Federal Register / Vol. 76, No. 63 / Friday, April 1, 2011 / Notices 18265 

collection of information; (c) ways to 

enhance the quality, utility, and clarity 

of the information on respondents; and 

(d) ways to minimize the burden of the 

collection of information on 

respondents, including through the use 

of automated collection techniques or 

other forms of information technology. 

Consideration will be given to 

comments and suggestions submitted in 

writing within 60 days of this 

publication. 

The Commission may not conduct or 

sponsor a collection of information 

unless it displays a currently valid 

control number. No person shall be 

subject to any penalty for failing to 

comply with a collection of information 

subject to the PRA that does not display 

a valid Office of Management and 

Budget (OMB) control number. 

Please direct your written comments 

to: Thomas Bayer, Chief Information 

Officer, Securities and Exchange 

Commission, c/o Remi Pavlik-Simon, 

6432 General Green Way, Alexandria, 

Virginia 22312 or send an e-mail to: 

PRA_Mailbox@sec.gov. 

Dated: March 28, 2011. 

Cathy H. Ahn, 

Deputy Secretary. 

[FR Doc. 2011–7689 Filed 3–31–11; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. IC–29619; File No. 812–13854] 

Fairholme VP Series Fund, Inc. and 

Fairholme Capital Management LLC 

March 28, 2011. 

AGENCY: Securities and Exchange 

Commission (‘‘SEC’’ or ‘‘Commission’’). 

ACTION: Notice of application for an 

order pursuant to Section 6(c) of the 

Investment Company Act of 1940, as 

amended, (the ‘‘Act’’) granting relief 

from the provisions of Section 9(a), 

13(a), 15(a) and 15(b) of the Act and 

Rules 6e–2(b)(15) and 6e–3(T)(b)(15) 

thereunder. 

APPLICANTS: Fairholme VP Series Fund, 

Inc. (the ‘‘Fund’’) and Fairholme Capital 

Management LLC. (‘‘FCM’’) (together the 

‘‘Applicants’’). 

FILING DATE: The application was filed 

on December 23, 2010, and an amended 

and restated application was filed on 

March 22, 2011. 

HEARING OR NOTIFICATION OF HEARING: An 

order granting the application will be 

issued unless the Commission orders a 

hearing. Interested persons may request 

a hearing by writing to the 

Commission’s Secretary and serving 

Applicants with a copy of the request, 

personally or by mail. Hearing requests 

should be received by the Commission 

by 5:30 p.m. on April 22, 2011 and 

should be accompanied by proof of 

service on Applicants, in the form of an 

affidavit, or, for lawyers, a certificate of 

service. Hearing requests should state 

the nature of the writer’s interest, the 

reason for the request, and the issues 

contested. Persons who wish to be 

notified of a hearing may request 

notification by writing to the Secretary 

of the Commission. 

ADDRESSES: Secretary, Securities and 

Exchange Commission, 100 F Street, 

NE., Washington, DC 20549. Applicants: 

Bruce R. Berkowitz Fairholme Capital 

Management, LLC, 4400 Biscayne Blvd., 

Miami, FL 33137, with a copy to Paul 

M. Miller, Esq., Seward & Kissel LLP, 

1200 G Street, NW., Washington, DC 

20005. 

FOR FURTHER INFORMATION CONTACT: 

Patrick Scott, Senior Counsel, at 202– 

551–6763, or Zandra Bailes, Branch 

Chief, Office of Insurance Products, 

Division of Investment Management, 

Commission SEC at (202) 551–6975. 

SUPPLEMENTARY INFORMATION: The 

following is a summary of the 

application. The complete application 

may be obtained for a fee from the SEC’s 

Public Reference Branch, 100 F Street, 

NE., Washington, DC 20549 (tel. (202) 

551–8090). 

SUMMARY OF APPLICATION: Applicants 

seek exemption of each life insurance 

company separate account supporting 

variable life insurance contracts (‘‘VLI 

Accounts’’) (and its insurance company 

depositor) that may invest in shares of 

the Fund or a ‘‘future fund’’ as defined 

below, from the provisions of Sections 

9(a), 13(a), 15(a) and 15(b) of the Act 

and Rules 6e–2(b)(15) and 6e– 

3(T)(b)(15) (or any comparable 

provisions of a permanent rule that 

replaces Rule 6e–3(T)(b)(15)) thereunder 

to the extent necessary to permit such 

VLI Accounts to hold shares of the Fund 

or a future fund when one or more of 

the following other types of investors 

also hold shares of the Fund or a future 

fund: (1) Life insurance company 

separate accounts supporting variable 

annuity contracts (‘‘VA Accounts’’), 

whether or not the life insurance 

company is an affiliated person of the 

insurance company depositor of any VLI 

Account, (2) VLI Accounts supporting 

scheduled or flexible premium variable 

life insurance contracts, whether or not 

the life insurance company is an 

affiliated person of the insurance 

company depositor of any other VLI 

Account, (3) general accounts of 

insurance company depositors of VA 

Accounts and/or VLI Accounts, (4) the 

Fund’s investment adviser or future 

fund’s investment adviser (or an 

affiliated person of the investment 

adviser), or (5) qualified group pension 

plans and group retirement plans 

(‘‘Plans’’) in accordance with Section 

817(h) of the Internal Revenue Code (the 

‘‘Code’’) outside the separate account 

context. A ‘‘future fund’’ is any 

investment company (or investment 

portfolio or series thereof), other than 

the Fund, shares of which are sold to 

VLI Accounts and to which NYLIM or 

its affiliates may in the future serve as 

investment adviser, investment 

subadviser, investment manager, 

administrator, principal underwriter or 

sponsor. Investment portfolios or series 

of the Fund or any future fund are 

referred to herein as ‘‘Insurance Funds.’’ 

SUPPLEMENTARY INFORMATION: The 

following is a summary of the 

application. The complete application is 

available for a fee from the Public 

Reference Branch of the Commission, 

100 F Street, NE., Washington, DC 

20549, (202) 551–8090. 

Applicants’ Representations 

1. The Fund was formed as a 

Maryland corporation on October 14, 

2010. The Fund is registered under the 

Act as an open-end management 

investment company (Reg. File No. 811– 

22490). The Fund is a series investment 

company as defined by Rule 18f–2 

under the Act and is currently 

comprised of three series (the 

‘‘Portfolios’’): (1) Fairholme VP Portfolio, 

(2) Fairholme VP Focused Income 

Portfolio and (3) Fairholme VP 

Allocation Portfolio. The Fund issues a 

separate series of shares of common 

stock for each Existing Fund and 

intends to file a registration statement 

under the Securities Act of 1933 (the 

‘‘1933 Act’’) on Form N–1A to register 

such shares. The Fund may establish 

additional Portfolios in the future and 

additional classes of shares for such 

Insurance Funds. 

2. The Fund may offer its shares to 

both VLI Accounts and VA Accounts 

(together, ‘‘Accounts’’) of life insurance 

companies in reliance on an order from 

the Commission. Applicants seek relief 

so that the Fund (and future funds) may 

offer each series of their shares to: (a) 

VLI Accounts and VA Accounts of both 

affiliated and unaffiliated life insurance 

companies; (b) insurance company 

depositors of VLI Accounts and/or VA 

Accounts investing in one or more 

Insurance Funds through their general 

accounts; (c) FCM and any other 

investment advisers to one or more 

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18266 Federal Register / Vol. 76, No. 63 / Friday, April 1, 2011 / Notices 

Insurance Funds (or their affiliates); and 

(d) Plans. 

3. Each VLI Account and VA Account 

is or will be established as a segregated 

asset account by an insurance company 

affiliated or not affiliated with FCM (life 

insurance companies affiliated with 

FCM and life insurance companies not 

affiliated with FCM are each referred to 

as a ‘‘Participating Insurance Company’’ 

and collectively as the ‘‘Participating 

Insurance Companies’’) pursuant to the 

insurance law of the insurance 

company’s state of domicile. As such, 

the assets of each will be the property 

of the Participating Insurance Company, 

and that portion of the assets of such an 

Account equal to the reserves and other 

contract liabilities with respect to the 

Account will not be chargeable with 

liabilities arising out of any other 

business that the insurance company 

may conduct. The income, gains and 

losses, realized or unrealized from such 

an Account’s assets will be credited to 

or charged against the Account without 

regard to other income, gains or losses 

of the Participating Insurance Company. 

