SEC Division of Investment Management staff letter: Travelers Insurance Company et al. — SEC — US

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 20549

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Lawrence J. La ..~.........

Shea & Gardner

1800 Massachusetts Avenue, N. W.

Washington, D.C. 20036

RE: The Travelers Insurance Company et al.

Dear Mr. Latto:
Enclosed is our response to your letters of May 27, 1993 and

July 27, 1993. 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-7-93. Sincerely, . L~, ,eJf-'H C_, l/~.;.!/L , . ,", I . Clifford E. Kirsch

Assistant Director

Office of Insurance Products

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RESPONSE OF THE OFFICE OF Our Ref. No. IP-7-93 INSURANCE PRODUCTS Travelers Insurance Company et al . DIVISION OF INVESTMENT MANAGEMENT Your letters of July 27, 1993 and May 27, 1993, request our

assurance that we would not recommend enforcement action to the

Commission if The Travelers Insurance Company ("Travelers") and The

Travelers Fund U for Variable Annuities ("Fund U") collect the fees

for the CHART investment advisory program (the "Program") of

Copeland Financial Services, Inc. ("CFSlI) in the manner described

in your letters. In your opinion, CFS i fee collection arrangement for the Program is not prohibited by Section 26 (a) (2) of the Investment Company Act, and Commission approval of the arrangement

is not required by Section 17 (d) of that Act or Rule 17d-1

thereunder.
As explained in your letters, Travelers serves as the

deposi tor of Fund U, a separate account that is registered with the

Commission as a unit investment trust and which issues variable

annui ty contracts. CFS is part of a group of companies known as

the "Copeland Group," which includes a broker-dealer that sells

variable annuity contracts issued by Travelers as well as contracts

issued by unaffiliated insurance companies. Because Travelers and

CFS are both subsidiaries of The Travelers Corporation, you state

that CFS is an "affiliated person" of Fund U under the Investment

Company Act.

Your letters indicate that under the Program, CFS will advise

each participant as to allocating his or her assets among a family

of mutual funds or within a variable annuity contract that offers

several investment options. CFS formulates its recommendations by

analyzing the investor i s risk tolerance, investment needs and

objectives, and other pertinent attributes. You state further that

as an investment adviser registered under the Investment Advisers . Act of 1940, CFS will provide investors with the disclosure required by that Act.

Initially, the Program will be offered only to owners of the

Fund U "Universal Annuityll contract who wish to allocate their

assets among the six series of American Odyssey Funds, Inc., a

mutual fund managed by a subsidiary of CFS called American Odyssey

Funds Management, Inc. Currently, there are 25 investment options

under the Universal Annuity, although only the six series of

American Odyssey Funds, Inc. will participate initially in the

Program. Your letters note that the Program is not limited to

investment products offered by Travelers and its affiliates, and

could be used with any family of open-end management investment

companies, series investment company, or variable insurance product

that allows for asset transfers and offers investment options that

are acceptable to CFS and suitable for the Program. However,

consistent with your request, the assurance that we provide in this

response applies only to the Program as operated currently with

Fund U.
To participate in the Program, an investor must sign an

investment advisory contract with CFS, which authorizes CFS to

submit the asset allocation instructions to be followed by Fund U.

You state further that the Program is optional: that is, an

investor may purchase the Universal Annuity without contracting

with CFS for asset allocation advice. Moreover, CFS will not allocate an investor i s funds without prior authorization (apart from periodic rebalancings designed to bring the investor i s holdings into closer conformity with the original agreed-upon allocation) . Your letters state further that for providing asset allocation

services, CFS will be paid an asset-based fee èach quarter. The

agreement between CFS and the investor pursuant to which CFS

provides asset allocation services will authorize Fund U to redeem

the number of units needed to pay that quarterly fee, and also will

authorize payment directly to CFS. These redemptions will be

confirmed and reflected in quarterly statements that are delivered

to each investor (or to each participant, in the case of a group

variable insurance contract). At any time, an investor may cease

participating in the Program and thereby terminate the automatic

quarterly redemptions. Finally, your letters state that Travelers will receive no part of the quarterly fee.
section 26 (a) of the 1940 Act in effect prohibits the trustee

or custodian of a unit investment trust from deducting any fee from

the trust i s assets other than fees for bookkeeping and other

administrative services. The section is intended to prevent the

trustee and custodian from reaping lIhidden profits" through various

deductions from trust assets or income. 1 Your letters argue that

the Program fees should not be regarded as an expense of Fund U

governed by Section 26 (a), because such fees are not charged

uniformly and proportionately to all the investors in Fund U.

