PARTICIPATION AGREEMENT
as of , 2002
Franklin Xxxxxxxxx Variable Insurance Products Trust
Franklin Xxxxxxxxx Distributors, Inc.
Modern Woodmen of America
CONTENTS
SECTION SUBJECT MATTER
1. Parties and Purpose
2. Representations and Warranties
3. Purchase and Redemption of Trust Portfolio Shares
4. Fees, Expenses, Prospectuses, Proxy Materials and Reports
5. Voting
6. Sales Material, Information and Trademarks
7. Indemnification
8. Notices
9. Termination
10. Miscellaneous
SCHEDULES TO THIS AGREEMENT
A. The Society
B. Accounts of the Society
C. Available Portfolios and Classes of Shares of the Trust;
Investment Advisers
D. Contracts of the Society
E. This schedule not used.
F. Rule 12b-1 Plans of the Trust
G. Addresses for Notices
H. Shared Funding Order
1. PARTIES AND PURPOSE
This agreement (the "Agreement") is between certain portfolios,
specified below and in Schedule C, of Franklin Xxxxxxxxx Variable Insurance
Products Trust, an open-end management investment company organized as a
business trust under Massachusetts law (the "Trust"), Franklin Xxxxxxxxx
Distributors, Inc., a California corporation which is the principal
underwriter for the Trust (the "Underwriter," and together with the Trust,
"we" or "us") and the insurer identified on Schedule A ("you"), on your own
behalf and on behalf of each segregated asset account maintained by you that
is listed on Schedule B, as that schedule may be amended from time to time
("Account" or "Accounts").
The purpose of this Agreement is to entitle you, on behalf of the
Accounts, to purchase the shares, and classes of shares, of portfolios of the
Trust ("Portfolios") that are identified on Schedule C, solely for the purpose
of funding benefits of your variable life insurance policies or variable annuity
contracts ("Contracts") that are identified on Schedule D. This Agreement does
not authorize any other purchases or redemptions of shares of the Trust.
2. REPRESENTATIONS AND WARRANTIES
2.1 REPRESENTATIONS AND WARRANTIES BY YOU
You represent and warrant that:
2.1.1 You are a fraternal benefit society duly organized
and in good standing under the laws of your state of incorporation.
2.1.2 All of your directors, officers, employees, and other
individuals or entities dealing with the money and/or securities of the Trust
are and shall be at all times covered by a blanket fidelity bond or similar
coverage for the benefit of the Trust, in an amount not less than $5 million.
Such bond shall include coverage for larceny and embezzlement and shall be
issued by a reputable bonding company. You agree to make all reasonable efforts
to see that this bond or another bond containing such provisions is always in
effect, and you agree to notify us in the event that such coverage no longer
applies.
2.1.3 Each Account is a duly organized, validly existing
segregated asset account under applicable insurance law and interests in each
Account are offered exclusively through the purchase of or transfer into a
"variable contract" within the meaning of such terms under Section 817 of the
Internal Revenue Code of 1986, as amended ("Code") and the regulations
thereunder. You will continue to meet such definitional requirements, and will
notify us immediately upon having a reasonable basis for believing that such
requirements have ceased to be met or that they might not be met in the future.
2.1.4 Each Account either: (i) has been registered or,
prior to any issuance or sale of the Contracts, will be registered as a unit
investment trust under the Investment Company Act of 1940 ("1940 Act"); or (ii)
has not been so registered in proper reliance upon an exemption from
registration under Section 3(c) of the 1940 Act; if the Account is exempt from
registration as an investment company under Section 3(c) of the 1940 Act, you
will use your best efforts to maintain such exemption and will notify us
immediately upon having a reasonable basis for believing that such exemption no
longer applies or might not apply in the future.
2.1.5 The Contracts or interests in the Accounts: (i) are
or, prior to any issuance or sale will be, registered as securities under the
Securities Act of 1933, as amended (the "1933 Act"); or (ii) are not registered
because they are properly exempt from registration under Section 3(a)(2) of the
1933 Act or will be offered exclusively in transactions that are properly exempt
from registration under Section 4(2) or Regulation D of the 1933 Act, in which
case you will make every effort to maintain such exemption and will notify us
immediately upon having a reasonable basis for believing that such exemption no
longer applies or might not apply in the future.
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2.1.6 The Contracts: (i) will be sold by broker-dealers, or
their registered representatives, who are registered with the Securities and
Exchange Commission ("SEC") under the Securities and Exchange Act of 1934, as
amended (the "1934 Act") and who are members in good standing of the National
Association of Securities Dealers, Inc. (the "NASD"); (ii) will be issued and
sold in compliance in all material respects with all applicable federal and
state laws; and (iii) will be sold in compliance in all material respects with
state insurance suitability requirements and NASD suitability guidelines.
2.1.7 Subject to the Trust's compliance with applicable
diversification requirements, the Contracts currently are and will be treated as
annuity contracts or life insurance contracts under applicable provisions of the
Code and you will use your best efforts to maintain such treatment; you will
notify us immediately upon having a reasonable basis for believing that any of
the Contracts have ceased to be so treated or that they might not be so treated
in the future.
2.1.8 The fees and charges deducted under each Contract, in
the aggregate, are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by you.
2.1.9 You will use shares of the Trust only for the purpose
of funding benefits of the Contracts through the Accounts.
2.1.10 Contracts will not be sold outside of the United
States.
2.1.11 With respect to any Accounts which are exempt from
registration under the 1940 Act in reliance on 3(c)(1) or Section 3(c)(7)
thereof:
2.1.11.1 the principal underwriter for each such
Account and any subaccounts thereof is a
registered broker-dealer with the SEC under
the 1934 Act;
2.1.11.2 the shares of the Portfolios of the Trust
are and will continue to be the only
investment securities held by the
corresponding subaccounts; and
2.1.11.3 with regard to each Portfolio, you, on
behalf of the corresponding subaccount,
will:
(a) vote such shares held by it in the
same proportion as the vote of all
other holders of such shares; and
(b) refrain from substituting shares of
another security for such shares
unless the SEC has approved such
substitution in the manner provided
in Section 26 of the 1940 Act, if
required by the 1940 Act.
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2.2 REPRESENTATIONS AND WARRANTIES BY THE TRUST
The Trust represents and warrants that:
2.2.1 It is duly organized and in good standing under the
laws of the State of Massachusetts.
2.2.2 All of its directors, officers, employees and others
dealing with the money and/or securities of a Portfolio are and shall be at all
times covered by a blanket fidelity bond or similar coverage for the benefit of
the Trust in an amount not less that the minimum coverage required by Rule 17g-1
or other regulations under the 1940 Act. Such bond shall include coverage for
larceny and embezzlement and be issued by a reputable bonding company.
2.2.3 It is registered as an open-end management investment
company under the 0000 Xxx.
2.2.4 Each class of shares of the Portfolios of the Trust
is registered under the 0000 Xxx.
2.2.5 It will amend its registration statement under the
1933 Act and the 1940 Act from time to time as required in order to effect the
continuous offering of its shares.
2.2.6 It does and will comply, in all material respects,
with the 1933 and 1940 Acts and the rules and regulations thereunder.
2.2.7 It is currently qualified as a "regulated investment
company" under Subchapter M of the Code, it will make every effort to maintain
such qualification, and will notify you immediately upon having a reasonable
basis for believing that it has ceased to so qualify or that it might not so
qualify in the future.
2.2.8 The Trust will comply with the diversification
requirements for variable annuity, endowment or life insurance contracts set
forth in Section 817(h) of the Code, and the rules and regulations thereunder,
including without limitation Treasury Regulation 1.817-5. Upon having a
reasonable basis for believing any Portfolio has ceased to comply and will not
be able to comply within the grace period afforded by Regulation 1.817-5, the
Trust will notify you immediately and will take all reasonable steps to
adequately diversify the Portfolio to achieve compliance.
2.2.9 It currently intends for one or more classes of
shares (each, a "Class") to make payments to finance its distribution expenses,
including service fees, pursuant to a plan ("Plan") adopted under rule 12b-1
under the 1940 Act ("Rule 12b-1"), although it may determine to discontinue such
practice in the future. To the extent that any Class of the Trust finances its
distribution expenses pursuant to a Plan adopted under rule 12b-1, the Trust
undertakes to comply with any then current SEC interpretations concerning rule
12b-1 or any successor provisions.
2.3 REPRESENTATIONS AND WARRANTIES BY THE UNDERWRITER
The Underwriter represents and warrants that:
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2.3.1 It is registered as a broker dealer with the SEC
under the 1934 Act, and is a member in good standing of the NASD.
2.3.2 Each investment adviser listed on Schedule C (each,
an "Adviser") is duly registered as an investment adviser under the Investment
Advisers Act of 1940, as amended, and any applicable state securities law.
2.3.3 It is duly organized and in good standing under the
laws of the State of California.
2.3.4 It will sell and distribute the Trust's shares in
accordance with all applicable federal securities laws.
2.4 WARRANTY AND AGREEMENT BY BOTH YOU AND US
We received an order from the SEC dated November 16, 1993 (file no.
812-8546), which was amended by a notice and an order we received on September
17, 1999 and October 13, 1999, respectively (file no. 812-11698) (collectively,
the "Shared Funding Order," attached to this Agreement as Schedule H). The
Shared Funding Order grants exemptions from certain provisions of the 1940 Act
and the regulations thereunder to the extent necessary to permit shares of the
Trust to be sold to and held by variable annuity and variable life insurance
separate accounts of both affiliated and unaffiliated life insurance companies
and qualified pension and retirement plans outside the separate account context.
You and we both warrant and agree that both you and we will comply with the
"Applicants' Conditions" prescribed in the Shared Funding Order as though such
conditions were set forth verbatim in this Agreement, including, without
limitation, the provisions regarding potential conflicts of interest between the
separate accounts which invest in the Trust and regarding contract owner voting
privileges. In order for the Trust's Board of Trustees to perform its duty to
monitor for conflicts of interest, you agree to inform us of the occurrence of
any of the events specified in condition 2 of the Shared Funding Order to the
extent that such event may or does result in a material conflict of interest as
defined in that order.
