Federal Register / Vol. 65, No. 81 / Wednesday, April 26, 2000 / Notices 24515

addressing electronic mail to

cxb@nrc.gov. A copy of draft NUREG–

1556, Volume 17, is also available for

inspection and/or copying for a fee in

the NRC Public Document Room, 2120

L Street, NW. (Lower Level),

Washington, DC 20555–0001.

The Presidential Memorandum dated

June 1, 1998, entitled, ‘‘Plain Language

in Government Writing,’’ directed that

the Federal government’s writing be in

plain language. The NRC requests

comments on this licensing guidance

NUREG specifically with respect to the

clarity and effectiveness of the language

used. Comments should be sent to the

address listed above.

FOR FURTHER INFORMATION CONTACT: Mrs.

Carrie Brown, TWFN 9-F–24, Division

of Industrial and Medical Nuclear

Safety, Office of Nuclear Material Safety

and Safeguards, U.S. Nuclear Regulatory

Commission, Washington, DC 20555,

telephone (301) 415–8092; electronic

mail address: cxb@nrc.gov.

Electronic Access

Draft NUREG–1556, Vol. 17 is

available electronically by visiting the

NRC’s Home Page (http://www.nrc.gov/

nrc/nucmat.html).

Dated at Rockville, Maryland, this 6th day

of April, 2000.

For the Nuclear Regulatory Commission.

Anthony N. Tse,

Acting Chief, Rulemaking and Guidance

Branch, Division of Industrial and Medical

Nuclear Safety, NMSS.

[FR Doc. 00–10391 Filed 4–25–00; 8:45 am]

BILLING CODE 7590–01–P

SECURITIES AND EXCHANGE

COMMISSION

[Rel. No. IC–24399; File No. 812–11886]

The Kelmoore Strategy TM Variable

Trust, et al.

April 19, 2000.

AGENCY: Securities and Exchange

Commission (the ‘‘Commission’’ or

‘‘SEC’’).

ACTION: Notice of application for an

order pursuant to Section 6(c) of the

Investment Company Act of 1940 (the

‘‘1940 Act’’ for exemptions from the

provisions of Sections 9(a), 13(a), 15(a)

and 15(b) of the 1940 Act and Rules 6e–

2(b)(15) and 6e–3(T)(b)(15) thereunder.

SUMMARY OF APPLICATION: Applicants

seek exemptive relief to the extent

necessary to permit shares of any

current or future investment portfolios

of The Kelmoore Strategy TM Variable

Trust (‘‘Trust’’), and shares of any other

investment company or portfolio that is

designed to fund insurance products

and for which Kelmoore Investment

Company, Inc. or nay of its affiliates

may serve in the future as investment

adviser, manager, principal underwriter,

sponsor administrator (‘‘Future Trusts’’)

(the Trust together with Future Trusts

are the ‘‘Trusts’’), to be sold to and held

by separate accounts funding variable

annuity and variable life insurance

contracts (collectively referred to herein

as ‘‘Variable Contracts’’) issued by both

affiliated and unaffiliated life insurance

companies and by qualified pension and

retirement plans (‘‘Qualified Plans’’ or

‘‘Plans’’) outside of the separate account

context.

APPLICANTS: The Kelmoore Strategy TM

Variable Trust (the ‘‘Trust’’) and

Kelmoore Investment Company, Inc.

(‘‘Kelmoore’’).

FILING DATE: The application was filed

on December 14, 1999, and amended

and restated on March 22, 2000.

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 Secretary of

the Commission and serving Applicants

with a copy of the request, personally or

by mail. Hearing requests must be

received by the Commission by 5:30

p.m. on May 15, 2000, and accompanied

by proof of service on the 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, 450 Fifth Street,

N.W., Washington, DC 20549–0609.

Applicants: Kelmoore Investment

Company, Inc., 2471 East Bayshore

Road, Suite 501, Palo Alto, CA 94303,

Attn: Ralph M. Kelmon, Jr., President.

FOR FURTHER INFORMATION CONTACT:

Kevin P. McEnery, Senior counsel, or

Susan M. Olson, Branch Chief, Office of

Insurance Products, Division of

Investment Management, at (202) 942–

0670.

SUPPLEMENTARY INFORMATION: The

following is a summary of the

application. The complete application is

available for a fee from the SEC’s Public

Reference Branch, 450 Fifth Street,

N.W., Washington, D.C. 20549–0102

(tel. (202) 942–8090).

Applicant’s Representations

1. The Trust is a Delaware business

trust that is registered under the 1940

Act as an open-end management

investment company. The Trust

currently consists of a single investment

portfolio, The Kelmoore Strategy TM

Covered Option Fund (the ‘‘Fund’’). The

Trust may offer one or more additional

investment portfolios in the future (each

a ‘‘Future Fund, and together with the

Fund, the Funds’’).

