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|  |  | Investment Company Act of 1940 — Section 17(a)Gartmore Variable Insurance TrustDecember 29, 2006
RESPONSE OF THE OFFICE OF CHIEF COUNSEL	DIVISION OF INVESTMENT MANAGEMENT

Our Ref. No. 20067101449	Gartmore Variable Insurance Trust	File No. 811-03213

Your letter dated December 29, 2006 requests our assurance that we would not recommend enforcement action to the Securities and Exchange Commission ("Commission") under section 17(a) of the Investment Company Act of 1940 (the "1940 Act") against Gartmore Variable Insurance Trust ("GVIT") if, under the circumstances described below and without obtaining an order from the Commission under the 1940 Act, certain of its portfolios (the "GVIT ID Funds") purchase shares of certain of its other portfolios (the "Underlying Funds") in exchange for in-kind consideration, as defined below.
BACKGROUND
You state that GVIT is registered with the Commission as an open-end management investment company (a "fund") that serves as an investment vehicle to certain insurance company separate accounts. You state that the GVIT ID Funds consist of five portfolios of GVIT that operate as fund of funds in reliance on a Commission exemptive order ("Order") under section 12(d)(1)(J) of the 1940 Act.1 You state that, pursuant to the Order, the GVIT ID Funds currently invest in certain portfolios (the "GMF Portfolios") of the Gartmore Mutual Funds ("GMF"), a fund that offers its shares primarily to retail investors.2

You state that the Underlying Funds correspond with the GMF Portfolios in that each portfolio has the same investment objectives and policies, is managed in the same manner by the same portfolio manager(s), and has or will have substantially identical portfolio holdings.3 You state that Gartmore would like to restructure the GVIT ID Funds by transferring investments in the GMF Portfolios to the Underlying Funds. You represent that the restructuring would permit the insurance company separate accounts investing in the GVIT ID Funds greater flexibility in complying with the Internal Revenue Code ("IRC") diversification requirements.4

You state that, to effect the restructuring, the GVIT ID Funds would redeem their shares of the GMF Portfolios in-kind,5 and use the redemption proceeds (the "in-kind consideration") to acquire shares of the corresponding Underlying Funds (the "in-kind purchases"). You claim that the in-kind purchases would benefit the GVIT ID Funds by allowing each GVIT ID Fund to avoid significant brokerage costs that would be incurred if it had to sell the in-kind consideration to realize the cash necessary to purchase shares of the Underlying Funds. You also claim that the Underlying Funds would avoid significant brokerage costs that would be incurred if the Underlying Funds were to receive the cash and invest it in substantially similar portfolio securities (which, you represent, would be substantially similar to the in-kind consideration).6

The GVIT ID Funds and the Underlying Funds (the "Participating Funds") propose to engage in an in-kind purchase only under the following circumstances ("Proposed Representations"):
- An in-kind purchase will not dilute the interests of the shareholders of either Participating Fund;   
- The in-kind consideration accepted by an Underlying Fund will consist of securities that are appropriate, in type and amount, for investment by the Underlying Fund in light of its investment objectives and policies, and current holdings;   
- A GVIT ID Fund's in-kind consideration will consist only of the entire redemption proceeds obtained through the redemption of shares of the corresponding GMF Portfolio;   
- A GMF Portfolio and its corresponding Underlying Fund will have the same procedures for determining their net asset values, 7  and will follow those procedures in determining the amount of redemption proceeds to be paid to the GVIT ID Fund upon the redemption, and the amount of Underlying Fund shares to sell to a GVIT ID Fund, respectively. A GMF Portfolio and corresponding Underlying Fund will ascribe the same value to the in-kind consideration;   
- The in-kind redemptions and in-kind purchases will be effected simultaneously;   
- GVIT will effect the in-kind purchases pursuant to procedures adopted by the Board on behalf of each Participating Fund, including a majority of trustees who are not "interested persons" of GVIT as defined in section 2(a)(19) of the 1940 Act ("Independent Trustees"), that are reasonably designed to provide that the purchases in-kind are effected in a manner consistent with (1) through (5) above;   
- Within the seven days following the 30-day period immediately after completion of the in-kind purchases, the Board, including a majority of Independent Trustees, on behalf of each Participating Fund, will determine that all of the in-kind purchases involving the Participating Funds:   
were effected in accordance with these procedures;
did not favor a GVIT ID Fund to the detriment of any other shareholder of the corresponding Underlying Fund or favor the Underlying Fund to the detriment of the GVIT ID Fund; and
were in the best interests of each Participating Fund;
 

