date. Under the Certificates, participants may, subj ect to the

terms of the retirement plan or annuity program, allocate

contributions made on their behalf to one or more of CREF' s

investment portfolios. CREF currently has four such

portfol ios: a stock Account, a Money Market Account, a Bond

Market Account, and a Social Choice Account (the "Accounts"). CREF is the companion organization of Teachers

Insurance and Annuity Association of America ("TIM"). TIM was established in 1918 by the Carnegie Foundation for the

Advancement of Teaching as a nonprofit corporation under the

New York state Insurance Law, and offers fixed annuity

contracts and insurance benefits suited to the needs of the

types of institutions and employees served by CREF.

CREF is registered as an open-end diversified

management investment company under the Act ii and the

securities issued in connection with the certificates are

registered under the 1933 Act. ~ In accordance with Section

18 (f) (2) of the Act, CREF treats units of interest in each of

Y File No. 811-4415.

~i CREF currently maintains two effective registration

statements under the 1933 Act: File No. 33-480 (RA and SRA

Certificates) and File No. 33-20480 (GRA Certificates).

Heidi Stam, Esq.

December 18, 1990

the Accounts as a class or series of special securities having

a preference over other classes or series in respect of assets

specifically allocated to that Account and, in general,

considers itself a "series company" as defined by Rule 18f-2

under the Act.
All services necessary for CREF' s operations are

provided internally at cost by salaried personnel through an

expense reimbursement arrangement with TIM. In this

connection, CREF is registered as a broker-dealer under the

Securities Exchange Act of 1934, and is a member of the

National Association of Securities Dealers, Inc. ("NASD"),

solely in connection with the distribution of the certificates.

It is also registered with the Commission as an investment

adviser under the Investment Advisers Act of 1940 in connection

wi th the management of its investment portfolios. ~/ CREF is

also subject to supervision and regulation by the New York

Y CREF, TIM and certain newly formed wholly-controlled subsidiaries of TIM filed an application with the Commission on

September 7, 1990 (as amended on November 16, 1990) for an order

pursuant to Section 17 (d) of the Act and Rule 17d-1 thereunder

approving a restructuring of CREF whereby CREF will "externalize"

all services necessary for its operations. File No. 812-7588. A

notice of that application was published in the Federal Register

on November 28, 1990 (55 Fed. Reg. 49470). Those services will be provided at cost from the subsidiaries of TIM, which consist of TIM-CREF Investment Management, Inc. ("T-C Management"), and TIM-CREF Individual & Institutional Services, Inc. ("T-C

Services"). Both are non-profit entities. If the Commission

issues the requested order, CREF will terminate its broker-dealer

and investment adviser registration and its NASD membership.

Heidi Stam, Esq.

State Superintendent of Insurance and by the insurance regulatory authorities of certain other states and jurisdictions.

In connection with its filing of registration

statements under the Act and the 1933 Act on September 26,

1985, CREF simultaneously filed an application with the

Commission requesting exemptions from certain provisions of the

Act in order to permit it to continue its traditional methods

of operation as a retirement vehicle (the "Application"). 2/ On August 22, 1989, the Commission issued an order (the

"Order") W granting the relief requested, as modified consistent with the terms of a settlement agreement entered into on

December 21, 1988, by CREF, TIAA and certain intervenors in a

proceeding ordered by the Commission on the Application. Among

, other things, the Order granted relief to permit CREF to rely

on certain conditional exemptions from the requirements of the

Act generally available to life insurance company issuers of

variable annuity contracts and granted certain other relief

from the redeemability provisions of the Act.
As of November 30, 1990, there were approximately

1.1 million individuals accumulating retirement benefits under

the Certificates or TIAA annuity contracts. 1/ As of that

2/ File No. 812-6208.

W Inv. Co. Act Rel. No. 17116.
V Most individuals in the TIAA-CREF system allocate premiums to

both TIAA and CREF annuities.

Heidi stam, Esq.

December 18, 1990

date, more than 4,400 institutions maintained retirement or

tax-deferred annuity plans funded at least in part by TIMCREF. As of November 30, 1990, CREF had net assets of

approximately $37 billion (unaudited).