2. Kelmoore is registered as an

investment adviser under the 1940 Act,

and serves as the investment adviser to

the Trust and also acts as the

underwriter of the shares of the Trust.

3. Once the Trust commences

operations, shares representing interests

in the Fund will be offered to insurance

companies (each a ‘‘Participating

Insurance Company’’) as an investment

vehicle for separate accounts (‘‘Separate

Accounts’’) supporting Variable

Contracts.

4. At the time of their investment in

the Trust, the Participating Insurance

Companies have or will establish their

own Separate Accounts and design their

own Variable Contracts. Each

participating Insurance Company, on

behalf of its Separate Account, has or

will enter into an agreement with the

Trust concerning such Participating

Insurance Company’s participation in

the Fund. Each Participating Insurance

Company has or will have the legal

obligation of satisfying all applicable

requirements under both state and

federal law. The role of the Trust under

this agreement, insofar as the federal

securities laws are applicable, will

consist of, among other things, offering

shares of the Funds to the participating

Separate Accounts and complying with

any conditions that the Commission

may impose upon granting the order

requested in the application.

Applicants also propose that the Trust

may offer and sell shares representing

interests in the Funds directly to

Qualified Plans outside the separate

account context.

Applicants’ Legal Analysis

1. Applicants and their affiliates

request an order pursuant to Section

6(c) of the 1940 Act exempting each

insurance company and insurance

company separate account supporting

Variable Contracts which may hereafter

invest in the Trusts from the provisions

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

of the 1940 Act, and Rules 6e–2(b)(15)

and 6e–3(T)(b)(15) thereunder, to the

extent necessary to permit shares of the

Trusts to be sold to and held by separate

accounts funding Variable Contracts

issued by both affiliated and unaffiliated

insurance companies and by Qualified

Plans. Applicants also request that the

relief, to the extent necessary, extend to

24516 Federal Register / Vol. 65, No. 81 / Wednesday, April 26, 2000 / Notices

investment advisers, principal

underwriters and depositors of such

separate accounts.

2. In connection with the funding of

scheduled premium variable life

insurance contracts issued through a

separate account registered as a unit

investment trust (‘‘UIT’’) under the 1940

Act, Rule 6e–2(b)(15) provides partial

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

15(a), and 15(b) of the 1940 Act to the

extent those sections require ‘‘pass

through’’ voting with respect to an

underlying fund’s shares. Rule 6e–

2(b)(15) provides these exemptions only

where all of the assets of the UIT are

shares of management investment

companies ‘‘which offer their shares

exclusively to variable life insurance

separate accounts of the life insurer of

any affiliate life insurance company.’’

Therefore, the relief granted by Rule 6e–

2(b)(15) is not available with respect to

a scheduled premium life insurance

separate account that owns shares of an

underlying fund that also offers it shares

to a variable annuity or flexible

premium variable life insurance

separate account of the same company.

The use of a common management

investment company as the underlying

investment medium for variable annuity

and variable life insurance separate

accounts of the same and any affiliated

life insurance company is referred to as

‘‘mixed funding.’’

3. The relief granted by Rule 6e–

2(b)(15) also is not available with

respect to a scheduled premium variable

life insurance separate account that

owns shares of an underlying fund that

also offers its shares to separate

accounts funding Variable Contracts of

one or more unaffiliated life insurance

companies. The use of a common

management investment company as the

underlying investment medium for

variable annuity and/or variable life

insurance separate accounts of

unaffiliated life insurance companies is

referred to as ‘‘shared funding.’’

4. In connection with flexible

premium variable life insurance

contracts issued through a separate

account registered under the 1940 Act

as a UIT, Rule 6e–3(T)(b)(15) similarly

provides partial exemptions from

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

the 1940 Act. The exemptions granted

by Rule 6e–3(T)(b)(15) are available only

where all the assets of the separate

account consist of the shares of one or

more registered management investment

companies which offer to sell their

shares ‘‘exclusively to separate accounts

of the life issuer, or of any affiliated life

insurance company, offering either

scheduled contracts or flexible

contracts, or both; or which also offer

their shares to variable annuity separate

accounts of the life insurer or of an

affiliated life insurance company.’’

Therefore, Rule 6e–3(T) permits mixed

funding while not permitting shared

funding.

5. In addition, neither Rule 6e–2 nor

Rule 6e–3(T) contemplate that shares of

the underlying portfolio funding

Variable Contracts might also be sold to

Qualified Plans. The use of a common

management investment company as the

underlying investment medium for

variable annuity and variable life

separate accounts of affiliated and

unaffiliated insurance companies, and

for Qualified Plans, is referred to herein

as ‘‘extended mixed and shared

funding.’’