If a VLI Account or VA Account is 

registered as an investment company, it 

will be a ‘‘separate account’’ as defined 

by Rule 0–1(e) (or any successor rule) 

under the Act and will be registered as 

a unit investment trust. For purposes of 

the Act, the life insurance company that 

establishes such a registered VLI 

Account or VA Account is the depositor 

and sponsor of the Account as those 

terms have been interpreted by the 

Commission with respect to variable life 

insurance and variable annuity separate 

accounts. 

4. FCM serves as the investment 

manager to the Fund and each of its 

Portfolios. FCM is a Delaware limited 

liability company and is registered as an 

investment manager under the 

Investment Advisers Act of 1940. Under 

the supervision of the Fund’s board of 

directors, FCM is responsible for all 

investment decisions for the Funds. 

5. The Fund proposes to offer and sell 

its shares (and a future fund would offer 

and sell its shares) to VLI Accounts and 

VA Accounts of various Participating 

Insurance Companies as an investment 

medium to support variable life 

insurance contracts (‘‘VLI Contracts’’) 

and variable annuity contracts (‘‘VA 

Contracts’’) (together, ‘‘Variable 

Contracts’’) issued through such 

Accounts. As described more fully 

below, the Fund (or a future fund) will 

only sell its shares to registered VLI 

Accounts and registered VA Accounts if 

each Participating Insurance Company 

sponsoring such a VLI or VA Account 

enters into a participation agreement 

with the Insurance Fund (or a future 

fund). The participation agreements 

define or will define the relationship 

between each Insurance Fund and each 

Participating Insurance Company and 

memorialize or will memorialize, among 

other matters, the fact that, except 

where the agreement specifically 

provides otherwise, the Participating 

Insurance Company will remain 

responsible for establishing and 

maintaining any VLI or VA Account 

covered by the agreement and for 

complying with all applicable 

requirements of state and federal law 

pertaining to such Accounts and to the 

sale and distribution of variable 

contracts issued through such Accounts. 

The participation agreements also 

memorialize or will memorialize, among 

other matters, the fact that, unless the 

agreement specifically states otherwise, 

the Fund (or a future fund) will remain 

responsible for establishing and 

maintaining any Insurance Fund 

covered by the agreement, for 

complying with all applicable 

requirements of state and federal law 

pertaining to such Insurance Funds and 

to the offer and sale of its shares to VLI 

Accounts and VA Accounts covered by 

the agreement, and for compliance with 

the conditions stated in the application. 

6. The use of a common management 

investment company (or investment 

portfolio thereof) as an investment 

medium for both VLI Accounts and VA 

Accounts of the same Participating 

Insurance Company, or of two or more 

insurance companies that are affiliated 

persons of each other, is referred to 

herein as ‘‘mixed funding.’’ The use of a 

common management investment 

company (or investment portfolio 

thereof) as an investment medium for 

VLI Accounts and/or VA Accounts of 

two or more Participating Insurance 

Companies that are not affiliated 

persons of each other, is referred to 

herein as ‘‘shared funding.’’ 

7. The Insurance Fund (or a future 

fund) may sell its shares directly to the 

Plans. As described below, federal tax 

law permits investment companies such 

as the Insurance Funds to increase their 

net assets by selling shares to Plans. 

8. Section 817(h) of the Code imposes 

certain diversification standards on the 

assets underlying Variable Contracts, 

such as those in each Insurance Fund. 

The Code provides that Variable 

Contracts will not be treated as annuity 

contracts or life insurance contracts, as 

the case may be, for any period (or any 

subsequent period) for which the 

underlying assets are not adequately 

diversified. On March 2, 1989, the 

Treasury Department issued regulations 

(Treas. Reg. 1.817–5) that established 

diversification requirements for Variable 

Contracts, which require the separate 

accounts upon which these Contracts 

are based to be diversified as provided 

in the Treasury Regulations. In the case 

of separate accounts that invest in 

underlying investment companies, the 

Treasury Regulations provide a ‘‘look 

through’’ rule that permits the separate 

account to look to the underlying 

investment company for purposes of 

meeting the diversification 

requirements, provided that the 

beneficial interests in the investment 

company are held only by the 

segregated asset accounts of one or more 

insurance companies. However, the 

Treasury Regulations also contain 

certain exceptions to this requirement, 

one of which permits shares in an 

investment company to be held by a 

Plan without adversely affecting the 

ability of shares in the same investment 

company to also be held by separate 

accounts funding Variable Contracts 

(Treas. Reg. Section 1.817–5(f)(3)(iii)). 

Another exception allows the 

investment adviser of the investment 

company (and certain companies related 

to the investment adviser) to hold shares 

of the investment company. 

9. Plans may invest in shares of an 

investment company as the sole 

investment under the Plan, or as one of 

several investments. Plan participants 

may or may not be given an investment 

choice depending on the terms of the 

Plan itself. The trustees or other 

fiduciaries of a Plan may vote 

investment company shares held by the 

Plan in their own discretion or, if the 

applicable Plan so provides, vote such 

shares in accordance with instructions 

from participants in such Plans. 

Applicants have no control over 

whether trustees or other fiduciaries of 

Plans, rather than participants in the 

Plans, have the right to vote under any 

particular Plan. Each Plan must be 

administered in accordance with the 

terms of the Plan and as determined by 

its trustees or other fiduciaries. To the 

extent permitted under applicable law, 

FCM or an affiliated person of FCM may 

act as investment adviser or trustee to 

Plans that purchase shares of any 

Insurance Fund. 

10. Applicants propose that any 

Insurance Fund also be permitted to sell 

shares to its investment adviser or an 

affiliate. The Treasury Regulations 

permit such sales as long as the return 

on shares held by the adviser or affiliate 

is computed in the same manner as 

shares held by VLI Accounts and VA 

Accounts, the adviser or affiliate does 

not intend to sell the shares to the 

public, and sales to an adviser or 

affiliate are only made in connection 

with the creation of the Insurance Fund. 

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11. Applicants propose that any 

Insurance Fund also be permitted to sell 

shares to the general account of a 

Participating Insurance Company. The 

Treasury Regulations also permit such 

sales as long as the return on shares 

held by general accounts are computed 

in the same manner as shares held by 

VLI Accounts and VA Accounts, and the 

Participating Insurance Company does 

not intend to sell the shares to the 

public. 

12. The promulgation of Rules 6e– 

2(b)(15) and 6e–3(T)(b)(15) preceded the 

issuance of the Treasury Regulations 

permitting the shares of Insurance 

Funds to be held by a Plan, an adviser 

for the Insurance Fund, or the general 

account of a Participating Insurance 

Company without adversely affecting 

the ability of the VLI Account to also 

hold shares. 

13. The use of a common management 

investment company (or investment 

portfolio thereof) as an investment 

medium for VLI Accounts, VA 

Accounts, Plans, investment advisers 

and general accounts of Participating 

Insurance Companies is referred to 

herein as ‘‘extended mixed funding.’’ 

Applicants’ Legal Analysis 

1. Section 9(a)(2) of the Act makes it 

unlawful for any company to serve as an 

investment adviser or principal 

underwriter of any investment 

company, including a unit investment 

trust, if an affiliated person of that 

company is subject to disqualification 

enumerated in Section 9(a)(1) or (2) of 

the Act. Sections 13(a), 15(a), and 15(b) 

of the Act have been deemed by the 

Commission to require ‘‘pass-through’’ 

voting with respect to an underlying 

investment company’s shares. 

2. Rule 6e–2(b)(15) under the Act 

provides partial exemptions from 

Sections 9(a), 13(a), 15(a), and 15(b) of 

the Act to VLI Accounts supporting 

scheduled premium VLI Contracts and 

to their life insurance company 

depositors. The exemptions granted by 

the Rule are available, however, only 

where an Insurance Fund offers its 

shares exclusively to VLI Accounts of 

the same Participating Insurance 

Company and/or of Participating 

Insurance Companies that are affiliated 

persons of the same Participating 

Insurance Company and then, only 

where scheduled premium VLI 

Contracts are issued through such VLI 

Accounts. Therefore, VLI Accounts, 

their depositors and their principal 

underwriters may not rely on the 

exemptions provided by Rule 6e– 

2(b)(15) if shares of the Insurance Fund 

are held by a VLI Account through 

which flexible premium VLI Contracts 

are issued, a VLI Account of an 

unaffiliated Participating Insurance 

Company, an unaffiliated investment 

adviser, any VA Account or a Plan. In 

other words, Rule 6e–2(b)(15) does not 

permit a scheduled premium VLI 

Account to invest in shares of a 

management investment company that 

serves as a vehicle for mixed funding, 

extended mixed funding or shared 

funding. 

