--

--

PUBLiè JUL 2 2 1993
 

RESPONSE OF THE OFFICE OF Our Ref. No. IP-6-93 

INSURACE PRODUCTS CREF Real Estate Account 

DIVISION OF INVESTMENT MANAGEMENT 

Your letters of June 26, 1991 and December 18, 1990, as
 

supplemented by your letter of October 15, 1992 and discussions
 

with the staff on October 16, 1992 and August 14, 1991, request
 

assurance that we would not recommend enforcement action to the
 

Commission against the College Retirement Equities Fund
 

("CREF") l. if CREF establishes a portfolio that invests


primarily in real property (the "RE Account") without registering
 

the portfolio under the Investment Company Act of 1940 (the
 

"Investment Company Act"). Y As explained in your letters, the
 

RE Account will be part of the CREF corporate entity and will be
 

managed by CREF' s Board of Trustees. You intend, however, to
 

provide for the legal segregation of the assets held in the RE
 

Account from the assets held in CREF' s other portfol ios. 1/
 

For a variety of reasons, you propose establ ishing the RE
 

Account as an unregistered portfolio under CREF rather than as
 

1/ CREF is a nonprofit membership corporation subject to the


Not-For-Profit corporation Law of New York State. It was
 

established by a special act of the New York State Legislature
 

and was formed for the purpose of providing retirement benefits
 

for the employees of certain nonprofit organizations. CREF is
 

registered under the Investment Company Act as an open-end
 

diversified management investment company.
 

Y Your request to establish an unregistered real estate

portfolio raised a number of fundamental concerns regarding
 

investment company regulation which you addressed over a period
 

of two years. As you offered new and additional arguments for
 

your position, we attempted to incorporate these arguments in our
 

continuing analysis of the issues over this period.
 

Understandably, this has been a lengthy process.
 

1/ At our October 15, 1992 meeting, the staff expressed its


concern that assets held in CREF' s existing accounts may be
 

subject to the claims of the RE Account. s unsecured creditors.
 

In response, you proposed amending CREF' s Charter and
 

Constitution to reflect the addition of the following sentence:
 

with respect to the establishment of a fund which
 

invests primarily in real property or direct or
 

indirect interests therein, including without
 

limitation, income-producing real estate, participating
 

and non-participating mortgage loans and real property
 

sale-leaseback transactions (the "Real Estate
 

Account"), the corporation may provide in the
 

applicable agreements that income and both unrealized
 

gains or losses from the Real Estate Account's assets
 

will be credited to or charged against the Real Estate
 

Account without regard to the income, gains and losses
 

of the corporation's other funds.
 
part of the Teachers Insurance and Annuity Association of America
 

("TIM") !/ or as an independent legal entity. Among other


things, you assert that establ ishing the RE Account as part of
 

TIM would significantly increase the level of mortality and
 

expense risk charges participants in the RE Account must pay.
 

You further explain that the alternative of creating a separate
 

investment company would require the RE Account to have its own
 

tax exempt status under the Internal Revenue Code, a procedure
 

you assert is time consuming and very costly.
 

We are unable to assure you that we would not recommend
 

enforcement action to the Commission if CREF proceeds as
 

proposed. We are not persuaded by your arguments that a _
 

registered investment company, consistent with the Investment ­

Company Act and the rules thereunder, may create a real estate
 

investment portfolio. You have offered no precedent to support
 

this argument nor considered whether it would be appropriate for
 

any other registered investment company to establish an
 

unregistered investment portfolio. In addition, your arguments
 

concerning the administrative and financial costs of establishing
 

the RE Account, either as a separate legal entity or as a
 

separate account of TIM, do not justify the relief you request.
 

We are also not convinced that CREF may insulate the RE
 

Account from its investment company operations to the same extent
 

insurance companies insulate their separate accounts under state
 

law. The amendments you propose to CREF' s Charter and
 

Constitution do not provide us with enough assurance that CREF's
 

existing accounts will not be chargeable with liabilities arising
 

from the RE Account.
 

The Commission and the staff in the past have considered
 

CREF's unique structure and history in connection with CREF' s
 

requests for relief from the Investment Company Act. In those
 

si tuations, however, failure to grant the requested reI ief would
 

have been inimical to CREF' s established operations and the
 

interests of! contract owners. CREF' s proposal to establ ish an
 

unregisteredi real estate portfolio, in our view, does not present
 

the same concerns.
 

A/~c.ß~

Thomas E. Bisset
 

Senior Attorney
 

Office of Insurance Products
 

!/ TIM is a companion organization of CREF. Like CREF, TIM


offers fixed annuity contracts and insurance benefits to
 

employees of certain nonprofit organizations.
 

- 2 ­
AL:'l / ~ r.- U-l / '"7 -y U
 

SECTION , .1 (a,lJ ..~,!"~~ d'\'L\~ í:/l" "='"
 RULE !i: It,. Pi UNITED STATES r~ \V;l ~ \~(~:~l SECURITIES AND EXCHANGE C~~Rl~~TY ¿) )-~d -9¿f 

~. WASHINGTON. D.C. 20549

July 22, 1993
 

steven B. Boehm, Esq.
 

Sutherland, Asbill & Brennan
 

1275 Pennsylvania Avenue, N.W.
 

Washington, D. C. 20004-2404
 

Re: CREF Real Estate Account
 

Enclosed is our response to your letters of October 15,
 

1992, June 26, 1991 and December 18, 1990. By incorporating our
 

answer into the enclosed photocopies of your letters, we avoid
 

having to recite or summarize the facts involved.
 

In any future correspondence on this matter, please refer to
 our Reference No. IP-6-93. 

Sincerely, ~ 

ll\.)~ ..t-\, A ~l\ L ~ Q...-'- ;. '\
 

Wendell M. Far~" 

Deputy Chief 

Off ice of Insurance Products
 

Enclosure
 
SUTHERLAND, ASBILL & BRENNAN 

1275 PENNSYLVANIA AVENUE, N. W. 

CABLE; SUTAB WASHINGTON 'WASHIXGTOX, D. C. 2004-2404 999 PEACHTREE STREET. N.E. TELEX; 89-501
 ATLANTA, GEORGIA 30309-3996
 

FACSIMILE: (202) 383-0100 14041853-8000 

12021637-3593 

PAUL J. MASON 

DIRECT LINE: (202) 383-0147
 

October 15, 1992
 

BY MESSENGER
 

Clifford E. Kirsch, Esquire /i .-1: / / / .IJ.. . ,. /G;. /,' /~;'_d;':c; J


Assistant Director (/.,.//",
 

Division of Investment Management
 

Securities and Exchange Commission
 

450 Fifth Street, N.W.


Washington, D. C. 20549 

Re: College Retirement Equities Fund -- Proposed Real
 

Estate Account
 

Dear Mr. Kirsch: 

As we discussed, this letter provides some background
 

as to the no-action letter request of the College Retirement
 

Equities Fund concerning the addition of an investment portfolio
 

that invests primarily in real property (the "RE Account" or
 

"Account"). As you will recall, CREF is seeking to establish and
 

operate the Account outside the definition of an investment
 

company in Section 3 of the Investment Company Act of 1940 (the
 

"1940 Act") and to not treat the Account as being part of its
 

regulated investment company operations. As you know, there are
 

practical reasons why a real estate fund cannot operate subject
 

to the 1940 Act and to the best of our knowledge, there are no
 

such funds that do.
 

On December 18, 1990, we initially submitted a no-


action letter request on behalf of CREF in connection with its
 

proposed implementation of the RE Account. In its letter of
 

February 27, 1991, the Staff responded by outlining certain
 

preliminary concerns and questions it had about the operation of
 

the proposed Account. We, in turn, responded to the specific
 

comments in that letter in a letter dated June 26, 1991.
 

On August 14, 1991, Charles stamm and Peter Clapman of
 

CREF, and Steve Boehm and I, met with you, Heidi Stam, Barry
 

Miller and Tom Bisset to further discuss the proposed RE Account.
 

At that time, it was acknowledged that the issues being raised
 

were novel, and that even the indirect precedent in the area was
 

not particularly relevant. We explained that CREF was choosing
 

this unique approach (rather than, for example, utilizing a
 
Clifford E. Kirsch, Esquire
 

October 15, 1992
 

Page 2
 

separate account, of TIM) to enable CRF to pursue its policy of 

providing benefits at the lowest cost possible. We pointed out
 

that under the RE Account approach, CREF could provide this
 investment al ternati ve with a level of aggregate fees that was 

lower than virtually anyone else's in the industry. It was
 

explained further that if a TIM separate account approach were
 

utilized, TIM would be required under New York insurance law to
 

impose a mortality expense risk-type charge, which necessarily
 

would be more costly to participants than CREF' s current approach
 

based on actual mortality experience, and does not involve
 

additional mortality charges against assets during either the
 

accumulation or the annuity phase. We also briefly explained
 

that CREF carefully studied other possible structures and found
 

each to be inappropriate for one material reason or another.
 