3. PURCHASE AND REDEMPTION OF TRUST PORTFOLIO SHARES
3.1 We will make shares of the Portfolios available to the
Accounts for the benefit of the Contracts. The shares will be available for
purchase at the net asset value per share next computed after we (or our agent)
receive a purchase order, as established in accordance with the provisions of
the then current prospectus of the Trust. Notwithstanding the foregoing, the
Trust's Board of Trustees ("Trustees") may refuse to sell shares of any
Portfolio to any person, or may suspend or terminate the offering of shares of
any Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or if, in the sole discretion of the Trustees, they deem
such action to be in the best interests of the shareholders of such Portfolio.
Without limiting the foregoing, the Trustees have determined that there is a
significant risk that the Trust and its shareholders may be adversely affected
by investors whose purchase and redemption activity follows a market timing
pattern, and have authorized the Trust, the Underwriter and the Trust's transfer
agent to adopt procedures and take other action (including, without limitation,
rejecting specific purchase orders) as they deem necessary to reduce, discourage
or eliminate market timing activity. You agree to
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cooperate with us to assist us in implementing the Trust's restrictions on
purchase and redemption activity that follows a market timing pattern.
3.2 We agree that shares of the Trust will be sold only to life
insurance companies which have entered into fund participation agreements with
the Trust ("Participating Insurance Companies") and their separate accounts or
to qualified pension and retirement plans in accordance with the terms of the
Shared Funding Order. No shares of any Portfolio will be sold to the general
public.
3.3 This section not used.
3.4 You shall be the designee for us for receipt of purchase
orders and requests for redemption resulting from investment in and payments
under the Contracts ("Instructions"). The Business Day on which such
Instructions are received in proper form by you and time stamped by the close of
trading will be the date as of which Portfolio shares shall be deemed purchased,
exchanged, or redeemed as a result of such Instructions. Instructions received
in proper form by you and time stamped after the close of trading on any given
Business Day shall be treated as if received on the next following Business Day.
You warrant that all orders, Instructions and confirmations received by you
which will be transmitted to us for processing on a Business Day will have been
received and time stamped prior to the Close of Trading on that Business Day.
Instructions we receive after 9 a.m. Eastern Time shall be processed on the next
Business Day. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Trust calculates its net asset
value pursuant to the rules of the SEC and its current prospectus.
3.5 We shall calculate the net asset value per share of each
Portfolio on each Business Day, and shall communicate these net asset values to
you or your designated agent on a daily basis as soon as reasonably practical
after the calculation is completed (normally by 6:30 p.m. Eastern time).
3.6 You shall submit payment for the purchase of shares of a
Portfolio on behalf of an Account no later than the close of business on the
next Business Day after we receive the purchase order. Payment shall be made in
federal funds transmitted by wire to the Trust or to its designated custodian.
3.7 We will redeem any full or fractional shares of any Portfolio,
when requested by you on behalf of an Account, at the net asset value next
computed after receipt by us (or our agent) of the request for redemption, as
established in accordance with the provisions of the then current prospectus of
the Trust. We shall make payment for such shares in the manner we establish from
time to time, but in no event shall payment be delayed for a greater period than
is permitted by the 0000 Xxx.
3.8 Issuance and transfer of the Portfolio shares will be by book
entry only. Stock certificates will not be issued to you or the Accounts.
Portfolio shares purchased from the Trust will be recorded in the appropriate
title for each Account or the appropriate subaccount of each Account.
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3.9 We shall furnish, on or before the ex-dividend date, notice to
you of any income dividends or capital gain distributions payable on the shares
of any Portfolio. You hereby elect to receive all such income dividends and
capital gain distributions as are payable on shares of a Portfolio in additional
shares of that Portfolio, and you reserve the right to change this election in
the future. We will notify you of the number of shares so issued as payment of
such dividends and distributions.
3.10 Each party to this Agreement agrees that, in the event of a
material error resulting from incorrect information or confirmations, the
parties will seek to comply in all material respects with the provisions of
applicable federal securities laws.
4. FEES, EXPENSES, PROSPECTUSES, PROXY MATERIALS AND REPORTS
4.1 We shall pay no fee or other compensation to you under this
Agreement except as provided on Schedule F, if attached.
4.2 We shall prepare and be responsible for filing with the SEC,
and any state regulators requiring such filing, all shareholder reports,
notices, proxy materials (or similar materials such as voting instruction
solicitation materials), prospectuses and statements of additional information
of the Trust. We shall bear the costs of preparation and filing of the documents
listed in the preceding sentence, registration and qualification of the Trust's
shares of the Portfolios.
4.3 We shall use reasonable efforts to provide you, on a timely
basis, with such information about the Trust, the Portfolios and each Adviser,
in such form as you may reasonably require, as you shall reasonably request in
connection with the preparation of disclosure documents and annual and
semi-annual reports pertaining to the Contracts.
4.4 At your option, we shall provide you, at our expense, with
either: (i) for each Contract owner who is invested through the Account in a
subaccount corresponding to a Portfolio ("designated subaccount"), one copy of
each of the following documents on each occasion that such document is required
by law or regulation to be delivered to such Contract owner who is invested in a
designated subaccount: the Trust's current prospectus, annual report,
semi-annual report and other shareholder communications, including any
amendments or supplements to any of the foregoing, pertaining specifically to
the Portfolios ("Designated Portfolio Documents"); or (ii) a camera ready copy
of such Designated Portfolio Documents in a form suitable for printing and from
which information relating to series of the Trust other than the Portfolios has
been deleted to the extent practicable. In connection with clause (ii) of this
paragraph, we will pay for proportional printing costs for such Designated
Portfolio Documents to the extent necessary to provide one copy for each
Contract owner who is invested in a designated subaccount on each occasion that
such document is required by law or regulation to be delivered to such Contract
owner, and provided the appropriate documentation is provided and approved by
us. We shall provide you with a copy of the Trust's current statement of
additional information, including any amendments or supplements, in a form
suitable for you to duplicate. The expenses of furnishing, including mailing, to
Contract owners the documents referred to in this paragraph shall be borne by
you. For each of the documents provided to you in accordance with clause (i) of
this paragraph 4.4, we shall provide you, upon your request and at your expense,
additional copies. In no event shall we be responsible for the costs of printing
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or delivery of Designated Portfolio Documents to potential or new Contract
owners or the delivery of Designated Portfolio Documents to existing contract
owners.
4.5 We shall provide you, at our expense, with copies of any
Trust-sponsored proxy materials in such quantity as you shall reasonably require
for distribution to Contract owners who are invested in a designated subaccount.
You shall bear the costs of distributing proxy materials (or similar materials
such as voting solicitation instructions) to Contract owners.
4.6 You assume sole responsibility for ensuring that the Trust's
prospectuses, shareholder reports and communications, and proxy materials are
delivered to Contract owners in accordance with applicable federal and state
securities laws.
5. VOTING
5.1 All Participating Insurance Companies shall have the
obligations and responsibilities regarding pass-through voting and conflicts of
interest corresponding to those contained in the Shared Funding Order.
5.2 If and to the extent required by law, you shall: (i) solicit
voting instructions from Contract owners; (ii) vote the Trust shares in
accordance with the instructions received from Contract owners; and (iii) vote
Trust shares for which no instructions have been received in the same proportion
as Trust shares of such Portfolio for which instructions have been received; so
long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable contract owners. You reserve
the right to vote Trust shares held in any Account in your own right, to the
extent permitted by law.
5.3 So long as, and to the extent that, the SEC interprets the
1940 Act to require pass-through voting privileges for Contract owners, you
shall provide pass-through voting privileges to Contract owners whose Contract
values are invested, through the Accounts, in shares of one or more Portfolios
of the Trust. We shall require all Participating Insurance Companies to
calculate voting privileges in the same manner and you shall be responsible for
assuring that the Accounts calculate voting privileges in the manner established
by us. With respect to each Account, you will vote shares of each Portfolio of
the Trust held by an Account and for which no timely voting instructions from
Contract owners are received in the same proportion as those shares held by that
Account for which voting instructions are received. You and your agents will in
no way oppose or interfere with the solicitation of proxies for Portfolio shares
held to fund the Contracts without our prior written consent, which consent may
be withheld in our sole discretion.
6. SALES MATERIAL, INFORMATION AND TRADEMARKS
6.1 For purposes of this Section 6, "Sales literature or other
Promotional material" includes, but is not limited to, portions of the following
that use any logo or other trademark related to the Trust, or Underwriter or its
affiliates, or refer to the Trust: advertisements (such as material published or
designed for use in a newspaper, magazine or other periodical, radio,
television, telephone or tape recording, videotape display, signs or billboards,
motion pictures, telephone directories (other than routine listings) electronic
communication or other public media), sales
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literature (I.E., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, performance reports or summaries, form letters,
telemarketing scripts, seminar texts, reprints or excerpts or any other
advertisement, sales literature or published article or electronic
communication), educational or training materials or other communications
distributed or made generally available to some or all agents or employees in
any media, and disclosure documents, shareholder reports and proxy materials.
6.2 You shall furnish, or cause to be furnished to us or our
designee, at least one complete copy of each registration statement, prospectus,
statement of additional information, private placement memorandum, retirement
plan disclosure information or other disclosure documents or similar
information, as applicable (collectively "Disclosure Documents"), as well as any
report, solicitation for voting instructions, Sales literature or other
Promotional materials, and all amendments to any of the above that relate to the
Contracts or the Accounts prior to its first use. You shall furnish, or shall
cause to be furnished, to us or our designee each piece of Sales literature or
other Promotional material in which the Trust or an Adviser is named, at least
ten (10) Business Days prior to its proposed use. No such material shall be used
unless we or our designee approve such material and its proposed use.
6.3 You and your agents shall not give any information or make any
representations or statements on behalf of the Trust or concerning the Trust,
the Underwriter or an Adviser, other than information or representations
contained in and accurately derived from the registration statement or
prospectus for the Trust shares (as such registration statement and prospectus
may be amended or supplemented from time to time), annual and semi-annual
reports of the Trust, Trust-sponsored proxy statements, or in Sales literature
or other Promotional material approved by the Trust or its designee, except as
required by legal process or regulatory authorities or with the written
permission of the Trust or its designee. You shall send us a complete copy of
each Disclosure Document and item of Sales literature or other Promotional
materials in its final form within twenty (20) days of its first use.
