Investment Company Act of 1940 — Section 3(c)(11) and Section 7
North American Division of Seventh-Day Adventists
October 6, 2015
RESPONSE OF THE CHIEF COUNSEL'S OFFICE
DIVISION OF INVESTMENT MANAGEMENT
Our Ref. No. 20151061221
Your letter dated October 2, 2015 requests our assurance that we would not recommend enforcement action to the U.S. Securities and Exchange Commission (the “Commission” or “SEC”) under Section 7 of the Investment Company Act of 1940 (the “1940 Act”) against certain bank collective trusts (each, a “BCT” or “bank collective trust”) or any insurance company separate account (“Separate Account”) in which a BCT invests, if a Separate Account that relies on the exclusion from the definition of “investment company” contained in Section 3(c)(11) of the 1940 Act continues to rely on that exclusion, notwithstanding the fact that BCTs holding church plan assets in accordance with Section 3(c)(11) invest a portion of their assets in such Separate Account.
You state the following:
The North American Division of Seventh-Day Adventists (the “Adventists”) is a church that is exempt from taxation under Section 501 of the Internal Revenue Code of 1986, as amended (the “Code”). As an adjunct to their religious and charitable activities, the Adventists maintain a plan (the “Plan”) providing defined contribution retirement income accounts as described in Section 403(b)(9) of the Code. The Plan is excluded from the definition of investment company contained in Section 3(a) of the 1940 Act pursuant to Section 3(c)(14), which excludes certain church plans from the definition of “investment company”. The Plan currently offers a variety of investment options to its participants, including a stable value investment option. The stable value investment option presently consists of a professionally managed account within the Plan consisting solely of Plan assets.
The Plan would like to move its stable value investments from the Plan account and invest them instead in a larger BCT fund maintained by an unaffiliated bank trustee that provides a similar investment strategy. The BCT is excluded from the definition of “investment company” contained in Section 3(a) of the 1940 Act pursuant to Section 3(c)(11). The Plan believes that investing in the BCT would benefit the Plan and its participants because the greater size of the BCT would allow the Plan to increase its asset diversification.
Currently, the BCT invests in one or more Separate Accounts that rely on the exclusion from the definition of “investment company” contained in Section 3(c)(11). Investors in the BCT have no ability to direct or influence the selection of investments by the BCT, including the BCT’s investment in a Separate Account. The BCT and the Separate Accounts do not currently hold any other church plan assets. The trustee to the BCT charges the BCT a management fee for managing the assets of the BCT, including the allocation of assets to various investments, and the insurance company sponsoring the Separate Account receives a fee for the services provided through the Separate Account, which can include any stable value guarantees.
Section 3(c)(11) of the 1940 Act explicitly permits a BCT – but not a separate account – to hold assets attributable to a church plan. With respect to BCTs, Section 3(c)(11) generally excludes from the definition of an “investment company” any bank collective trust consisting solely of the assets of one or more of such trusts, government plans, or church plans, companies or accounts that are excluded from the definition of an investment company under Section 3(c)(14). With respect to separate accounts, Section 3(c)(11) excludes any separate account, the assets of which are derived solely from (A) contributions under pension or profit-sharing plans which meet the requirements of Section 401 or 404(a)(2) of the Code, (B) contributions under governmental plans in connection with which interests, participations, or certain exempt securities, and (C) advances made by an insurance company in connection with the operation of such separate account. Your proposed structure therefore raises a concern that if the Separate Accounts were to look through the BCT and count the BCT’s assets as their own for purposes of Section 3(c)(11), the Separate Accounts would no longer be able to rely on the exclusion due to the fact that the BCT’s assets will include assets of a church plan.
You contend, however, that your proposed arrangement is consistent with our prior no-action assurances with respect to investments by church plans in separate accounts that rely on Section 3(c)(11). You note that in the Aetna Letter, the staff agreed not to recommend enforcement action to the Commission if Aetna issued group annuity contracts to church-sponsored pension and retirement plans as defined in Section 414(e) of the Code, basing its position specifically on representations that the annuity contracts would be offered and sold solely to church plans which were the functional equivalent to plans qualified under Section 401 of the Code, and which did not involve the exercise of employee discretion with respect to involvement in the contracts. You represent that, consistent with the Aetna Letter, the Plan is functionally equivalent to plans qualified under Section 401 of the Code, and that investors in the BCT have no ability to direct or influence the selection of investments by the BCT, including the BCT’s investment in a Separate Account.
Your proposed structure raises the additional issue of whether the Separate Accounts may accept investments from the BCT, as Section 3(c)(11) does not explicitly permit one entity relying upon Section 3(c)(11)’s exclusion from the definition of investment company to hold the assets of another 3(c)(11) entity. You note that the staff has previously provided no-action assurances with respect to investments by one 3(c)(11) entity in another 3(c)(11) entity, notwithstanding the fact that such investments are not included within the wording of the section. You contend that the staff’s positions in the Two-Tier Letters indicates that it can be appropriate for the lower-level 3(c)(11) entity to look through, or collapse, the top-tier 3(c)(11) entity and count the investors in the top-tier entity as its own for purposes of assessing the availability of the 3(c)(11) exclusion. You believe that it would be similarly appropriate to extend these assurances to a BCT holding church plan assets and investing those assets in the Separate Account without compromising the excluded status under Section 3(c)(11) of either the BCT or the Separate Account. With a view to the concerns raised in public correspondence relating to the Two-Tier Letters, you represent that the other investors in the Separate Account will consist solely of those categories of investors that are eligible to invest in Section 3(c)(11) vehicles under the terms of Section 3(c)(11) or as a result of guidance provided by the Commission or its staff.
