In October, the SEC’s Division of Investment Management issued an IM Guidance Update (the “Mixed and Shared Funding Update”) relating to mutual funds that offer their shares under variable life and/or variable annuity contracts. The Mixed and Shared Funding Update addresses questions received by the Staff regarding whether (i) a mutual fund that offers its shares as an investment option under a variable life and/or variable annuity contract is required to obtain a so-called “mixed and shared funding” order from the SEC prior to making any such offer; and (ii) a mutual fund that has previously obtained a mixed and shared funding order must, in all circumstances, comply with the terms and conditions of that order.
“Mixed funding” occurs when a mutual fund is offered as an investment option to various types of offerees, such as under both variable annuity and variable life insurance contracts or retirement plans. “Shared funding” occurs when sponsors seek to offer mutual fund shares as investment options under variable insurance contracts of multiple unaffiliated insurance companies. The Staff noted that, while neither mixed nor shared funding is prohibited by the 1940 Act, insurance companies typically obtain mixed and shared funding orders from the SEC. Such orders provide exemptions from certain restrictions under Sections 9(a), 13(a) and 15(a) and (b) of the 1940 Act applicable to insurance company separate accounts organized as unit investment trusts investing in underlying funds, which is the structure currently used by most insurers offering variable insurance contracts.
The Mixed and Shared Funding Update notes that, based on the Staff’s experience and discussions with industry representatives, such exemptions “are relied upon very infrequently,” and, therefore, the absence of an exemptive order may be of limited or no practical significance. The Mixed and Shared Funding Update also states that a fund that has previously obtained a mixed and shared funding order need not comply with the terms and conditions of such order if the exemptions granted by the order are not being relied upon by the insurer or its affiliate.
The Staff encouraged industry participants to carefully consider the Staff’s views in determining whether to apply for mixed and shared funding orders and whether continued reliance on existing orders is necessary. The Staff also noted that insurers and funds may want to consider updating participation agreements to eliminate references to a mixed and shared funding order upon which the funds no longer intend to rely.