6.4 We shall not give any information or make any representations
or statements on behalf of you or concerning you, the Accounts or the Contracts
other than information or representations, including naming you as a Trust
shareholder, contained in and accurately derived from Disclosure Documents for
the Contracts (as such Disclosure Documents may be amended or supplemented from
time to time), or in materials approved by you for distribution, including Sales
literature or other Promotional materials, except as required by legal process
or regulatory authorities or with your written permission.
6.5 Except as provided in Section 6.2, you shall not use any
designation comprised in whole or part of the names or marks "Franklin" or
"Xxxxxxxxx" or any logo or other trademark relating to the Trust or the
Underwriter without prior written consent, and upon termination of this
Agreement for any reason, you shall cease all use of any such name or xxxx as
soon as reasonably practicable.
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6.6 You shall furnish to us ten (10) Business Days prior to its
first submission to the SEC or its staff, any request or filing for no-action
assurance or exemptive relief naming, pertaining to, or affecting, the Trust,
the Underwriter or any of the Portfolios.
7. INDEMNIFICATION
7.1 INDEMNIFICATION BY YOU
7.1.1 You agree to indemnify and hold harmless the
Underwriter, the Trust and each of its Trustees, officers, employees
and agents and each person, if any, who controls the Trust within the
meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually the "Indemnified Party" for purposes of this
Section 7) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with your written consent, which
consent shall not be unreasonably withheld) or expenses (including the
reasonable costs of investigating or defending any alleged loss, claim,
damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the
Indemnified Parties may become subject under any statute or regulation,
or at common law or otherwise, insofar as such Losses are related to
the sale or acquisition of shares of the Trust or the Contracts and
7.1.1.1 arise out of or are based upon any untrue
statements or alleged untrue statements of any material fact
contained in a Disclosure Document for the Contracts or in the
Contracts themselves or in sales literature generated or
approved by you on behalf of the Contracts or Accounts (or any
amendment or supplement to any of the foregoing)
(collectively, "Company Documents" for the purposes of this
Section 7), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading, provided that this indemnity shall not
apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in
reliance upon and was accurately derived from written
information furnished to you by or on behalf of the Trust for
use in Company Documents or otherwise for use in connection
with the sale of the Contracts or Trust shares; or
7.1.1.2 arise out of or result from statements or
representations (other than statements or representations
contained in and accurately derived from Trust Documents as
defined below in Section 7.2) or wrongful conduct of you or
persons under your control, with respect to the sale or
acquisition of the Contracts or Trust shares; or
7.1.1.3 arise out of or result from any untrue
statement or alleged untrue statement of a material fact
contained in Trust Documents as defined below in Section 7.2
or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statements therein not misleading if such statement
or omission was made in reliance upon and accurately derived
from written information furnished to the Trust by or on
behalf of you; or
7.1.1.4 arise out of or result from any failure by
you to provide the services or furnish the materials required
under the terms of this Agreement;
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7.1.1.5 arise out of or result from any material
breach of any representation and/or warranty made by you in
this Agreement or arise out of or result from any other
material breach of this Agreement by you; or
7.1.1.6 arise out of or result from a Contract
failing to be considered a life insurance policy or an annuity
Contract, whichever is appropriate, under applicable
provisions of the Code thereby depriving the Trust of its
compliance with Section 817(h) of the Code.
7.1.2 You shall not be liable under this indemnification
provision with respect to any Losses to which an Indemnified Party
would otherwise be subject by reason of such Indemnified Party's
willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this
Agreement or to the Trust or Underwriter, whichever is applicable. You
shall also not be liable under this indemnification provision with
respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified you in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received
notice of such service on any designated agent), but failure to notify
you of any such claim shall not relieve you from any liability which it
may have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In case
any such action is brought against the Indemnified Parties, you shall
be entitled to participate, at your own expense, in the defense of such
action. Unless the Indemnified Party releases you from any further
obligations under this Section 7.1, you also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from you to such party of your
election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it,
and you will not be liable to such party under this Agreement for any
legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than
reasonable costs of investigation.
7.1.3 The Indemnified Parties will promptly notify you of
the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Trust shares or the
Contracts or the operation of the Trust.
7.2 INDEMNIFICATION BY THE UNDERWRITER
7.2.1 The Underwriter agrees to indemnify and hold harmless
you, and each of your directors and officers and each person, if any,
who controls you within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" and individually an
"Indemnified Party" for purposes of this Section 7.2) against any and
all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Underwriter, which consent
shall not be unreasonably withheld) or expenses (including the
reasonable costs of investigating or defending any alleged loss, claim,
damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses") to which the
Indemnified Parties may become subject under any statute, at common law
or otherwise, insofar as such Losses are related to the sale or
acquisition of the shares of the Trust or the Contracts and:
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7.2.1.1 arise out of or are based upon any untrue
statements or alleged untrue statements of any material fact
contained in the Registration Statement, prospectus or sales
literature of the Trust (or any amendment or supplement to any
of the foregoing) (collectively, the "Trust Documents") or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall
not apply as to any Indemnified Party if such statement or
omission of such alleged statement or omission was made in
reliance upon and in conformity with information furnished to
us by or on behalf of you for use in the Registration
Statement or prospectus for the Trust or in sales literature
(or any amendment or supplement) or otherwise for use in
connection with the sale of the Contracts or Trust shares; or
7.2.1.2 arise out of or as a result of statements or
representations (other than statements or representations
contained in the Disclosure Documents or sales literature for
the Contracts not supplied by the Underwriter or persons under
its control) or wrongful conduct of the Trust, Adviser or
Underwriter or persons under their control, with respect to
the sale or distribution of the Contracts or Trust shares; or
7.2.1.3 arise out of any untrue statement or alleged
untrue statement of a material fact contained in a Disclosure
Document or sales literature covering the Contracts, or any
amendment thereof or supplement thereto, or the omission or
alleged omission to state therein a material fact required to
be stated therein or necessary to make the statement or
statements therein not misleading, if such statement or
omission was made in reliance upon information furnished to
you by or on behalf of the Trust; or
7.2.1.4 arise as a result of any failure by us to
provide the services and furnish the materials under the terms
of this Agreement (including a failure, whether unintentional
or in good faith or otherwise, to comply with the
qualification representation specified above in Section 2.2.7
and the diversification requirements specified above in
Section 2.2.8; or
7.2.1.5 arise out of or result from any material
breach of any representation and/or warranty made by the
Underwriter in this Agreement or arise out of or result from
any other material breach of this Agreement by the
Underwriter; as limited by and in accordance with the
provisions of Sections 7.2.2 and 7.2.3 hereof.
7.2.2 The Underwriter shall not be liable under this
indemnification provision with respect to any Losses to which an
Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence
in the performance of such Indemnified Party's duties or by reason of
such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to you or the Accounts, whichever is
applicable.
7.2.3 The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified the
Underwriter in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the claim
shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any
designated
12
agent), but failure to notify the Underwriter of any such claim shall
not relieve the Underwriter from any liability which it may have to the
Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Underwriter will be
entitled to participate, at its own expense, in the defense thereof.
Unless the Indemnified Party releases the Underwriter from any further
obligations under this Section 7.2, the Underwriter also shall be
entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Underwriter to
such party of the Underwriter's election to assume the defense thereof,
the Indemnified Party shall bear the expenses of any additional counsel
retained by it, and the Underwriter will not be liable to such party
under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
7.2.4 You agree promptly to notify the Underwriter of the
commencement of any litigation or proceedings against you or the
Indemnified Parties in connection with the issuance or sale of the
Contracts or the operation of each Account.
7.3 INDEMNIFICATION BY THE TRUST
7.3.1 The Trust agrees to indemnify and hold harmless you,
and each of your directors and officers and each person, if any, who
controls you within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section
7.3) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Trust, which consent shall not be unreasonably withheld) or litigation
(including legal and other expenses) to which the Indemnified Parties
may become subject under any statute, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements result from the gross
negligence, bad faith or willful misconduct of the Board or any member
thereof, are related to the operations of the Trust, and arise out of
or result from any material breach of any representation and/or
warranty made by the Trust in this Agreement or arise out of or result
from any other material breach of this Agreement by the Trust; as
limited by and in accordance with the provisions of Sections 7.3.2 and
7.3.3 hereof. It is understood and expressly stipulated that neither
the holders of shares of the Trust nor any Trustee, officer, agent or
employee of the Trust shall be personally liable hereunder, nor shall
any resort be had to other private property for the satisfaction of any
claim or obligation hereunder, but the Trust only shall be liable.
7.3.2 The Trust shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation incurred or assessed against any Indemnified
Party as such may arise from such Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement or to
you, the Trust, the Underwriter or each Account, whichever is
applicable.
7.3.3 The Trust shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified the
Trust in writing within a reasonable time after the summons or other
first legal process giving
13
information of the nature of the claims shall have been served upon
such Indemnified Party (or after such Indemnified Party shall have
received notice of such service on any designated agent), but failure
to notify the Trust of any such claim shall not relieve the Trust from
any liability which it may have to the Indemnified Party against whom
such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against
the Indemnified Parties, the Trust will be entitled to participate, at
its own expense, in the defense thereof. Unless the Indemnified Party
releases the Trust from any further obligations under this Section 7.3,
the Trust also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice
from the Trust to such party of the Trust's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses
of any additional counsel retained by it, and the Trust will not be
liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
7.3.4 You agree promptly to notify the Trust of the
commencement of any litigation or proceedings against you or the
Indemnified Parties in connection with this Agreement, the issuance or
sale of the Contracts, with respect to the operation of the Account, or
the sale or acquisition of shares of the Trust.
8. NOTICES
Any notice shall be sufficiently given when sent by registered or certified mail
or overnight mail through a nationally-recognized delivery service to the other
party at the address of such party set forth in Schedule G below or at such
other address as such party may from time to time specify in writing to the
other party.
9. TERMINATION
9.1 This Agreement may be terminated by any party in its entirety
or with respect to one, some or all Portfolios for any reason by sixty (60) days
advance written notice delivered to all other parties.
