[14617]
April 8, 2002
TO: VARIABLE INSURANCE PRODUCTS ADVISORY COMMITTEE No. 2-02
RE: DRAFT ICI REGULATORY REFORM PROPOSALS RELATING TO VARIABLE
INSURANCE PRODUCTS
In connection with plans to undertake a comprehensive review of the federal securities
laws, SEC Chairman Harvey Pitt has invited the industry to make recommendations for
possible regulatory changes. In response to this invitation, the Institute has prepared a draft
package of regulatory reform proposals. Summarized below and attached are two
recommendations that relate to variable insurance products. In particular, the Institute’s
recommendations would amend Rules 6e-2 and 6e-3(T) under the Investment Company Act to
eliminate the need for mixed and shared funding relief and codify exemptive relief to permit
substitutions of underlying funds.
We have scheduled a conference call for Monday, April 15 at 3:00 pm Eastern to
discuss the attached proposals. If you would like to participate on the conference call, the
dial in number will be 888-455-0058 and the pass code will be “Variable Insurance.” In
addition, if you plan to participate on the conference call, please contact Monica Carter-
Johnson by phone at 202-326-5823, by fax at 202-326-5827 or by e-mail at mcarter@ici.org.
Finally, if you have any comments on the proposals, please provide them to the undersigned
by phone at 202-371-5408, by fax at 202-326-5839 or by e-mail at aburstein@ici.org no later
than Friday, April 19.
I. Amend Rules to Allow Mixed and Shared Funding
Currently, Rules 6e-2 and 6e-3(T) under the Investment Company Act provide
exemptive relief from various provisions of the Act to separate accounts funding variable life
insurance (“VLI”) contracts to permit those contracts to be offered and administered under the
Act. However, where the separate accounts funding these contracts are organized as unit
investment trusts, certain relief provided by these rules is available only if shares of the
underlying fund are offered “exclusively” to separate accounts funding VLI contracts of the
insurance company and/or of any affiliated life insurance company. Because of this exclusivity
requirement, to qualify for exemptive relief under the rules, the underlying fund cannot offer its
shares to, among other things, separate accounts funding variable annuity (“VA”) contracts of
the same or an affiliated insurer (“mixed funding”) and separate accounts funding VLI
contracts of unaffiliated insurers or separate accounts funding VA contracts of unaffiliated
insurers (“shared funding”).
2
The draft submission recommends amendments to Rule 6e-2 and 6e-3(T) to eliminate the
“exclusivity” requirements.
II. Adopt Rules to Allow Substitutions of Insurance Product Funds
The draft submission recommends that the SEC adopt a new rule under the Investment
Company Act to permit insurance companies and their registered separate accounts to
substitute shares of one underlying fund for another without first obtaining SEC approval
under Section 26(c) of the Act. The new rule would exempt insurance company depositors from
Section 26(c) based on a set of conditions that would capture the most important of the criteria
that have been employed by the SEC in reviewing exemptive applications: (1) the compatibility
of investment objectives and strategies; and (2) expenses. The recommended rule would leave
for SEC approval on a case-by-case basis those applications that do not meet these conditions.
In addition, the draft submission recommends that the SEC adopt a companion rule to
the new rule on substitutions to permit the transfer in-kind of portfolio securities from an
existing underlying fund to a new underlying fund in effecting a substitution. The new rule
would codify the positions taken by the SEC in no-action letters and numerous exemptive
orders. Among the conditions to which applicants have agreed is that the in-kind transaction
will comply or will substantially comply with the conditions in Rule 17a-7 under the Act.
Ari Burstein
Associate Counsel
Attachment
Attachment (in .pdf format)