Without necessarily agreeing with your analysis, and based on the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission under Section 7 of the 1940 Act against certain BCTs or any Separate Account in which a BCT invests if, in accordance with the terms of your letter, such Separate Account continues to rely on the exclusion from the definition of “investment company” contained in Section 3(c)(11) of the 1940 Act, notwithstanding the fact that certain BCTs holding church plan assets in accordance with Section 3(c)(11) invest a portion of their assets in such Separate Account. Our position is based particularly on your representations that: (1) the Plan satisfies the requirements of Section 403(b)(9) of the Code, and is therefore functionally equivalent to plans qualified under Section 401 of the Code; (2) investors in the BCT have no ability to direct or influence the selection of investments by the BCT, including the BCT’s investment in a Separate Account; and (3) other than the Plan, investors in a Separate Account will consist solely of those categories of investors that are eligible to invest in Section 3(c)(11) vehicles under the terms of Section 3(c)(11) or as a result of guidance provided by the Commission or the staff.
Our response expresses our view on enforcement action only and does not express any legal or interpretive position on the issues presented. Because our position is based on all of the facts and representations made in your letter, you should note that any different facts or circumstances might require a different conclusion.
/s/ Kyle R. Ahlgren
Kyle R. Ahlgren
 You note that under Section 403(b)(9) of the Code, a “retirement income account” is a defined contribution program established or maintained by a church, or a convention or association of churches, including an organization described in Section 414(e)(3)(A) of the Code, to provide benefits for certain employees and their beneficiaries under section 403(b). You represent that the Plan is maintained in accordance with Section 414(e)(3)(A) of the Code, and that the Adventists are a church within the meaning of this section. As a result, the Plan is a “church plan” within the meaning of Section 414(e) of the Code.
 You assert that this increased diversification should allow the Plan to maximize its investment return while minimizing risk in a manner that is currently not available to the Plan account due to its smaller asset size as compared to the BCT. In addition, you state that the Adventists believe that they will have access to a larger number of investment options and manager options than those currently available in the Plan account, which would provide greater investment flexibility for the Plan and would provide commensurate benefits to Plan participants.
 You state that the Separate Accounts will sell their interests to the BCT and to other investors in offerings that are not required to be registered under the Securities Act of 1933 (the “1933 Act”) (e.g., pursuant to an offering under Section 4(2) or Section 3(a)(2) of the 1933 Act, Regulation D under the 1933 Act, or other exemption from the provisions of the 1933 Act).
 See Mutual of America Life, SEC Staff No-Action Letter (Jun. 17, 1993) (the “Mutual of America Letter”) and Aetna Life Insurance Company, SEC Staff No-Action Letter (Apr. 19, 1984) (the “Aetna Letter”, and together with the Mutual of America Letter, the “Church Plan Letters”).
 You further note that the staff took a similar position in the Mutual of America Letter, basing its no-action assurances, among other things, on the following representations: (1) the separate account would be used for no purpose other than to fund (i) the church-sponsored pension plans and (ii) plans meeting the requirements of Sections 401 or 404(a)(2) of the Code; (2) the annuity contract would be offered and sold only to church-sponsored pension plans, which are functionally equivalent to Section 401(a) plans and which do not involve the exercise of individual employee discretion; (3) the annuity contract would not be offered or sold in connection with retirement plans described under Sections 403(b) or 408 of the Code; and (4) no part of the corpus or income of the church-sponsored plans would be used or diverted to any purpose other than for the exclusive benefit of the employers’ employees or their beneficiaries prior to the satisfaction of all the plans’ liabilities to such employees and beneficiaries. You represent that your proposed structure would comply in all material respects with these conditions other than condition (3), as your proposed structure involves a church plan that is a 403(b)(9) plan. You suggest that the exclusion of 403(b) plans in the Mutual of America Letter was intended to eliminate annuity plans that are qualified under 403(b)(1) of the Code from being included in an insurance product, and was not intended to encompass retirement income accounts provided by churches in accordance with Section 403(b)(9) of the Code. You contend that Congress recognized this distinction in 2012 when it amended Section 3(a)(2) of the Securities Act of 1933 to clarify that 403(b)(9) plans are eligible to invest in exempt collective funds notwithstanding the exclusion of other types of 403(b) plan assets. See Church Plan Clarification Act, PL 112-142 (Jan. 3, 2012).
 See Frank Russell Trust Co., SEC Staff No-Action Letter (Sept. 2, 1982) (collective trust with assets consisting solely of Section 401 plan assets investing in another collective trust or a separate account); Equitable Life Assurance Society of the U.S., SEC Staff No-Action Letter (Dec. 17, 1981) (3(c)(11) separate account investing in another separate account); Maccabees Life Insurance Co., SEC Staff No-Action Letter (July 29, 1983) (separate accounts investing in bank collective trusts); Nippon Life Insurance Co. of America, SEC Staff No-Action Letter (Nov. 2, 1992) (separate account investing in another separate account)(collectively the “Two-Tier Letters”).
The Incoming Letter is in Acrobat format.