Sutherland Comment Letter

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SUTHERLAND

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HOUSTON
NEW YORK
TALLAHASSEE
WASHINGTON DC

September 8, 2009
Elizabeth M. Murphy
Secretary
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-1090
Re:

Comments on Proposed Rules and Rule Amendments

For Money Market Funds (File No. S7-11-09)

Dear Ms. Murphy:
We are submitting this letter on behalf of our client, the Committee of Annuity Insurers
(the "Committee"). I The Committee is pleased to have the opportunity to offer its comments in
response to the request of the Securities and Exchange Commission (the "Commission") in
Release No. IC-28807 (June 30, 2009) (the "Release") for comments on proposed amendments
to Rules 2a-7, 17a-9 and 30b1-5 and on proposed new Rules 22e-3 and 30b 1-6 under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Committee's comments
relate to money market mutual funds that sell their shares to separate accounts of life insurance
companies as investment vehicles for variable annuity contracts ("underlying money market
funds").
Investment by Registered Separate Accounts in Money Market Fund Shares
Variable annuity contracts are insurance contracts issued to an investor purchasing the
contract. 2 Today most variable annuity contracts are issued through a two-tiered investment
company structure. The top tier consists of a separate account of the issuing insurance company,
which is a segregated investment account established under state insurance law that holds
variable annuity contract assets and liabilities separate and apart from the assets and liabilities of
the insurance company's general account. Separate accounts are usually divided into sub-

I The Committee of Annuity Insurers is a coalition of 30 life insurance companies that issue fixed and variable
annuities. The Committee was formed in 1981 to participate in the development of federal securities law regulation
and federal tax policy affecting annuities. The member companies of the Committee represent over two-thirds of
the annuity business in the United States. A list of the Committee's member companies is attached as Appendix A.

For ease of reference, this letter refers to insurance companies as issuers of variable annuity contracts although,
under the federal securities laws, insurance company separate accounts are the primary issuers of the contracts, with
the insurance companies serving as the sponsors or depositors of the separate accounts. See Stephen E. Roth, Susan
S. Krawczyk, and David S. Goldstein, Reorganizing Insurance Company Separate Accounts Under Federal
Securities Laws, 46 Business Lawyer 546 (Feb. 1991).
2

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accounts, with each sub-account investing in the shares of a single underlying open-end
management investment company (a "mutual fund"), such as a money market fund. The
underlying mutual funds are the bottom tier of the two-tier structure. 3 Absent an applicable
exclusion from the definition of an investment company in the 1940 Act, separate accounts are
required to register as investment companies under the Act. Where a registered separate account
is the top tier of a two-tier structure, it is almost always registered as a unit investment trust.
Purchase payments under variable annuity contracts are allocated by their owners among
the various available sub-accounts and the proceeds are invested in shares of the corresponding
mutual fund. On behalf of their separate accounts, insurance companies transmit orders to
purchase or redeem shares of mutual funds on a daily basis based on the net results of purchase
payments, redemption requests (i. e., surrender or withdrawal requests under the variable annuity
contracts) and transfer requests from owners of variable annuity contracts. 4
Because variable annuity contracts are themselves redeemable securities, the registered
separate accounts through which they are issued are subject to Section 22(e) of the 1940 Act. 5
As a result, insurance companies generally may not suspend the right of variable annuity contract
owners to surrender their contracts or withdraw cash value from them, and generally may not
postpone payment of cash value to contract owners for more than seven days.
Proposed New Specific Liquidity Tests

The Release proposes to amend Rule 2a-7 to include daily and weekly liquidity tests that
would be based on a money market fund's legal right to receive cash from a portfolio investment
rather than on the fund's ability to find a buyer for the investment. With regard to taxable money
market funds, those defined as "retail" funds would be required to invest at least five percent of
their total assets in U.S. Treasury securities, or other securities that the fund can reasonably
expect to convert to cash within a day ("daily liquid assets"). Similarly, with regard to taxable
money market funds, those defined as "institutional" funds would be required to invest at least
ten percent of their total assets in daily liquid assets. With regard to all money market funds,
retail funds also would be required to invest at least fifteen percent of their total assets in U.S.
Treasury securities, or other securities (including repurchase agreements) that mature or are
subject to demand features exercisable and payable in five business days ("weekly liquid
3

Virtually all underlying mutual funds, including underlying money market funds, are taxable funds.