At our earlier meeting, the Staff expressed concern
 

about the issue of the insulation that participants in CREF' s
 

investment company accounts would have vis-a-vis the RE Account
 

even if it were not deemed part of CREF' s investment company
 

operation. You indicated that the Staff needed some level of
 

assurance that insulation existed similar to that provided under
 

separate account statutes. We indicated at that time that CREF
 

believed that an opinion of counsel could be obtained from a
 

major New York law firm to the effect that changes to certain of
 

CREF's governing documents, appropriately worded, together with
 

action by the New York State Insurance Department (the
 

"Department"), would have that effect.
 

After some discussion, you indicated that if action
 

were taken with respect to this issue by the Department, and such
 

an opinion could be obtained, the Staff would be in a position to
 

more favorably consider our request for relief.
 

Subsequent to that meeting, CREF commenced a dialogue
 

wi th the Department concerning the proposed RE Account.
 

Ul timately, officials of the Department approved amendments to
 

CREF's charter and constitution that would provide for insulation
 

between the Account and the rest of CREF' s investment portfolios.
 

CREF could implement the appropriate changes to those governing
 

documents, but of course will not do so pending the outcome of
 

this request for relief.
 

Following its discussions with the Department, CREF
 

sought the opinion letter discussed at our August meeting. On
 

October 5, 1992, that letter was issued by the New York city
 

office of the law firm of Rogers & Wells. After reciting the
 

relevant facts and other considerations, that letter concludes
 that: 
Clifford E. Kirsch, Esquire
 

October 15, 1992
 

Page 3
 

(O)nce the (charter and constitution) Amendments become


effective, if (A) CREF files a statement of operations*
 

for the Real Estate Account with the Insurance
 

Department which is approved by the Insurance
 

Department and is not inconsistent with the exclusive
 

allocation of income, gains and losses on the Real


Estate Account l s assets to the Real Estate Account and 

(B) the contract 'with the participants in the Real


Estate Account so provides, then (i) income, gains and
 

losses from the Real Estate Account i s assets will be
 

credited to or charged against the Real Estate Account


wi thout regard to the income, gains and losses of 

CREF i s other investment accounts and (i i) the assets in
 

CREF's other investment accounts should not be liable
 

for losses incurred by participants in the Real Estate


Fund. 

(* We would note that the Department, as part of the process


of considering these amendments, went through the issues
 

that are involved in connection with the statement of
 

operations and was satisfied that CREF would meet the


Department's standards.) 

We believe that the foregoing developments are
 

responsive to the concerns raised by the Staff on the
 

"insulation" issue. We look forward to discussing this issue
 

further at our meeting on Friday.
 

Sincerely, 

---- . . ~ ­

Paul' J. Mason
 

cc: Peter C. Clapman, Esq.
 

Steven B. Boehm, Esq.
 
SUTHERLAND. ASBILL & BRENNAN 

127S PENNSYLVANIA AVENUE. N. W. 

CABLE: SUTAB WASHINGTON 'WASHIXGTOX, D. C. 2004-240-4
 999 PEACHTREE STREET, N.£. TELEX: 89-501
 ATLANTA. GEORGIA 30309-3996
 FACSIMILE: (202) 383-0100 (4041 853-8000 (2021637-3593 

STEVEN B. BOEHM 

DIRECT LINE: (202) 383-0176
 

October 16, 1992
 

Ii -f~/r,./) /1, /¿~?~~J (, /1 / /~/" ' ....~.,'~' j.­

BY MESSENGER
 

Clifford E. Kirsch, Esquire
 

Assistant Director
 

Division of Investment Management
 

Securities and Exchange Commission
 

450 Fifth Street, N. W.


Washington, D. C. 20549 

Re: College Retirement Equities Fund ("CREF")
 

Dear Mr. Kirsch: 

Pursuant to your request at our meeting this morning,
 

enclosed is a copy of the opinion letter issued by the law firm
 

of Rogers & Wells in connection with CREF' s proposed Real Estate


Account. 

Please let us know if you require any additJonal
 information. 

S.lncerely"

\."~i...._--~~::.." . /....

1\; '. . / "-,..: /\"

..¡ __)~.. ------\ - :tJ '-..

i 

Steven B. Boehm
 

Enclosure 

cc: Peter C. Clapman, Esq.
 

Paul J., Mason, Esq.
 
W..e"ING':CN. ~C. 20=Oe-~au 17:1'7 M 5"'''&11'', N.W. &cy~ 47, "'VCNU!: ..0C:..1i 'lU""ON& (C02) 33'-"'00 75004l-....,.S. ,./I"'Hc;i: 'ACSI.41i.. (CC:Uli 3:1'-0_":1
 'l!tL.C,h.O",£ ~3.'-47-e3-l1-00 'T1":X Z-_31l ........UA
 ~~ "..c:SI..'u: ~3.l--Z-O"'-eo-el 'lIEU: ..1..., ltl,~w 

..~ ~ A/'~ 1'lJ1'6'ô-lJ1'.5~
 

ILL COl.IoAH STREET Tl:'-!:I"HCNI! (¡II; 11"'&-5000 i.O"OON !:C211 S.ii. !:NOI.NO 

'l1Ci.&....ONC .--710018-0101 'ACSIMii.i; (1121 &70-S:l7!1
 

I"ACa.",i.£ ....71-e:ia.ioce


7'lCi.i:x 1~.oe3 ""WI,A 'l£I.£X .._ea_ USl.w 0 

201 /OOAn. "10"&"0.. aTAI::-:

I.CII ..GIEi.s. CA. eooll!-l!iUll 

Te:I.:....ONl: :21:1) '00-'000 W"'OI!NS'TA"'S~i: 37 0000 ""..,.iirullT/Io , "AC.,..,U ,lIS' 1I.0-ie~ TI!:L.&li ia_""a IOWI.6.. "COIU...i. IOCl'uai.lc; 0,. OE..,.......
 

TIE \.,... 0.. C ~V-eQ -07-37-1 1- 0 ,...C....,i. ~Q.O.-.7.1I.,.ii-33 

October 5, 1992
 

BY~ 

Peter c. Clapman, tsg.
 

Senior Vice President and
 

Chief Counsel, Investments
 College Retirament Equities Fud 

730 Third Avenue
 

New York, New York 10017
 

Re: College Retirement Equities Fund _
 

Real Estate Account
 

Dear Peter: 

The College Retirement Equities Fund (frOEFtI) anticipates


establishing and operating a new invest~ent fund that would invest
 

primarily in real property (the "Real Estate Accountfr). You have
 

requested our advice concerning the allocation of income, gains and
 

losses to the Real Estate Account. You have also requested our
 

. advice as to whether the assets in CRE?' s other investment accounts
 

would be liable for losses incurred by participants in the Real
 

Estate Account. SUbj ect to ~~e condi tiona described herein, it is
 

our opinion that similar to the treatment accorded to sQparate
 

accounts of New York life insurance companies (i) income, gains and
 

losses trom L~~ Real Estate Account's assets will be credited to or
 

charged against the Real Estate Account wit."iout regard to the 

income, gains and losses of CR' s other investment accounts and
 

( ii) the assets in CREF' s othsr investment accounts should not be


liable for losses incurred by par-ticipants in the Real Estate


Account. 

CREF Was incorporated in 1952 under a special enactment


. of the New York State Legislature. Chapter 124 of the Laws of New
 

York of 1952 (the "CRF Act"). The CREF Act established the
 

Charter (the "Charter") of CREF, and provided for the adoption of


a Constitution (the "Constitu'tionlt) and By-laws for the regulation 

ACC06SF;\. WPS
 
~&c~
 

Peter C. Clapman
 2 October 5, 1992
 

of the affairs of CREF. CREP is a Tye B Corporation under the New


York Noi:-For-Profit Cor~oration Law (lfNPCtJ') and has elected 

pursuan~ to Section 103 (a) of ~~e NPCL to have the NPC~ apply to it
 

in all respects.
 

Under the CREF Act, as amended, CRY is subj ect to certain Aricles and Sec~ions (Art:icles 1, J, 25 and 74, and
 

Sections 1212,1217, 1411 and 4230) of the New York Insurance Law
 

(the "Insurance Lawn), to tho extent not inconsistent with the


Charter, but is exempt from most provisions of the !nsurance Law.
 Under ,t.i.e current statutory scheme, CREF is therefore not an II insurer" for most purposes of the Insurance Law. CUP is, 

"however, authorized under Section 8 of its Charter and Article VI,
 

Section 3 of its Constitution to establish funds with investment
 

objecti ves and limitations as described in such funds i statements
 

of operations filed wit.i., and approved by, the Insurance


Department. 