3. Accordingly, Applicants request an 

order of the Commission granting 

exemptions from Sections 9(a), 13(a), 

15(a), and 15(b) of the Act, and Rule 6e– 

2(b)(15) thereunder, to the extent 

necessary to permit a scheduled 

premium VLI Account to hold shares of 

Insurance Funds when one or more of 

the following types of investors also 

hold shares of the Insurance Funds: (1) 

VA Accounts, (2) VLI Accounts 

supporting flexible premium VLI 

Contracts, (3) VA Accounts or VLI 

Accounts of Participating Insurance 

Companies that are not affiliated 

persons of the depositor of the 

scheduled premium VLI Account, (4) 

general accounts of Participating 

Insurance Companies, (5) investment 

advisers (or affiliated persons of an 

investment adviser) of an Insurance 

Fund, or (6) Plans. 

4. Rule 6e–3(T)(b)(15) under the Act 

provides partial exemptions from 

Sections 9(a), 13(a), 15(a), and 15(b) of 

the Act to VLI Accounts supporting 

flexible premium variable life insurance 

contracts and their life insurance 

company depositors. The exemptions 

granted by the Rule are available, 

however, only where an Insurance Fund 

offers its shares exclusively to VLI 

Accounts (through which either 

scheduled premium or flexible premium 

VLI Contracts are issued) of the same 

Participating Insurance Company and/or 

of Participating Insurance Companies 

that are affiliated persons of the same 

Participating Insurance Company, VA 

Accounts of the same Participating 

Insurance Company or of affiliated 

Participating Insurance Companies, or 

the general account of the same 

Participating Insurance Company or of 

affiliated Participating Insurance 

Companies. Therefore, VLI Accounts, 

their depositors and their principal 

underwriters may not rely on the 

exemptions provided by Rule 6e– 

3(T)(b)(15) if shares of the Insurance 

Fund are held by a VLI Account of an 

unaffiliated Participating Insurance 

Company, a VA Account of an 

unaffiliated Participating Insurance 

Company, the general account of an 

unaffiliated Participating Insurance 

Company, an unaffiliated investment 

adviser, or a Plan. In other words, Rule 

6e–3(T)(b)(15) permits VLI Accounts 

supporting flexible premium VLI 

Contracts to invest in shares of a 

management investment company that 

serves as a vehicle for mixed funding 

but does not permit such a VLI Account 

to invest in shares of a management 

investment company that serves as a 

vehicle for extended mixed funding or 

shared funding. 

5. Accordingly, Applicants request an 

order of the Commission granting 

exemptions from Sections 9(a), 13(a), 

15(a) and 15(b) of the Act and Rule 6e– 

3(T)(b)(15) (and any comparable 

permanent rule) thereunder, to the 

extent necessary to permit a flexible 

premium VLI Account to hold shares of 

Insurance Funds when one or more of 

the following types of investors also 

hold shares of the Insurance Funds: (1) 

VA Accounts or VLI Accounts of 

Participating Insurance Companies that 

are not affiliated persons of the 

depositor of the flexible premium VLI 

Account, (2) general accounts of 

Participating Insurance Companies, (3) 

investment advisers (or affiliated 

persons of an investment adviser) of an 

Insurance Fund, or (4) Plans. 

6. As explained below, Applicants 

maintain that there is no public policy 

reason why VLI Accounts and their 

Participating Insurance Company 

depositors (or principal underwriters) 

should not be able to rely on the 

exemptions provided by Rules 6e– 

2(b)(15) and 6e–3(T)(b)(15) just because 

shares of Insurance Funds held by the 

VLI Accounts are also held by an 

Insurance Fund’s investment adviser (or 

affiliated person), the general account of 

the Participating Insurance Company (or 

another Participating Insurance 

Company), or a Plan (‘‘Eligible 817(h) 

Purchasers’’). Rather, Applicants assert 

that the proposed sale of Insurance 

Fund shares to Plans may allow for the 

development of larger pools of assets, 

resulting in the potential for greater 

investment and diversification 

opportunities and decreased expenses at 

higher asset levels. Similarly, 

Applicants believe that the proposed 

sale of Insurance Fund shares to 

investment advisers (or their affiliates) 

and to general accounts of Participating 

Insurance Companies may result in the 

creation of more Insurance Funds as 

investment options for certain VA 

Contracts and VLI Contracts than would 

otherwise be the case. 

7. Applicants understand that the 

reason the Commission did not grant 

more extensive relief in the area of 

mixed and shared funding when it 

adopted Rule 6e–3(T) is because of the 

Commission’s uncertainty in this area 

with respect to issues such as conflicts 

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18268 Federal Register / Vol. 76, No. 63 / Friday, April 1, 2011 / Notices 

of interest. Applicants believe, however, 

that the Commission’s concern in this 

area is not warranted here. For the 

reasons explained below, Applicants 

have concluded that investment by 

Eligible 817(h) Purchasers in the 

Insurance Funds should not increase the 

risk of material irreconcilable conflicts 

between owners of VLI Contracts and 

other types of investors or between 

owners of VLI Contracts issued by 

unaffiliated Participating Insurance 

Companies. 

8. Consistent with the Commission’s 

authority under Section 6(c) of the Act 

to grant exemptive orders to a class or 

classes of persons and transactions, 

Applicants request exemptions for a 

class of parties consisting of VLI 

Accounts, their Participating Insurance 

Company depositors and their principal 

underwriters. There is ample precedent, 

in a variety of contexts, for the 

Commission to grant exemptions to a 

carefully defined class of persons or 

parties where the specific identities of 

all such persons or parties cannot be 

ascertained at the time an application 

for the exemptions is filed. Likewise, 

there is ample precedent for parties not 

seeking to rely on the exemptions to 

apply for such exemptions in order to 

further their reasonable business 

purposes. 

9. In the context of mixed funding, 

extended mixed funding and shared 

funding, the Commission has granted 

numerous orders of exemption covering 

a class composed of registered VLI 

Accounts, their insurance company 

depositors and principal underwriters. 

The order sought is largely identical to 

these precedents with respect to the 

scope of the exemptions and the 

conditions proposed by the Applicants. 

Applicants believe that the same 

policies and considerations that led the 

Commission to grant such exemptions 

to other similarly situated applicants are 

present here. 

10. Section 6(c) of the Act provides, 

in part, that the Commission, by order 

upon application, may conditionally or 

unconditionally exempt any person, 

security or transaction, or any class or 

classes of persons, securities or 

transactions, from any provision or 

provisions of the Act, or any rule or 

regulation thereunder, if and to the 

extent that such exemption is necessary 

or appropriate in the public interest and 

consistent with the protection of 

investors and the purposes fairly 

intended by the policy and provisions of 

the Act. The Applicants submit that the 

exemptions requested are appropriate in 

the public interest and consistent with 

the protection of investors and the 

purposes fairly intended by the policy 

and provisions of the Act. 

11. Section 9(a)(3) of the Act provides, 

among other things, that it is unlawful 

for any company to serve as investment 

adviser or principal underwriter of any 

registered open-end investment 

company if an affiliated person of that 

company is subject to a disqualification 

enumerated in Sections 9(a)(1) or (2). 

Rules 6e–2(b)(15)(i) and (ii) and Rules 

6e–3(T)(b)(15)(i) and (ii) under the Act 

provide exemptions from Section 9(a) 

under certain circumstances, subject to 

the limitations discussed above on 

mixed funding, extended mixed funding 

and shared funding. These exemptions 

limit the application of the eligibility 

restrictions to affiliated individuals or 

companies that directly participate in 

management of the underlying 

investment company. 

12. The relief provided by Rules 6e– 

2(b)(15)(i) and 6e–3(T)(b)(15)(i) permits 

a person that is disqualified under 

Sections 9(a)(1) or (2) of the Act to serve 

as an officer, director, or employee of 

the life insurance company, or any of its 

affiliates, as long as that person does not 

participate directly in the management 

or administration of the underlying 

investment company. The relief 

provided by Rules 6e–2(b)(15)(ii) and 

6e–3(T)(b)(15)(ii) under the Act permits 

the life insurance company to serve as 

the underlying investment company’s 

investment manager or principal 

underwriter, provided that none of the 

insurer’s personnel who are ineligible 

pursuant to Section 9(a) participates in 

the management or administration of 

the investment company. 