The RE Account

CREF intends to establish the RE Acçount as a new

investment portfolio with the investment objectives of preserving and protecting its capital, providing for compounding

of income as a result of reinvestment of cash flow from investments, and providing for increases over time in the amount of

such income through appreciation in the value of its assets.

CREF currently intends that the RE Account will attempt to

achieve these objectives by investing primarily (at least 65%)

in direct ownership interests in income-producing real estate

(such as office buildings, shopping centers, agricultural land,

hotels, apartment buildings or industrial properties)

participating mortgage loans originated by the Account and real

property sale-leaseback transactions negotiated on behalf of

the Account. Examples of direct ownership interests in real

estate include, but are not limited to, fee interests, general

partnership interests, leaseholds and tenancies in common.

Apart from a portion of the Account's assets (normally 5-10%)

invested in short-term or intermediate-term debt instruments

for 1 iquidi ty purposes, the remainder of the Account's assets

Heidi Stam, Esq.

December 18, 19~ß

may be invested in other types of real estate investments,

including primarily conventional, non-participating mortgage

loans.
As with the Accounts, all services necessary for the

operation of the RE Account will be provided at cost through an

expense reimbursement arrangement with subsidiaries of

TIM. §/ viewed separately, the RE Account will not be an

investment company within the meaning of Section 3 (a) (1) of the Act because it will not be, nor will it hold itself out as

being, engaged primarily in the business of investing,

reinvesting or trading in securities. 2/ In addition, the RE

Account will not be an investment company wi thin the meaning of

section 3 (a) (3) of the Act because at no time will it invest
more than 35% OÎ its total assets in "investment securities" as

defined in Section 3 (a) (3). li In this regard, the Division

has in the past recognized that unregistered real estate

§/ CREF does not anticipate offering the RE Account until the

externalization of services described above takes place . See

supra note 4 and accompanying text.

2/ section 3 (a) (2) of the Act is inapplicable because the RE

Account will not engage or propose to engage in the business of

issuing "face amount certificates of the installment type" as that term is defined in section 2 (a) (15) of the Act. 10/ The RE Account may rely on Rule 3a-2 under the Act for a

period of one year from the effective date of the Form S-1

registration statement relating to its securities. Rule 3a-2

generally provides a one year "start-up period" exemption from

Sections 3 (a) (1) and 3 (a) (2) of the Act.

Heidi Stam, Esq.

December 18, 1990

,separate accounts of life insurance companies are not

investment companies within the meaning of Sections 3 (a) (1) or 3 (a) (3) of the Act. ill Although the RE Account will be part of the CREF

corporate entity, it will, in many material respects, be

operated in the same manner as are unregistered real estate

separate accounts offered by a number of life insurance

companies. III The relationship between the RE Account and

the Accounts will be comparable to that between different

series (or subaccounts) of a registered management separate

account in a series company form. Income and both realized and

unrealized gains or losses from the RE Account's assets will be

credi ted to or charged against the RE Account without regard to the income, gains and losses of the Accounts. In addition, as

is generally the case with investors in unregistered real

estate separate accounts of life insurers, participants in the

RE Account would not have any voting rights. Nonetheless,

CREF's Board of Trustees will be responsible for the management

and administration of the RE Account. Because CREF is not a

ill See,~, Pruco Life Ins. Co. Real Property Account, SEC No-

Action Letter (avail. Sept. 18, 1986); N. N. Providence Variable

Account, SEC No-Action Letter (avail. April 5, 1982).

III In this regard, the RE Account, like all other real estate

accounts, will not be able to comply with many requirements of

the Act such as those found in Sections 2 (a) (4), 17, 18, 22 (c) and 22(e) or Rules 2a-4 and 22c-1 thereunder. It will also not

be able to avoid the activities prohibited to investment

companies by Section 7 of the Act.

Heidi Stam, Esq.