Generally speaking, the facts about variable annuity contracts and the separate accounts through which they are
issued are equally true of variable life insurance contracts and the separate accounts through which variable life
insurance contracts are issued. Therefore, though this letter speaks in terms variable annuity contracts, the
Committee's comments would apply to variable life insurance separate accounts as well.
4

5 Most registered separate accounts rely on the exemption from Section 27 of the 1940 Act found in paragraph (i) of
that section. Paragraph (i)(2)(A) of Section 27 requires that variable annuity contracts issued through the separate
account be redeemable securities.

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assets"), whereas institutional funds would be required to invest at least thirty percent of their
total assets in weekly liquid assets.
For purposes of the daily and weekly liquidity tests, Rule 2a-7 would defme an
"institutional" money market fund as one the board of directors of which have determined is
intended to be offered primarily to institutional investors (or has the characteristics of such a
fund), based on the:
• Nature of the record owners of the fund's shares;
• Minimum initial investment requirements; and
• Historic cash flows that have resulted or expected cash flows that would
result from purchases and redemptions.
The Rule would define a "retail" money market fund as one the board of directors of which has
not made a determination that it is an institutional money market fund.
In general, the Committee is concerned that the utility of having money market funds
characterize themselves as either "retail" or "institutional" may be outweighed by the "cost" in
investor confusion of doing so. In the particular context of underlying money market funds,
prospective investors receive relatively lengthy and complex prospectuses describing a variable
armuity contract and the separate account through which it is issued, as well as prospectuses for
one or more underlying mutual funds. To add to this volume of disclosure a discussion of the
subtle distinction between "retail" and "institutional" money market funds may be very
confusing. 6 This may be particularly so because of the likelihood that in any year some
underlying money market funds will change their status. Therefore, the Committee does not
believe that introducing a distinction between "retail" and "institutional" underlying money
market funds would serve to protect owners of variable annuity contracts. In addition, the
Committee does not necessarily agree that a determination of whether a money market fund is a
"retail" fund or an "institutional" one should only be made by its board of directors.
In the event that the proposed retail/institutional dichotomy is adopted, Committee
believes that the "nature" of insurance company separate accounts as record owners of an
underlying money market fund's shares is that of a mere conduit for the investment of contract
values of variable annuity contracts by their owners. Owners of variable annuity contracts, and
not the separate accounts through which the contracts are issued or their insurance company
depositors, have the authority to invest in or redeem investments in underlying money market
At the current time, most variable annuity contracts offer only one underlying money market fund investment
option. As a result, except when initially considering the purchase of a variable annuity contract, owners would not
have the opportunity to select one money market fund over another and therefore would not care very much whether
"their" fund is a retail one or an institutional one.

6

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funds. 7 Therefore, large numbers of individual variable annuity contract owners and participants
under many group variable annuity contracts make the investment decisions with respect to
underlying mutual funds, rather than the separate accounts or their insurance company sponsors. s
As a result, the Committee believes that investment in an underlying money market fund by
variable annuity contract owners is primarily a "retail" investment and any amendments to Rule
2a-7 should permit boards of directors of such funds to recognize this fact. 9
With regard to the foregoing, the Committee has some concern with the proposed
requirement that boards base their determination of the institutional status of their money market
funds, in part, on the nature of the record owners of the funds' shares. Although this requirement
could be intended to lead boards of underlying money market funds to consider the "conduit"
nature of separate accounts, it also could be read to require such boards to focus on the insurance
companies and their separate accounts rather than on owners of variable annuity contracts when
evaluating the "retail" vs. "institutional" character of such funds. Therefore, the Committee
recommends that the Commission clarify that consideration of the nature of record owners of
shares means consideration of the persons that make investment decisions with regard to such
shares (i. e., contract owners or other beneficial owners of the shares) where appropriate.