9.2 This Agreement shall terminate upon written notice by any
party to all other parties:
9.2.1 upon institution of formal public proceedings against
any party, regarding the duties of that party under this Agreement, by
the NASD, the SEC, or any state securities or insurance commission or
any other regulatory body, or in anticipation of an expected ruling,
judgment or outcome which, in any other party's reasonable judgment
based on a written opinion of its outside counsel (which written
opinion shall be made available to any other party to this Agreement
upon request), would materially impair the ability of the affected
party to perform its duties under this Agreement;
9.2.2 if such terminating party has determined, in its
reasonable judgment exercised in good faith, that any other party or an
Adviser has suffered a material adverse change in its business,
operations, financial condition or prospects since the date of this
Agreement or is the subject of material adverse publicity; or
14
9.2.3 upon the material breach of any provision of this
Agreement, but no termination shall be effective under this Section
9.2.3 until the terminating party has specified the nature of the
material breach in writing to the other parties to this Agreement and
such other parties have been afforded a reasonable opportunity (and no
less than 30 days) to cure the material breach.
9.3 This Agreement shall terminate immediately:
9.3.1 in the event of its assignment by any party without
the prior written approval of the other parties, or as otherwise
required by law.
9.3.2 by written notice from you to the Trust and the
Underwriter if the Trust:
9.3.2.1 ceases to qualify as a Regulated Investment
Company under Subchapter M of the Code; or
9.3.2.2 fails to meet the diversification
requirements specified in Section 817(h) of the Code and any
regulations thereunder.
9.3.3 by written notice from either the Trust or
the Underwriter to you if:
9.3.3.1 any Contract: (i) ceases to be treated as an
annuity contract or life insurance contract under applicable
provisions of the Code or under any successor or similar
provisions; or (ii) fails to qualify as a "variable contract"
within the meaning of such term under Section 817 of the Code,
as amended, or any regulations thereunder;
9.3.3.2 you notify the Trust or the Underwriter that
the exemption from registration under Section 3(c) of the 1940
Act no longer applies, or might not apply in the future, to
the unregistered Accounts, or that the exemption from
registration under Section 4(2) or Regulation D promulgated
under the 1933 Act no longer applies or might not apply in the
future, to interests under the unregistered Contracts.
9.4 If this Agreement is terminated for any reason, except as
required by the Shared Funding Order or pursuant to Section 9.3.3, above, we
shall, at your option, continue to make available additional shares of any
Portfolio and redeem shares of any Portfolio pursuant to all of the terms and
conditions of this Agreement for all Contracts in effect on the effective date
of termination of this Agreement. If this Agreement is terminated as required by
the Shared Funding Order, its provisions shall govern.
9.5 The provisions of Sections 2 (Representations and Warranties)
and 7 (Indemnification) shall survive the termination of this Agreement. All
other applicable provisions of this Agreement shall survive the termination of
this Agreement, as long as shares of the Trust are held on behalf of Contract
owners in accordance with Section 9.4, except that we shall have no further
obligation to sell Trust shares with respect to Contracts issued after
termination.
15
9.6 You shall not redeem Trust shares attributable to the
Contracts (as opposed to Trust shares attributable to your assets held in the
Account) except: (i) as necessary to implement Contract owner initiated or
approved transactions or to redeem a Contract owner's investment if it is below
contractually minimum required levels; (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"); or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act. Upon
request, you shall promptly furnish to us the opinion of your counsel (which
counsel shall be reasonably satisfactory to us) to the effect that any
redemption pursuant to clause (ii) above is a Legally Required Redemption.
Furthermore, except in cases where permitted under the terms of the Contracts,
you shall not prevent Contract owners from allocating payments to a Portfolio
that was otherwise available under the Contracts without first giving us ninety
(90) days notice of your intention to do so.
10. MISCELLANEOUS
10.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions of this
Agreement or otherwise affect their construction or effect.
10.2 This Agreement may be executed simultaneously in two or more
counterparts, all of which taken together shall constitute one and the same
instrument.
10.3 If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
10.4 This Agreement shall be construed and its provisions
interpreted under and in accordance with the laws of the State of California. It
shall also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder, to any orders of the SEC on behalf of the
Trust granting it exemptive relief, and to the conditions of such orders. We
shall promptly forward copies of any such orders to you.
10.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
10.6 The parties to this Agreement agree that the assets and
liabilities of each Portfolio of the Trust are separate and distinct from the
assets and liabilities of each other Portfolio. No Portfolio shall be liable or
shall be charged for any debt, obligation or liability of any other Portfolio.
10.7 Each party to this Agreement shall cooperate with each other
party and all appropriate governmental authorities (including without limitation
the SEC, the NASD, and state insurance regulators) and shall permit such
authorities reasonable access to its books and records in connection with any
investigation or inquiry relating to this Agreement or the transactions
16
contemplated hereby to the extent practicable and except where a party's
respective interests are adverse to or in conflict with another party's
interests.
10.8 Each party shall treat as confidential all information of the
other party which the parties agree in writing is confidential ("Confidential
Information"). Except as permitted by this Agreement or as required by
appropriate governmental authority (including, without limitation, the SEC, the
NASD, or state securities and insurance regulators) the receiving party shall
not disclose or use Confidential Information of the other party before it enters
the public domain, without the express written consent of the party providing
the Confidential Information.
10.9 The rights, remedies and obligations contained in this
Agreement are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties to this Agreement are
entitled to under state and federal laws.
10.10 The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect.
10.11 Neither this Agreement nor any rights or obligations created
by it may be assigned by any party without the prior written approval of the
other parties.
17
10.12 No provisions of this Agreement may be amended or modified in
any manner except by a written agreement properly authorized and executed by
both parties.
IN WITNESS WHEREOF, each of the parties have caused their duly
authorized officers to execute this Agreement.
The Society: MODERN WOODMEN OF AMERICA
By:
---------------------------------------------
Name:
Title:
The Trust: FRANKLIN XXXXXXXXX VARIABLE INSURANCE PRODUCTS TRUST
ONLY ON BEHALF OF EACH
PORTFOLIO LISTED ON
SCHEDULE C HEREOF.
By:
---------------------------------------------
Name: Xxxxx X. Xxxxxxxx
Title: Assistant Vice President
The Underwriter: FRANKLIN XXXXXXXXX DISTRIBUTORS, INC.
By:
--------------------------------------------
Name:
Title:
18
SCHEDULE A
THE SOCIETY
Modern Woodmen of America
0000 0xx Xxxxxx
Xxxx Xxxxxx, Xxxxxxxxx 00000
A fraternal benefit society incorporated in Illinois, and authorized by the
Illinois Department of Insurance to transact variable contract business.
19
SCHEDULE B
ACCOUNTS OF THE SOCIETY
1. Name: Modern Woodmen of America Variable Account
Date Established: March 30, 2001
SEC Registration Number: 333-69446
2. Name: Modern Woodmen of America Variable Annuity
Account
Date Established: March 30, 2001
SEC Registration Number: 333-63972
20
SCHEDULE C
AVAILABLE PORTFOLIOS AND CLASSES OF SHARES OF THE TRUST; INVESTMENT ADVISERS
FRANKLIN XXXXXXXXX VARIABLE INSURANCE PRODUCTS TRUST INVESTMENT ADVISER
Franklin Small Cap Fund, Class 2 Franklin Advisers, Inc.
Franklin Value Securities Fund, Class 2 Franklin Advisory Services, LLC
Franklin U.S. Government Fund, Class 2 Franklin Advisers, Inc.
Mutual Shares Securities Fund, Class 2 Franklin Mutual Advisers, LLC
Templeton Growth Securities Fund, Class 2 Xxxxxxxxx Global Advisors Limited
21
SCHEDULE D
CONTRACTS OF THE SOCIETY
---------------------------------------------------------------------------------------------------------------------------------
INSURANCE PRODUCT NAME SEPARATE ACCOUNT NAME
# COMPANY REGISTERED Y/N REGISTERED Y/N CLASSES OF SHARES AND PORTFOLIOS
1933 ACT #, STATE FORM ID 1940 ACT #
---------------------------------------------------------------------------------------------------------------------------------
01 Modern Individual Flexible Premium Modern Woodmen of America CLASS 2 SHARES:
Woodmen of Deferred Variable Annuity Variable Annuity Account Franklin Small Cap Fund
America Yes Yes Franklin Value Securities Fund
333-63972 811-10429 Franklin U.S. Government Fund
Form VAMWA Mutual Shares Securities Fund
Xxxxxxxxx Growth Securities Fund
---------------------------------------------------------------------------------------------------------------------------------
02 Modern Flexible Premium Deferred Modern Woodmen of America CLASS 2 SHARES:
Woodmen of Variable Life Insurance Variable Account Franklin Small Cap Fund
America YES YES Franklin Value Securities Fund
333-69446 811-10497 Franklin U.S. Government Fund
Form VULMWA Mutual Shares Securities Fund
Xxxxxxxxx Growth Securities Fund
---------------------------------------------------------------------------------------------------------------------------------
22
SCHEDULE E
THIS SCHEDULE NOT USED.
23
SCHEDULE F
RULE 12b-1 PLANS
COMPENSATION SCHEDULE
Each Portfolio named below shall pay the following amounts pursuant to the terms
and conditions referenced below under its Class 2 Rule 12b-1 Distribution Plan,
stated as a percentage per year of Class 2's average daily net assets
represented by shares of Class 2.
PORTFOLIO NAME MAXIMUM ANNUAL PAYMENT RATE
Franklin Small Cap Fund 0.25%
Franklin Value Securities Fund 0.25%
Franklin U.S. Government Fund 0.25%
Mutual Shares Securities Fund 0.25%
Xxxxxxxxx Growth Securities Fund 0.25%
AGREEMENT PROVISIONS
If Modern Woodmen of America ("the Society"), on behalf of any
Account, purchases Trust Portfolio shares ("Eligible Shares") which are
subject to a Rule 12b-1 plan adopted under the 1940 Act (the "Plan"), the
Company may participate in the Plan.