December 18, 1990

life insurance company under the New York insurance laws,

however, the RE Account could not be organized as a separate

account under those laws and therefore is not a separate

account within the meaning of Section 2 (a) (37) of the Act or Rule 0-1(e) thereunder.

Interests in the RE Account will be registered under

the 1933 Act on Form S-l and the prospectus contained therein

will contain the type of disclosure typically found in registration statements for real estate variable annuity contracts

funded by real estate separate accounts of life insurance

companies. In addition, CREF will file periodic reports

pursuant to Section 15 of the securities Exchange Act of 1934

in respect of the RE Account.

In addition, unlike registered investment companies,

the RE Account will be operated in accordance with applicable

standards and requirements promulgated pursuant to Title I of

the Employee
Retirement Income Security Act of 1974, as amended

("ERISA"). Most Certificates are issued in connection with a

program for the purchase of annuity contracts described in

section 403 (b) of the Code. Unless an applicable exception
applies, Section 403 (b) plans would be "pension plans" subject

Heidi Stam, Esq.

to Title I of ERiSA 13/ and the assets of the RE Account would

be deemed to include "assets" of those ERISA plans. 14/

ERISA attaches fiduciary status and responsibilities'

to persons that provide investment management or investment

advice for a fee with respect to the "assets" of ERISA pension

plans. In relevant part, section 404 (a) (1) requires plan

fiduciaries li/ to discharge their duties with respect to a plan solely in the interests of plan participants and

beneficiaries and (A) for the exclusive purpose of providing

benefits to participants and beneficiaries and defraying

13/ See ERISA § 3(2),29 U.S.C. § 1002(2); 29 CFR § 2510.3-2.

section 403 (b) plans are not subject to ERISA if, for example,

they are not "established or maintained" by an employer (see 29

CFR § 2510.3-2(f)) or they are "governmental plans" (see ERISA

§§ 3(32), 4(b)(1), 29 U.S.C. §§ 1002(32), 1004(b)(1)).

14/ In Advisory Opinion 78-8A (March 13, 1978), the Department of

Labor ("DOL") opined that CREF Stock Account assets segregated to

support variable annuity payments would be treated as "plan

assets" for ERISA purposes. In 1986, the Department issued

definitive regulations interpreting "plan assets." See 29 C. F. R.

§2510.3-101. Those regulations provide that "plan assets" include, inter alia, a fractional undivided interest in each of

the underlying assets of (1) any life insurance company separate

account supporting a variable annuity contract issued to the plan

(unless registered under the Act) and (2) any entity in which the

plan has an equity interest unless certain exceptions apply, such

as a publicly-offered security, an investment in an operating

company or an interest in another entity where there is not

significant participation by benefit plan investors.

li/ section 3 (21) (A) of ERISA defines a fiduciary as a person

exercises discretionary authority or control over

the management of the plan or its assets, or (2) renders

investment advice (or has authority to render investment advice)

for a fee with respect to plan assets.

who, ~, (1)

Heidi Stam, Esq.

December 18, i9~O

reasonable expenses of administering the plan; (B) with the

care, skill, prudence, and diligence under the circumstances

then prevailing that a prudent, man in a like capacity and

familiar with such matters would use in the conduct of an

enterprise of a like character and with like aims; and (C) by

diversifying the investments of the plan so as to minimize the

risk of large losses, unless under the circumstances it is

clearly prudent not to do so. In addition, absent an exemption

under section 408, Section 406 of ERISA prohibits plan

fiduciaries, ~, from causing a plan to engage in specified

transactions with parties in interest 16/ or from engaging in

self dealing, acting with conflicting interests or receiving

third-party consideration for their own account with respect to

the plan. 17/

16/ section 3 (14) of ERISA defines a "party in interest" very

broadly. In general terms, a party in interest is analogous to

an "interested person" under section 2 (a) (19) of the Act. 1~ DOL has issued a class exemption from certain of these

prohibi ted transaction rules with respect to insurance company

pooled separate accounts subject to certain conditions. See PTE

90-1 (formerly PTE 78-19), 55 Fed. Reg. 2891 (January 29, 1990).