Rather, the Program fees are paid only by those Fund U investors

who have opted to receive asset allocation advice from CFS.

Further, you state that the amounts redeemed do not compensate CFS

for expenses incurred in operating Fund U. Rather, the fee pays

CFS for the asset allocation services of the Program, which is

See Protectinq Investors: A Half Century of Investment Company Requlation, Report of the Division of Investment Management, at 382-83 (1992).

3 separate from and independent of Fund U. You state that CFS is in

no way responsible for operating Fund U. In sum, your letters

contend that the Program fee is an expense of the investor, rather

than an expense of Fund U.

section 17 (d) of the 1940 Act prohibits affiliated persons of

a registered investment company and certain others from engaging

in j oint transactions wi th the company in contravention of

Commission rules. Rule 17d-1 under the 1940 Act prohibits any

joint enterprise, joint arrangement, or profit-sharing plan

involving an investment company and such affiliated persons absent

an exemptive order of the Commission. Although Fund U and its

affiliate, CFS, participate in the Program, your letters assert

that no arrangement violative of Section 17 (d) and Rule 17d-1 is

present. Moreover, you argue that because Fund U i S only involvement in the Program is to process participating investors i quarterly redemption requests, Fund U cannot be disadvantaged in

any way.

Based on the representations and conditions set out in your

letters, but without necessarily agreeing with your legal

arguments, we would not recommend enforcement action to the

Commission if Travelers and Fund U collect the fees for the CHART

investment advisory program of CFS in the manner described in your

letters. Our position is subject to the following disclosure conditions:
(1) Consistent with Rule 204-3 of the Investment Advisers Act

of 1940, CFS will provide its "brochure" to each advisory client

and prospective advisory client;

(2) the portion of Fund U' s prospectus that responds to item

3 (a) of Form N-4 will contain a separate fee table that illustrates

the total fees to be paid by investors who participate in the

Program; and

(3) to the extent set out in your letters, any advertisement of the performance of the subaccounts of Fund U that invest in the

American Odyssey Funds, Inc. will reflect the effect of Program

fees.
In assuring you that we would not recommend enforcement action to the Commission, we are not implying that any fee deducted by cancelling units attributable to an investor i s participation in a unit investment trust would be outside the ambit of Section 26. In our opinion, a mandatory fee deducted in this manner from every investor i s account is a deduction from trust assets for purposes

of Section 26, even though the value of each unit remains the same.

Accordingly, we would consider such a fee to be indistinguishable

from an asset-based charge in applying the provisions of Section

26. the facts and representations

in your letters, you should note that different facts or

representations may require a different conclusion. Further, this

Because our position is based on

response expresses the Division i s position on enforcement action only, and does not purport to express any legal conclusions on the

issues presented.

((,,-n.,,/ k~('-""1 .-S~C~ c. Christophe~ sprague~ CJ Senior Counsel

SHEA & GARDNER
1800 MASSACHUSETTS AVENUE, N,W.

WASHINGTON, D, C. 20036

FR"NCIS M. SHE" l1905-19B91
W"RNER W. G"RDNER
LAWRENCE .I, LATTO
RICH"RD T, CONW"Y
ROBERT T. B¡SSECHES
BENJ"MIN W, BOLEY
R"LPH .I, MOORE, JR.
M"RTIN .I, FLYNN
STEPHEN J. POLLAK
D"VID BOOTH BEERS
"NTHONY ", L"PH"M
RICH"RD M, SH"RP
JOHN D. "LDOCK
WILLIAM S, MOORE
JOHN TOWNSEND RICH
JAMES R. BIEKE
STEPHEN J. HADLEY
FR"NKLIN D. KRAMER
WENDY S. WHITE
WILLIAM R. GALEOTA
PATRICK M. HANLON
NANCY C. SH E¡
TIMOTHY K SHUB"
JAMES R. BIRD
MICHAEL S. GIANNOTTO
JEFFREY C. MARTIN
WILLIAM R. HANLON
ELIZABETH RUNYAN GEISE
COLLETTE C. GOODMAN
JULIE M, EDMOND
LAUR" S. WERTHEIMER
(202) 828-2000
TELEX NO: 89-2399
TELECOPIER: (202) 828-2195
ERIC C, JEFFREY
CHRISTOPHER E. PALMER
MARK S. RAFFMAN
RUTH L. HENNING
JOHN D. GIBSON
JOHN E. VEILLEUX
ELISE J. RABEKOFF
ELlZ"BETH M, BROWN
P"TRICIA L HANSEN
JOSEPH 1", YENOUSKA
ROBERT B, WASSERMAN
BERNICE M. BLAIR
ANNE R. BOWDEN
WILLIAM D. WEINREB
D"VID A. BONO
KENNETH F. SPARKS
LIS" A. LANDSMAN
ANTHONY HONG
PETER oJ. SPIRO
LARRY T, GARVIN
AMANDA J. BERLOWE
LAWRENCE A. WEST"
RICHARD A. NAGAREDA
JOHN MOUSTAKA.
DAVID E. JONES
JONATHAN 0, BOGGS
CYNTHIA H. GURNEE.
DANA J. MARTIN.
J. BRADFORD WIEGMANN.
M. SOFIA ADROGUÉ'GUSTAFSON'
LLOYD D. COLLIER.
DAVID M, BATTAN.
L MICHAEL GREENBERGER RICHARD M. WYNER WILLIAM 1", SHEEHAN THOMAS J. MIKULA 'NOT ADMiTTED IN D. C. FREDERICK C, SCHAFRICK EUGENIA LANGAN DAVID B. COOK NANCY B. STONE WILLIAM H. DEMPSEY OF COUNSEL July 27, 1993