- GVIT will maintain and preserve for a period of not less than six years from the end of the fiscal year in which the purchase occurred, the first two years in an easily accessible place, a copy of the in-kind purchase procedures, as well as other records for the in-kind purchases setting forth the identity of the Participating Funds involved, a description of the composition of the relevant Participating Funds' investment portfolios (including each asset's value) immediately prior to the in-kind purchases, a description of each security delivered in connection with the in-kind purchases, the terms of the in-kind purchases, the information or materials upon which the asset valuations were made, and a description of the composition of the relevant Participating Funds' investment portfolios (including each asset's value) 30 days after the in-kind purchases; and   
- Gartmore will, consistent with its fiduciary duties, disclose to the Independent Trustees of the GVIT Board the existence of, and all of the material facts relating to, any conflicts of interest between Gartmore and the Participating Funds in a proposed in-kind purchase, to allow the Independent Trustees to approve the in-kind purchases. 8

You note that the in-kind purchases and the Proposed Representations are similar to the in-kind transaction and representations described in GE Institutional Funds (pub. avail. Dec. 21, 2005) (the "GE Letter"). The GE Letter provided no-action assurances under section 17(a)(1) of the 1940 Act in connection with in-kind purchase transactions between a fund and certain affiliated shareholders.9 Unlike the arrangement in the GE Letter, however, your letter entails an in-kind purchase transaction between affiliated funds.10
LEGAL ANALYSIS
Section 17(a)(1) of the 1940 Act, as relevant here, prohibits any affiliate, acting as principal, from knowingly selling any security or other property to a fund.11 Section 17(a)(2) of the 1940 Act, in relevant part, prohibits any affiliate, acting as principal, from knowingly purchasing from such fund, any security or other property. Section 17(a) of the 1940 Act was designed to prohibit self-dealing and other forms of overreaching of a fund by its affiliates. The section addresses self-dealing by prohibiting a purchase or sale transaction involving a fund when an affiliate of the fund is a party to the transaction and the affiliate has "both the ability and the pecuniary incentive to influence the actions of the investment company."12

An in-kind purchase transaction between two affiliated funds, as presented in your letter, involves four separate transactions, each of which implicates the prohibitions of section 17(a) of the 1940 Act because the protections of section 17 extend to each Underlying Fund and corresponding GVIT ID Fund:13
- the sale of Underlying Fund shares to the GVIT ID Fund may be viewed as a sale of securities by an affiliate (the Underlying Fund) to a fund (the GVIT ID Fund) under section 17(a)(1) of the 1940 Act;   
- the purchase of the in-kind consideration by the Underlying Fund from the GVIT ID Fund may be viewed as a purchase of securities by an affiliate (the Underlying Fund) from a fund (the GVIT ID Fund) under section 17(a)(2) of the 1940 Act;   
- the sale of the in-kind consideration by the GVIT ID Fund to the Underlying Fund may be viewed as a sale of securities by an affiliate (the GVIT ID Fund) to a fund (the Underlying Fund) under section 17(a)(1) of the 1940 Act; and   
- the purchase by the GVIT ID Fund of Underlying Fund shares may be viewed as a purchase of securities by an affiliate (the GVIT ID Fund) from a fund (the Underlying Fund) under section 17(a)(2) of the 1940 Act.

Section 17(a) of the 1940 Act prohibits all of the transactions, except transaction (4).14 Thus, the concerns underlying section 17(a) must be addressed with respect to transactions (1) through (3). Transactions (1) and (2) raise the concerns that an Underlying Fund may overreach a GVIT ID Fund by: (i) selecting particular securities to be transferred to the Underlying Fund as in-kind consideration that would be more beneficial for the GVIT ID Fund to retain (*i.e.*, cherry picking); and/or (ii) causing the GVIT ID Fund to accept an amount of the Underlying Fund's shares that is of lesser value than the in-kind consideration.15 Similarly, transaction (3) raises the concerns that a GVIT ID Fund may overreach an Underlying Fund by: (i) causing the Underlying Fund to accept unwanted portfolio securities as in-kind consideration; and/or (ii) causing the Underlying Fund to issue its shares in exchange for in-kind consideration that is of lesser value than the shares. 