If the Division issues the no-action letter requested, CREF may

seek prohibited transaction exemptions necessary or appropriate

to the operation of the RE Account and comparable to those

granted in similar cases by DOL (or to confirm that CREF may rely

on PTE 90-1). 17/

Heidi Stam, Esq.

other Considerations

CREF has considered the option of establishing an

unregistered real estate separate account of TIM. CREF does

not, however, believe that this alternative is as favorable to

participants as the proposed RE Account.

A significant disadvantage is that the New York

Insurance Regulations (Chapter III, Subchapter A, Part

50.7(a)(3)), would require that TIM offer a so-called "nonforfeiture" benefit in the form of either "an option to

receive the cash surrender value of the contract or an option

to receive a paid-up annuity to commence at the maturity date."

The regulation also requires that "if only the option to

receive a paid-up annuity is available, the accumulated value

of the contract in the separate account or accounts of the

company at the time of default shall, at the option of the

contractholder, be transferred to the general account of the

company to provide a fixed dollar paid-up annuity." Consequently, TIAA would either have to use its general account

assets to meet surrender and paid-up annuity requests or

maintain a higher than desirable portion of the real estate

separate account's assets in liquid securities. Although other

for-profit life insurance companies offering real estate

separate accounts apparently rely on both of these strategies,

the expenses inherent in such practices is ultimately passed on

Heidi Stam, Esq.

December 18, 199~

to participants in the form' of lower investment returns or

higher fees and charges.

For participants, the high mortality and expense risk

fee that TIM would have to charge makes the proposed RE

Account much more advantageous than a TIM separate account.

Unlike CREF, which is unique in that it may (for each Account)

pool the mortality experience of its annuitants and the expense

experience attributable to participants (including annuitants)

and pay the costs of this experience as they are incurred, 181

TlAA must, under New York Insurance Law, 191 guarantee annuity purchase rates. A guarantee of such rates entails a guarantee that

the rates will be as favorable to annuitants as those based on

a specific mortality table identified in the certificate.

Equally significant, it guarantees that expenses --other than

investment portfolio expenses-- will not exceed the levels

stated in the certificate. 201 In order to accumulate

~I See pages 33-36 of CREF's March 1, 1990 prospectus. File No.

33-480.
191 This is true of state variable annuity contract and variable

annuity separate account laws (and corresponding regulations) in

a number jurisdictions (see, ~, Pennsylvania Regulations,

Title 31, §§ 85.36(a) &
85.36(b) ).
201 New York Insurance Regulation 50.6(a) (1) states, in relevant

part:
Each variable annuity contract delivered or issued

for delivery in this state shall provide that

(continued. . . )

Heidi stam, Esq.

December 18, 199B

sufficient assets/reserves to support such guarantees, TIM

would, as do all variable annuity issuers other than CREF, have

to charge a mortality and expense risk fee. Of necessity, this

fee would be based on estimates of mortality that are conservati ve and, thus, less advantageous for participants than a procedure which relies on ,actual mortality experience in determining the amounts of annuity payments. In this connection, TIM has estimated that it would have to charge a combined risk fee

within the range of industry practice, currently between 0.75%

and 1.25% of net assets per year.

The addition of a mortality and expense risk fee

would dramatically increase the cost of a real estate variable

annui ty to participants when compared with that of a CREF

certificate which would reflect the pooled mortality and

expense experience as it occurs. Currently, CREF variable

annuity participants pay approximately 0.35% of net assets per

201 ( . . . continued) neither expenses actually incurred, other than taxes

on the investment return, nor mortality actually

experienced, shall adversely affect the dollar

amount of variable annuity payments to any annuitant

for whom variable annuity payments have commenced

. . . . The method of computing the dollar amount of

variable annuity payments shall be such that, if the

annual rate of investment return of the separate

account, as defined in section 50.1(a)(7)

hereinabove, were six and one half percent at all

times from the issue of the contract, such amounts

would not decrease.