Inv. Co. Act of 1940
§ 17(d) Rule 17d-1; § 26(a) (2)
HAD DELIVERED

Clifford E. Kirsch, Esq.

Assistant Director

Office of Insurance Products

Division of Investment Management

Securities and Exchange Commission

450 Fifth street, N.W.

Washington, D.C. 20549

Re: The Travelers Insurance Company;

The Travelers Fund U for Variable Annuities; and

Copeland Financial Services. Inc.

Dear Mr. Kirsch:
This is to supplement our letter of May 27, 1993 in which

we asked to be advised that the staff would not recommend that

the Commission take enforcement action if The Travelers

Insurance Company ("The Travelers"), acting as depositor of

the Travelers Fund U for Variable Annuities ("Fund U"),

collected certain fees owed to Copeland Financial Services,

Inc. ("CFS") by clients participating in its "CHART"

Investment Advisory Program (the "Program") in the manner

described in that letter.

Clifford E. Kirsch, Esq.

July 27, 1993

This will confirm that CFS is registered as an

investment adviser under the Investment Advisors Act of 1940.

The CHAT Program is described at pages 2 and 3 of
our May 27, 1993 letter. This is to expand upon that

description. As is there explained, when a new client enters

into an investment advisory agreement under the Program, an analysis is made of the characteristics of that cl ient and a recommendation is given by CFS concerning what percentages of

the assets held in the client's Universal Annuity variable

annui ty contract that are invested in the several Funds in

American Odyssey Funds, Inc. should be allocated among the

Funds. For example, the recommendation might be that 20% be

invested in the Core Equity Fund, 30% in the Emerging

Opportunities Fund, 30% in the International Equity Fund, and

20% in the Long-Term Bond Fund. If the client approves, CFS

will exercise its authority under its investment advisory agreement and will direct Travelers to allocate the Client i s assets accordingly. As the values in each Fund vary with

time, CFS, without consultation with the client, will

rebalance these amounts so as to bring them into closer

conformi ty with the original agreed-upon allocation. The

original allocation, however, will not be changed without the client i s consent. Periodically, the allocations will be reviewed with the client; and if CFS believes that a change in

the allocation percentages is desirable, it will make such a

recommendation to the client and, once again, if the client

approves, the revised allocation will be carried out.

There is a brief discussion on pages 3 and 4 of our

May 27, 1993 letter about how the fees under the CHART Program

are determined. The computation of the fee and how it will be

collected is set forth in the CHAT Program brochure which, to

this extent and others, is incorporated into the Investment

Advisory Agreement entered into by the client. The fees are

determined as a percentage of the amount to which the Program

applies on the last business day of each three-month period

ending at the close of January, April, July and October. The

fees are charged on a prospective basis for the following

three-month period so that no charge is made for the period

between the date that participation in the Program first

begins and the following valuation (or fee determination)

date. However, if a participant should withdraw from the

Program, for example, two months after a valuation date, there

would be no refund of the fee based on that valuation date.

The first valuation date under the Program will be July 30th,

the last business day of July.

Clifford E. Kirsch, Esq. u-July 27, 1993

Two sentences on page 4 of our letter of May 27, 1993 may

possibly be ambiguous because they are redundant. We state

that the quarterly redemption requests provided for under the

Program will be revocable at any time by the participant, and

also will be revoked automatically if he or she withdraws from

the Program. This may imply that a participant who wishes to

pay the fee in some other manner may remain in the Program,

revoke the redemption request and then, for example, pay the fee in cash. At present, at least, this option is not available to participants. Every participant who embarks upon

the Program must agree that the fee will be collected through

the quarterly redemption requests described in our May 27,

1993 letter.