CR? is registered with t."'e Securities and EXChange
 Commission (the "SEC") as an open-end investment company under t."'e 

Investment Company Act of 1940, as amended (the ni940 Act"), and
 

operates as a series fund oft.rinq investment options inCluding a
 

Stock Account, a Bond Market Account, a Money Market Account, a
 

Social Choice Account and a Global Equities Account (the lIEXistiID


Accounts"). Although the Existing Accounts are subj ect to the 1940 

Act and applicable SEC regUlations, WQ understand that it would be
 

i~practicable for CR to offer its Real Estate Account as a par
 

ot this series fund becausQ of valuation and redem~tion
 

requirements under the 1940 Act. The Real Estate Account, howaver,
 

Would be subject to registration under the Securities Act of 1933
 

(requiring that the offering to participants b~ through a
 prospectus) and the reporting requirements of the Securities 

EXchange Act ot 1934 (governing periodic financial reporting to
 

account participants).
 

CUrrently, Section a of tbe Charter and Article VI,
 Section J ot the Constitution permit CREF to establish funds with
 

investment objectives and limitations as described in a statement
 

of operations tiled wiL"', and approved by, the Insurance


Department. CRF has proposed amendments (the "Amendments") to 

these Sections of ths Char-car and Constitution to the New York
 

Insurance Department by addition of L~e following sentence:
 

t.i th respect to the establishment of a fund 

which invests primarily in real property or
 

direct or indirect interests therein,
 

inClUding without limitation, income-producing
 

real estate, partiCipating and nonparticipating mortgage loans and real property
 

sale-leaseback transactions (the "Real Estate
 

ACC06BFA. WPS
 
~&c~
 

Peter C. Clapman
 3 October 5, 1992
 

Account..), -the corporation may provide in the 

applicable aqreement:s that income and both
 

realized and u.'"realized gains or loases from
 

the Real Estate Account · s assets will be
 

credited to or charged against tne Real Estate
 

Account wi tlout regar~ to the income, gains
 

and lOsses ot the corporation's other funds.
 

Thus, under the Charter and Const! tution if so amended,
 

CREF would be expressly authorized to establish the Real Estate


Account. However, the Real Estate Account can only be established 

atter a statement of operations has been tiled with, and approved
 by, the Insurance Department. The investment obj ecti ves' and 

limitations tor the Real Estate Account will be those set forth in
 

such statement of operations. Moreover l if so provided in the
 

agreements witl participants relating to the Real Estate Account,


t.~e income, gains and losses from the Real Estate Account's assets 

are to be only credited to or charqeå against the Real Estate
 

Account. The text of the proposed amendments requires that if the
 

agreement with the participant: so provides, 10s&.s from the Real
 

Estate Account will be charged against the Real Estate Account and
 

i t8 assets. This prohibits such losses froi the Real Estate
 

Account trom being used to reduce income from the Existing Accounts
 

(such losses being charged to the Real Estate Account "without
 

regard to the income, gains and losses of C CREF · s J other funds.") .
 

Simil~rly, because losses arising from costs, expenses or
 

liabilities relating to L~e Real Estate Account assets can only be
 

charged against the Real Estate Account, such losses cannot be
 

,charged against the assets of the Existing Accounts.
 

Section 6 of the Charter makes Article 74,
 

"Rehabilitation, Liquidation, Conservation and DiSSOlution of


Insurers", as amended, applicablQ to CREF flto the extent.. ,not 

inconsistent with the provisions of (the CREF ActJ ," The CREF Act
 

constitute.s the Charter. Therefore, the provisions of the proposed
 

Charter amendment would supersede any inconsistent provision of
 

ArtiCle 74 relating to the payment of liabilities ot CREF. For
 

example, the provisions ot the proposed Charter amendment
 

restricting the charges of losses trom Real Estate Account assets
 

to the Real Estate Account would supersede the provisions of
 

Section 7435 relating to priority of distribution ot claims trom
 

the estate of a lite insurance company in a rehabilitation,
 

liquidation, conservation O~ ¿issoiu~ion proceeding.
 