To the extent Modern Woodmen of America or its affiliates, agents or
designees (collectively "you") provide any activity or service which is
primarily intended to assist in the promotion, distribution or account
servicing of Eligible Shares ("Rule 12b-1 Services") or variable contracts
offering Eligible Shares, the Underwriter, the Trust or their affiliates
(collectively, "we") may pay you a Rule 12b-1 fee. "Rule 12b-1 Services" may
include, but are not limited to, printing of prospectuses and reports used
for sales purposes, preparing and distributing sales literature and related
expenses, advertisements, education of dealers and their representatives, and
similar distribution-related expenses, furnishing personal services to owners
of Contracts which may invest in Eligible Shares ("Contract Owners"),
education of Contract Owners, answering routine inquiries regarding a
Portfolio, coordinating responses to Contract Owner inquiries regarding the
Portfolios, maintaining such accounts or providing such other enhanced
services as a Trust Portfolio or Contract may require, or providing other
services eligible for service fees as defined under NASD rules. Your
acceptance of such compensation is your acknowledgment that eligible services
have been rendered. All Rule 12b-1 fees, shall be based on the value of
Eligible Shares owned by the Society on behalf of its Accounts, and shall be
calculated on the basis and at the rates set forth in the Compensation
Schedule stated above. The aggregate annual fees paid pursuant to each Plan
shall not exceed the amounts stated as the "annual maximums" in the
Portfolio's prospectus, unless an increase is approved by shareholders as
provided in the Plan. These maximums shall be a specified percent of the
value of a Portfolio's net assets attributable to Eligible Shares owned by
the Society on behalf of its Accounts (determined in the same manner as the
Portfolio uses to compute its net assets as set
24
forth in its effective Prospectus). The Rule 12b-1 fee will be paid to you
within thirty (30) days after the end of the three-month periods ending in
January, April, July and October.
You shall furnish us with such information as shall reasonably be
requested by the Trust's Boards of Trustees ("Trustees") with respect to the
Rule 12b-1 fees paid to you pursuant to the Plans. We shall furnish to the
Trustees, for their review on a quarterly basis, a written report of the amounts
expended under the Plans and the purposes for which such expenditures were made.
The Plans and provisions of any agreement relating to such Plans must
be approved annually by a vote of the Trustees, including the Trustees who are
not interested persons of the Trust and who have no financial interest in the
Plans or any related agreement ("Disinterested Trustees"). Each Plan may be
terminated at any time by the vote of a majority of the Disinterested Trustees,
or by a vote of a majority of the outstanding shares as provided in the Plan, on
sixty (60) days' written notice, without payment of any penalty. The Plans may
also be terminated by any act that terminates the Underwriting Agreement between
the Underwriter and the Trust, and/or the management or administration agreement
between Franklin Advisers, Inc. and its affiliates and the Trust. Continuation
of the Plans is also conditioned on Disinterested Trustees being ultimately
responsible for selecting and nominating any new Disinterested Trustees. Under
Rule 12b-1, the Trustees have a duty to request and evaluate, and persons who
are party to any agreement related to a Plan have a duty to furnish, such
information as may reasonably be necessary to an informed determination of
whether the Plan or any agreement should be implemented or continued. Under Rule
12b-1, the Trust is permitted to implement or continue Plans or the provisions
of any agreement relating to such Plans from year-to-year only if, based on
certain legal considerations, the Trustees are able to conclude that the Plans
will benefit each affected Trust Portfolio and class. Absent such yearly
determination, the Plans must be terminated as set forth above. In the event of
the termination of the Plans for any reason, the provisions of this Schedule F
relating to the Plans will also terminate. You agree that your selling
agreements with persons or entities through whom you intend to distribute
Contracts will provide that compensation paid to such persons or entities may be
reduced if a Portfolio's Plan is no longer effective or is no longer applicable
to such Portfolio or class of shares available under the Contracts.
Any obligation assumed by the Trust pursuant to this Agreement shall be limited
in all cases to the assets of the Trust and no person shall seek satisfaction
thereof from shareholders of the Trust. You agree to waive payment of any
amounts payable to you by Underwriter under a Plan until such time as the
Underwriter has received such fee from the Trust.
The provisions of the Plans shall control over the provisions of the
Participation Agreement, including this Schedule F, in the event of any
inconsistency.
You agree to provide complete disclosure as required by all applicable statutes,
rules and regulations of all rule 12b-1 fees received from us in the prospectus
of the Contracts.
25
SCHEDULE G
ADDRESSES FOR NOTICES
To the Society: Modern Woodmen of America
c/o Farm Bureau Life Insurance Company
0000 Xxxxxxxxxx Xxxxxx
Xxxx Xxx Xxxxxx, XX 00000
Attention: Xxxxxx Xxxxxx
Vice-President,
Investment Administration
To the Trust: Franklin Xxxxxxxxx Variable Insurance Products Trust
000 Xxxxxxxx Xxxxxx Xxxxxxxxx
Xxx Xxxxx, Xxxxxxxxxx 00000
Attention: Xxxxx X. Xxxxxxxx
Assistant Vice President
To the Underwriter: Franklin Xxxxxxxxx Distributors, Inc.
000 Xxxxxxxx Xxxxxx Xxxxxxxxx
Xxx Xxxxx, Xxxxxxxxxx 00000
Attention: Xxxxxx X. Xxxxxx
Vice President
26
SCHEDULE H
SHARED FUNDING ORDER
Templeton Variable Products Series Fund, et al.
File No. 812-11698
SECURITIES AND EXCHANGE COMMISSION
Release No. IC-24018
1999 SEC LEXIS 1887
September 17, 1999
ACTION: Notice of application for an amended order of exemption pursuant to
Section 6(c) of the Investment Company Act of 1940 (the "1940 Act") from the
provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act and Rules
6e-2(b)(15) and 6e-3(T)(b)(15) thereunder.
TEXT: Summary of Application: Templeton Variable Products Series Fund (the
"Templeton Trust"), Franklin Xxxxxxxxx Variable Insurance Products Trust
(formerly Franklin Valuemark Funds) (the "VIP Trust," and together with the
Templeton Trust, the "Funds"), Xxxxxxxxx Funds Annuity Company ("TFAC") or any
successor to TFAC, and any future open-end investment company for which TFAC or
any affiliate is the administrator, sub-administrator, investment manager,
adviser, principal underwriter, or sponsor ("Future Funds") seek an amended
order of the Commission to (1) add as parties to that order the VIP Trust and
any Future Funds and (2) permit shares of the Funds and Future Funds to be
issued to and held by qualified pension and retirement plans outside the
separate account context.
Applicants: Templeton Variable Products Series Fund, Franklin Xxxxxxxxx
Variable Insurance Products Trust, Xxxxxxxxx Funds Annuity Company or any
successor to TFAC, and any future open-end investment company for which TFAC or
any affiliate is the administrator, sub-administrator, investment manager,
adviser, principal underwriter, or sponsor (collectively, the "Applicants").
Filing Date: The application was filed on July 14, 1999, and amended and
restated on September 17, 1999.
Hearing or Notification of Hearing: An order granting the application will be
issued unless the Commission orders a hearing. Interested persons may request a
hearing by writing to the Secretary of the Commission and serving Applicants
with a copy of the request, personally or by mail. Hearing requests should be
received by the Commission by 5:30 p.m., on October 12, 1999, and should be
accompanied by proof of service on the Applicants in the form of an affidavit
or, for
27
lawyers, a certificate of service. Hearing requests should state the nature of
the writer's interest, the reason for the request, and the issues contested.
Persons who wish to be notified of a hearing may request notification by writing
to the Secretary of the Commission.
Addresses: Secretary, Securities and Exchange Commission, 000 Xxxxx Xxxxxx,
XX, Xxxxxxxxxx, X.X. 00000-0000.
Applicants: Templeton Variable Products Series Fund and Franklin Xxxxxxxxx
Variable Insurance Products Trust, 000 Xxxxxxxx Xxxxxx Xxxxxxxxx, Xxx Xxxxx,
Xxxxxxxxxx 00000, Attn: Xxxxx X. Xxxxxxxx, Esq.
For Further Information Contact: Xxxxx X. XxXxxxx, Senior Counsel, or Xxxxx
X. Xxxxx, Branch Chief, Office of Insurance Products, Division of Investment
Management, at (000) 000-0000.
Supplementary Information: The following is a summary of the application. The
complete application is available for a fee from the SEC's Public Reference
Branch, 000 Xxxxx Xxxxxx, X.X., Xxxxxxxxxx, X.X. 00000-0000
(tel. (000) 000-0000).
Applicants' Representations:
1. Each of the Funds is registered under the 1940 Act as an open-end
management investment company and was organized as a Massachusetts business
trust. The Templeton Trust currently consists of eight separate series, and the
VIP Trust consists of twenty-five separate series. Each Fund's Declaration of
Trust permits the Trustees to create additional series of shares at any time.
The Funds currently serve as the underlying investment medium for variable
annuity contracts and variable life insurance policies issued by various
insurance companies. The Funds have entered into investment management
agreements with certain investment managers ("Investment Managers") directly or
indirectly owned by Franklin Resources, Inc. ("Resources"), a publicly owned
company engaged in the financial services industry through its subsidiaries.
2. TFAC is an indirect, wholly owned subsidiary of Resources. TFAC is the
sole insurance company in the Franklin Xxxxxxxxx organization, and specializes
in the writing of variable annuity contracts. The Templeton Trust has entered
into a Fund Administration Agreement with Franklin Xxxxxxxxx Services, Inc. ("FT
Services"), which replaced TFAC in 1998 as administrator, and FT Services
subcontracts certain services to TFAC. FT Services also serves as administrator
to all series of the VIP Trust. TFAC and FT Services provide certain
administrative facilities and services for the VIP and Templeton Trusts.
3. On November 16, 1993, the Commission issued an order granting exemptive
relief to permit shares of the Xxxxxxxxx Trust to be sold to and held by
variable annuity and variable life insurance separate accounts of both
affiliated and unaffiliated life insurance companies (Investment Company Act
Release No. 19879, File No. 812-8546) (the "Original Order"). Applicants
incorporate by reference into the application the Application for the Original
Order and each amendment thereto, the Notice of Application for the Original
Order, and the Original Order, to the extent necessary, to supplement the
representations made in the application in support of the requested relief.