You contend that the concerns underlying sections 17(a)(1) and (2) would be addressed by conducting the in-kind purchases consistent with the Proposed Representations. You state that the Proposed Representations are similar to those in the GE Letter, but have been expanded to address the fact that each party to an in-kind purchase transaction is a fund and, therefore, the representations entail additional Board responsibilities to oversee the in-kind purchases on behalf of each Participating Fund. 

In particular, you contend that the Proposed Representations would address the concerns underlying sections 17(a)(1) and (2) with respect to transactions (1) and (2). You contend that no Underlying Fund (or its affiliate) would overreach a GVIT ID Fund by selecting particular securities to be transferred as in-kind consideration because, pursuant to the Proposed Representations, the in-kind consideration will consist only of the entire redemption proceeds that were distributed to the GVIT ID Fund, by a GMF Portfolio, which would be distributed on a pro rata basis. You also contend that no Underlying Fund (or its affiliate) would overreach a GVIT ID Fund by causing it to accept an amount of the Underlying Fund's shares that is of lesser value than the in-kind consideration because the representations focus on the proper and consistent valuation of the in-kind consideration and require a determination by the Board that the in-kind purchases did not favor the Underlying Fund to the detriment of the GVIT ID Fund.

Similarly, you contend that the Proposed Representations would address the concerns underlying sections 17(a)(1) and (2) with respect to transaction (3). You contend that no GVIT ID Fund (or its affiliate) would overreach an Underlying Fund by causing the Underlying Fund to accept unwanted portfolio securities as in-kind consideration because, pursuant to the Proposed Representations, the in-kind consideration would be consistent, in type and amount, with the Underlying Fund's investment objectives, investment policies and current holdings. In particular, you represent that the in-kind consideration would consist of the in-kind proceeds from the redemption of shares of a GMF Portfolio, which has the same investment objectives and policies, is managed in the same manner by the same portfolio manager(s), and has, or will have, substantially identical portfolio holdings, as the Underlying Fund. You also contend that no GVIT ID Fund (or its affiliate) would overreach an Underlying Fund by causing the Underlying Fund to issue its shares in exchange for in-kind consideration that is of lesser value because the representations focus on the proper and consistent valuation of the in-kind consideration and require a determination by the Board that the in-kind purchases did not favor the GVIT ID Fund to the detriment of any other shareholder of the corresponding Underlying Fund.

Based on the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission under section 17(a) of the 1940 Act against GVIT if, under the circumstances described in this letter and without obtaining an order from the Commission under the 1940 Act, the GVIT ID Funds purchase shares of the Underlying Funds in exchange for the in-kind consideration. Because our position is based on the facts and representations in your letter, you should note that any different facts and representations may require a difference conclusion.

Kenneth C. Fang   Senior Counsel
Endnotes
1*See* In the Matter of Nationwide Life Insurance Company, Investment Company Act Release Nos. 25492 (Mar. 21, 2002) (notice) and 25528 (Apr. 16, 2002) (order). You note that the Order also granted an exemption under sections 6(c) and 17(b) of the 1940 Act from the prohibitions of section 17(a) to the extent necessary to implement the fund of funds structure. You state that the Order does not grant any exemption pursuant to which GVIT could conduct the proposed in-kind purchases that are described below. 

2 You state that Gartmore Mutual Fund Capital Trust ("Gartmore"), or one of Gartmore's registered investment advisory affiliates, serves as investment adviser to GVIT and GMF. You also state that the same persons serve as members of the board of trustees ("Board") of GVIT and GMF.

3 You note that certain of the Underlying Funds have not been offered to public investors and have minimal, if any assets, as of the date of your letter. You represent that those funds will have substantially identical underlying securities and in substantially the same proportional amounts as the GMF Underlying Funds when those funds are offered publicly.

4 You state that, for example, the IRC diversification requirements allow an insurance company separate account to "look through" to the assets held by any fund in which the separate account invests as long as all of the beneficial interests of the fund are held by one or more separate accounts. You represent that the restructuring will allow the GVIT ID Funds to take advantage of this "look through" provision as the Underlying Funds are sold exclusively to insurance company separate accounts, while the GMF Portfolios are not.