It is also clear that the Insurance Department


understands that the proposed Amendments res~rict Real Estate
 

Account losses to the assets of the Real Estate Account. In your
 

letter, dated September 13, 1991, to Mr. Terence Lennon requesting
 

approval of thG proposed Amendments, you clearly stated that the
 

Real Estate Account was intended to "operate as a distinct vehicle
 

ACC06SFA. WP5
 
~~~
 

Peter C. Clapman
 4 october 5, 1992 

and not have any effect on the investient experience ot other accounts witliin the CRF i series i that operate under the 1940 Act" 

and that such amendment was designed to "expressly provide for the
 intenàQd insulation of the Real Estate Account trom the 'series' 

accounts. II Wi th this understanding, and after reviewing and
 

discussing the proposed Amendments and their effects on the
 

relationships between the various CREF accounts, the Insurance
 

Department has found the proposed Amendments to be unobjectionable
 

(the language typically used by the New York Insurance Department
 

prior to its approval of CRF Charter and Constitution amendments) .
 

Thus, once the Amendments become effective, if (A) CRF
 

files a statement of operations for the Real Estate Account with
 the Insurance Depar'bent which is approved by the, Insurance 

Department and is not inconsistent with the exclusive allocation of


income, gains and losses on thè Real Estate Account i s assets to the 

Real Estate Account and (B) the contract with the participants in
 

the Real Estate Account so provides, then (i) income, gains and
 

losses from the Real Estate Account i s assets will be cred! ted to or
 

charged against the Real Estate Account without regard to the
 income, gains and losses ofCRF i s other investment accounts and 

. (1i) the assets in CRF's other investment accounts should not be


liable for losses incurred by participants in the Real Estate Fund.
 

Sincerely, 

0/ if '-ka 

ACC06BPA. WPS
 
SUTHERLA:KD, ASBILL & BREXXAX 

1275 PENNSYLVANIA AVENUE. N. W. 

CABLE; SUTA8 WASHINGTON 'L\.sHI:-GTO:-, D. C. 2000-1-2-10"1. 999 PEACHTREE STREET. N.£. TELEX: 89-501
 ATLANTA. GEORGIA 30309-3996
 FACSIMILE; (202) 383-0100 1404' 853-8000 (202' 637-3593 

STEVEN 8, 80EHM 

DIRECT LINE: (2021 383-0176 

June 26, 1991
 

Thomas E. Bisset i Esquire
 

Off ice 
 of Insurance Products
 

and Legal Compliance
 

Division of Investment Management
 

Securi ties and Exchange Commission


Room 10183 

450 Fifth street, N.W.


Washington, D. C. 20549 

Re: College Retirement Equities Fund 

Real Estate Account 

Dear Mr. Bisset: 

This letter responds to your letter of February 27, 

1991, which set forth certain concerns and questions regarding 

the no-action letter request of the College Retirement Equities 

Fund ("CREFri) concerning the addition of an investment portfolio 

that invests primarily in real property (the "RE Account" or 

"Account") . As you will recall, CREF is seeking to establish and 

operate the account outside the definition of an investment 

company in section 3 of the Investment Company Act of 1940 (the 

"1940 Act") and to not treat the account as being part of its 

regulated investment company operations. By this letter, we also
 

request the opportunity to meet with you and further discuss the
 

issues you raised and our responses to them.
 

The items below correspond to your specific comments.
 
Thomas E. Bissett, Esquire
 

June 26, 1991
 

Page 2
 

1. Relationship of RE Account to Other CREF Accounts.
 

As the staff is aware, CREF is unique in a number of respects.
 

It issues variable annuities, but it is a free-standing entity
 

and not a separate account of an insurance company. In addition, 

since it is not an insurance company, it cannot create "separate
 

accounts" within the meaning of New York insurance law. Also, it
 

is not regulated by the New York Business Corporation Law, but
 

rather is subj ect to that state's Not-For-Profit Corporation Law
 

(the "NFPCL"). That law generally does not contemplate an 

investment-company type of operation like CREF' s, nor the 

issuance of a number of classes or series of stock. ( Indeed, 

that law is designed to regulate membership corporations, a 

common form of organization for nonprofit entities, and does not 

contemplate the issuance of any class of stock.) 

Accordingly, there are no relevant "state law 

provisions that control CREF's ability to establish the RE
 

Account as a separate series." CREF believes, however, that it
 

can establ ish and operate the RE Account so that: ( 1) income and 

both realized and unrealized gains or losses from the RE
 

Account's assets will be credited to or charged against the
 

Account without regard to the income, gains and losses of the
 

other CREF accounts; and (2) the other CREF accounts should be
 

protected from claims asserted by creditors of the RE Account.
 

CREF will seek to achieve this result as follows:
 
Thomas E. Bissett, 'Esquire
 

June 26, 1991
 

Page 3
 

First, CREF will seek to amend its charter to indicate
 

that, from a corporate structural standpoint, the other CREF
 

accounts will be insulated from the investment activities of, and
 

any claims that might be raised against, the RE Account. To be
 

effecti ve, the charter amendment must be approved by the New York
 

state Insurance Department. If and when the required approval is
 

received, CREF will obtain an opinion of counsel to the effect
 

that the charter amendment and action by the Insurance Department
 

should have the effect of insulating the RE Account vis-a-vis the
 

other CREF accounts to the same extent as separate accounts of an
 

insurance company generally are insulated vis-a-vis the insurance
 

company by statute.
 

2. section 18 (f) Issues. As discussed in the no-


action letter request, CREF believes that, consistent with the
 

approach taken by the Third Circuit in Prudential Ins. Co. v.
 

securities and Exchange Commission, 326 F.2d 383, 387 (3rd Cir.
 

1963), a non-investment company can be carved out of an
 

investment company if the functional attributes of the structure
 

do not subvert the policies and provisions of the 1940 Act. That 

approach necessarily requires that the RE Account not be
 

considered part of CREF' s investment company operation. Under
 

that approach, then, CREF qua regul~ted investment company should
 

not be viewed as issuing a class of stock representing interests
 

in assets (i. e., the RE Account) that are not afforded the
 

protections of the 1940 Act. Stated differently, the RE Account
 
Thomas E. Bissett, Esquire
 

June 26, 1991
 

Page 4
 

would not be another class or series of an investment company,
 

but would represent another part of CREF' s business, just as an
 

insurance company's general account would not be viewed as
 

another series of any registered separate account the insurance
 

company might maintain.
 

3. Comparison with Unreqistered Real Estate Separate
 

Accounts. Like interests in unregistered real estate separate 

accounts offered by life insurance companies ("Separate
 

Accounts"), interests in the RE Account will be subject to
 

registration under the Securities Act of 1933 (the "1933 Act").
 

Also, CREF, with respect to the RE Account, will be subject to
 

the periodic reporting requirements of the Securities Exchange
 

Act of 1934.
 

If the relief sought in the no-action letter is
 

granted, the RE Account would not be subj ect to regulation under
 

the 1940 Act. Likewise, Separate Accounts generally are not
 

subject to those requirements of the 1940 Act.
 

Separate Accounts, as part of an insurance company, are
 

subj ect to supervision and regulation by state insurance 

regulatory authorities. The RE Account, like the rest of CREF' s
 

operation, would be subject to regulation by the New York State
 

Insurance Department, as well as by the insurance regulatory
 

authorities of certain other states and jurisdictions.
 

The RE Account would also be subj ect to two layers of
 

regulation affecting CREF which generally are not applicable to
 
Thomas E. Bissett, Esquire
 

June 26, 1991
 

Page 5
 

Separate Accounts. First, its operation would have to be
 

consistent with the requirements of the NFPCL. Second, it could
 

not operate in a manner that was inconsistent with CREF' s tax-


exempt status Under federal income tax law.
 

4. Disclosure Concerninq Status of RE Account. CREF
 

does not believe, as your comment suggests, that its status as a
 

registered investment company with respect to its existing four
 

accounts justifies a presumption that investors in the RE Account
 

will be misled with respect 
 'to the applicability of the 

protections of the 1940 Act. Indeed, CREF is in virtually the 

same position in this regard as any unregistered real estate
 

separate account of an insurance company that also offers
 

interests in registered separate aCCounts.
 

CREF believes that the disclosure it intends to include
 

in the registration statement covering interests in the RE
 

Account will make clear that participants allocating amounts to
 

the Account are not afforded the protections extended to the
 

other CREF accounts under the 1940 Act. Specifically, CREF
 

currently proposes t:o include a number of references in the
 

prospectus to the fact that, unlike the other accounts, the RE
 

Account is riot subject to the 1940 Act. In addition, specific
 

reference will be made to the fact that participants will have no
 

voting rights with respect to interests in the Account. Given
 

this disclosure, which the Staff will, of course, have an
 

opportuni ty to review, CREF believes that the risk of a recipient
 
Thomas E. Bissett, Esquire
 

June 26, 1991
 

Page 6
 

of the RE Account prospectus being misled as to its regulatory
 

status is low. Obviously, CREF cannot guarantee that every
 

participant will read the prospectus. The 1933 Act does not,
 

however, impose that requirement on an issuer.
 

5. Feasibility of Separate Investment Companv. The
 

establishment of a CREF real estate account as a separate
 

investment company was, in fact, considered by CREF before 
 a

determination to follow the proposed approach was made. However,
 

the separate company approach raises two significant
 

administrative and legal concerns which would make it impractical
 

for CREF participants. First, and perhaps most significant, is
 

the fact that a separate entity would have to have its own tax-


exempt status recognized by the Internal Revenue Service. While
 

CREF believes that it could ultimately obtain a tax exemption for
 

such a separate real estate entity, the process can be, and often
 

is, time consuming.
 

Second, CREF has a unique organizational history (i. e. , 

it was formed by a special act of the New York State Legislature
 

in 1952, prior to the existence of variable annuity regulation).
 