Heidi stam, Esq.

year for all expenses during the accumulation period: ~ no deduction or charge is made for mortality. CREF estimates that

any real estate investment portfolio would require an investment management fee of approximately 0.65% of net assets per

year. Therefore, a TIM real estate separate account variable

annui ty could be expected to cost participants approximately

1.88% of net assets per year 22/ during the accumulation

period as compared with 0.88% per year for a CREF real estate

variable annuity. 23/

Legal Arguents For Relief
CREF believes that it should be permitted to offer a

real estate investment option to its participants at a level of

expense consistent with its non-profit purpose and historical

experience. TIM cannot do this through a separate account. CREF believes, however, that it can and should be permitted to

offer the RE Account at expense levels that participants and

ZLI Of this figure, investment management expenses run

approximately .12% of net assets per year.

22/ This figure is based on the assumption that a 1.00% deduction

for mortality and expense risk would be made and that

distribution and administrative expenses of a TIM separate

account product would be the same as they currently are for CREF certificates. 23/ Even during the annuity period, the cost under a CREF product

should be significantly lower, as the actual mortality experience

of CREF annuitants during both 1988 and 1989 had an effect on

returns to CREF annuitants equal to that of a .40% annual

deduction.

Heidi Stam, Esq.

December 18, 199Q

insti tutions have come to expect from it. CREF' s status as a

registered investment company, however, raises questions about

the applicability of the Act to the RE Account and any effect

that the RE Account may have on CREF's compliance with the Act or the rules thereunder.

A number of legal issues arguably are raised by

CREF 's establ ishment of the RE Account: first, whether the RE

Account is part of an investment company because it is part of

the CREF corporate entity; second, whether CREF would meet the

Section 3 definition of an investment company where one of its

investment portfolios does not meet that definition, or whether

CREF is properly registered under Section 8 of the Act where

onê of its portfolios is not "covered" by its Section 8

registration; and third, and most broadly, whether CREF' s

establishment of the RE Account makes it impossible to comply

with the full range of substantive regulatory requirements

imposed under the Act. In connection with the third issue,

questi.ons arise such as whether CREF would be in compliance

with Section 18 (f) of the Act because the securities it issues

in connection with the RE Account are not, within the terms of

Section 18 (f) (2), excluded from the definition of a senior

securi ty.

Therefore, before it proceeds with establishment of

the RE Account, CREF wishes to resolve any questions about the

applicability of the Act to the RE Account and any effect the

Heidi Stam, Esq.

December 18, 199~

RE Account may have on CREF under the Act. As demonstrated below, the policy of the Act and the evolution of variable

contract regulation thereunder are consistent with the no-

action position requested.

We believe that the Act and rules thereunder do not

prohibit a series company, as that term is defined in Rule

18 f-2, from establ ishing an investment portfol io (and issuing a

corresponding series of securities) that does not meet the

section 3 definition of an investment company and could not

series company established such a portfolio and issued a series

or class of special securities having preference over other

securities issued by the company with respect to the assets of

that portfolio, then that portfolio should be treated as not

being part of the registered series investment company for

purposes of the Act. Likewise, in such a situation all the

other portfolios should be treated as those of a series

investment company and all the other classes of securities

should be treated as those issued by an investment company.

The purposes fairly intended by the policy and

provisions of the Act, as interpreted in court opinions with

'variable annuities and as reflected by Commission

and Division treatment of series companies, support the

proposition that each portfolio of a series investment company

should be treated as a separate investment company notwithrespect to

Heidi Stam, Esq.

standing that certain practical exceptions to such treatment

are recognized. with regard to series companies, the Commission and the Division have generally applied the Act as if each

portfolio were a separate investment company. 24/ For

example, Rule 18f-2 under the Act requires that a majority of

the outstanding voting securities of a series must approve most

shareholder actions for the actions to be effective as to that

series. The fact that the Rule contains exceptions 25/

evidences the Commission's understanding that the primary

elements of the Rule were not doctrinaire formulations, but

rather were pragmatic responses to the function rather than the

form of the investment company.