This will confirm that CFS will comply with

Rule 204-3 under the Investment Advisors Act and will give a

wri tten disclosure statement describing the Program to every participant.
5. This will confirm that the pages of the prospectus

for The Travelers Universal Annuity that contains the

information required by Item 3 of Form N-4 will contain a

separate table that shows the fees to be paid by those persons

who select American Odyssey Funds, Inc. and who participate in

the Program. Thus, there will be two separate examples in the

fee tables respecting the American Odyssey Funds, Inc., one

showing the total charges and expenses for persons who do not

participate in the Program and the other showing the charges

and expenses that include the fee charged under the Program.

Similarly, this will confirm that if there is any

general adyertising respecting investment performance of the

sub-account of Fund U that is invested in the American Odyssey

Funds, Inc., the performance will be calculated, if only one

investment return is displayed, so as to include the fee

charged under the CHAT Program. There may be an appropriate footnote indicating that the returns would be higher if there

were no participation in the CHART Program. There may be

instances where performance advertising will be directed to

and received by only contract owners who are not participants

in the Program. For example, there may be a class made up of

employees of a single employer which has not made the Program

available under its retirement plan. Performance advertising

limited to such a class will provide only the performance data

that applies to them. Alternatively, any advertising of

performance involving the sub-account of Fund U that is

invested in the American Odyssey Funds, Inc., in advertising

that is not so limited, will show two sets of returns, one

Clifford E. Kirsch, Esq.

3u-ly 27 i 1993

assuming participation in the CHAT Program and the other

assuming that there is no participation in the Program.

We are hopeful that we will have a response to our letter

in the near future; and if we can be of assistance in any way,

we would appreciate it if we could be promptly advised.

y yours,

rence J~ ilq

Christopher E. Palmer

SHEA & GARDNER

1800 Massachusetts Ave., N.W.

Washington, D.C. 20036

Attorneys for
The Travelers Insurance Company,

The Travelers Fund U For

Variable Annuities, and

Copeland Financial Services, Inc.

SHEA & GARDNER
1800 MASSACHUSETTS AVENUE, N.W.

!
." , :, I FR"NCIS M. SHEA l 1905-19891 WARNER W. GARDNER ; LAWRENCE J. LAT:O RICH"RD T. CONWAY ROBERT T. BASSECHES BENJAMIN W, BOLEY RALPH J. MOORE, JR. MARTIN J. FLYNN STEPHEN J. POLLAK DAVID BOOTH BEERS ANTHONY A. LAPHAM RICHARD M. SHARP JOHN D. ALDOCK WILLIAM S. MOORE j WASHINGTON, D. C. 20036 STEPHEN J. HADLEY FRANKLIN D. KRAM~R WENDY S. WHITE WILLIAM R. GALEO-:" PATRICK M. HANLO~ N"NCY C. SHEA TIMOTHY K. SHUBA JAMES R. BIRD MICHAEL S. GIANNOTTO JEFFREY C. MARToN WILLIAM R. HANLON ELIZABETH RUNYAN GEISE COLLETTE C, GOODM"N (202) 828-2000 TELEX NO: 89-2398 TELECOPIER: (202) 828-2195 ERIC C. JEFFREY CHRISTOPHER E, PALMER MARK S. RAFFMAN RUTH L. HENNING JOHN D. GIBSON JOHN E. VEILLEUX ELISE J. RABEKOFF ELIZABETH M. BROWN PA TR ICI" i. HANSEN JOSEPH F. YENOUSKA ROBERT B, WASSERMAN BERNICE M. BLAIR ANNE R. BOWDEN WILLIAM D. WEINREB LISA A. LANDSMAN ANTHONY HONG PETER J. SPIRO LARRY T. GARVIN AMANDA .I, BERLOWE LAWRENCE A. WEST. RICHARD A. NAG"REDA JOHN MOUSTAKAS. DAVID E. JONES JONATHAN D. BOGGS CYNTHIA H. GURNEE. DANA J. M"RTIN. J. BRADFORD WIEGMANN. M. SOFIA ADROGUÉ-GUSTAFSOW JOHN TOWNSEND RICH JULIE M. EDMOND DAVID ". BONO LLOYD D. COLLIER. JAMES R. BOEKE LAUR" S. WERTHEIMF.R KENNETH F. SPARKS DAVID M. BATTAN.
i. MICHAEL GREENBERGER RICH"RD M. WYNER
WILLIAM F. SHEEHAN
FREDERICK C. SCHAFRICK
THOMAS J. MIKULA
EUGENIA LANGAN -NOT AOMITTED IN D. C.
D"VID B. COOK NANCY B. STONE
WILLIAM H. DEMPSEY
OF COUNSEL
,
,
,
("I; t. ¡ 1qÇ ~~ l J ~ J

Inv. Co. Act of 1940
§ 17(d); Rule 17d-1; § 26(a) (2) HAD DELIVERED

Clifford E. Kirsch, Esq.

