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Insurance-Dedicated Funds

Some mutual funds may be used as a funding vehicle for variable life insurance and variable annuity contracts. Primarily for tax reasons, these insurance-dedicated funds do not offer their shares to the public. The owners of the fund shares are the insurance company separate accounts rather than the underlying contract owner.

Boards of directors of insurance-dedicated funds have the same duties as directors of mutual funds that offer their shares to the general public, with notable distinctions in two areas—Rule 12b-1 plans and monitoring for potential conflicts.

Rule 12b-1 Plans

Like all directors considering a 12b-1 plan (see Director Responsibilities Under Rule 12b-1), directors of an insurance-dedicated fund must assure themselves that legitimate services will be rendered in return for 12b-1 payments. This analysis may be affected by the unique offering structure of insurance products. Also, when considering the benefits of the 12b-1 plan to the shareholders, the directors must consider the likelihood of a benefit to the individual contract owners, not the insurance company separate account, even though the insurance company separate account is the technical owner of the fund’s shares.

Monitoring for Potential Conflicts

A second area of specific focus for directors overseeing insurance-dedicated funds involves monitoring for potential conflicts. Specifically, directors of an insurance-dedicated fund that sells its shares to both variable life separate accounts and variable annuity separate accounts (also known as “mixed funding”) must monitor for material irreconcilable conflicts between the interests in the two types of contract owners and determine what action, if any, should be taken in the event of a conflict. In practice, this type of conflict seems to be rare, but might arise, for example, by virtue of a change in the tax code.