5 You do not request relief for the proposed in-kind redemption pursuant to which the GMF Portfolios would satisfy a redemption request from the GVIT ID Funds by means of a pro rata in-kind distribution of portfolio securities. Instead, you represent that the GMF Portfolios would effect the proposed in-kind redemption in reliance on the no-action relief provided in Signature Financial Group, Inc. (pub. avail. Dec. 28, 1999) ("Signature Letter").

6 Telephone conversation between Kenneth C. Fang of the staff and Peter M. Hong of Stradley Ronon Stevens & Young, LLP, counsel to GVIT, on December 29, 2006.

7*See* rule 22c-1 and rule 2a-4 under the 1940 Act.

8*See Tannenbaum v. Zeller*, 552 F.2d 402, 418 (2d Cir. 1977), *cert. denied*, 434 U.S. 934 (1977) (stating that the investment adviser had a duty to disclose information to the unaffiliated directors of the fund "in every area where there was even a possible conflict of interest" between the interests of the adviser and the interests of the fund).

9 The affiliated persons in the GE Letter included affiliated persons of a registered investment company, and affiliated persons of such affiliated persons (collectively, "affiliates"). *See also* section 2(a)(3) of the 1940 Act (defining "affiliated person").

10*See* GE Letter at note 13 (stating that an in-kind purchase transaction between two affiliated funds raises concerns outside of the scope of an in-kind purchase transaction between a fund and a non-investment company affiliate).

11 Section 17(a) applies only to certain transactions involving funds that are registered with the Commission as investment companies under the 1940 Act.

12*See* Investment Company Mergers, Investment Company Act Release No. 25259 (Nov. 15, 2001) (proposing amendments to rule 17a-8 under the 1940 Act), citing, among other things, Investment Trusts and Investment Companies: Hearings on S.3580 Before a Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong. 3d Sess., at 256-59 (1940).

13 You acknowledge that the GVIT ID Funds could be deemed to be affiliates of the Underlying Funds under section 2(a)(3)(C) of the 1940 Act because, for instance, they may be deemed to be under the common control of their investment adviser (Gartmore, or an affiliate of Gartmore), the Board, and the principal underwriter. You also represent that the GVIT ID Funds would be deemed to be affiliates of the Underlying Funds under section 2(a)(3)(A) of the 1940 Act to the extent that the GVIT ID Funds own, control, or hold with power to vote, five percent or more of the outstanding voting securities of the Underlying Funds.

14 Section 17(a)(2) excepts from the prohibitions of section 17(a)(2) purchases by an affiliate from a registered investment company involving "securities of which the seller is the issuer." A GVIT ID Fund would purchase from the Underlying Fund shares that were issued by the Underlying Funds.

We note that section 17(a)(1)(B) does not exclude transaction (1) from the prohibitions of section 17(a)(1). Section 17(a)(1)(B) provides that a sale of fund shares to an affiliate is excepted from the prohibitions of section 17(a)(1) if the sale involves *solely* "securities of which the seller is the issuer and which are part of a general offering to the holders of a class of its securities." Transaction (1), however, also involves the GVIT ID Funds' portfolio securities that were not issued by the Underlying Fund as in-kind consideration. *See also* Signature Letter (in-kind transactions raise concerns under section 17(a) that are different than transactions involving cash and provide greater opportunities for overreaching by affiliates than cash redemptions). Further, we believe that a continuous offering by an open-end fund does not constitute part of "a general offering to the holders of a class of the [fund's] securities." Instead, a fund's continuous offering is being made to the general public, and not solely to existing holders of its shares.

15*See*, *e.g.*, Exemption of Certain Purchase or Sale Transactions between a Registered Investment Company and Certain Affiliated Persons, Investment Company Act Release No. 11136 (Apr. 21, 1980) (noting that there is a section 17(a) concern when an unscrupulous investment adviser transfers desirable securities from a fund to another fund managed by the adviser or when an affiliated transaction is effected at a price which is disadvantageous to the fund).
Incoming Letter
The Incoming Letter is in Acrobat format.

*http://www.sec.gov/divisions/investment/noaction/2006/gartmorevit122906-17a.htm*Home | Previous PageModified: 01/03/2007 |
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