Assistant Director

Office of Insurance Products

Division of Investment Management

Securi ties and Exchange Commission

450 Fifth street, N.W.

Washington, D.C. 20549

Re: The Travelers Insurance Company;

The Travelers Fund U for Variable Annuities; and

Copeland Financial Services. Inc.

Dear Mr. Kirsch:
We request the staff i s advice that it will not recommend

that the Commission take enforcement action if The Travelers

Insurance Company ("The Travelers") acting as the depositor of

The Travelers Fund U for Variable Annuities (lIFund U") and

Fund U collect the fees for the CHAT investment advisory

program (the "CHART Program" or the "Program") of Copeland

Financial Services, Inc. ("CFS"), a registered investment

adviser, in the manner described below.

Clifford E. Kirsch, Esq.

A. The CHART Proqram

CFS is the sponsor of the CHAT Program, a nondiscretionary investment allocation advisory service. CFS

recommends to participants in the Program how to allocate

their assets held in a family of mutual funds or in a variable

contract which provides for several investment options. The

allocations are based upon an analysis of the characteristics

of the individual participant, including his or her risk

tolerance and investment needs and obj ecti ves. Participants

in the CHAT Program sign an investment advisory contract with

CFS, g i v ing it the authority to submit trans fer instructions

to the mutual funds or insurance company to carry out the

asset allocation advice.

The CHAT Program can be used with any family of open-end

investment companies (or any series investment company) which

provides for transfer privileges, so long as it includes

several funds with investment obj ecti ves acceptable to CFS and

suitable for the Program. The Program also can be used with a

variable annuity or variable life insurance contract, again so

long as it provides investment options acceptable to CFS and

suitable for the Program.

CFS intends, at the outset, to offer the CHART Program to

persons who are now contract owners, or who intend to become

contract owners, of a variable annuity contract issued by

The Travelers called the "Universal Annuity." CFS has decided

to introduce the Program in connection the Universal Annuity

because a broker-dealer affiliated with CFS, Copeland

Equities, Inc., has offered that contract successfully in the

past, primarily in connection with the funding of retirement

plans that enjoy tax advantages under §§ 403 (b) and 457 of the

Internal Revenue Code.

CFS is a wholly-owned indirect subsidiary of

The Travelers Corporation, which is also the parent of

The Travelers. More significantly, CFS is one of a group of

subsidiaries of The Travelers Corporation that includes

The Copeland Companies and subsidiaries of The Copeland

Companies (collectively the "Copeland Group"). This group has

always been operated largely autonomously and independently of

the other subsidiaries of The Travelers Corporation, and

independently of The Travelers. For example, the broker-

dealer in the Copeland Group, Copeland Equities, Inc., offers

variable annuity contracts issued by many other insurance

companies not affiliated with The Travelers Corporation, and

Clifford E. Kirsch, Esq.

approximately 60% of its business is with the products of

issuers unrelated to The Travelers.

At least initially, CFS will offer the CHAT Program in

connection with only six of the 25 investment options

available under the Universal Annuity, namely the six

investment funds that are all part of a newly established

series investment company, American Odyssey Funds, Inc., which

is managed by American Odyssey Funds Management, Inc., a

subsidiary of CFS. The American Odyssey Funds are available

to Universal Annuity contract owners through The Travelers

Fund U for Variable Annuities ("Fund Uli), a separate account of The Travelers which is registered as a unit investment

trust.!1 That separate account purchases and holds shares of

other open-end investment companies as well as shares of

American Odyssey Funds, Inc.

The CHART Program is not an integral element of the

Universal Annuity or the American Odyssey Funds. A purchaser

of a Universal Annuity is not required to join the Program,

and he or she may allocate amounts to the American Odyssey

Funds without joining the Program. Only if he or she decides

to become a participant in the CHAT Program, and if the

recommendations to that person made by CFS under the Program

are acceptable, will transfer instructions be given to

The Travelers by CFS, pursuant to the authority given to it

under the investment advisory agreement.

CFS anticipates that the CHAT Program will be offered in

the future in connection with investment options that are

unrelated to any other subsidiary of The Travelers Corporation

and is already in active discussion with several unaffiliated

issuers for this purpose.