The fact that there is now a long-standing body of state
 

regulation governing issuers of variable annuities raises
 

questions as to the appropriate form such a separate entity
 

should take. Reliance on CREF's existing structure by simply
 

adding a new real estate portfolio eliminates these concerns.
 
ThomasE . Bissett, Esquire
 

June 26, 1991
 

Page 7
 

6. ERISA Fiduciary Issues. In our letter of December
 

18, 1990, we noted that the RE Account would be operating
 

according to applicable standards and requirements of ERISA. We
 

bel ieve that discussion remains relevant. However, in connection
 

with the development of more firm specifications for the Account,
 

CREF recently has reevaluated the status of the Account under
 

ERISA. It is now CREF' s expectation that, at least during the
 

early years following the establishment of the RE Account, it
 

will satisfy the conditions of a so-called "real estate operating
 

company" ("REOC") within the meaning of 29 C.F.R. §2510.3-101(e)
 

of the Department of Labor's regulations defining "plan assets"
 

for purposes of ERISA. To the extent (and for the time period) 

that the RE Account constitutes a REOC, it will not be considered 

to hold "plan assets," and therefore neither the RE Account nor 

the CREF Board of Trustees would be considered to be ERISA 

fiduciaries. 

To the extent (and for such time as) the RE Account 

does not qualify as a REOC, however, it is CREF' s expectation 

that the RE Account would be considered to hold "plan assets," so 

that: 

(a) the CREF Board of Trustees (if exercising
 

discretionary management or control over the
 

assets in the RE Account), and
 

(b) any compensated investment adviser or manager of
 

the RE Account
 
Thomas E. Bissett, Esquire
 

June 26, 1991
 

Page 8
 

would be considered to be plan fiduciaries of the ERISA plans
 

investing in the Account.
 

As we discussed in the no-action letter request,
 

persons who are plan fiduciaries are subj ect to the fiduciary
 

duty provisions of ERISA, including the requirements that they
 

act prudently and solely in the interest of plan participants and
 

beneficiaries. Further, a fiduciary is prohibited from causing a
 

plan to engage in transactions with parties in interest with
 

respect to that plan in the absence of an applicable
 

administrative or statutory exemption.
 

Even though the RE Account would not be subj ect to 

ERISA during such time as it constitutes a REOC, CREF would be
 

willing to undertake that the RE Account will be operated by CREF
 

(and any compensated investment adviser or manager of the RE
 

Account) in a manner consistent with the general fiduciary
 

standards set forth in section 404 (a) (1) (A), (B) and (C) of 

ERISA. In other words, the RE Account would be managed solely in
 

the interest of the participants and beneficiaries of the
 

Account, and
 

(A) for the exclusive purpose of:
 

(i) providing benefits to participants and their
 

beneficiaries, and
 

(ii) defraying reasonable expenses of administering the
 

plans participating in the RE Account;
 
Thomas E. Bissett, Esquire
 

June 26, 1991
 

Page 9
 

(B) with the care, skill, prudence and diligence under the
 

circumstances then prevailing that a prudent man acting in
 

a like capacity and familiar with such matters would use in
 

the conduct of an enterprise of a like character and with
 

like aims; and
 

(C) by diversifying the investments of the RE Account so as to
 

minimize the risk of Iprge losses, unless under the
 

circumstances it is clearly prudent not to do so. 1/
 

* * * 

As mentioned earlier; we would appreciate the
 

opportunity to meet with you and further discuss this matter. If
 

you have any questions or require any additional information,
 

please call the undersigned at (202) 383-0176.
 

c,-s_i'/~ce.:e,~j , _
 "/ ,.-'~ "
 I ' . . _ . -n_J.. ~­ '~~~.
 ---- l ,

/

/ steven B. Boehm 

cc: Clifford Kirsch, Esquire
 

Peter C. Clapman, Esquire (TIAA-CREF)
 

Paul J. Mason, Esquire (SA&B)
 

Y The "solely in the interest" and "exclusive purpose"
 

standards would effectively preclude self-dealing, while the
 

prudence and diversification standards would require professional
 

fiduciary investment management for the RE Account. As to
 

diversification, CREF would indicate to each potential investor
 

in the RE Account that the Account is only one reasonable
 

component of his or her pension plan's diversification strategy,
 

and would suggest to institutions that no plan's assets should be
 

invested wholly in the Account.
 

SCTHERLAKD, ASBILL & BRE:\:' :\:' 

1275 PENNSYLVANIA AVENUE. N. W. 

CABLE: SUTAB WASHINGTON \\_\.SllI~(jTO~. D. C. 2000,'¡-~,'lOl 999 PEACHTREE STREET, N,£. TELEX: 89-501
 ATLANTA. GEORGIA 30309-3996
 

FACSIMILE: 12021383-0100 '4041853-8000 '202' 637-3593 

STEVEN B. BOEHM 

DIRECT LINE: '2021 383-0176
 December 18, 1990
 

1940 Act Section 3 (a) VIA MESSENGER
 

Heidi Stam, Esquire
 

Special Counsel
 

Office of Insurance Products
 RECE:\'3,)

Dh.l.:!:::i of !::vo.::::.:mt M:''"1~:::::.t and Legal Compliance
 

Division of Investment Management
 Ute 18 l~~J
 Securities and Exchange Commission
 

450 Fifth Street, N.W.
 ".---.-.-,. C l ....­ Washington, D.C. 20549 O~CG ofl~'ñ:~"l~:-,:­

c.~d Ld~:'t:~~"'.."'"",,,
 

Re: College Retirement Equities Fund -­

Real Estate Account
 

Dear Ms. stam: 

We are writing on behalf of the College Retirement
 

Equities Fund ("CREF") to request that the staff of the Division of Investment Management (the "Division") advise us that
 

it will not recommend that the Securities and Exchange
 

Commission ("Commission") take any enforcement action under the
 

Investment Company Act of 1940 (the "Act") or the Securities
 

Act of 1933 (the "1933 Act") if CREF establishes and operates
 \" 

an investment portfolio that invests primarily in real property
 

(the "RE Account") in a manner, as described below, so as to
 

place the RE Account outside the definition of an investment
 

company in Section 3 of the Act, and does not treat the RE
 

Account as part of its regulated investment company operations.
 
Heidi Stam, Esq.
 

December 18, 19~0
 

Page 2
 

Backqround 

CREF is a nonprofit membership corporation subj ect to
 

the Not-For-Profit Corporation Law of New York state. It was
 

established by a special act of the New York state Legislature
 

which became effective on March 18# 1952, and was formed for
 

the purpose of providing retirement benefits suited to the
 

needs of fa 
 cui ty and other employees of nonprofit organizations

that are exempt from federal taxation under Section 501(c) (3) 

of the Internal Revenue Code of 1986, as amended (the "Code"),
 

or are publicly supported, and are engaged primarily in
 

education or research. CREF currently achieves its purpose by
 

issuing variable annuity certificates (the "Certificates") Y
 

that fund employer-sponsored pension plans and tax-deferred
 

1/ Currently, CREF issues two types of individual variable
 

annuity certificates, Retirement Annuity certificates (liRA
 

certificate") and Supplemental Retirement Annuity certificates
 

("SRA Certificate"), and another type of individual certificate


pursuant to a master group retirement annuity contract ("GRA
 

Certificate"). The RA certificate is d(~signed for use in
 

connection with retirement plans maintained pursuant to Section


401 (a), 403 (a), or 403 (b) of the Code or tax-deferred annuity 

plans maintained pursuant to Section 403 (b) of the Code. The SRA
 

Certificate is used primarily in connection with tax-deferred
 

annuity plans adopted pursuant to Section 403 (b) of the Code.
 

SRA Certificates are issued to individuals to permit them to
 

contribute amounts toward retirement or other financial goals in
 

addition to amounts accumulated under their institutions' basic
 

retirement plan. GRA Certificates are issued pursuant to master
 

group variable annuity contracts between CREF and U. S. Trust
 

Company and are intended to be used in connection with retirement


plans maintained pursuant to Section 401 (a), 403 (a), or 403 (b) of 

the Code.
 
Heidi Stam, Esq.
 

December 18, 19~0
 

Page 3
 

annuity programs. The Certificates permit the accumulation of
 

funds on their owners' (hereinafter "participants") behalf to
 

be paid out as annuities at retirement or at some other 
 future 

date. Under the Certificates, participants may, subj ect to the
 

terms of the retirement plan or annuity program, allocate
 

contributions made on their behalf to one or more of CREF' s
 

investment portfolios. CREF currently has four such
 

portfol ios: a stock Account, a Money Market Account, a Bond
 

Market Account, and a Social Choice Account (the "Accounts"). 

CREF is the companion organization of Teachers
 

Insurance and Annuity Association of America ("TIM"). TIM 

was established in 1918 by the Carnegie Foundation for the
 

Advancement of Teaching as a nonprofit corporation under the
 

New York state Insurance Law, and offers fixed annuity
 

contracts and insurance benefits suited to the needs of the
 

types of institutions and employees served by CREF.
 

CREF is registered as an open-end diversified
 

management investment company under the Act ii and the
 

securities issued in connection with the certificates are
 

registered under the 1933 Act. ~ In accordance with Section
 

18 (f) (2) of the Act, CREF treats units of interest in each of
 

Y File No. 811-4415.
 

~i CREF currently maintains two effective registration
 

statements under the 1933 Act: File No. 33-480 (RA and SRA
 

Certificates) and File No. 33-20480 (GRA Certificates).
 
Heidi Stam, Esq.
 

December 18, 1990
 

Page 4
 

the Accounts as a class or series of special securities having
 

a preference over other classes or series in respect of assets
 

specifically allocated to that Account and, in general,
 

considers itself a "series company" as defined by Rule 18f-2
 

under the Act. 

All services necessary for CREF' s operations are
 

provided internally at cost by salaried personnel through an
 

expense reimbursement arrangement with TIM. In this
 

connection, CREF is registered as a broker-dealer under the
 

Securities Exchange Act of 1934, and is a member of the
 

National Association of Securities Dealers, Inc. ("NASD"),
 

solely in connection with the distribution of the certificates.
 

It is also registered with the Commission as an investment
 

adviser under the Investment Advisers Act of 1940 in connection
 

wi th the management of its investment portfolios. ~/ CREF is
 

also subject to supervision and regulation by the New York
 

Y CREF, TIM and certain newly formed wholly-controlled 

subsidiaries of TIM filed an application with the Commission on
 

September 7, 1990 (as amended on November 16, 1990) for an order
 