13. In effect, the partial relief granted 

in Rules 6e–2(b)(15) and 6e–3(T)(b)(15) 

under the Act from the requirements of 

Section 9 of the Act limits the amount 

of monitoring necessary to ensure 

compliance with Section 9 to that which 

is appropriate in light of the policy and 

purposes of Section 9. Those rules 

recognize that it is not necessary for the 

protection of investors or the purposes 

fairly intended by the policy and 

provisions of the Act to apply the 

provisions of Section 9(a) to all 

individuals in a large insurance 

complex, most of whom will have no 

involvement in matters pertaining to 

investment companies in that 

organization. Applicants assert that it is 

also unnecessary to apply Section 9(a) 

of the Act to the many individuals in 

various unaffiliated insurance 

companies (or affiliated companies of 

Participating Insurance Companies) that 

may utilize the Insurance Funds as 

investment vehicles for VLI Accounts 

and VA Accounts. There is no 

regulatory purpose served in extending 

the monitoring requirements to embrace 

a full application of Section 9(a) 

eligibility restrictions because of mixed 

funding, extended mixed funding or 

shared funding. The Participating 

Insurance Companies and Plans are not 

expected to play any role in the 

management of the Insurance Funds. 

Those individuals who participate in 

the management of the Insurance Funds 

will remain the same regardless of 

which VA Accounts, VLI Accounts, 

Plans or other Eligible 817(h) Purchasers 

invest in the Insurance Funds. Applying 

the monitoring requirements of Section 

9(a) of the Act because of investment by 

VLI Accounts would be unjustified and 

would not serve any regulatory purpose. 

Furthermore, the increased monitoring 

costs could reduce the net rates of 

return realized by owners of VLI 

Contracts and Plan participants. 

14. Rules 6e–2(b)(15)(iii) and 

6e–3(T)(b)(15)(iii) under the Act provide 

exemptions from pass-through voting 

requirements with respect to several 

significant matters, assuming the 

limitations on mixed funding, extended 

mixed funding and shared funding are 

observed. Rules 6e–2(b)(15)(iii)(A) and 

6e–3(T)(b)(15)(iii)(A) provide that the 

insurance company may disregard the 

voting instructions of its variable life 

insurance contract owners with respect 

to the investments of an underlying 

investment company, or any contract 

between such an investment company 

and its investment adviser, when 

required to do so by an insurance 

regulatory authority (subject to the 

provisions of paragraphs (b)(5)(i) and 

(b)(7)(ii)(A) of Rules 6e–2 and 6e–3(T)). 

15. Rules 6e–2(b)(l5)(iii)(B) and 

6e–3(T)(b)(15)(iii)(A)(2) provide that an 

insurance company may disregard the 

voting instructions of owners of its 

variable life insurance contracts if such 

owners initiate any change in an 

underlying investment company’s 

investment policies, principal 

underwriter or any investment adviser 

(provided that disregarding such voting 

instructions is reasonable and subject to 

the other provisions of paragraphs 

(b)(5)(ii), (b)(7)(ii)(B) and (b)(7)(ii)(C) of 

Rules 6e–2 and 6e–3(T)). 

16. In the case of a change in the 

investment policies of the underlying 

investment company, the insurance 

company, in order to disregard contract 

owner voting instructions, must make a 

good faith determination that such a 

change either would: (1) Violate state 

law, or (2) result in investments that 

either (a) would not be consistent with 

the investment objectives of its separate 

account, or (b) would vary from the 

general quality and nature of 

investments and investment techniques 

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used by other separate accounts of the 

company, or of an affiliated life 

insurance company with similar 

investment objectives. 

17. Both Rule 6e–2 and Rule 6e–3(T) 

generally recognize that a variable life 

insurance contract is primarily a life 

insurance contract containing many 

important elements unique to life 

insurance contracts and subject to 

extensive state insurance regulation. In 

adopting subparagraph (b)(15)(iii) of 

these Rules, the Commission implicitly 

recognized that state insurance 

regulators have authority, pursuant to 

state insurance laws or regulations, to 

disapprove or require changes in 

investment policies, investment 

advisers, or principal underwriters. 

18. The sale of Insurance Fund shares 

to Plans will not have any impact on the 

provisions of Rules 6e–2 and 6e–3(T) 

relating to pass-through voting and an 

insurance company’s ability to disregard 

voting instructions in certain 

circumstances. Shares sold to Plans will 

be held by such Plans, not insurance 

companies. The exercise of voting rights 

by Plans, whether by trustees, other 

fiduciaries, participants, beneficiaries, 

or investment managers engaged by the 

Plans, does not raise the type of issues 

respecting disregard of voting rights that 

are raised by VLI Accounts. With 

respect to Plans, which are not 

registered as investment companies 

under the Act, there is no requirement 

to pass through voting rights to Plan 

participants. Indeed, to the contrary, 

applicable law expressly reserves voting 

rights associated with Plan assets to 

certain specified persons. For example, 

for many Plans, under Section 403(a) of 

the Employee Retirement Income 

Security Act of 1974 (‘‘ERISA’’), shares 

of a portfolio of an investment company 

sold to a Plan must be held by the 

trust(s) funding the Plan. Section 403(a) 

also provides that the trustee(s) of such 

trusts must have exclusive authority and 

discretion to manage and control the 

Plan, with two exceptions: (1) When the 

Plan expressly provides that the 

trustee(s) are subject to the direction of 

a named fiduciary who is not a trustee, 

in which case the trustee(s) are subject 

to proper directions made in accordance 

with the terms of the Plan and not 

contrary to ERISA, and (2) when the 

authority to manage, acquire, or dispose 

of assets of the Plan is delegated to one 

or more investment managers pursuant 

to Section 402(c)(3) of ERISA. For such 

Plans, unless one of the above two 

exceptions stated in Section 403(a) 

applies, Plan trustees have the exclusive 

authority and responsibility for voting 

investment company shares (or related 

proxies) held by their Plan. 

19. If a named fiduciary to a Plan 

appoints an investment manager, the 

investment manager has the 

responsibility to vote the shares held, 

unless the right to vote such shares is 

reserved to the trustee(s) or another 

named fiduciary. The Plans may have 

their trustee(s) or other fiduciaries 

exercise voting rights attributable to 

investment securities held by the Plans 

in their discretion. Some Plans, 

however, may provide for the trustee(s), 

an investment adviser (or advisers), or 

another named fiduciary to exercise 

voting rights in accordance with 

instructions from Plan participants. 

20. Where a Plan does not provide 

participants with the right to give voting 

instructions, Applicants do not see any 

potential for material irreconcilable 

conflicts of interest between or among 

the Variable Contract owners and Plan 

participants with respect to voting of the 

respective Fund shares. Accordingly, 

unlike the circumstances surrounding 

VLI Accounts and VA Accounts, 

because Plans are not required to pass 

through voting rights to participants, the 

issue of resolution of material 

irreconcilable conflicts of interest 

should not arise with respect to voting 

Insurance Fund shares. 

21. In addition, if a Plan were to hold 

a controlling interest in an Insurance 

Fund, Applicants do not believe that 

such control would disadvantage other 

investors in such Insurance Fund to any 

greater extent than is the case when any 

institutional shareholder holds a 

majority of the shares of any open-end 

management investment company. In 

this regard, Applicants submit that 

investment in an Insurance Fund by a 

Plan will not create any of the voting 

complications occasioned by VLI 

Account investments in the Insurance 

Fund. Unlike VLI Account investments, 

Plan voting rights cannot be frustrated 

by veto rights of Participating Insurance 

Companies or state insurance regulators. 

22. Where a Plan provides 

participants with the right to instruct 

the trustee(s) as to how to vote 

Insurance Fund shares, Applicants see 

no reason why such participants 

generally or those in a particular Plan, 

either as a single group or in 

combination with participants in other 

Plans, would vote in a manner that 

would disadvantage VLI Contract 

owners. The purchase of shares by Plans 

that provide voting rights does not 

present any complications not otherwise 

occasioned by mixed or shared funding. 

23. Similarly, an investment adviser 

to an Insurance Fund (or its affiliates) 

and the general accounts of 

Participating Insurance Companies are 

not subject to any pass-through voting 

requirements. Accordingly, unlike the 

circumstances surrounding VLI Account 

and VA Account investments in 

Insurance Fund shares, investment in 

such shares by Eligible 817(h) 

Purchasers should not raise issues of 

resolution of material irreconcilable 

conflicts of interest with respect to 

voting. 

24. Applicants recognize that the 

Commission’s primary concern with 

respect to mixed funding, extended 

mixed funding and shared funding 

issues is the potential for irreconcilable 

conflicts between the interests of 

owners of variable life insurance 

contracts and those of other investors in 

an open end investment company 

serving as an investment vehicle for 

such contracts. The prohibitions on 

mixed and shared funding might reflect 

concern regarding possible different 

investment motivations among 

investors. When Rule 6e–2 was first 

adopted, variable annuity separate 

accounts could invest in mutual funds 

whose shares were also offered to the 

general public. Therefore, the 

Commission staff may have been 

concerned with the potentially different 

investment motivations of public 

shareholders and owners of variable life 

insurance contracts. There also may 

have been some concern with respect to 

the problems of permitting a state 

insurance regulatory authority to affect 

the operations of a publicly available 

mutual fund and the investment 

decisions of public shareholders. 