B. Collection of the CHART Proqram Fee

At the same time that the participant joins the CHAT

Program, by executing the investment advisory agreement with

1/ Al though American Odyssey Funds, Inc. is currently

selling its shares only to Fund U (with the exception of seed

money shares), it plans to offer and sell its shares to

issuers of variable annuity contracts and to qualified

retirement plans that are independent of The Travelers

Corporation.

Clifford E. Kirsch, Esq.

CFS, he or she will authorize directing the issuer of the

investment contract that is utilized in his or her program (in

the initial use of the Program, this will be The Travelers as

the issuer of the Universal Annuity) to redeem a sufficient

number of shares, units or dollars to pay the quarterly fee

payable under the Program and to pay that amount directly to

CFS. These redemptions will be confirmed and reflected in the

quarterly statements received by each contract owner (in the

case of group contracts, each participant). The continuing

redemption request will, of course, be revocable at any time

by the contract owner or participant and it will also be

revoked automatically if he or she withdraws from the CHAT

Program. The CHAT investment advisory agreement with CFS is also terminable by the participant at any time.

CFS will provide to persons it solicits to participate in

the Program a disclosure statement explaining the Program, its

fees and the manner in which those fees will be collected.

C. The Proposed Fee Collection Is Not Prohibited By
§ 26(a) (2)
section 26 (a) (2) of the Investment Company Act of 1940

(the 111940 Actll) provides generally that the trustee or

custodian of a unit investment trust may charge against the trust i s assets fees for its services and reimbursement for its expenses. There is, however, an important 1 imi tation in § 26(a) (2) (C):
"no payment to the depositor of or a

principal underwriter for such trust, or

to any affiliated person or agent of such

depositor or underwriter, shall be allowed

the trustee or custodian as an expense

(except that provision may be made for the

payment to any such person of a fee, not

exceeding such reasonable amount as the

Commission may prescribe as compensation

for performing bookkeeping and other

administrative services, of a character

normally performed by the trustee or

custodian itself); * * *."

In other words, any fee paid by a unit investment trust to its

depositor or principal underwriter (of an affiliate of either)

to cover the unit investment trust i s expenses must be for

bookkeeping or other administrative services and meet the

Commission i s reasonableness standard, which is set forth in

Clifford E. Kirsch, Esq.

Rule 26a-1.g¡ The Division's recent 1940 Act study report

explains the purpose behind these provisions:

"The periodic payment plan, because it is

nothing more than a means of purchasing

securities by installment, requires a plan

trustee or sponsor to perform relatively

simple administrative tasks. Therefore,

the often illusory services for which

sponsors were paid out of trust assets

before 1940 necessitated the restrictions

of section 26 (a) (2) (C) and the at cost limits of rule 26a-1." Division of

Investment Management, Protecting

Investors: A Half Century of Investment

Company Regulation 391 (May 1992) (111940

Act study Report") .~J
The Travelers, as well as many other life insurance

companies that issue variable contracts, has taken the

position that the deduction of amounts from a registered

separate account such as Fund U in return for assuming risks

2J The staff, in a 1979 no-action letter, made clear that

§ 26(a) (2) (C) is concerned with payment of the trust's

expenses for administrative services, rather than all payments

or withdrawals from the trust. "This Division has consistently interpreted Section 26 (a) (2) (C) of the Act to require that if the trustee deleqates to the investment

company's principal underwriters, depositor, or promoter

( , sponsor' ), duties the trustee is obl igated to perform under the terms of the trust indenture, for the performance of which

(the sponsor) receives fees from the investment company or its

securi ty holders, the trustee may pay to the sponsor only such

amounts as will reimburse the sponsor for the approximate cost

actually incurred by the sponsor in performing such delegated

duties." E.F. Hutton Tax Exempt Fund, 1979 SEC Noact LEXIS

2690 (Apr. 11, 1979) (emphasis added).

JJ See also E.F. Hutton Tax Exempt Fund, 1979 SEC Noact

LEXIS 2690 (Apr. 11, 1979) ("In our view, Section 26(a) of the

Investment Company Act of 1940 (' Act') is aimed at preserving

the assets of registered investment companies and preventing

securi ty holders thereof from being subj ected to purported

'custodian' charges which, instead of compensating the

custodian for custodianship services actually rendered, in

fact, provide additional remuneration to the promoters. ") .