Applicants
28
represent that all of the facts asserted in the Application for the Original
Order and any amendments thereto remain true and accurate in all material
respects to the extent that such facts are relevant to any relief on which
Applicants continue to rely. The Original Order allows the Templeton Trust to
offer its shares to insurance companies as the investment vehicle for their
separate accounts supporting variable annuity contracts and variable life
insurance contracts (collectively, the "Variable Contracts"). Applicants state
that the Original Order does not (i) include the VIP Trust or Future Funds as
parties, nor (ii) expressly address the sale of shares of the Funds or any
Future Funds to qualified pension and retirement plans outside the separate
account context including, without limitation, those trusts, plans, accounts,
contracts or annuities described in Sections 401(a), 403(a), 403(b), 408(b),
408(k), 414(d), 457(b), 501(c)(18) of the Internal Revenue Code of 1986, as
amended (the "Code"), and any other trust, plan, contract, account or annuity
that is determined to be within the scope of Treasury Regulation
1.817.5(f)(3)(iii) ("Qualified Plans").
4. Separate accounts owning shares of the Funds and their insurance company
depositors are referred to in the application as "Participating Separate
Accounts" and "Participating Insurance Companies," respectively. The use of a
common management investment company as the underlying investment medium for
both variable annuity and variable life insurance separate accounts of a single
insurance company (or of two or more affiliated insurance companies) is referred
to as "mixed funding." The use of a common management investment company as the
underlying investment medium for variable annuity and/or variable life insurance
separate accounts of unaffiliated insurance companies is referred to as "shared
funding."
Applicants' Legal Analysis:
1. Applicants request that the Commission issue an amended order pursuant to
Section 6(c) of the 1940 Act, adding the VIP Trust and Future Funds to the
Original Order and exempting scheduled premium variable life insurance separate
accounts and flexible premium variable life insurance separate accounts of
Participating Insurance Companies (and, to the extent necessary, any principal
underwriter and depositor of such an account) and the Applicants from Sections
9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and Rules 6e-2(b)(15) and
6e-3(T)(b)(15) (and any comparable rule) thereunder, respectively, to the extent
necessary to permit shares of the Funds and any Future Funds to be sold to and
held by Qualified Plans. Applicants submit that the exemptions requested are
appropriate in the public interest, consistent with the protection of investors,
and consistent with the purposes fairly intended by the policy and provisions of
the 1940 Act.
2. The Original Order does not include the VIP Trust or Future Funds as
parties nor expressly address the sale of shares of the Funds or any Future
Funds to Qualified Plans. Applicants propose that the VIP Trust and Future Funds
be added as parties to the Original Order and the Funds and any Future Funds be
permitted to offer and sell their shares to Qualified Plans.
3. Section 6(c) of the 1940 Act provides, in part, that the Commission, by
order upon application, may conditionally or unconditionally exempt any person,
security or transaction, or any class or classes of persons, securities or
transactions from any provisions of the 1940 Act or the rules or regulations
thereunder, if and to the extent that such exemption is necessary or appropriate
in the
29
public interest and consistent with the protection of investors and the purposes
fairly intended by the policy and provisions of the 1940 Act.
4. In connection with the funding of scheduled premium variable life
insurance contracts issued through a separate account registered under the 1940
Act as a unit investment trust ("UIT"), Rule 6e-2(b)(15) provides partial
exemptions from various provisions of the 1940 Act, including the following: (1)
Section 9(a), which makes it unlawful for certain individuals to act in the
capacity of employee, officer, or director for a UIT, by limiting the
application of the eligibility restrictions in Section 9(a) to affiliated
persons directly participating in the management of a registered management
investment company; and (2) Sections 13(a), 15(a) and 15(b) of the 1940 Act to
the extent that those sections might be deemed to require "pass-through" voting
with respect to an underlying fund's shares, by allowing an insurance company to
disregard the voting instructions of contractowners in certain circumstances.
5. These exemptions are available, however, only where the management
investment company underlying the separate account (the "underlying fund")
offers its shares "exclusively to variable life insurance separate accounts of
the life insurer, or of any affiliated life insurance company." Therefore, Rule
6e-2 does not permit either mixed funding or shared funding because the relief
granted by Rule 6e-2(b)(15) is not available with respect to a scheduled premium
variable life insurance separate account that owns shares of an underlying fund
that also offers its shares to a variable annuity or a flexible premium variable
life insurance separate account of the same company or of any affiliated life
insurance company. Rule 6e-2(b)(15) also does not permit the sale of shares of
the underlying fund to Qualified Plans.
6. In connection with flexible premium variable life insurance contracts
issued through a separate account registered under the 1940 Act as a UIT, Rule
6e-3(T)(b)(15) also provides partial exemptions from Sections 9(a), 13(a), 15(a)
and 15(b) of the 1940 Act. These exemptions, however, are available only where
the separate account's underlying fund offers its shares "exclusively to
separate accounts of the life insurer, or of any affiliated life insurance
company, offering either scheduled contracts or flexible contracts, or both; or
which also offer their shares to variable annuity separate accounts of the life
insurer or of an affiliated life insurance company." Therefore, Rule 6e-3(T)
permits mixed funding but does not permit shared funding and also does not
permit the sale of shares of the underlying fund to Qualified Plans. As noted
above, the Original Order granted the Xxxxxxxxx Trust exemptive relief to permit
mixed and shared funding, but did not expressly address the sale of its shares
to Qualified Plans.
7. Applicants note that if the Funds were to sell their shares only to
Qualified Plans, exemptive relief under Rule 6e-2 and Rule 6e-3(T) would not be
necessary. Applicants state that the relief provided for under Rule 6e-2(b)(15)
and Rule 6e-3(T)(b)(15) does not relate to qualified pension and retirement
plans or to a registered investment company's ability to sell its shares to such
plans.
8. Applicants state that changes in the federal tax law have created the
opportunity for each of the Funds to increase its asset base through the sale of
its shares to Qualified Plans. Applicants state that Section 817(h) of the
Internal Revenue Code of 1986, as amended (the "Code"), imposes certain
diversification standards on the assets underlying Variable Contracts. Treasury
Regulations
30
generally require that, to meet the diversification requirements, all of the
beneficial interests in the underlying investment company must be held by the
segregated asset accounts of one or more life insurance companies.
Notwithstanding this, Applicants note that the Treasury Regulations also contain
an exception to this requirement that permits trustees of a Qualified Plan to
hold shares of an investment company, the shares of which are also held by
insurance company segregated asset accounts, without adversely affecting the
status of the investment company as an adequately diversified underlying
investment of Variable Contracts issued through such segregated asset accounts
(Treas. Reg. 1.817-5(f)(3)(iii)).
9. Applicants state that the promulgation of Rules 6e-2(b)(15) and
6e-3(T)(b)(15) under the 1940 Act preceded the issuance of these Treasury
Regulations. Thus, Applicants assert that the sale of shares of the same
investment company to both separate accounts and Qualified Plans was not
contemplated at the time of the adoption of Rules 6e-2(b)(15) and
6e-3(T)(b)(15).
10. Section 9(a) provides that it is unlawful for any company to serve as
investment adviser or principal underwriter of any registered open-end
investment company if an affiliated person of that company is subject to a
disqualification enumerated in Section 9(a)(1) or (2). Rules 6e-2(b)(15) and
6e-3(T)(b)(15) provide exemptions from Section 9(a) under certain circumstances,
subject to the limitations on mixed and shared funding. These exemptions limit
the application of the eligibility restrictions to affiliated individuals or
companies that directly participate in the management of the underlying
portfolio investment company.
11. Applicants state that the relief granted in Rule 6e-2(b)(15) and
6e-3(T)(b)(15) from the requirements of Section 9 limits, in effect, the amount
of monitoring of an insurer's personnel that would otherwise be necessary to
ensure compliance with Section 9 to that which is appropriate in light of the
policy and purposes of Section 9. Applicants submit that those Rules recognize
that it is not necessary for the protection of investors or the purposes fairly
intended by the policy and provisions of the 1940 Act to apply the provisions of
Section 9(a) to the many individuals involved in an insurance company complex,
most of whom typically will have no involvement in matters pertaining to
investment companies funding the separate accounts.
12. Applicants to the Original Order previously requested and received relief
from Section 9(a) and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) to the extent
necessary to permit mixed and shared funding. Applicants maintain that the
relief previously granted from Section 9(a) will in no way be affected by the
proposed sale of shares of the Funds to Qualified Plans. Those individuals who
participate in the management or administration of the Funds will remain the
same regardless of which Qualified Plans use such Funds. Applicants maintain
that more broadly applying the requirements of Section 9(a) because of
investment by Qualified Plans would not serve any regulatory purpose. Moreover,
Qualified Plans, unlike separate accounts, are not themselves investment
companies and therefore are not subject to Section 9 of the 1940 Act.
13. Applicants state that Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii)
provide exemptions from the pass-through voting requirement with respect to
several significant matters, assuming the limitations on mixed and shared
funding are observed. Rules 6e-2(b)(15)(iii)(A) and 6e-3(T)(b)(15)(iii)(A)
provide that the insurance company may disregard the voting instructions of its
31
contractowners with respect to the investments of an underlying fund or any
contract between a fund and its investment adviser, when required to do so by an
insurance regulatory authority (subject to the provisions of paragraphs
(b)(5)(i) and (b)(7)(ii)(A) of the Rules). Rules 6e-2(b)(15)(iii)(B) and
6e-3(T)(b)(15)(iii)(A)(2) provide that the insurance company may disregard
contractowners' voting instructions if the contractowners initiate any change in
such company's investment policies, principal underwriter, or any investment
adviser (provided that disregarding such voting instructions is reasonable and
subject to the other provisions of paragraphs (b)(5)(ii) and (b)(7)(ii)(B) and
(C) of the Rules).