25. For reasons unrelated to the Act, 

however, Revenue Ruling 81–225 (Sept. 

25, 1981) effectively deprived variable 

annuity contracts funded by publicly 

available mutual funds of their taxbenefited status. The Tax Reform Act of 

1984 codified the prohibition against 

the use of publicly available mutual 

funds as an investment vehicle for both 

variable annuity contracts and variable 

life insurance contracts. In particular, 

Section 817(h) of the Code, in effect, 

requires that the investments made by 

both variable annuity and variable life 

insurance separate accounts be 

‘‘adequately diversified.’’ If such a 

separate account is organized as part of 

a ‘‘two-tiered’’ arrangement where the 

account invests in shares of an 

underlying open-end investment 

company (i.e., an underlying fund), the 

diversification test will be applied to the 

underlying fund (or to each of several 

underlying funds), rather than to the 

separate account itself, but only if ‘‘all 

of the beneficial interests’’ in the 

underlying fund ‘‘are held by one or 

more insurance companies (or affiliated 

companies) in their general account or 

in segregated asset accounts.’’ 

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Accordingly, a separate account that 

invests in a publicly available mutual 

fund will not be adequately diversified 

for these purposes. As a result, any 

underlying fund, including any Fund 

that sells shares to VA Accounts or VLI 

Accounts, would, in effect, be precluded 

from also selling its shares to the public. 

Consequently, the Insurance Funds may 

not sell their shares to the public. 

26. The rights of an insurance 

company or a state insurance regulator 

to disregard the voting instructions of 

owners of Variable Contracts is not 

inconsistent with either mixed funding 

or shared funding. The National 

Association of Insurance Commissioners 

Variable Life Insurance Model 

Regulation (the ‘‘NAIC Model 

Regulation’’) suggests that it is unlikely 

that insurance regulators would find an 

underlying fund’s investment policy, 

investment adviser or principal 

underwriter objectionable for one type 

of Variable Contract but not another 

type. The NAIC Model Regulation has 

long permitted the use of a single 

underlying fund for different separate 

accounts. Moreover, the NAIC Model 

Regulation does not distinguish between 

scheduled premium and flexible 

premium variable life insurance 

contracts. The NAIC Model Regulation, 

therefore, reflects the NAIC’s apparent 

confidence that such combined funding 

is appropriate and that state insurance 

regulators can adequately protect the 

interests of owners of all variable 

contracts. 

27. Shared funding by unaffiliated 

insurance companies does not present 

any issues that do not already exist 

where a single insurance company is 

licensed to do business in several or all 

states. A particular state insurance 

regulator could require action that is 

inconsistent with the requirements of 

other states in which the insurance 

company offers its contracts. However, 

the fact that different insurers may be 

domiciled in different states does not 

create a significantly different or 

enlarged problem. 

28. Shared funding by unaffiliated 

insurers, in this respect, is no different 

than the use of the same investment 

company as the funding vehicle for 

affiliated insurers, which Rules 6e– 

2(b)(15) and 6e–3(T)(b)(15) permit. 

Affiliated insurers may be domiciled in 

different states and be subject to 

differing state law requirements. 

Affiliation does not reduce the 

potential, if any exists, for differences in 

state regulatory requirements. In any 

event, the conditions set forth below are 

designed to safeguard against, and 

provide procedures for resolving, any 

adverse effects that differences among 

state regulatory requirements may 

produce. If a particular state insurance 

regulator’s decision conflicts with the 

majority of other state regulators, then 

the affected Participating Insurance 

Company will be required to withdraw 

its separate account investments in the 

relevant Insurance Fund. This 

requirement will be provided for in the 

Participation Agreement that will be 

entered into by Participating Insurance 

Companies with the relevant Insurance 

Fund. 

29. Rules 6e–2(b)(15) and 6e– 

3(T)(b)(15) give the Participating 

Insurance Company the right to 

disregard the voting instructions of VLI 

Contract owners in certain 

circumstances. This right derives from 

the authority of state insurance 

regulators over VLI Accounts and VA 

Accounts. Under Rules 6e–2(b)(15) and 

6e–3(T)(b)(15), a Participating Insurance 

Company may disregard VLI Contract 

owner voting instructions only with 

respect to certain specified items. 

Affiliation does not eliminate the 

potential, if any exists, for divergent 

judgments as to the advisability or 

legality of a change in investment 

policies, principal underwriter or 

investment adviser initiated by such 

Contract owners. The potential for 

disagreement is limited by the 

requirements in Rules 6e–2 and 6e–3(T) 

that the Participating Insurance 

Company’s disregard of voting 

instructions be reasonable and based on 

specific good faith determinations. 

30. A particular Participating 

Insurance Company’s disregard of 

voting instructions, nevertheless, could 

conflict with the voting instructions of 

a majority of VLI Contract owners. The 

Participating Insurance Company’s 

action possibly could be different than 

the determination of all or some of the 

other Participating Insurance 

Companies (including affiliated 

insurers) that the voting instructions of 

VLI Contract owners should prevail, and 

either could preclude a majority vote 

approving the change or could represent 

a minority view. If the Participating 

Insurance Company’s judgment 

represents a minority position or would 

preclude a majority vote, then the 

Participating Insurance Company may 

be required, at the relevant Insurance 

Fund’s election, to withdraw its VLI 

Accounts’ and VA Accounts’ 

investments in the relevant Insurance 

Fund. No charge or penalty will be 

imposed as a result of such withdrawal. 

This requirement will be provided for in 

the Participation Agreement entered 

into by the Participating Insurance 

Companies with the relevant Insurance 

Fund. 

31. There is no reason why the 

investment policies of an Insurance 

Fund would or should be materially 

different from what these policies 

would or should be if the Insurance 

Fund supported only VA Accounts or 

VLI Accounts, whether flexible 

premium or scheduled premium VLI 

Contrasts. Each type of insurance 

contract is designed as a long-term 

investment program. 

32. Each Insurance Fund will be 

managed to attempt to achieve its 

specified investment objective, and not 

favor or disfavor any particular 

Participating Insurance Company or 

type of insurance contract. There is no 

reason to believe that different features 

of various types of Variable Contracts 

will lead to different investment 

policies for each or for different VLI 

Accounts and VA Accounts. The sale of 

Variable Contracts and ultimate success 

of all VA Accounts and VLI Accounts 

depends, at least in part, on satisfactory 

investment performance, which 

provides an incentive for each 

Participating Insurance Company to 

seek optimal investment performance. 

33. Furthermore, no single investment 

strategy can be identified as appropriate 

to a particular Variable Contract. Each 

‘‘pool’’ of VLI Contract and VA Contract 

owners is composed of individuals of 

diverse financial status, age, insurance 

needs and investment goals. An 

Insurance Fund supporting even one 

type of Variable Contract must 

accommodate these diverse factors in 

order to attract and retain purchasers. 

Permitting mixed and shared funding 

will provide economic support for the 

continuation of the Insurance Funds. 

Mixed and shared funding will broaden 

the base of potential Variable Contract 

owner investors, which may facilitate 

the establishment of additional 

Insurance Funds serving diverse goals. 

34. Applicants do not believe that the 

sale of the shares to Plans will increase 

the potential for material irreconcilable 

conflicts of interest between or among 

different types of investors. In 

particular, Applicants see very little 

potential for such conflicts beyond 

those that would otherwise exist 

between owners of VLI Contracts and 

VA Contracts. Applicants submit that 

either there are no conflicts of interest 

or that there exists the ability by the 

affected parties to resolve such conflicts 

consistent with the best interests of VLI 

Contract owners, VA Contract owners 

and Plan participants. 

35. Applicants considered whether 

there are any issues raised under the 

Code, Treasury Regulations, or Revenue 

Rulings thereunder, if Plans, VA 

Accounts, and VLI Accounts all invest 

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in the same Insurance Fund. Section 

817(h) of the Code is the culmination of 

a series of Revenue Rulings aimed at the 

control of investments by owners of 

Variable Contracts. Section 817(h) is the 

only Section of the Code that discusses 

insurance company separate accounts. 

Treasury Regulation 1.817–5(f)(3)(iii), 

which establishes the diversification 

requirements for underlying funds, 

specifically permits, among other 

things, ‘‘qualified pension or retirement 

plans,’’ and separate accounts to invest 

in the same underlying fund. For this 

reason, Applicants have concluded that 

neither the Code, nor the Treasury 

Regulations nor Revenue Rulings 

thereunder, present any inherent 

conflicts of interest if Plans, VLI 

Accounts, and VA Accounts all invest 

in the same Insurance Fund. 