pursuant to Section 17 (d) of the Act and Rule 17d-1 thereunder
 

approving a restructuring of CREF whereby CREF will "externalize"
 

all services necessary for its operations. File No. 812-7588. A
 

notice of that application was published in the Federal Register
 

on November 28, 1990 (55 Fed. Reg. 49470). Those services will be
 provided at cost from the subsidiaries of TIM, which consist of

TIM-CREF Investment Management, Inc. ("T-C Management"), and 

TIM-CREF Individual & Institutional Services, Inc. ("T-C
 

Services"). Both are non-profit entities. If the Commission
 

issues the requested order, CREF will terminate its broker-dealer
 

and investment adviser registration and its NASD membership.
 
Heidi Stam, Esq.
 

December 18, 19~0
 

Page 5
 

State Superintendent of Insurance and by the insurance regulatory authorities of certain other states and jurisdictions.
 

In connection with its filing of registration
 

statements under the Act and the 1933 Act on September 26,
 

1985, CREF simultaneously filed an application with the
 

Commission requesting exemptions from certain provisions of the
 

Act in order to permit it to continue its traditional methods
 

of operation as a retirement vehicle (the "Application"). 2/ 

On August 22, 1989, the Commission issued an order (the
 

"Order") W granting the relief requested, as modified consistent with the terms of a settlement agreement entered into on
 

December 21, 1988, by CREF, TIAA and certain intervenors in a
 

proceeding ordered by the Commission on the Application. Among
 

, other things, the Order granted relief to permit CREF to rely
 

on certain conditional exemptions from the requirements of the
 

Act generally available to life insurance company issuers of
 

variable annuity contracts and granted certain other relief
 

from the redeemability provisions of the Act. 

As of November 30, 1990, there were approximately
 

1.1 million individuals accumulating retirement benefits under
 

the Certificates or TIAA annuity contracts. 1/ As of that
 

2/ File No. 812-6208.
 

W Inv. Co. Act Rel. No. 17116. 

V Most individuals in the TIAA-CREF system allocate premiums to
 

both TIAA and CREF annuities.
 
Heidi stam, Esq.
 

December 18, 1990
 

Page 6
 

date, more than 4,400 institutions maintained retirement or
 

tax-deferred annuity plans funded at least in part by TIMCREF. As of November 30, 1990, CREF had net assets of
 

approximately $37 billion (unaudited).
 

The RE Account
 

CREF intends to establish the RE Acçount as a new
 

investment portfolio with the investment objectives of preserving and protecting its capital, providing for compounding
 

of income as a result of reinvestment of cash flow from investments, and providing for increases over time in the amount of
 

such income through appreciation in the value of its assets.
 

CREF currently intends that the RE Account will attempt to
 

achieve these objectives by investing primarily (at least 65%)
 

in direct ownership interests in income-producing real estate
 

(such as office buildings, shopping centers, agricultural land,
 

hotels, apartment buildings or industrial properties)
 

participating mortgage loans originated by the Account and real
 

property sale-leaseback transactions negotiated on behalf of
 

the Account. Examples of direct ownership interests in real
 

estate include, but are not limited to, fee interests, general
 

partnership interests, leaseholds and tenancies in common.
 

Apart from a portion of the Account's assets (normally 5-10%)
 

invested in short-term or intermediate-term debt instruments
 

for 1 iquidi ty purposes, the remainder of the Account's assets 
Heidi Stam, Esq.
 

December 18, 19~ß
 

Page 7
 

may be invested in other types of real estate investments,
 

including primarily conventional, non-participating mortgage
 

loans. 

As with the Accounts, all services necessary for the
 

operation of the RE Account will be provided at cost through an
 

expense reimbursement arrangement with subsidiaries of
 

TIM. §/ 

viewed separately, the RE Account will not be an
 

investment company within the meaning of Section 3 (a) (1) of the 

Act because it will not be, nor will it hold itself out as
 

being, engaged primarily in the business of investing,
 

reinvesting or trading in securities. 2/ In addition, the RE
 

Account will not be an investment company wi thin the meaning of
 

section 3 (a) (3) of the Act because at no time will it invest 

more than 35% OÎ its total assets in "investment securities" as
 

defined in Section 3 (a) (3). li In this regard, the Division
 

has in the past recognized that unregistered real estate
 

§/ CREF does not anticipate offering the RE Account until the
 

externalization of services described above takes 
 place . See
 

supra note 4 and accompanying text.
 

2/ section 3 (a) (2) of the Act is inapplicable because the RE
 

Account will not engage or propose to engage in the business of
 

issuing "face amount certificates of the installment type" as
 that term is defined in section 2 (a) (15) of the Act. 

10/ The RE Account may rely on Rule 3a-2 under the Act for a
 

period of one year from the effective date of the Form S-1
 

registration statement relating to its securities. Rule 3a-2
 

generally provides a one year "start-up period" exemption from


Sections 3 (a) (1) and 3 (a) (2) of the Act. 
Heidi Stam, Esq.
 

December 18, 1990
 

Page 8
 

,separate accounts of life insurance companies are not
 

investment companies within the meaning of Sections 3 (a) (1) or 

3 (a) (3) of the Act. ill 

Although the RE Account will be part of the CREF
 

corporate entity, it will, in many material respects, be
 

operated in the same manner as are unregistered real estate
 

separate accounts offered by a number of life insurance
 

companies. III The relationship between the RE Account and
 

the Accounts will be comparable to that between different
 

series (or subaccounts) of a registered management separate
 

account in a series company form. Income and both realized and
 

unrealized gains or losses from the RE Account's assets will be
 

credi ted to or charged against the RE Account without regard to 

the income, gains and losses of the Accounts. In addition, as
 

is generally the case with investors in unregistered real
 

estate separate accounts of life insurers, participants in the
 

RE Account would not have any voting rights. Nonetheless,
 

CREF's Board of Trustees will be responsible for the management
 

and administration of the RE Account. Because CREF is not a
 

ill See,~, Pruco Life Ins. Co. Real Property Account, SEC No-


Action Letter (avail. Sept. 18, 1986); N. N. Providence Variable
 

Account, SEC No-Action Letter (avail. April 5, 1982).
 

III In this regard, the RE Account, like all other real estate
 

accounts, will not be able to comply with many requirements of


the Act such as those found in Sections 2 (a) (4), 17, 18, 22 (c) 

and 22(e) or Rules 2a-4 and 22c-1 thereunder. It will also not
 

be able to avoid the activities prohibited to investment
 

companies by Section 7 of the Act.
 
Heidi Stam, Esq.
 

December 18, 1990
 

Page 9
 

life insurance company under the New York insurance laws,
 

however, the RE Account could not be organized as a separate
 

account under those laws and therefore is not a separate
 

account within the meaning of Section 2 (a) (37) of the Act or 

Rule 0-1(e) thereunder.
 

Interests in the RE Account will be registered under
 

the 1933 Act on Form S-l and the prospectus contained therein
 

will contain the type of disclosure typically found in registration statements for real estate variable annuity contracts
 

funded by real estate separate accounts of life insurance
 

companies. In addition, CREF will file periodic reports
 

pursuant to Section 15 of the securities Exchange Act of 1934
 

in respect of the RE Account.
 

In addition, unlike registered investment companies,
 

the RE Account will be operated in accordance with applicable
 

standards and requirements promulgated pursuant to Title I of
 

the Employee 
 Retirement Income Security Act of 1974, as amended
 

("ERISA"). Most Certificates are issued in connection with a
 

program for the purchase of annuity contracts described in
 

section 403 (b) of the Code. Unless an applicable exception 

applies, Section 403 (b) plans would be "pension plans" subject
 
Heidi Stam, Esq.
 

December 18, 19~0
 

Page 10
 

to Title I of ERiSA 13/ and the assets of the RE Account would
 

be deemed to include "assets" of those ERISA plans. 14/
 

ERISA attaches fiduciary status and responsibilities'
 

to persons that provide investment management or investment
 

advice for a fee with respect to the "assets" of ERISA pension
 

plans. In relevant part, section 404 (a) (1) requires plan
 

fiduciaries li/ to discharge their duties with respect to a 

plan solely in the interests of plan participants and
 

beneficiaries and (A) for the exclusive purpose of providing
 

benefits to participants and beneficiaries and defraying
 

13/ See ERISA § 3(2),29 U.S.C. § 1002(2); 29 CFR § 2510.3-2.
 

section 403 (b) plans are not subject to ERISA if, for example,
 

they are not "established or maintained" by an employer (see 29
 

CFR § 2510.3-2(f)) or they are "governmental plans" (see ERISA
 

§§ 3(32), 4(b)(1), 29 U.S.C. §§ 1002(32), 1004(b)(1)).
 

14/ In Advisory Opinion 78-8A (March 13, 1978), the Department of
 

Labor ("DOL") opined that CREF Stock Account assets segregated to
 

support variable annuity payments would be treated as "plan
 

assets" for ERISA purposes. In 1986, the Department issued
 

definitive regulations interpreting "plan assets." See 29 C. F. R.


§2510.3-101. Those regulations provide that "plan assets" 

include, inter alia, a fractional undivided interest in each of
 

the underlying assets of (1) any life insurance company separate
 

account supporting a variable annuity contract issued to the plan
 

(unless registered under the Act) and (2) any entity in which the


plan has an equity interest unless certain exceptions apply, such
 

as a publicly-offered security, an investment in an operating
 

company or an interest in another entity where there is not
 

significant participation by benefit plan investors.
 

li/ section 3 (21) (A) of ERISA defines a fiduciary as a person
 

exercises discretionary authority or control over
 

the management of the plan or its assets, or (2) renders
 

investment advice (or has authority to render investment advice)
 

for a fee with respect to plan assets.
 

who, ~, (1) 

Heidi Stam, Esq.
 

December 18, i9~O
 

Page 11
 

reasonable expenses of administering the plan; (B) with the
 

care, skill, prudence, and diligence under the circumstances
 

then prevailing that a prudent, man in a like capacity and
 

familiar with such matters would use in the conduct of an
 