The adaptation of form to suit function has a long

history in the variable insurance products arena. 26/ Section

24/ See Fleming, Requlation of Series Investment Companies Under

the Investment Company Act of 1940, 44 Bus. Law. 1179, 1180

(1989) .
25/ Paragraphs (e), (f), and (g) of Rule 18f-2 exempt shareholder

selection of a company's independent public accountant,

shareholder approval of a company i s contract with a principal

underwriter and shareholder election of directors, from the

otherwise applicable requirement of a majority vote of each

series. See also ide at 1191. These exceptions are based on the

premise that the interests of all securi tyholders in a company

will be the same with regard such matters. The exceptions would

not have been necessary, however r if not for the practical

difficulty of having more than one board of directors,

independent accountant, or underwriter for a single

corporation.
26/ One clear example of this is the use and adaptation of

certain registration forms for registration of separate accounts

(continued. . . )

Heidi Stam, Esq.

December 18, 1990

2 (a) (8) of the Act defines a "company" to mean "a corporation, a partnership, an association, a joint-stock company, a trust,

a fund, or any organized group of persons whether incorporated

or not. " . . . The Third Circuit, after reviewing the legislative history of Section 2 (a) (8), concluded that life insurance

company separate accounts can come wi thin the definition of an

investment company notwithstanding that they are not legal

entities under state law, and in fact are part of a larger

legal entity that is excluded from the definition of an

investment company. 27/ In essence, an investment company can

26/ ( . . . continued) under the Act and the registration of securities issued by such

accounts. with two notable exceptions (Forms N-3 and N-4) these

forms were not designed for separate accounts or variable annuity

or variable life insurance contracts.

27/ Prudential Ins. Co. v. Securities and Exchanqe Commission,

326 F.2d 383, 387 (3d Cir. 1963), cert. denied, 377 U.S. 953

(1964). The court of appeals was quite specific on this point

stating, in relevant part:

Furthermore, a study of the legislative history of

the Act shows that Congress intentionally drafted

the statutory definitions in general terms in order

to control such situations regardless cf the legal

form or structure of the investment enterprise.

In these circumstances we rej ect Prudential's

argument that the broad statutory phrase "a trust, a

fund, or any organized group of persons whether

incorporated or not" refers only to recognizable

business entities. . . . As we have previously seen,

the Investment Fund is a completely segregated

account, devoted to investing in securities. The

cash for these investments is derived from payments

(continued. . . )

Heidi stam, Esq.

be carved out of a non-investment company. In this respect,

the various investment portfolios or "Accounts" of CREF can be

viewed as being no different in concept from insurance company

separate accounts registered as investment companies, carved

out of a non-investment company insurance company, and we

believe that had CREF begun its life as a single real estate

portfolio and now proposed to add new portfolios investing in

securities, the Commission would insist that these new

portfo1ios be registered under the Act.

The obvious corollary to the functional definition of

an investment company as articulated in Prudential is that a

non- investment company can be carved out of an investment

27/ ( . . . continued) made by the purchaser of the variable annuity

contract. Though the proceeds of the fund are held

for the sole benefit of the annuitant, it is this

fund, and no other entity in which he has an interest. Prudential also asserts that the specific

exemption provided for the common trust funds of

banks shows that regulation under the Act was

imposed on an institutional rather than on a

£unctional basis. It is pointed out that this

exemption is provided i~ addition to the general

exemption for banks. Prudential declares that such

common trust funds are functionally indistinguishable from investment companies, but were excluded

from the Act "because they were in fact part of the'

banking business and intended to be covered by the

broad exemption for banks." We think that this

specific exemption leads to the opposite

conclusion.

Heidi stam, Esq.

December 18, 1990

company if the functional attributes of the structure do not

subvert the policies and provisions of the Act as these are

applied to protect investors in investment companies and if

certain practical aspects of routine Commission regulation

(such as registration statements) can be facilitated. CREF

submits that no aspect of the Act's (or the 1933 Act's)

applicabili ty to CREF or the Commission's regulation thereof

would be adversely affected in any way by the existence or

operation of the RE Account as described herein. 28/ CREF

would continue to file or amend registration statements under

the 1933 Act and to update its registration, vis-a-vis the

Accounts, under the Act on Form N~3. 29/ In addition, CREF

would file, and amend as necessary, a registration statement

for the RE Account under the 1933 Act.