36. Applicants note that, while there 

are differences in the manner in which 

distributions from VLI Accounts and 

Plans are taxed, these differences have 

no impact on the Insurance Funds. 

When distributions are to be made, and 

a VLI Account or Plan is unable to net 

purchase payments to make 

distributions, the VLI Account or Plan 

will redeem shares of the relevant 

Insurance Fund at its net asset values in 

conformity with Rule 22c–1 under the 

Act (without the imposition of any sales 

charge) to provide proceeds to meet 

distribution needs. A Participating 

Insurance Company will then make 

distributions in accordance with the 

terms of its VLI Contract and a Plan will 

then make distributions in accordance 

with the terms of the Plan. 

37. Applicants considered whether it 

is possible to provide an equitable 

means of giving voting rights to VLI 

Contract owners and Plans. In 

connection with any meeting of 

Insurance Fund shareholders, the 

Insurance Fund’s transfer agent will 

inform each Participating Insurance 

Company and other Eligible 817(h) 

Purchaser of their share holdings and 

provide other information necessary for 

such shareholders to participate in the 

meeting (e.g., proxy materials). Each 

Participating Insurance Company then 

will solicit voting instructions from 

owners of VLI Contracts and VA 

Contracts as required by either Rules 

6e–2 or 6e–3(T), or Section 

12(d)(1)(E)(iii)(aa) of the Act, as 

applicable, and its Participation 

Agreement with the relevant Insurance 

Fund. Shares held by a Participating 

Insurance Company general account 

will be voted by the Participating 

Insurance Company in the same 

proportion of shares for which it 

receives voting instructions from its 

Variable Contract owners. Shares held 

by Plans will be voted in accordance 

with applicable law. The voting rights 

provided to Plans with respect to the 

shares would be no different from the 

voting rights that are provided to Plans 

with respect to shares of mutual funds 

sold to the general public. Furthermore, 

if a material irreconcilable conflict 

arises because of a Plan’s decision to 

disregard Plan participant voting 

instructions, if applicable, and that 

decision represents a minority position 

or would preclude a majority vote, the 

Plan may be required, at the election of 

the relevant Insurance Fund, to 

withdraw its investment in the 

Insurance Fund, and no charge or 

penalty will be imposed as a result of 

such withdrawal. 

38. Applicants do not believe that the 

ability of an Insurance Fund to sell its 

shares to its investment adviser (or an 

affiliated person of the adviser), to 

Plans, or to the general account of a 

Participating Insurance Company gives 

rise to a senior security. ‘‘Senior 

Security’’ is defined in Section 18(g) of 

the Act to include ‘‘any stock of a class 

having priority over any other class as 

to distribution of assets or payment of 

dividends.’’ As noted above, regardless 

of the rights and benefits of participants 

under Plans and owners of VLI 

Contracts, VLI Accounts, VA Accounts, 

Participating Insurance Companies, 

Plans, and investment advisers (or their 

affiliates), only have, or will only have, 

rights with respect to their respective 

shares of an Insurance Fund. These 

parties can only redeem such shares at 

net asset value. No shareholder of an 

Insurance Fund has any preference over 

any other shareholder with respect to 

distribution of assets or payment of 

dividends. 

39. Applicants do not believe that the 

veto power of state insurance 

commissioners over certain potential 

changes to Fund investment objectives 

approved by owners of VLI Contracts 

creates conflicts between the interests of 

such owners and the interests of Plan 

participants. Applicants note that a 

basic premise of corporate democracy 

and shareholder voting is that not all 

shareholders may agree with a 

particular proposal. Their interests and 

opinions may differ, but this does not 

mean that inherent conflicts of interest 

exist between or among such 

shareholders or that occasional conflicts 

of interest that do occur between or 

among them are likely to be 

irreconcilable. 

40. Although Participating Insurance 

Companies may have to overcome 

regulatory impediments in redeeming 

shares of an Insurance Fund held by 

their VLI Accounts, the Plans and the 

participants in participant-directed 

Plans can make decisions quickly and 

redeem their shares in an Insurance 

Fund and reinvest in another 

investment company or other funding 

vehicle without impediments, or as is 

the case with most Plans, hold cash 

pending suitable investment. As a 

result, conflicts between the interests of 

VLI Contract owners and the interests of 

Plans and Plan participants can usually 

be resolved quickly since the Plans can, 

on their own, redeem their Insurance 

Fund shares. 

41. Finally, Applicants considered 

whether there is a potential for future 

conflicts of interest between 

Participating Insurance Companies and 

Plans created by future changes in the 

tax laws. Applicants do not see any 

greater potential for material 

irreconcilable conflicts arising between 

the interests of VLI Contract owners (or, 

for that matter, VA Contract owners) 

and Plan participants from future 

changes in the federal tax laws than that 

which already exists between VLI 

Contract owners and VA Contract 

owners. 

42. Applicants recognize that the 

foregoing is not an all-inclusive list, but 

rather is representative of issues that 

they believe are relevant to this 

Application. Applicants believe that the 

discussion contained herein 

demonstrates that the sale of Insurance 

Fund shares to Plans trustees would not 

increase the risk of material 

irreconcilable conflicts between the 

interests of Plan participants and VLI 

Contract owners or other investors. 

Further, Applicants submit that the use 

of the Insurance Funds with respect to 

Plans is not substantially dissimilar 

from each Insurance Fund’s anticipated 

use, in that Plans, like VLI Accounts, are 

generally long-term investors. 

43. Applicants assert that permitting 

an Insurance Fund to sell its shares to 

its investment adviser (or the adviser’s 

affiliates) or to the general account of a 

Participating Insurance Company will 

enhance management of each Insurance 

Fund without raising significant 

concerns regarding material 

irreconcilable conflicts among different 

types of investors. 

44. A potential source of initial 

capital is an Insurance Fund’s 

investment adviser or a Participating 

Insurance Company. Either of these 

parties may have an interest in making 

a capital investment and in assisting an 

Insurance Fund in its organization. 

However, provision of seed capital or 

the purchase of shares in connection 

with the management of an Insurance 

Fund by its investment adviser or by a 

Participating Insurance Company may 

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be deemed to violate the exclusivity 

requirement of Rule 6e–2(b)(15) and/or 

Rule 6e–3(T)(b)(15). 

45. Given the conditions of Treasury 

Regulation 1.817–5(f)(3) and the 

harmony of interest between an 

Insurance Fund, on the one hand, and 

its investment adviser (or affiliates) or a 

Participating Insurance Company, on 

the other, Applicants assert that little 

incentive for overreaching exists. 

Furthermore, such investment should 

not implicate the concerns discussed 

above regarding the creation of material 

irreconcilable conflicts. Instead, 

permitting investments by an 

investment adviser (or its affiliates), or 

by general accounts of Participating 

Insurance Companies, will permit the 

orderly and efficient creation and 

operation of an Insurance Fund, and 

reduce the expense and uncertainty of 

using outside parties at the early stages 

of the Insurance Fund’s operations. 

46. Various factors have limited the 

number of insurance companies that 

offer Variable Contracts. These factors 

include the costs of organizing and 

operating a funding vehicle, certain 

insurers’ lack of experience with respect 

to investment management, and the lack 

of name recognition by the public of 

certain insurance companies as 

investment experts. In particular, some 

smaller life insurance companies may 

not find it economically feasible, or 

within their investment or 

administrative expertise, to enter the 

Variable Contract business on their own. 

Use of an Insurance Fund as a common 

investment vehicle for VLI Accounts 

would reduce or eliminate these 

concerns. Mixed and shared funding 

should also provide several benefits to 

owners of VLI Contracts by eliminating 

a significant portion of the costs of 

establishing and administering separate 

underlying funds. 

47. Participating Insurance 

Companies will benefit not only from 

the investment and administrative 

expertise of FCM and its affiliates, but 

also from the potential cost efficiencies 

and investment flexibility afforded by 

larger pools of funds. Mixed and shared 

funding also would permit a greater 

amount of assets available for 

investment by an Insurance Fund, 

thereby promoting economies of scale, 

by permitting increased safety through 

greater diversification, or by making the 

addition of new Insurance Funds more 

feasible. Therefore, making the 

Insurance Funds available for mixed 

and shared funding will encourage more 

insurance companies to offer VLI 

Accounts. This should result in 

increased competition with respect to 

both VLI Account design and pricing, 

which can in turn be expected to result 

in more product variety. Applicants also 

assert that sale of shares in an Insurance 

Fund to Plans, in addition to VLI 

Accounts and VA Accounts, will result 

in an increased amount of assets 

available for investment in an Insurance 

Fund. This may benefit VLI Account 

owners by promoting economies of 

scale, permitting increased safety of 

investments through greater 

diversification, and making the addition 

of new Funds more feasible. 