enterprise of a like character and with like aims; and (C) by
 

diversifying the investments of the plan so as to minimize the
 

risk of large losses, unless under the circumstances it is
 

clearly prudent not to do so. In addition, absent an exemption
 

under section 408, Section 406 of ERISA prohibits plan
 

fiduciaries, ~, from causing a plan to engage in specified
 

transactions with parties in interest 16/ or from engaging in
 

self dealing, acting with conflicting interests or receiving
 

third-party consideration for their own account with respect to
 

the plan. 17/
 

16/ section 3 (14) of ERISA defines a "party in interest" very
 

broadly. In general terms, a party in interest is analogous to


an "interested person" under section 2 (a) (19) of the Act. 

1~ DOL has issued a class exemption from certain of these
 

prohibi ted transaction rules with respect to insurance company
 

pooled separate accounts subject to certain conditions. See PTE
 

90-1 (formerly PTE 78-19), 55 Fed. Reg. 2891 (January 29, 1990).
 

If the Division issues the no-action letter requested, CREF may
 

seek prohibited transaction exemptions necessary or appropriate
 

to the operation of the RE Account and comparable to those
 

granted in similar cases by DOL (or to confirm that CREF may rely


on PTE 90-1). 17/ 
Heidi Stam, Esq.
 

December 18, 19~0
 

Page 12
 

other Considerations
 

CREF has considered the option of establishing an
 

unregistered real estate separate account of TIM. CREF does
 

not, however, believe that this alternative is as favorable to
 

participants as the proposed RE Account.
 

A significant disadvantage is that the New York
 

Insurance Regulations (Chapter III, Subchapter A, Part
 

50.7(a)(3)), would require that TIM offer a so-called 

"nonforfeiture" benefit in the form of either "an option to
 

receive the cash surrender value of the contract or an option
 

to receive a paid-up annuity to commence at the maturity date."
 

The regulation also requires that "if only the option to
 

receive a paid-up annuity is available, the accumulated value
 

of the contract in the separate account or accounts of the
 

company at the time of default shall, at the option of the
 

contractholder, be transferred to the general account of the
 

company to provide a fixed dollar paid-up annuity." Consequently, TIAA would either have to use its general account
 

assets to meet surrender and paid-up annuity requests or
 

maintain a higher than desirable portion of the real estate
 

separate account's assets in liquid securities. Although other
 

for-profit life insurance companies offering real estate
 

separate accounts apparently rely on both of these strategies,
 

the expenses inherent in such practices is ultimately passed on
 
Heidi Stam, Esq.
 

December 18, 199~
 

Page 13
 

to participants in the form' of lower investment returns or
 

higher fees and charges.
 

For participants, the high mortality and expense risk
 

fee that TIM would have to charge makes the proposed RE
 

Account much more advantageous than a TIM separate account.
 

Unlike CREF, which is unique in that it may (for each Account)
 

pool the mortality experience of its annuitants and the expense
 

experience attributable to participants (including annuitants)
 

and pay the costs of this experience as they are incurred, 181
 

TlAA must, under New York Insurance Law, 191 guarantee annuity 

purchase rates. 

A guarantee of such rates entails a guarantee that
 

the rates will be as favorable to annuitants as those based on
 

a specific mortality table identified in the certificate.
 

Equally significant, it guarantees that expenses --other than
 

investment portfolio expenses-- will not exceed the levels
 

stated in the certificate. 201 In order to accumulate
 

~I See pages 33-36 of CREF's March 1, 1990 prospectus. File No.
 

33-480. 

191 This is true of state variable annuity contract and variable
 

annuity separate account laws (and 
 corresponding regulations) in
 

a number jurisdictions (see, ~, Pennsylvania Regulations,
 

Title 31, §§ 85.36(a) & 
 85.36(b) ). 

201 New York Insurance Regulation 50.6(a) (1) states, in relevant
 

part: 

Each variable annuity contract delivered or issued
 

for delivery in this state shall provide that
 

(continued. . . ) 
Heidi stam, Esq.
 

December 18, 199B
 

Page 14
 

sufficient assets/reserves to support such guarantees, TIM
 

would, as do all variable annuity issuers other than CREF, have
 

to charge a mortality and expense risk fee. Of necessity, this
 

fee would be based on estimates of mortality that are conservati ve and, thus, less advantageous for participants than a procedure which relies on ,actual mortality experience in determining the amounts of annuity payments. In this connection, TIM 

has estimated that it would have to charge a combined risk fee
 

within the range of industry practice, currently between 0.75%
 

and 1.25% of net assets per year.
 

The addition of a mortality and expense risk fee
 

would dramatically increase the cost of a real estate variable
 

annui ty to participants when compared with that of a CREF
 

certificate which would reflect the pooled mortality and
 

expense experience as it occurs. Currently, CREF variable
 

annuity participants pay approximately 0.35% of net assets per
 

201 ( . . . continued) 

neither expenses actually incurred, other than taxes
 

on the investment return, nor mortality actually
 

experienced, shall adversely affect the dollar
 

amount of variable annuity payments to any annuitant
 

for whom variable annuity payments have commenced
 

. . . . The method of computing the dollar amount of
 

variable annuity payments shall be such that, if the
 

annual rate of investment return of the separate
 

account, as defined in section 50.1(a)(7)
 

hereinabove, were six and one half percent at all
 

times from the issue of the contract, such amounts
 

would not decrease.
 
Heidi stam, Esq.
 

December 18, 19~0
 

Page 15
 

year for all expenses during the accumulation period: ~ no 

deduction or charge is made for mortality. CREF estimates that
 

any real estate investment portfolio would require an investment management fee of approximately 0.65% of net assets per
 

year. Therefore, a TIM real estate separate account variable
 

annui ty could be expected to cost participants approximately
 

1.88% of net assets per year 22/ during the accumulation
 

period as compared with 0.88% per year for a CREF real estate
 

variable annuity. 23/
 

Legal Arguents For Relief 

CREF believes that it should be permitted to offer a
 

real estate investment option to its participants at a level of
 

expense consistent with its non-profit purpose and historical
 

experience. TIM cannot do this through a separate account. 

CREF believes, however, that it can and should be permitted to
 

offer the RE Account at expense levels that participants and
 

ZLI Of this figure, investment management expenses run
 

approximately .12% of net assets per year.
 

22/ This figure is based on the assumption that a 1.00% deduction
 

for mortality and expense risk would be made and that
 

distribution and administrative expenses of a TIM separate
 

account product would be the same as they currently are for CREF
 certificates. 

23/ Even during the annuity period, the cost under a CREF product
 

should be significantly lower, as the actual mortality experience
 

of CREF annuitants during both 1988 and 1989 had an effect on
 

returns to CREF annuitants equal to that of a .40% annual


deduction. 
Heidi Stam, Esq.
 

December 18, 199Q
 

Page 16
 

insti tutions have come to expect from it. CREF' s status as a
 

registered investment company, however, raises questions about
 

the applicability of the Act to the RE Account and any effect
 

that the RE Account may have on CREF's compliance with the Act

or the rules thereunder.
 

A number of legal issues arguably are raised by
 

CREF 's establ ishment of the RE Account: first, whether the RE
 

Account is part of an investment company because it is part of
 

the CREF corporate entity; second, whether CREF would meet the
 

Section 3 definition of an investment company where one of its
 

investment portfolios does not meet that definition, or whether
 

CREF is properly registered under Section 8 of the Act where
 

onê of its portfolios is not "covered" by its Section 8
 

registration; and third, and most broadly, whether CREF' s
 

establishment of the RE Account makes it impossible to comply
 

with the full range of substantive regulatory requirements
 

imposed under the Act. In connection with the third issue,
 

questi.ons arise such as whether CREF would be in compliance
 

with Section 18 (f) of the Act because the securities it issues
 

in connection with the RE Account are not, within the terms of
 

Section 18 (f) (2), excluded from the definition of a senior
 

securi ty.
 

Therefore, before it proceeds with establishment of
 

the RE Account, CREF wishes to resolve any questions about the
 

applicability of the Act to the RE Account and any effect the
 
Heidi Stam, Esq.
 

December 18, 199~
 

Page 17
 

RE Account may have on CREF under the Act. As demonstrated 

below, the policy of the Act and the evolution of variable
 

contract regulation thereunder are consistent with the no-


action position requested.
 

We believe that the Act and rules thereunder do not
 

prohibit a series company, as that term is defined in Rule
 

18 f-2, from establ ishing an investment portfol io (and issuing a
 

corresponding series of securities) that does not meet the
 

section 3 definition of an investment company and could not
 

register as such under the Act. We also believe that if a
 

series company established such a portfolio and issued a series
 

or class of special securities having preference over other
 

securities issued by the company with respect to the assets of
 

that portfolio, then that portfolio should be treated as not
 

being part of the registered series investment company for
 

purposes of the Act. Likewise, in such a situation all the
 

other portfolios should be treated as those of a series
 

investment company and all the other classes of securities
 

should be treated as those issued by an investment company.
 

The purposes fairly intended by the policy and
 

provisions of the Act, as interpreted in court opinions with
 

'variable annuities and as reflected by Commission
 

and Division treatment of series companies, support the
 

proposition that each portfolio of a series investment company
 

should be treated as a separate investment company notwithrespect to 

Heidi Stam, Esq.
 

December 18, 19~0
 

Page 18
 

standing that certain practical exceptions to such treatment
 

are recognized. with regard to series companies, the Commission and the Division have generally applied the Act as if each
 

