## Facts

- Prudential, a life insurance company, proposed selling individual variable annuity contracts funded by purchasers’ fixed monthly payments during a pay-in period.
- After deductions, payments would be invested in a pooled securities portfolio maintained as a separate “Investment Fund.”
- Purchasers would be credited with “units” representing a proportionate interest in the Fund; unit values would fluctuate with the portfolio’s market performance.
- During the annuity pay-out period, Prudential would pay monthly amounts equal to the then-current value of a fixed number of units, so dollar payments would vary with investment results.
- The SEC determined that the variable annuity contracts were securities, that the Investment Fund was the issuer of those securities, and that the Fund was an investment company under the Investment Company Act of 1940 (ICA) subject to registration.
- Prudential sought review, arguing that the ICA’s insurance-company exemption should extend to the Fund because Prudential was an exempt insurance company.

## Issues

1. Whether the ICA applies to Prudential’s Investment Fund created to receive and invest variable annuity proceeds, or whether the Fund is exempt because it is associated with an insurance company.
2. Whether the Investment Fund is a separate “issuer” and “investment company” under the ICA despite Prudential’s exempt status as an insurance company.

## Decision

- The Third Circuit affirmed the SEC’s order.
- The court held that the Investment Fund was the issuer of the variable annuity interests and qualified as an investment company under the ICA.
- The court held that the ICA’s insurance-company exemption did not extend to the separate Investment Fund.
- The Fund therefore had to register and comply with the ICA.

## Legal Principles

- An entity that pools purchasers’ contributions to invest in a securities portfolio and issues interests whose value depends on portfolio performance can be treated as the issuer and an investment company under the ICA.
- The insurance-company exemption in ICA § 3(c)(3) applies to the insurance company as an entity and does not automatically exempt a separate pooled investment fund established in connection with an insurance product.
- Statutory exemptions are construed by their text and structure; courts will not extend exemptions to unlisted pooled vehicles by analogy to other expressly exempt arrangements.
- In determining ICA coverage, courts consider the product’s economic function, including who bears investment risk and whether purchasers are effectively buying interests in a managed securities pool.

## Conclusion

The court upheld the SEC’s determination that Prudential’s separate Investment Fund for variable annuities was an investment company and issuer under the ICA, and that Prudential’s insurance-company exemption did not shield the Fund from federal registration and regulation.


Prudential Ins. Co. of Am. v. SEC, 326 F.2d 383 (3d Cir. 1964)