Proposed New General Liquidity Requirement
The Release also proposes to amend Rule 2a-7 to require that money market funds hold
sufficient amounts of daily liquid assets and weekly liquid assets to meet reasonably foreseeable
shareholder redemptions in light of such funds' obligations under Section 22(e) of the 1940 Act
and any commitments a fund may make to shareholders. In this regard, the Release points out
that a money market fund should adopt policies and procedures to assure that appropriate efforts
are undertaken to identify risk characteristics of its shareholders, particularly shareholders that
hold their shares through omnibus accounts. to The Committee believes that this would require
One exception to this would be where an insurance company determines to substitute the shares of one underlying
mutual fund for those of another held by one or several of its separate accounts. Substitution transactions, however,
generally must carried out pursuant to an approval order from the Commission under Section 26(c) of the 1940 Act.
7

In many cases, participants under group variable annuity contracts have the authority to make investment decisions
regarding underlying mutual funds, including underlying money market funds. In such cases, individual
participants, often in large numbers, make investment decisions in a "retail" manner. In cases where a group
variable annuity contract leaves the contract owner with the authority to make investment decisions, such an owner
may be more of an institutional investor than a retail investor. However, even in these cases, boards of underlying
money market funds should look to the owner of the contract rather than the separate account or insurance company
to evaluate the retail or institutional nature of the investment.
S

9 Otherwise, owners of individual variable annuity contracts and participants under many group variable annuity
contracts would likely be denied the higher yield that underlying retail money market funds would presumably
provide.
10 Rule 38a-1 under the 1940 Act requires all mutual funds to maintain written compliance policies and procedures
reasonably designed to prevent violation of the Federal Securities Laws.

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underlying money market funds to have policies and procedures that reflect the anticipated cash
flows resulting from purchases and redemptions of shares arising from variable annuity contract
owner transactions. In addition, such policies and procedures also would typically reflect the
terms of participation agreements entered into by underlying money market funds with the
insurance companies that sponsor separate accounts investing in the funds' shares.
The Release requests comment on whether the Commission should provide guidance to
money market funds to assist them in determining the adequacy of their policies and procedures
relating to the proposed general liquidity requirement. The Committee believes that the
Commission should provide such guidance and requests that the guidance address the
circumstances of underlying money market funds that sell shares to separate accounts registered
under the 1940 Act as unit investment trusts. In particular, the Committee requests that the
guidance affirm that the terms and conditions of participation agreements can be integrated into
such policies and procedures.
Proposed New Rule 22e-3
Paragraph (a) of proposed new Rule 22e-3 would permit a money market fund to
temporarily suspend redemption of its outstanding shares and postpone the payment of
redemption proceeds, in the event that the fund can no longer maintain a constant net asset value
per share and the board of directors has approved the liquidation of the fund. Paragraph (b) of
proposed Rule 22e-3 would provide a limited exemption from Section 22(e) for certain conduit
funds that own (pursuant to Section 12(d)( 1)(E) of the 1940 Act) shares of a money market fund
that suspends redemptions in reliance on paragraph (a) of the proposed Rule. 11 The Committee
believes that the parallel exemption for conduit funds is a critically important element of the
proposed rule. As the Commission correctly explained in the Release, without a parallel
exemption conduit funds would be placed in the position of having to honor redemption requests
while being unable to liquidate shares of money market funds held as portfolio securities. The
Committee is very pleased that the Commission proposes to adopt such a provision and
wholeheartedly supports the Commission's position in this regard.
However, as worded paragraph (b) fails to achieve the Commission's goal. The Release
states that the Commission anticipates that this provision "would be used principally by
insurance company separate accounts issuing variable insurance contracts" and certain other
conduits. The problem is that paragraph (b) applies to a "fund," and paragraph (a) of the
proposed rule defines "fund" to be a registered open-end management investment company or
series thereof. As explained above, virtually all insurance company separate accounts registered
11 Paragraph (b) of proposed Rule 22e-3 was included in the Rule in response to a comment by the Committee on
Rule 22e-3T, a current rule that provides a similar exemption for money market funds participating in the Treasury
Department's Guarantee Program. See note 288 of the Release and accompanying text. The Committee's comment
letter explained the reasons why paragraph (b) of Proposed Rule 22e-3 is necessary.