Clifford E. Kirsch, Esq.

involving life contingencies or rendering services generally

provided by life insurance companies do not violate

§ 26(a)(2). Nevertheless, the Commission staff has taken the

different position that such deductions may lawfully be made only if an exemptive order pursuant to § 6 (c) has been issued. Life insurance companies generally, including The Travelers,

have acceded to this view and have sought and obtained

exemptions from § 26 (a) (2) whenever such charges or deductions are made from the accounts or cash values of owners of

variable contracts pursuant to the terms of the variable

contract. For purposes of this letter we assume that this is

a correct interpretation of § 26 (a) (2), and we do not intend

to question the accuracy of this interpretation.

In our opinion, the proposed quarterly redemptions from

uni t investment trusts, such as Fund U, to pay the CHAT

Program fees do not violate § 26 (a) (2). Unlike contract

charges applicable to all contract owners which are deducted

from a unit investment trust, such as a mortal i ty and expenses

risk charge, the quarterly CHART redemptions are not made to

pay an expense of the trust. The amounts redeemed do not

compensate CFS for expenses incurred in operating the trust;

in fact, CFS does not have any responsibilities for operating

the trust. Rather, the amounts redeemed pay CFS for asset

allocation services of the CHAT Program, which is separate

from and independent of the trust. The Travelers, as

depositor of the trust, gets no part of this fee. It is

important also to recognize that participation in the CHAT

Program is not required to invest in Fund U or the American

Odyssey Funds. This fact dispels any notion that the

redemptions are simply hidden additional charges for investing

in Fund U or the American Odyssey Funds. Rather, the

redemptions are made only at the direction of an investor who

has determined that he or she wants to purchase and pay for

the additional services provided by CFS through the CHAT

Program.
Although most exemptive orders from § 26 (a) (2) involve charges that are determined as a percentage of the value on

each day of the net assets of the separate account, we

recognize that an issue could arise under § 26(a) (2) when

wi thdrawals are made quarterly through redemption of units.

The primary determining factor is that these withdrawals are not "expenses of the trustll within the meaning of § 26 (a) (2) because they are not charged uniformly and proportionately

against all the participants in the trust. They are rather

expenses only of those participants who have chosen

voluntarily to employ Copeland's CHART Program.

Clifford E. Kirsch, Esq.

In short, the CHAT Program redemptions are analogous to

redemptions pursuant to a systematic withdrawal plan, an

arrangement in widespread use in the industry, with the

exception that the contract owner has requested the payments

be made directly to another person to pay a fee incurred

pursuant to a separate investment advisory agreement. Since

these redemptions are made to pay fees under a separate,

optional program rather than to pay expenses of the trust, they are not prohibited by § 26(a) (2). D. Commission Approval of the Fee Collection Procedure

is Not Required by ~ 17 Cd) or Rule 17d-1

Section 17(d) of the 1940 Act, in pertinent part, makes

it "unlawful for any affiliated person of or principal

underwriter for a registered investment company * * * or any

affiliated person of such a person or principal underwriter,

acting as principal to effect any transaction in which such

registered investment company, or a company controlled by such

registered company, is a joint or a joint and several

participant with such person, principal underwriter, or

affiliated person, in contravention of such rules and

regulations as the Commission may prescribe for the purpose of

limiting or preventing participation by such registered or

controlled company on a basis different from or less

advantageous than that of such other participant." Thus,

§ 17 (d) is not self-executing and the Commission's authority

is limited to the adoption of rules which carry out the

specified purpose.

Rule 17d-1, which is plainly within that authority,

requires Commission approval before any "affiliated person of

or principal underwriter for any registered investment company

- - (or any) affiliated person of such a person or principal

underwriter, acting as principal, (may) participate in, or

effect any transaction in connection with, any joint

enterprise or other joint arrangement or profit-sharing plan

in which any such registered company, or a company controlled

by such registered company, is a participant * * *."

The Rule defines "joint enterprise or other joint

arrangement or profit-sharing plan" as "any written or oral

plan, contract, authorization or arrangement, or any practice

or understanding concerning an enterprise or undertaking

whereby a registered investment company or a controlled

company thereof and any affiliated person of or a principal

underwri ter for such registered inyestment company, or any

affiliated person of such a person or principal underwriter,

Clifford E. Kirsch, Esq.

have a j oint or a j oint and several participation, or share in the profits of such enterprise or undertaking, including, but

not limited to, any stock option or stock purchase plan, but

shall not include an investment advisory contract subject to

section 15 of the Act."