CREF maintains th~t the addition of the RE Account

will not increase or diminish the protection and regulation

28/ In this regard, a potential confl ict of interest could arise

from the fact that CREF' s Board of Trustees would be responsible

for several investment company portfolios as well as a non-

investment company portfolio. To avoid any possibility of "overreaching" or undue influence by the RE Account or its investors

or any other party with an interest or a relationship with the RE

Account, CREF' s Trustees will only be elected by participants in

the Accounts in accordance with the Order.

29/ As one COIDlentator recently pointed out "(T)he treatment of a

series company as a single entity for purposes of filing a

registration statement under Section 8 of the 1940 Act is one of

the exceptions to the general rule that each portfolio of a

series fund is regulated as a separate investment company under

the 1940 Act." Fleming, supra, note 24, at 1183.

Heidi Stam, Esq.

under the federal securities laws currently received by

participants in the Accounts. Likewise, CREF maintains that

participants in the proposed RE Account will receive the same

degree of protection and regulation under the federal securities laws as do investors in any unregistered insurance company

real estate separate account, interests in which are registered

under the 1933 Act. ~I Moreover, the RE Account will be

operated in accordance with applicable ERISA requirements.

The issues raised by CREF' s proposed addition of the

RE Account are novel and arise because, unlike other issuers of

variable annuities, CREF is a stand-alone corporate entity and

not a separate account of an insurance company. Granting the assurances sought here would recognizei as the Commission did

in granting CREF extensive exemptive relief in 1989 to permit

it to continue to operate as a pension funding vehicle, IV

30/ In addition, it is our understanding that, pursuant to

exemptions set forth in section 3 (a) (2) of the 1933 Act and

exclusions from the definition of an investment company found in
section 3 (c) (11) of the Act, interests in most real estate
separate accounts of life insurance companies are not subject to

the federal securities laws. We anticipate that a significant

portion of the RE Account's assets will be derived from

contributions under pension plans or under governmental plans of

the type described in sections 3 (a) (2) or 3 (c) (11). Therefore, participants who might otherwise not receive the protection of

the federal securities laws if such assets were not commingled

with "non-qualified" assets will, in the RE Account, benefit from

the fact their interests will be registered under the 1933 Act.

31/ See supra note 6 and accompanying text.

Heidi Stam, Esq.

December 18, 1990

that CREF' s unique history and structure create unprecedented

compliance issues.
Accordingly, in light of the policy considerations

outlined above, we believe that:
(1) the RE Account should not

be considered part of CREF' s investment company operations nor

should CREF be deemed to be operating in a manner that

conflicts with the various substantive regulatory requirements

of the Act solely because of the maintenance of the RE Account,

and (2) neither CREF' s status as an investment company within

the meaning of Section 3 of the Act nor its registration under

section 8 of the Act should be affected by its maintenance of

an investment portfolio which does not, itself, fall within the

investment company definition. Thus, the establishment and

maintenance of the proposed RE Account should not affect CREF' s

status as an investment company under the Act or cause the

Commission to deem CREF not to be in compliance with any

provision of the Act or the rules thereunder.

Conclusion
In view of the foregoing, we respectfully request

that the Division advise us that it will not recommend that the

Commission take enforcement action under the Act or the 1933

Act if CREF establishes and operates the RE Account in a

manner, as described herein, so as to place it outside the

definition of an investment company in Section 3 of the Act and

Heidi Stam, Esq.

December 18, 1990

does not treat it as part of its regulated investment company

operations.

If you have any questions or require any additional

information, please call the undersigned at (202) 383-0176 or

David S. Goldstein at (202) 383-0606.

Very truly yours,

)3teven B. Boehm

cc: Clifford Kirsch, Esq. (SEC) Barry D. Miller, Esq. (SEe) Peter C. Clapman, Esq. (TIM-CREF) Paul J. Mason, Esq. (SA&B)