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under the 1940 Act are registered as unit investment trusts. Therefore the wording of paragraph
(b), as proposed, would make it unavailable for a class of investment companies for whom it
was clearly intended. The Committee recommends a simple solution: insert the phrase "or
registered unit investment trust" in the beginning of paragraph (b), so that the opening phrase
reads "Any fund or registered unit investment trust that owns .... ,,12

Proposed New Rule 30bl-6
Proposed new Rule 30b1-6 would require money market funds to file a monthly report on
portfolio holdings with the Commission on proposed new Form N-MFP (for "money fund
portfolio" reporting). Some members of the Committee have affiliates that are investment
advisers to underlying mutual funds, including underlying money market funds, that have
portfolios managed by sub-advisers. 13 Some of these Committee members believe that
preparation of Form N-MFP on a monthly basis would place an undue burden on sub-advised
underlying money market funds. This is because a number of the information items required by
proposed Form N-MFP require information that typically is in the possession of the sub-adviser
that actually manages the portfolio. As a result, investment advisers acting in the capacity of
managers-of-managers would have to obtain such information from the sub-advisers managing
their money market fund portfolios. As to certain ofthese information items, obtaining the
necessary data for Form N-MFP would be costly and put advisers acting as managers-of­
managers at a distinct disadvantage vis-a-vis their counterparts that directly manage money
market fund portfolios. In this regard, the Committee believes that the Commission's view that
proposed Rule 30b1-6 would not have an adverse effect on competition, may be incorrect for
sub-advised money market funds.
In particular, the information required by items 17,20, 26(b), and 30 - 35 are not
typically in the possession of an investment adviser that is not directly managing the portfolio or
available from a money market fund's accounting agent. For example, investment advisers and
fund accounting agents may rely on different NRSROs to obtain credit ratings for compliance
monitoring or valuation than the NRSROs used by a sub-adviser for making investment
decisions. In most cases, the investment adviser or another service provider would be
responsible for preparing Form N-MFP and would therefore have to obtain the information for
the foregoing items from the sub-adviser on a real-time basis. In many cases, this would require
a significant investment in new infrastructure. In this regard, the Committee believes that the

12 We note that Rule 22c-2 under the 1940 Act includes unit investment trusts in the definition of "fmancial
intermediary". See paragraph (c)(l)(ii) of Rule 22c-2.

13 Where this is the case, the investment adviser is often a manager-of-managers. Manager-of-managers
arrangements are quite common for underlying funds managed by insurance-affiliated investment advisers. Indeed,
it is our sense that manager-of-managers arrangements are more widely used in this segment of the mutual fund
industry than in any other.

