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SEC Position Allows Insurance Companies to Rely on Prior Mutual Fund Substitution Orders

On February 23, 2021, the SEC issued a statement taking the position that the substitution by an insurance company of mutual funds used as investment options for variable life insurance policies or variable annuity contracts will not provide a basis for an enforcement action if the insurance company does not obtain a substitution order, so long as the terms and conditions of the proposed substitution are substantially similar to those approved by a prior substitution order obtained by the company since January 1, 2004.

Prior to the SEC’s statement, an insurance company was required to receive a substitution order under Section 26(c) of the Investment Company Act before substituting shares of mutual funds offered as investment options with the company’s variable insurance products, regardless of whether such insurance company had received a similar substitution order in the past.

An insurance company that intends to rely on the SEC’s position must disclose the substitution in a prospectus supplement filed with the SEC and submit correspondence accompanying the filing that:

  • indicates that the substitution is of the type discussed in the statement;

  • identifies the prior order with terms and conditions similar to those in the substitution;

  • confirms that the substitution is consistent with the terms and conditions of the identified prior order; and

  • explains why each existing fund and corresponding replacement fund are substantially similar, including a comparison of the investment objectives, strategies and risks of each existing fund and its corresponding replacement fund.

If an insurance company has not obtained a substitution order since January 1, 2004, the insurance company will need to apply for one. An insurance company that has received a substitution order since January 1, 2004 is not required to rely on the SEC’s position and may continue to apply for a new order.

The statement is available here

© 2022 Vedder PriceNational Law Review, Volume XI, Number 110

About this Author

John Marten Investment Attorney Vedder Price Law FIrm

John S. Marten, a Shareholder in the Chicago office of Vedder Price, has substantial experience representing clients in the investment management industry.

As a member of the firm’s Investment Services group, Mr. Marten counsels clients on a wide variety of matters involving the application of the federal securities laws to investment companies, investment advisers and broker-dealers. He has significant experience counseling investment company clients with respect to new products and was recently involved in the creation of two mutual funds...

(312) 609 7753
Nathaniel Segal Investment Attorney Vedder Price Law Firm

Nathaniel Segal is counsel at Vedder Price and a member of the Investment Services group. He focuses his practice on investment companies and investment advisers in connection with the organization and operation of investment products and services, including traditional mutual funds, closed-end investment companies (including interval funds and listed closed-end funds), variable insurance products and registered hedge funds, as well as mutual funds utilizing complex hedging and absolute return strategies. Mr. Segal has experience in conducting transactional due diligence...

(312) 609 7747
Jacob Tiedt,Vedder Price law firm investment services attorney

Jacob C. Tiedt is a Shareholder at Vedder Price and a member of the Investment Services group.

Mr. Tiedt’s practice includes the representation of registered mutual funds, closed-end funds and exchange-traded funds; private funds; investment advisers; and other financial institutions on a broad range of regulatory, governance and compliance matters. Mr. Tiedt regularly counsels clients on matters relating to SEC registration, disclosure and compliance; shareholder solicitation; NYSE, Nasdaq and FINRA regulation; corporate governance; and board administration. Mr....

John M. Sanders Investment Lawyer Vedder Price

John M. Sanders is an Associate at Vedder Price and a member of the firm's Investment Services group.

Mr. Sanders focuses on advising clients on mutual funds, private placements, sale transactions and regulatory issues.

While in law school, Mr. Sanders was a judicial extern for the Honorable David J. Novak, U.S. District Court for the Eastern District of Virginia and a law clerk with the Baltimore City State’s Attorney’s Office. He also served as Lead Articles Editor for the William & Mary Law Review.

(202) 312 3332