portfolio were a separate investment company. 24/ For
 

example, Rule 18f-2 under the Act requires that a majority of
 

the outstanding voting securities of a series must approve most
 

shareholder actions for the actions to be effective as to that
 

series. The 
 fact that the Rule contains exceptions 25/


evidences the Commission's understanding that the primary
 

elements of the Rule were not doctrinaire formulations, but
 

rather were pragmatic responses to the function rather than the
 

form of the investment company.
 

The adaptation of form to suit function has a long
 

history in the variable insurance products arena. 26/ Section
 

24/ See Fleming, Requlation of Series Investment Companies Under
 

the Investment Company Act of 1940, 44 Bus. Law. 1179, 1180
 

(1989) . 

25/ Paragraphs (e), (f), and (g) of Rule 18f-2 exempt shareholder
 

selection of a company's independent public accountant,
 

shareholder approval of a company i s contract with a principal
 

underwriter and shareholder election of directors, from the
 

otherwise applicable requirement of a majority vote of each
 

series. See also ide at 1191. These exceptions are based on the
 

premise that the interests of all securi tyholders in a company
 

will be the same with regard such matters. The exceptions would
 

not have been necessary, however r if not for the practical
 

difficulty of having more than one board of directors,
 

independent accountant, or underwriter for a single


corporation. 

26/ One clear example of this is the use and adaptation of
 

certain registration forms for registration of separate accounts


(continued. . . ) 
Heidi Stam, Esq.
 

December 18, 1990
 

Page 19
 

2 (a) (8) of the Act defines a "company" to mean "a corporation, 

a partnership, an association, a joint-stock company, a trust,
 

a fund, or any organized group of persons whether incorporated
 

or not. " . . . The Third Circuit, after reviewing the legislative history of Section 2 (a) (8), concluded that life insurance
 

company separate accounts can come wi thin the definition of an
 

investment company notwithstanding that they are not legal
 

entities under state law, and in fact are part of a larger
 

legal entity that is excluded from the definition of an
 

investment company. 27/ In essence, an investment company can
 

26/ ( . . . continued) 

under the Act and the registration of securities issued by such
 

accounts. with two notable exceptions (Forms N-3 and N-4) these
 

forms were not designed for separate accounts or variable annuity
 

or variable life insurance contracts.
 

27/ Prudential Ins. Co. v. Securities and Exchanqe Commission,
 

326 F.2d 383, 387 (3d Cir. 1963), cert. denied, 377 U.S. 953
 

(1964). The court of appeals was quite specific on this point


stating, in relevant part:
 

Furthermore, a study of the legislative history of
 

the Act shows that Congress intentionally drafted
 

the statutory definitions in general terms in order
 

to control such situations regardless cf the legal
 

form or structure of the investment enterprise.
 

In these circumstances we rej ect Prudential's
 

argument that the broad statutory phrase "a trust, a
 

fund, or any organized group of persons whether
 

incorporated or not" refers only to recognizable
 

business entities. . . . As we have previously seen,
 

the Investment Fund is a completely segregated
 

account, devoted to investing in securities. The
 

cash for these investments is derived from payments
 

(continued. . . ) 
Heidi stam, Esq.
 

December 18, 19~0
 

Page 20
 

be carved out of a non-investment company. In this respect,
 

the various investment portfolios or "Accounts" of CREF can be
 

viewed as being no different in concept from insurance company
 

separate accounts registered as investment companies, carved
 

out of a non-investment company insurance company, and we
 

believe that had CREF begun its life as a single real estate
 

portfolio and now proposed to add new portfolios investing in
 

securities, the Commission would insist that these new
 

portfo1ios be registered under the Act.
 

The obvious corollary to the functional definition of
 

an investment company as articulated in Prudential is that a
 

non- investment company can be carved out of an investment
 

27/ ( . . . continued) 

made by the purchaser of the variable annuity
 

contract. Though the proceeds of the fund are held
 

for the sole benefit of the annuitant, it is this
 

fund, and no other entity in which he has an
 interest. 

Prudential also asserts that the specific
 

exemption provided for the common trust funds of
 

banks shows that regulation under the Act was
 

imposed on an institutional rather than on a
 

£unctional basis. It is pointed out that this
 

exemption is provided i~ addition to the general
 

exemption for banks. Prudential declares that such
 

common trust funds are functionally indistinguishable from investment companies, but were excluded
 

from the Act "because they were in fact part of the'
 

banking business and intended to be covered by the
 

broad exemption for banks." We think that this
 

specific exemption leads to the opposite


conclusion. 
Heidi stam, Esq.
 

December 18, 1990
 

Page 21
 

company if the functional attributes of the structure do not
 

subvert the policies and provisions of the Act as these are
 

applied to protect investors in investment companies and if
 

certain practical aspects of routine Commission regulation
 

(such as registration statements) can be facilitated. CREF
 

submits that no aspect of the Act's (or the 1933 Act's)
 

applicabili ty to CREF or the Commission's regulation thereof
 

would be adversely affected in any way by the existence or
 

operation of the RE Account as described herein. 28/ CREF
 

would continue to file or amend registration statements under
 

the 1933 Act and to update its registration, vis-a-vis the
 

Accounts, under the Act on Form N~3. 29/ In addition, CREF
 

would file, and amend as necessary, a registration statement
 

for the RE Account under the 1933 Act.
 

CREF maintains th~t the addition of the RE Account
 

will not increase or diminish the protection and regulation
 

28/ In this regard, a potential confl ict of interest could arise
 

from the fact that CREF' s Board of Trustees would be responsible
 

for several investment company portfolios as well as a non-


investment company portfolio. To avoid any possibility of "overreaching" or undue influence by the RE Account or its investors
 

or any other party with an interest or a relationship with the RE
 

Account, CREF' s Trustees will only be elected by participants in
 

the Accounts in accordance with the Order.
 

29/ As one COIDlentator recently pointed out "(T)he treatment of a
 

series company as a single entity for purposes of filing a
 

registration statement under Section 8 of the 1940 Act is one of
 

the exceptions to the general rule that each portfolio of a
 

series fund is regulated as a separate investment company under
 

the 1940 Act." Fleming, supra, note 24, at 1183.
 
Heidi Stam, Esq.
 

December 18, 19~0
 

Page 22
 

under the federal securities laws currently received by
 

participants in the Accounts. Likewise, CREF maintains that
 

participants in the proposed RE Account will receive the same
 

degree of protection and regulation under the federal securities laws as do investors in any unregistered insurance company
 

real estate separate account, interests in which are registered
 

under the 1933 Act. ~I Moreover, the RE Account will be
 

operated in accordance with applicable ERISA requirements.
 

The issues raised by CREF' s proposed addition of the
 

RE Account are novel and arise because, unlike other issuers of
 

variable annuities, CREF is a stand-alone corporate entity and
 

not a separate account of an insurance company. Granting the 

assurances sought here would recognizei as the Commission did
 

in granting CREF extensive exemptive relief in 1989 to permit
 

it to continue to operate as a pension funding vehicle, IV
 

30/ In addition, it is our understanding that, pursuant to
 

exemptions set forth in section 3 (a) (2) of the 1933 Act and
 

exclusions from the definition of an investment company found in
 section 3 (c) (11) of the Act, interests in most real estate 

separate accounts of life insurance companies are not subject to
 

the federal securities laws. We anticipate that a significant
 

portion of the RE Account's assets will be derived from
 

contributions under pension plans or under governmental plans of


the type described in sections 3 (a) (2) or 3 (c) (11). Therefore, 

participants who might otherwise not receive the protection of
 

the federal securities laws if such assets were not commingled
 

with "non-qualified" assets will, in the RE Account, benefit from
 

the fact their interests will be registered under the 1933 Act.
 

31/ See supra note 6 and accompanying text.
 
Heidi Stam, Esq.
 

December 18, 1990
 

Page 23
 

that CREF' s unique history and structure create unprecedented
 

compliance issues. 

Accordingly, in light of the policy considerations
 

outlined above, we believe that:
 (1) the RE Account should not
 

be considered part of CREF' s investment company operations nor
 

should CREF be deemed to be operating in a manner that
 

conflicts with the various substantive regulatory requirements
 

of the Act solely because of the maintenance of the RE Account,
 

and (2) neither CREF' s status as an investment company within
 

the meaning of Section 3 of the Act nor its registration under
 

section 8 of the Act should be affected by its maintenance of
 

an investment portfolio which does not, itself, fall within the
 

investment company definition. Thus, the establishment and
 

maintenance of the proposed RE Account should not affect CREF' s
 

status as an investment company under the Act or cause the
 

Commission to deem CREF not to be in compliance with any
 

provision of the Act or the rules thereunder.
 

Conclusion 

In view of the foregoing, we respectfully request
 

that the Division advise us that it will not recommend that the
 

Commission take enforcement action under the Act or the 1933
 

Act if CREF establishes and operates the RE Account in a
 

manner, as described herein, so as to place it outside the
 

definition of an investment company in Section 3 of the Act and
 
,
 

Heidi Stam, Esq.
 

December 18, 1990
 

Page 24
 

does not treat it as part of its regulated investment company
 

operations. 

* * * * 

If you have any questions or require any additional
 

information, please call the undersigned at (202) 383-0176 or
 

David S. Goldstein at (202) 383-0606.
 

Very truly yours,
 

)3teven B. Boehm
 

cc:	 Clifford Kirsch, Esq. (SEC) Barry D. Miller, Esq. (SEe)

Peter C. Clapman, Esq. (TIM-CREF) Paul J. Mason, Esq. (SA&B)