48. Applicants also submit that, 

regardless of the type of shareholder in 

an Insurance Fund, its investment 

adviser (and the adviser’s affiliates) are 

or would be contractually and otherwise 

obligated to manage the Insurance Fund 

solely and exclusively in accordance 

with that Insurance Fund’s investment 

objectives, policies and restrictions, as 

well as any guidelines established by its 

board of directors or trustees (a 

‘‘Board’’). Thus, each Insurance Fund 

will be managed in the same manner as 

any other mutual fund. 

49. Applicants see no significant legal 

impediment to permitting mixed 

funding, extended mixed funding and 

shared funding. VLI Accounts 

historically have been employed to 

accumulate shares of mutual funds that 

are not affiliated with the depositor or 

sponsor of the VLI Account. In 

particular, Applicants assert that sales 

of Insurance Fund shares to Eligible 

817(h) Purchasers, as described above, 

will not have any adverse federal 

income tax consequences to other 

investors in such an Insurance Fund. 

50. In addition, Applicants note that 

the Commission has issued numerous 

orders permitting mixed funding, 

extended mixed funding and shared 

funding. Therefore, granting the 

exemptions requested herein is in the 

public interest and, as discussed above, 

will not compromise the regulatory 

purposes of Sections 9(a), 13(a), 15(a), or 

15(b) of the Act or Rules 6e–2 or 6e–3(T) 

thereunder. 

Applicants’ Conditions 

Applicants agree that the Commission 

order requested herein shall be subject 

to the following conditions which shall 

apply to the Insurance Fund and any 

future trusts: 

1. A majority of the Board of the 

Fairholme Corporation will consist of 

persons who are not ‘‘interested 

persons’’ of the Insurance Fund, as 

defined by Section 2(a)(19) of the Act, 

and the rules thereunder, and as 

modified by any applicable orders of the 

Commission, except that if this 

condition is not met by reason of death, 

disqualification or bona fide resignation 

of any trustee or trustees, then the 

operation of this condition will be 

suspended: (a) For a period of 90 days 

if the vacancy or vacancies may be filled 

by the Board, (b) for a period of 150 

days if a vote of shareholders is required 

to fill the vacancy or vacancies, or (c) for 

such longer period as the Commission 

may prescribe by order upon 

application, or by future rule. 

2. The Board of each Insurance Fund 

will monitor the Insurance Fund for the 

existence of any material irreconcilable 

conflict between and among the 

interests of the owners of all VLI 

Contracts and VA Contracts and 

participants of all Plans investing in the 

Insurance Fund, and determine what 

action, if any, should be taken in 

response to such conflicts. A material 

irreconcilable conflict may arise for a 

variety of reasons, including: (a) An 

action by any state insurance regulatory 

authority, (b) a change in applicable 

federal or state insurance, tax, or 

securities laws or regulations, or a 

public ruling, private letter ruling, noaction or interpretive letter, or any 

similar action by insurance, tax or 

securities regulatory authorities, (c) an 

administrative or judicial decision in 

any relevant proceeding, (d) the manner 

in which the investments of the 

Insurance Fund are being managed, (e) 

a difference in voting instructions given 

by VA Contract owners, VLI Contract 

owners, and Plans or Plan participants, 

(f) a decision by a Participating 

Insurance Company to disregard the 

voting instructions of contract owners; 

or (g) if applicable, a decision by a Plan 

to disregard the voting instructions of 

Plan participants. 

3. Participating Insurance Companies 

(on their own behalf, as well as by 

virtue of any investment of general 

account assets in an Insurance Fund), an 

adviser and its affiliates, and any Plan 

that executes a Participation Agreement 

upon its becoming an owner of 10% or 

more of the net assets of an Insurance 

Fund (collectively, ‘‘Participants’’) will 

report any potential or existing conflicts 

to the Board of the Insurance Fund. Net 

assets of an Insurance Fund will be 

defined and calculated in accordance 

with the prospectus and as reflected in 

the financial statements of the Insurance 

Fund. Each Participant will be 

responsible for assisting the Board in 

carrying out the Board’s responsibilities 

under these conditions by providing the 

Board with all information reasonably 

necessary for the Board to consider any 

issues raised. This responsibility 

includes, but is not limited to, an 

obligation by each Participating 

Insurance Company to inform the Board 

whenever Variable Contract owner 

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voting instructions are disregarded, and, 

if pass-through voting is applicable, an 

obligation by each Plan to inform the 

Board whenever it has determined to 

disregard Plan participant voting 

instructions. The responsibility to report 

such information and conflicts, and to 

assist the Board, will be a contractual 

obligation of all Participating Insurance 

Companies under their Participation 

Agreement with an Insurance Fund, and 

these responsibilities will be carried out 

with a view only to the interests of the 

Variable Contract owners. The 

responsibility to report such 

information and conflicts, and to assist 

the Board, also will be contractual 

obligations of all Plans under their 

Participation Agreement with an 

Insurance Fund, and such agreements 

will provide that these responsibilities 

will be carried out with a view only to 

the interests of Plan participants. 

4. If it is determined by a majority of 

the Board of an Insurance Fund, or a 

majority of the disinterested directors/ 

trustees of such Board, that a material 

irreconcilable conflict exists, then the 

relevant Participant will, at its expense 

and to the extent reasonably practicable 

(as determined by a majority of the 

disinterested directors/trustees), take 

whatever steps are necessary to remedy 

or eliminate the material irreconcilable 

conflict, up to and including: (a) 

Withdrawing the assets allocable to 

some or all of their VLI Accounts or VA 

Accounts from the Insurance Fund and 

reinvesting such assets in a different 

investment vehicle including another 

Insurance Fund, (b) in the case of a 

Participating Insurance Company, 

submitting the question as to whether 

such segregation should be 

implemented to a vote of all affected 

Variable Contract owners and, as 

appropriate, segregating the assets of 

any appropriate group (i.e., VA Contract 

owners or VLI Contract owners of one 

or more Participating Insurance 

Companies) that votes in favor of such 

segregation, or offering to the affected 

Contract owners the option of making 

such a change, (c) withdrawing the 

assets allocable to some or all of the 

Plans from the affected Insurance Fund 

and reinvesting them in a different 

investment medium, and (d) 

establishing a new registered 

management investment company or 

managed separate account. If a material 

irreconcilable conflict arises because of 

a decision by a Participating Insurance 

Company to disregard Variable Contract 

owner voting instructions, and that 

decision represents a minority position 

or would preclude a majority vote, then 

the Participating Insurance Company 

may be required, at the election of the 

Insurance Fund, to withdraw such 

Participating Insurance Company’s VA 

Account and VLI Account investments 

in the Insurance Fund, and no charge or 

penalty will be imposed as a result of 

such withdrawal. If a material 

irreconcilable conflict arises because of 

a Plan’s decision to disregard Plan 

participant voting instructions, if 

applicable, and that decision represents 

a minority position or would preclude 

a majority vote, the Plan may be 

required, at the election of the Insurance 

Fund, to withdraw its investment in the 

Insurance Fund, and no charge or 

penalty will be imposed as a result of 

such withdrawal. The responsibility to 

take remedial action in the event of a 

Board determination of a material 

irreconcilable conflict and to bear the 

cost of such remedial action will be a 

contractual obligation of all Participants 

under their Participation Agreement 

with an Insurance Fund, and these 

responsibilities will be carried out with 

a view only to the interests of Variable 

Contract owners or, as applicable, Plan 

participants. For purposes of this 

Condition 4, a majority of the 

disinterested directors/trustees of the 

Board of each Insurance Fund will 

determine whether or not any proposed 

action adequately remedies any material 

irreconcilable conflict, but, in no event 

will the Insurance Fund or its 

investment adviser be required to 

establish a new funding vehicle for any 

Variable Contract or Plan. No 

Participating Insurance Company will 

be required by this Condition 4 to 

establish a new funding vehicle for any 

Variable Contract if any offer to do so 

has been declined by vote of a majority 

of the Contract owners materially and 

adversely affected by the material 

irreconcilable conflict. Further, no Plan 

will be required by this Condition 4 to 

establish a new funding vehicle for the 

Plan if: (a) A majority of the Plan 

participants materially and adversely 

affected by the irreconcilable material 

conflict vote to decline such offer, or (b) 

pursuant to documents governing the 

Plan, the Plan trustee makes such 

decision without a Plan participant 

vote. 