14. Applicants assert that Qualified Plans, which are not registered as
investment companies under the 1940 Act, have no requirement to pass-through the
voting rights to plan participants. Applicants state that applicable law
expressly reserves voting rights to certain specified persons. Under Section
403(a) of the Employment Retirement Income Security Act ("ERISA"), shares of a
fund sold to a Qualified Plan must be held by the trustees of the Qualified
Plan. Section 403(a) also provides that the trustee(s) must have exclusive
authority and discretion to manage and control the Qualified Plan with two
exceptions: (1) when the Qualified Plan expressly provides that the trustee(s)
are subject to the direction of a named fiduciary who is not a trustee, in which
case the trustees are subject to proper directions made in accordance with the
terms of the Qualified Plan and not contrary to ERISA; and (2) when the
authority to manage, acquire or dispose of assets of the Qualified Plan is
delegated to one or more investment managers pursuant to Section 402(c)(3) of
ERISA. Unless one of the two above exceptions stated in Section 403(a) applies,
Qualified Plan trustees have the exclusive authority and responsibility for
voting proxies. Where a named fiduciary to a Qualified Plan appoints an
investment manager, the investment manager has the responsibility to vote the
shares held unless the right to vote such shares is reserved to the trustees or
the named fiduciary. Where a Qualified Plan does not provide participants with
the right to give voting instructions, Applicants do not see any potential for
material irreconcilable conflicts of interest between or among variable contract
holders and Qualified Plan investors with respect to voting of the respective
Fund's shares. Accordingly, Applicants state that, unlike the case with
insurance company separate accounts, the issue of the resolution of material
irreconcilable conflicts with respect to voting is not present with respect to
such Qualified Plans since the Qualified Plans are not entitled to pass-through
voting privileges.
15. Even if a Qualified Plan were to hold a controlling interest in one of
the Funds, Applicants believe that such control would not disadvantage other
investors in such Fund to any greater extent than is the case when any
institutional shareholder holds a majority of the voting securities of any
open-end management investment company. In this regard, Applicants submit that
investment in a Fund by a Qualified Plan will not create any of the voting
complications occasioned by mixed funding or shared funding. Unlike mixed or
shared funding, Qualified Plan investor voting rights cannot be frustrated by
veto rights of insurers or state regulators.
16. Applicants state that some of the Qualified Plans, however, may provide
for the trustee(s), an investment adviser (or advisers), or another named
fiduciary to exercise voting rights in accordance with instructions from
participants. Where a Qualified Plan provides participants with the right to
give voting instructions, Applicants see no reason to believe that participants
in Qualified Plans generally or those in a particular Qualified Plan, either as
a single group or in combination with
32
participants in other Qualified Plans, would vote in a manner that would
disadvantage Variable Contract holders. In sum, Applicants maintain that the
purchase of shares of the Funds by Qualified Plans that provide voting rights
does not present any complications not otherwise occasioned by mixed or shared
funding.
17. Applicants do not believe that the sale of the shares of the Funds to
Qualified Plans will increase the potential for material irreconcilable
conflicts of interest between or among different types of investors. In
particular, Applicants see very little potential for such conflicts beyond that
which would otherwise exist between variable annuity and variable life insurance
contractowners.
18. As noted above, Section 817(h) of the Code imposes certain
diversification standards on the underlying assets of variable contracts held in
an underlying mutual fund. The Code provides that a variable contract shall not
be treated as an annuity contract or life insurance, as applicable, for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the Treasury Department, adequately
diversified.
19. Treasury Department Regulations issued under Section 817(h) provide that,
in order to meet the statutory diversification requirements, all of the
beneficial interests in the investment company must be held by the segregated
asset accounts of one or more insurance companies. However, the Regulations
contain certain exceptions to this requirement, one of which allows shares in an
underlying mutual fund to be held by the trustees of a qualified pension or
retirement plan without adversely affecting the ability of shares in the
underlying fund also to be held by separate accounts of insurance companies in
connection with their variable contracts (Treas. Reg. 1.817-5(f)(3)(iii)). Thus,
Applicants believe that the Treasury Regulations specifically permit "qualified
pension or retirement plans" and separate accounts to invest in the same
underlying fund. For this reason, Applicants have concluded that neither the
Code nor the Treasury Regulations or revenue rulings thereunder presents any
inherent conflict of interest.
20. Applicants note that while there are differences in the manner in which
distributions from Variable Contracts and Qualified Plans are taxed, these
differences will have no impact on the Funds. When distributions are to be made,
and a Separate Account or Qualified Plan is unable to net purchase payments to
make the distributions, the Separate Account and Qualified Plan will redeem
shares of the Funds at their respective net asset value in conformity with Rule
22c-1 under the 1940 Act (without the imposition of any sales charge) to provide
proceeds to meet distribution needs. A Qualified Plan will make distributions in
accordance with the terms of the Qualified Plan.
21. Applicants maintain that it is possible to provide an equitable means of
giving voting rights to Participating Separate Account contractowners and to
Qualified Plans. In connection with any meeting of shareholders, the Funds will
inform each shareholder, including each Participating Insurance Company and
Qualified Plan, of information necessary for the meeting, including their
respective share of ownership in the relevant Fund. Each Participating Insurance
Company will then solicit voting instructions in accordance with Rules 6e-2 and
6e-3(T), as applicable, and its
participation agreement with the relevant Fund.
Shares held by Qualified Plans will be voted in accordance with applicable law.
The voting rights provided to Qualified Plans with respect to shares
33
of the Funds would be no different from the voting rights that are provided to
Qualified Plans with respect to shares of funds sold to the general public.
22. Applicants have concluded that even if there should arise issues with
respect to a state insurance commissioner's veto powers over investment
objectives where the interests of contractowners and the interests of Qualified
Plans are in conflict, the issues can be almost immediately resolved since the
trustees of (or participants in) the Qualified Plans can, on their own, redeem
the shares out of the Funds. Applicants note that state insurance commissioners
have been given the veto power in recognition of the fact that insurance
companies usually cannot simply redeem their separate accounts out of one fund
and invest in another. Generally, time-consuming, complex transactions must be
undertaken to accomplish such redemptions and transfers. Conversely, the
trustees of Qualified Plans or the participants in participant-directed
Qualified Plans can make the decision quickly and redeem their interest in the
Funds and reinvest in another funding vehicle without the same regulatory
impediments faced by separate accounts or, as is the case with most Qualified
Plans, even hold cash pending suitable investment.
23. Applicants also state that they do not see any greater potential for
material irreconcilable conflicts arising between the interests of participants
under Qualified Plans and contractowners of Participating Separate Accounts from
possible future changes in the federal tax laws than that which already exist
between variable annuity contractowners and variable life insurance
contractowners.
24. Applicants state that the sale of shares of the Funds to Qualified Plans
in addition to separate accounts of Participating Insurance Companies will
result in an increased amount of assets available for investment by the Funds.
This may benefit variable contractowners by promoting economies of scale, by
permitting increased safety of investments through greater diversification, and
by making the addition of new portfolios more feasible.
25. Applicants assert that, regardless of the type of shareholders in each
Fund, each Fund's Investment Manager is or would be contractually and otherwise
obligated to manage the Fund solely and exclusively in accordance with that
Fund's investment objectives, policies and restrictions as well as any
guidelines established by the Board of Trustees of such Fund (the "Board"). The
Investment Manager works with a pool of money and (except in a few instances
where this may be required in order to comply with state insurance laws) does
not take into account the identity of the shareholders. Thus, each Fund will be
managed in the same manner as any other mutual fund. Applicants therefore see no
significant legal impediment to permitting the sale of shares of the Funds to
Qualified Plans.
26. Applicants state that the Commission has permitted the amendment of a
substantially similar original order for the purpose of adding a party to the
original order and has permitted open-end management investment companies to
offer their shares directly to Qualified Plan in addition to separate accounts
of affiliated or unaffiliated insurance companies which issue either or both
variable annuity contracts or variable life insurance contracts. Applicants
state that the amended order sought in the application is identical to precedent
with respect to the conditions Applicants propose should be imposed on Qualified
Plans in connection with investment in the Funds.
34
Applicants' Conditions:
If the requested amended order is granted, Applicants consent to the
following conditions:
1. A majority of the Board of each Fund shall consist of persons who are not
"interested persons" thereof, as defined by Section 2(a)(19) of the 1940 Act,
and the rules thereunder and as modified by any applicable orders of the
Commission, except that if this condition is not met by reason of the death,
disqualification or bona fide resignation of any Board Member or Members, then
the operation of this condition shall be suspended: (a) for a period of 45 days
if the vacancy or vacancies may be filled by the remaining Board Members; (b)
for a period of 60 days if a vote of shareholders is required to fill the
vacancy or vacancies; or (c) for such longer period as the Commission may
prescribe by order upon application.
2. The Board will monitor their respective Fund for the existence of any
material irreconcilable conflict among the interests of the Variable Contract
owners of all Separate Accounts investing in the Funds and of the Qualified Plan
participants investing in the Funds. The Board will determine what action, if
any, shall be taken in response to such conflicts. A material irreconcilable
conflict may arise for a variety of reasons, including: (a) an action by any
state insurance regulatory authority; (b) a change in applicable federal or
state insurance, tax or securities laws or regulations, or a public ruling,
private letter ruling, no-action or interpretive letter, or any similar action
by insurance, tax or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of the Funds are being managed; (e) a difference in voting
instructions given by variable annuity contract owners, variable life insurance
contract owners, and trustees of Qualified Plans; (f) a decision by an insurer
to disregard the voting instructions of Variable Contract owners; or (g) if
applicable, a decision by a Qualified Plan to disregard the voting instructions
of Qualified Plan participants.
3. Participating Insurance Companies, the Investment Managers, and any
Qualified Plan that executes a fund
participation agreement upon becoming an
owner of 10 percent or more of the assets of an Fund (a "Participating Qualified
Plan"), will report any potential or existing conflicts of which it becomes
aware to the Board of any relevant Fund. Participating Insurance Companies, the
Investment Managers and the Participating Qualified Plans will be responsible
for assisting the Board in carrying out its responsibilities under these
conditions by providing the Board with all information reasonably necessary for
the Board to consider any issues raised. This responsibility includes, but is
not limited to, an obligation by each Participating Insurance Company to inform
the Board whenever voting instructions of Contract owners are disregarded and,
if pass-through voting is applicable, an obligation by each Participating
Qualified Plan to inform the Board whenever it has determined to disregard
Qualified Plan participant voting instructions. The responsibility to report
such information and conflicts, and to assist the Board, will be contractual
obligations of all Participating Insurance Companies investing in the Funds
under their agreements governing participation in the Funds, and such agreements
shall provide that these responsibilities will be carried out with a view only
to the interests of the Variable Contract owners. The responsibility to report
such information and conflicts, and to assist the Board, will be contractual
obligations of all Participating Qualified Plans under their agreements
governing participation in the Funds, and such
35
agreements will provide that their responsibilities will be carried out with a
view only to the interests of Qualified Plan participants.