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Commission's estimate of 128 burden hours per money market fund for the first year is far too
low for sub-advised funds. 14
As a result, the Committee believes that the Commission should reconsider the potential
benefits that could be provided to investors in money market funds with the information called
for in proposed Form N-MFP in light of the significant costs such funds (or their affiliates)
would likely have to incur in order to provide it. The Committee recognizes that the outcome of
such an analysis is highly dependent on the uses to which the Commission would put such
information. In this connection, the Committee requests that if the Commission ultimately
adopts Form N-MFP that it explain in some detail how it will use the information and why the
resulting benefits to investors would outweigh the costs.
"In Kind" Redemptions
In addition to proposing certain new rules and rule amendments, the Release asked for
public comment on several concepts for future regulation of money market funds to improve the
ability of money market funds to weather liquidity crisis and other shocks to the short-term
financial markets. One concept related to "in-kind" redemption of money market fund shares.
Specifically, the Commission sought public comment as to whether money market funds should
be required to satisfy redemptions in excess of a certain size through "in-kind" redemptions. The
Committee opposes such an idea in the strongest possible terms.
For several reasons, separate accounts registered as unit investment trusts simply cannot
accept redemptions "in-kind" from underlying mutual funds, including underlying money market
funds. To begin with, if they hold as assets portfolio securities of more than one issuer, such
separate accounts would likely fail to meet the requirements of Section 12(d)( 1)(E)(ii) of the
1940 Act and would not be able to rely on the exemptions provided by Section 12(d)(1)(E). In
addition, the organization documents of most such separate accounts, including plans of
operations filed with state insurance regulators, do not contemplate (and in some cases, do not
permit) assets in any form other than shares of underlying mutual funds. Likewise, variable
annuity contract forms, all of which have been filed for approval with state insurance regulators,
typically identify the various available investment alternatives which are shares of underlying
mutual funds and not fund portfolio securities. Moreover, separate accounts registered as unit
investment trusts do not have investment advisers and therefore would have difficulty managing
or disposing a portfolio of securities. Finally, prospectuses and other disclosure documents
indicate that shares of mutual funds and not mutual fund portfolio securities are the relevant
investment options under variable annuity contracts. 15

14

Note 396 of the Release and accompanying text.

15 For some or all of the foregoing reasons, participation agreements between insurance companies sponsoring
separate accounts and underlying money market funds, may prohibit the fund from making "in-kind" redemptions.

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For the foregoing reasons, the Committee believes that if underlying money market funds
are required to make certain redemptions "in-kind", insurance companies issuing variable
annuity contracts will have to stop offering such funds as investment options under such
contracts.
Suspension of Redemptions by Money Market Fund Boards
Another concept for future regulation of money market funds as to which the
Commission is seeking public comment is to permit a money market fund's board of directors to
suspend redemption of the fund's shares (and postpone payment of redemption proceeds) in the
event that the board determines that the net asset value of such shares is "materially impaired"
(i. e., the shares may break a buck) even if the board does not determine to liquidate the fund.
The Committee believes that for all the reasons that paragraph (b) of proposed Rule 22e-3 is
necessary, substantially identical relief would be necessary for registered separate accounts that
hold shares of any underlying money market fund whose board suspended redemptions for any
reason. 16

16 In the event that the Commission proposes to amend Rule 22e-3 to incorporate this concept, the Committee very
likely would provide additional comments on it, including comments relating to possible state insurance law issues.

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Conclusion
The Committee appreciates the opportunity to comment on proposed amendments to
Rules 2a-7, 17a-9 and 30bl-5 and on proposed new Rules 22e-3 and 30bl-6 under the 1940 Act
as these would apply to money market funds offering shares to registered insurance company
separate accounts through which variable annuity contracts are issued. The Committee looks
forward to assisting the Commission in this endeavor in any way possible.
Respectfully Submitted,

BY:

cc:

Andrew 1. Donohue, Division of Investment Management
Robert E. Plaze, Division of Investment Management
Susan Nash, Division ofInvestment Management

8506330.7

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APPENDIX A
Committee of Annuity Insurers
AEGON USA, Inc.

Allstate Financial

AVIVA USA Corporation

AXA Equitable Life Insurance Company

Commonwealth Annuity and Life Insurance Company

Conseco, Inc.

Fidelity Investments Life Insurance Company

Genworth Financial

Great American Life Insurance Co.

Guardian Insurance & Annuity Co., Inc.

Hartford Life Insurance Company

ING North America Insurance Corporation

Jackson National Life Insurance Company

John Hancock Life Insurance Company

Life Insurance Company of the Southwest

Lincoln Financial Group

MassMutual Financial Group

Metropolitan Life Insurance Company

Nationwide Life Insurance Companies

New York Life Insurance Company

Northwestern Mutual Life Insurance Company

Ohio National Financial Services

Pacific Life Insurance Company

Protective Life Insurance Company

Prudential Insurance Company of America

RiverSource Life Insurance Company

(an Ameriprise Financial company)
Sun Life Financial

Symetra Financial

USAA Life Insurance Company

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