Although CFS is an affiliated person of Fund U, the

system of quarterly redemptions to pay the CHAT Program fee does not, in our opinion, constitute a j oint transaction subject to § 17 (d) or Rule 17d-1. The Travelers as the issuer of the Universal Annuity is obligated by § 22 (e) of the 1940 Act to carry out redemption requests, and that is all, in

our view, that The Travelers is doing. The Travelers does not

participate in any way in the CHAT Program and does not

receive any part of the CHAT fee. It does not make any

special charge for carrying out this continuing redemption

request. CFS did, of course, discuss this arrangement with

its affiliated company, The Travelers, but the only thing

The Travelers agreed to do that it was, perhaps, not required

to do by law was to carry out the instructions of its contract

owners to send the redemption proceeds to CFS rather than to

the contract owners for transmission to CFS. Those

discussions and that agreement, in our opinion, do not

consti tute a j oint transaction. Although § 17 (d) appl ies to

more than formal written joint ventures, at least "some

element of 'combination' is required." SEC v. Talley

Industries. Inc., 399 F.2d 396, 403 (2d Cir. 1968). Here,

there is no combined arrangement of the type found by the

Commission in Talley -- a implied alliance between a fund and

an affiliate concerning the purchase of stock of a particular

company -- and to find a combination here would be to find a

combination almost anytime a fund consulted with an affiliate.

That, in our view, would be too broad a reading of the

statute. To act jointly requires some written or oral

agreement or the taking of some action with another person

that involves more than following instructions that one is

required by law to observe.

We reach the same conclusion under Rule 17d-1, which defines a "joint enterprise or other joint arrangement" as an arrangement where an investment company and an affiliate "have a j oint or a j oint and several participation, or share in the profits of such enterprise or undertaking." The Travelers and Fund U have no meaningful j oint participation with CFS; they have simply agreed to honor a type of continuing redemption request submitted by their contract owners. Thus, in our opinion, the redemption procedure is not subj ect to Rule 17d-1.

Clifford E. Kirsch, Esq.

Finally, and perhaps most importantly, the purposes of § 17 (d) and Rule 17d-1 would not be advanced by construing them to cover this situation. section 17 was designed in

general to deal with transactions of an investment company in

which affiliates have a conflict of interest, and § 17 (d) 's

stated purpose is to prevent the participation by an

investment company in a joint transaction "on a basis

different from or less advantageous than that of (the

affiliated) participant." § 17 (d); see also 1940 Act study

Report at 494, 497 (discussing purposes) . In this instance,

there is no conflict between the investment company, Fund U,

and CFS; the investment company is simply following the

redemption instructions of some of its shareholders. Even if

CFS, Travelers and Fund U could be said to be involved in some

j oint arrangement, Fund U and its shareholders are not in any

way disadvantaged by the redemption procedure. The

requirement that the participation not be "less advantageous"

is either fully met or not meaningful in this context. The

staff has taken no-action positions where the nature of the

arrangement was such that there was a possibility that the

purposes of § 17 (d) and Rule 17d-1 might be compromised - arrangements such as service agreements between a fund and an

affiliate -- and has insisted that there be adequate safeguards to prevent overreaching. See,~, Merrill Lynch Capital Fund. Inc., 1990 SEC Noact LEXIS 1333 (Dec. 21, 1990)

(citing other letters); Federated Securities Corp., 1983 SEC

Noact LEXIS 2955 (Oct. 2l, 1983) .1/ Here, the proposed

redemption procedure simply does not even offer any

opportuni ty for overreaching by CFS. Accordingly, it is our

opinion that § 17 (d) is not implicated and that there is no

need for an order under Rule 17d-1.

E. Conclusion

For the reasons stated above, CFS' s proposed fee

collection arrangement for the CHART Program is, in our

opinion, not prohibited by § 26(a) (2) of the 1940 Act, and

Commission approval of that arrangement is not required by

!/ In Federated Securities, the staff explained: "That

Congress did not intend a service agreement to be subject to

section 17 (d) is also shown by its standard for rulemaking

under section 17 (d), i. e., 'for the purpose of 1 imi ting or

preventing participation by such registered * * * company on a

basis different from or less advantageous than that of such

other participant.' This standard would have 1 imi ted, if any,

applicability to a service contract."

Clifford E. Kirsch, Esq.

§ 17 (d) of that Act or Rule 17d-1 thereunder. We therefore request the staff's advice that it will not recommend that the

Commission take enforcement action if The Travelers collects

and remits the fees for the CHAT investment advisory program

in the manner described in this letter.

S incer~Iy yours, /) , r~l ~(:-?, /;/~~tf /,Itl-,Cf.ir iI .' L/

Lawrence J. íatto

Christopher E. Palmer

SHEA & GARDNER

1800 Massachusetts Ave., N.W.

Washington, D. C. 20036
Attorneys for
The Travelers Insurance Company,

The Travelers Fund U For

Variable Annuities, and

Copeland Financial Services, Inc.