4. If it is determined by a majority of the Board of a Fund, or by a
majority of the disinterested Board Members, that a material irreconcilable
conflict exists, the relevant Participating Insurance Companies and
Participating Qualified Plans will, at their own expense and to the extent
reasonably practicable as determined by a majority of the disinterested Board
Members, take whatever steps are necessary to remedy or eliminate the
material irreconcilable conflict, which steps could include: (a) in the case
of Participating Insurance Companies, withdrawing the assets allocable to
some or all of the Separate Accounts from the Fund or any portfolio thereof
and reinvesting such assets in a different investment medium, including
another portfolio of a Fund or another Fund, or submitting the question as to
whether such segregation should be implemented to a vote of all affected
Variable Contract owners and, as appropriate, segregating the assets of any
appropriate group (i.e., variable annuity contract owners or variable life
insurance contract owners of one or more Participating Insurance Companies)
that votes in favor of such segregation, or offering to the affected Variable
Contract owners the option of making such a change; (b) in the case of
Participating Qualified Plans, withdrawing the assets allocable to some or
all of the Qualified Plans from the Fund and reinvesting such assets in a
different investment medium; and (c) establishing a new registered management
investment company or managed Separate Account. If a material irreconcilable
conflict arises because of a decision by a Participating Insurance Company to
disregard Variable Contract owner voting instructions, and that decision
represents a minority position or would preclude a majority vote, then the
insurer may be required, at the Fund's election, to withdraw the insurer's
Separate Account investment in such Fund, and no charge or penalty will be
imposed as a result of such withdrawal. If a material irreconcilable conflict
arises because of a Participating Qualified Plan's decision to disregard
Qualified Plan participant voting instructions, if applicable, and that
decision represents minority position or would preclude a majority vote, the
Participating Qualified Plan may be required, at the Fund's election, to
withdraw its investment in such Fund, and no charge or penalty will be
imposed as a result of such withdrawal. The responsibility to take remedial
action in the event of a determination by a Board of a material
irreconcilable conflict and to bear the cost of such remedial action will be
a contractual obligation of all Participating Insurance Companies and
Participating Qualified Plans under their agreements governing participation
in the Funds, and these responsibilities will be carried out with a view only
to the interest of Variable Contract owners and Qualified Plan participants.
5. For purposes of Condition 4, a majority of the disinterested Board Members
of the applicable Board will determine whether or not any proposed action
adequately remedies any material irreconcilable conflict, but in no event will
the relevant Fund or the Investment Managers be required to establish a new
funding medium for any Contract. No Participating Insurance Company shall be
required by Condition 4 to establish a new funding medium for any Variable
Contract if any offer to do so has been declined by vote of a majority of the
Variable Contract owners materially and adversely affected by the material
irreconcilable conflict. Further, no Participating Qualified Plan shall be
required by Condition 4 to establish a new funding medium for any Participating
Qualified Plan if (a) a majority of Qualified Plan participants materially and
adversely affected by the irreconcilable material conflict vote to decline such
offer, or (b) pursuant to governing Qualified
36
Plan documents and applicable law, the Participating Qualified Plan makes such
decision without a Qualified Plan participant vote.
6. The determination of the Board of the existence of a material
irreconcilable conflict and its implications will be made known in writing
promptly to all Participating Insurance Companies and Participating Qualified
Plans.
7. Participating Insurance Companies will provide pass-through voting
privileges to Variable Contract owners who invest in registered Separate
Accounts so long as and to the extent that the Commission continues to interpret
the 1940 Act as requiring pass-through voting privileges for Variable Contract
owners. As to Variable Contracts issued by unregistered Separate Accounts,
pass-through voting privileges will be extended to participants to the extent
granted by issuing insurance companies. Each Participating Insurance Company
will also vote shares of the Funds held in its Separate Accounts for which no
voting instructions from Contract owners are timely received, as well as shares
of the Funds which the Participating Insurance Company itself owns, in the same
proportion as those shares of the Funds for which voting instructions from
contract owners are timely received. Participating Insurance Companies will be
responsible for assuring that each of their registered Separate Accounts
participating in the Funds calculates voting privileges in a manner consistent
with other Participating Insurance Companies. The obligation to calculate voting
privileges in a manner consistent with all other registered Separate Accounts
investing in the Funds will be a contractual obligation of all Participating
Insurance Companies under their agreements governing their participation in the
Funds. Each Participating Qualified Plan will vote as required by applicable law
and governing Qualified Plan documents.
8. All reports of potential or existing conflicts received by the Board of a
Fund and all action by such Board with regard to determining the existence of a
conflict, notifying Participating Insurance Companies and Participating
Qualified Plans of a conflict, and determining whether any proposed action
adequately remedies a conflict, will be properly recorded in the minutes of the
meetings of such Board or other appropriate records, and such minutes or other
records shall be made available to the Commission upon request.
9. Each Fund will notify all Participating Insurance Companies that separate
disclosure in their respective Separate Account prospectuses may be appropriate
to advise accounts regarding the potential risks of mixed and shared funding.
Each Fund shall disclose in its prospectus that (a) the Fund is intended to be a
funding vehicle for variable annuity and variable life insurance contracts
offered by various insurance companies and for qualified pension and retirement
plans; (b) due to differences of tax treatment and other considerations, the
interests of various Contract owners participating in the Fund and/or the
interests of Qualified Plans investing in the Fund may at some time be in
conflict; and (c) the Board of such Fund will monitor events in order to
identify the existence of any material irreconcilable conflicts and to determine
what action, if any, should be taken in response to any such conflict.
10. Each Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders (which, for these purposes, will be the persons having a
voting interest in the shares of the Funds), and, in particular, the Funds will
either provide for annual shareholder meetings (except insofar as
37
the Commission may interpret Section 16 of the 1940 Act not to require such
meetings) or comply with Section 16(c) of the 1940 Act, although the Funds are
not the type of trust described in Section 16(c) of the 1940 Act, as well as
with Section 16(a) of the 1940 Act and, if and when applicable, Section 16(b) of
the 1940 Act. Further, each Fund will act in accordance with the Commission's
interpretation of the requirements of Section 16(a) with respect to periodic
elections of Board Members and with whatever rules the Commission may promulgate
with respect thereto.
11. If and to the extent Rules 6e-2 or 6e-3(T) under the 1940 Act is amended,
or proposed Rule 6e-3 under the 1940 Act is adopted, to provide exemptive relief
from any provision of the 1940 Act or the rules promulgated thereunder, with
respect to mixed or shared funding on terms and conditions materially different
from any exemptions granted in the order requested in the application, then the
Funds and/or Participating Insurance Companies and Participating Qualified
Plans, as appropriate, shall take such steps as may be necessary to comply with
such Rules 6e-2 and 6e-3(T), as amended, or proposed Rule 6e-3, as adopted, to
the extent that such Rules are applicable.
12. The Participating Insurance Companies and Participating Qualified Plans
and/or the Investment Managers, at least annually, will submit to the Board such
reports, materials or data as the Board may reasonably request so that the Board
may fully carry out obligations imposed upon it by the conditions contained in
the application. Such reports, materials and data will be submitted more
frequently if deemed appropriate by the Board. The obligations of the
Participating Insurance Companies and Participating Qualified Plans to provide
these reports, materials and data to the Board, when the Board so reasonably
requests, shall be a contractual obligation of all Participating Insurance
Companies and Participating Qualified Plans under their agreements governing
participation in the Funds.
13. If a Qualified Plan should ever become a holder of ten percent or more of
the assets of a Fund, such Qualified Plan will execute a
participation agreement
with the Fund that includes the conditions set forth herein to the extent
applicable. A Qualified Plan will execute an application containing an
acknowledgment of this condition upon such Qualified Plan's initial purchase of
the shares of any Fund.
Conclusion:
Applicants assert that, for the reasons summarized above, the requested
exemptions are appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the policy and
provisions of the 1940 Act.
For the Commission, by the Division of Investment Management, pursuant to
delegated authority.
38
Xxxxxxxxx Variable Products Series Fund, et al.
File No. 812-11698
SECURITIES AND EXCHANGE COMMISSION
Release No. IC-24079
1999 SEC LEXIS 2177
October 13, 1999
ACTION: Order Granting Exemptions
TEXT: Xxxxxxxxx Variable Products Series Fund ("Xxxxxxxxx Trust"), Franklin
Xxxxxxxxx Variable Insurance Products Trust ("VIP Trust"), Xxxxxxxxx Funds
Annuity Company ("TFAC") or any successor to TFAC, and any future open-end
investment company for which TFAC or any affiliate is the administrator,
sub-administrator, investment manager, adviser, principal underwriter, or
sponsor ("Future Funds") filed an application on July 14, 1999, and an amendment
on September 17, 1999 seeking an amended order of the Commission pursuant to
Section 6(c) of the Investment Company Act of 1940 ("1940 Act") exempting them
from the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act and
Rules 6e-2(b)(15) and 6e-3(T)(b)(15). The prior order (Rel. No. IC-19879)
granted exemptive relief to permit shares of the Xxxxxxxxx Trust to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies. The proposed relief
would amend the prior order to add as parties to that order the VIP Trust and
any Future Funds and to permit shares of the Xxxxxxxxx Trust, the VIP Trust, and
Future Funds to be issued to and held by qualified pension and retirement plans
outside the separate account context.
A notice of the filing of the application was issued on September 17, 1999
(Rel. No. IC-24018). The notice gave interested persons an opportunity to
request a hearing and stated that an order granting the application would be
issued unless a hearing should be ordered. No request for a hearing has been
filed, and the Commission has not ordered a hearing.
The matter has been considered, and it is found that granting the requested
exemptions is appropriate in the public interest and consistent with the
protection of investors and the purposes intended by the policy and provisions
of the 1940 Act.
Accordingly,
IT IS ORDERED, pursuant to Section 6(c) of the 1940 Act, that the requested
exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and Rules
6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, be, and hereby are, granted,
effective forthwith.
For the Commission, by the Division of Investment Management, pursuant to
delegated authority.