5. The Board of each Insurance Fund’s 

determination of the existence of a 

material irreconcilable conflict and its 

implications will be made known in 

writing promptly to all Participants. 

6. Participating Insurance Companies 

will provide pass-through voting 

privileges to all Variable Contract 

owners whose Contracts are issued 

through registered VLI Accounts or 

registered VA Accounts for as long as 

required by the Act as interpreted by the 

Commission. However, as to Variable 

Contracts issued through VA Accounts 

or VLI Accounts not registered as 

investment companies under the Act, 

pass-through voting privileges will be 

extended to owners of such Contracts to 

the extent granted by the Participating 

Insurance Company. Accordingly, such 

Participating Insurance Companies, 

where applicable, will vote the shares of 

each Insurance Fund held in their VLI 

Accounts and VA Accounts in a manner 

consistent with voting instructions 

timely received from Variable Contract 

owners. Participating Insurance 

Companies will be responsible for 

assuring that each of their VLI and VA 

Accounts investing in an Insurance 

Fund calculates voting privileges in a 

manner consistent with all other 

Participating Insurance Companies 

investing in that Fund. The obligation to 

calculate voting privileges as provided 

in this Application shall be a 

contractual obligation of all 

Participating Insurance Companies 

under their Participation Agreement 

with the Insurance Fund. Each 

Participating Insurance Company will 

vote shares of each Insurance Fund held 

in its VLI or VA Accounts for which no 

timely voting instructions are received, 

as well as shares held by its general 

account or otherwise attributed to it, in 

the same proportion as those shares for 

which voting instructions are received. 

Each Plan will vote as required by 

applicable law, governing Plan 

documents and as provided in this 

application. 

7. As long as the Act requires passthrough voting privileges to be provided 

to Variable Contract owners or the 

Commission interprets the Act to 

require the same, an Insurance Fund 

investment adviser (or its affiliates) or 

any general account will vote their 

shares of the Insurance Fund in the 

same proportion as all votes cast on 

behalf of all Variable Contract owners 

having voting rights; provided, however, 

that such an investment adviser (or 

affiliates) shall vote its shares in such 

other manner as may be required by the 

Commission or its staff. 

8. Each Insurance Fund will comply 

with all provisions of the Act requiring 

voting by shareholders (which, for these 

purposes, shall be the persons having a 

voting interest in its shares), and, in 

particular, the Insurance Fund will 

either provide for annual meetings 

(except to the extent that the 

Commission may interpret Section 16 of 

the Act not to require such meetings) or 

comply with Section 16(c) of the Act 

(although each Insurance Fund is not, or 

will not be, one of those trusts of the 

type described in Section 16(c) of the 

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18274 Federal Register / Vol. 76, No. 63 / Friday, April 1, 2011 / Notices 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3A Complex Order is any order involving the 

simultaneous purchase and/or sale of two or more 

different options series in the same underlying 

security, priced at a net debit or credit based on the 

relative prices of the individual components, for the 

same account, for the purpose of executing a 

particular investment strategy. Furthermore, a 

Complex Order can also be a stock-option order, 

which is an order to buy or sell a stated number 

of units of an underlying stock or ETF coupled with 

the purchase or sale of options contract(s). See 

Exchange Rule 1080, Commentary .08(a)(i). 

Act), as well as with Section 16(a) of the 

Act and, if and when applicable, 

Section 16(b) of the Act. Further, each 

Insurance Fund will act in accordance 

with the Commission’s interpretations 

of the requirements of Section 16(a) 

with respect to periodic elections of 

directors/trustees and with whatever 

rules the Commission may promulgate 

thereto. 

9. An Insurance Fund will make its 

shares available to the VLI Accounts, 

VA Accounts, and Plans at or about the 

time it accepts any capital from its 

investment adviser (or affiliates) or from 

a general account of a Participating 

Insurance Company. 10. Each Insurance Fund has notified, 

or will notify, all Participants that 

disclosure regarding potential risks of 

mixed and shared funding may be 

appropriate in VLI Account and VA 

Account prospectuses or Plan 

documents. Each Insurance Fund will 

disclose, in its prospectus that: (a) 

Shares of the Insurance Fund may be 

offered to both VA Accounts and VLI 

Accounts and, if applicable, to Plans, (b) 

due to differences in tax treatment and 

other considerations, the interests of 

various Variable Contract owners 

participating in the Insurance Fund and 

the interests of Plan participants 

investing in the Insurance Fund, if 

applicable, may conflict, and (c) the 

Insurance Fund’s Board will monitor 

events in order to identify the existence 

of any material irreconcilable conflicts 

and to determine what action, if any, 

should be taken in response to any such 

conflicts. 

11. If and to the extent Rule 6e–2 and 

Rule 6e–3(T) under the Act are 

amended, or Rule 6e–3 under the Act is 

adopted, to provide exemptive relief 

from any provision of the Act, or the 

rules thereunder, with respect to mixed 

or shared funding, on terms and 

conditions materially different from any 

exemptions granted in the order 

requested in this Application, then each 

Insurance Fund and/or Participating 

Insurance Companies, as appropriate, 

shall take such steps as may be 

necessary to comply with Rules 6e–2 or 

6e–3(T), as amended, or Rule 6e–3, to 

the extent such rules are applicable. 12. Each Participant, at least annually, 

shall submit to the Board of each 

Insurance Fund such reports, materials 

or data as the Board reasonably may 

request so that the directors/trustees of 

the Board may fully carry out the 

obligations imposed upon the Board by 

the conditions contained in this 

Application. Such reports, materials and 

data shall be submitted more frequently 

if deemed appropriate by the Board of 

an Insurance Fund. The obligations of 

the Participants to provide these reports, 

materials and data to the Board, when 

it so reasonably requests, shall be a 

contractual obligation of all Participants 

under their Participation Agreement 

with the Insurance Fund. 

13. All reports of potential or existing 

conflicts received by the Board of each 

Insurance Fund, and all Board action 

with regard to determining the existence 

of a conflict, notifying Participants of a 

conflict and determining whether any 

proposed action adequately remedies a 

conflict, will be properly recorded in 

the minutes of the Board or other 

appropriate records, and such minutes 

or other records shall be made available 

to the Commission upon request. 14. Each Insurance Fund will not 

accept a purchase order from a Plan if 

such purchase would make the Plan an 

owner of 10 percent or more of the net 

assets of the Insurance Fund unless the 

Plan executes an agreement with the 

Insurance Fund governing participation 

in the Insurance Fund that includes the 

conditions set forth herein to the extent 

applicable. A Plan will execute an 

application containing an 

acknowledgement of this condition at 

the time of its initial purchase of shares. 15. Each Insurance Fund will make its 

shares available through an Account at 

or about the same time that the 

Insurance Fund receives any seed 

money from the general account of a 

Participating Insurance Company. 

Conclusion 

For the reasons summarized above, 

applicants assert that the requested 

exemptions are appropriate in the 

public interest and consistent with the 

protection of investors and the purposes 

fairly intended by the policy and 

provisions of the Act. 

For the Commission, by the Division of 

Investment Management, pursuant to 

delegated authority. 

Cathy H. Ahn, 

Deputy Secretary. 

[FR Doc. 2011–7695 Filed 3–31–11; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–64137; File No. SR–Phlx– 

2011–37] 

Self-Regulatory Organizations; Notice 

of Filing and Immediate Effectiveness 

of Proposed Rule Change by NASDAQ 

OMX PHLX LLC Relating to Complex 

Order Fees 

March 28, 2011. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on March 21, 

2011, NASDAQ OMX PHLX LLC (‘‘Phlx’’ 

or ‘‘Exchange’’) filed with the Securities 

and Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III, below, which Items have been 

prepared by the Exchange. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend its 

Complex Order 3 Fees in Section I of its 

Fee Schedule titled Rebates and Fees for 

Adding and Removing Liquidity in 

Select Symbols. 

While changes to the Fee Schedule 

pursuant to this proposal are effective 

upon filing, the Exchange has 

designated these changes to be operative 

on April 1, 2011. 

The text of the proposed rule change 

is available on the Exchange’s Website 

at http://nasdaqtrader.com/ 

micro.aspx?id=PHLXfilings, at the 

principal office of the Exchange, and at 

the Commission’s Public Reference 

Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

Exchange included statements 

concerning the purpose of and basis for 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. The 

Exchange has prepared summaries, set 

forth in sections A, B, and C below, of 

the most significant aspects of such 

statements. 

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