6. Applicants state that changes in the

federal tax law created the opportunity

for the Trust to substantially increase its

asset base by selling shares to Qualified

Plans. Applicants further state that

Section 817(h) of the Internal Revenue

Code of 1986, as amended (the ‘‘Code’’),

imposes certain diversified standards on

the assets underlying Variable

Contracts, such as those in each 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, in accordance

with regulations issued by the Treasury

Department (the ‘‘Regulations’’),

adequately diversified. On March 2,

1989, the Treasury Department issued

regulations (Treas. Reg. 1.817–50 which

established specific diversification

requirements for investment portfolios

underlying Variable Contracts. The

Regulations generally provide that, in

order to meet these diversification

requirements, all of the beneficial

interests in such portfolio must be held

by the segregated asset accounts of our

or more life insurance companies.

Notwithstanding this, the Regulations

also contain an exception to this

requirement that permits trustees of

Qualified Plans to hold shares of an

investment company portfolio, the

shares of which are also held by

insurance company segregated asset

accounts, without adversely affecting

the status of the investment company

portfolio as an adequately diversified

underlying investment for Variable

Contracts issued through such

segregated asset accounts (Treas. Reg.

1.817–5(F)(3)(iii)). Applicants maintain

that a result of this exception to the

great diversification requirement,

Qualified Plans may select the Funds as

investment options without endangering

the tax status of the Variable Contracts

issued through Participation Insurance

Companies as life insurance or

annuities.

7. Applicants note that the

promulgation of Rules 6e–2(b)(15) and

6e–3(T)(b)(15) preceded the issuance of

the Regulations which made it possible

for shares of an investment company

portfolio to be held by the trustee of a

Qualified Plan without adversely

affecting the ability of shares in the

same investment company portfolio also

to be held by the separate accounts of

insurance companies in connection

with their Variable Contracts. Thus, the

sale of shares of the same portfolio to

both separate accounts and Qualified

Plans was not contemplated at the time

of the adoption of Rules 6e–2(b)(15) and

6e–3(T)(b)(15).

8. Section 9(a)(3) of the 1940 Act

provides that it is unlawful for any

company to serve as investment adviser

or principal underwriter of an 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 63–

3((T)(b)(15)(i) and (ii) under the 1940

Act provide exemptions from Section

9(a) under certain circumstances,

subject to the limitations on mixed and

shared funding. These exemptions limit

the application of the eligibility

restrictions to affiliated individuals or

companies that directly participate in

the management of the underlying

management company.

9. Applicants state that the partial

relief granted in Rules 6e–2(b)(15) and

6e–3(T)(b)(15) under the 1940 Act from

the requiremen4ts of Section 9 of the

1940 Act, in effect, 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. Applicants state

that those 1940 Act rules recognizes that

it is not necessary for the protection of

investors or the purposes fairly intended

by the policy and provisions of the 1940

Act to apply the provisions of Section

9(a) to individuals in a large insurance

company complex, most of whom will

have no involvement in matters

pertaining to investment companies in

that organization. Applicants state that

those 1940 Act rules further recognizes

that it also is unnecessary to apply

Section 9(a) of the 1940 Act to

individuals in various unaffiliated

insurance companies (or affiliated

companies of Participating Insurance

Companies) that may utilize the Trusts

as the funding medium for Variable

Contracts. According to Applicants,

there is not regulatory purpose in

extending the Section 9(a) monitoring

requirements because of extended

Federal Register / Vol. 65, No. 81 / Wednesday, April 26, 2000 / Notices 24517

mixed or shared funding. The

Participating Insurance Companies and

Qualified Plans are not expected to play

any role in the management of the

Trusts. Those individuals who

participate in the management of the

Trusts will remain the same regardless

of which Separate Accounts or

Qualified Plans invests in a Trust.

Applicants argue that applying the

monitoring requirements of Section 9(a)

of the 1940 Act because of investment

by separate accounts of other insurers or

Qualified Plans would be unjustified

and would not serve any regulatory

purpose. Applicants further argue that

the increased monitoring costs would

reduce the net rates of return realized by

contract owners.

10. Applicants also state that in the

case of Qualified Plans, the Plans,

unlike the Separate Accounts, are not

themselves investment companies, and

therefore are not subject to Section 9 of

the 1940 Act. It is not anticipated that

a Qualified Plan would be an affiliated

person of any of the Trusts by virtue of

its shareholders.

11. Applicants state that Rules 6e–

2(b)(15)(iii) and 6e–3(T)(b)(15)(iii) under

the 1940 Act provide exemptions from

the pass-through voting requirement

with respect to several significant

matters, assuming the limitations on

mixed and shared funding are observed.

12. 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 contract

owners with respect to the investments

of an underlying fund, or any contract

between such a fund 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 Rule 6e–2 and 6e–

3(T) under the 1940 Act).

13. Rules 6e–2(b)(15)(iii)(B) and 6e–

3(T)(b)(15)(iii)(A)(2) provide that the

insurance company may disregard the

voting instructions of its contract

owners if the contract owners initiate

any change in an underlying fund’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) under the 1940

Act).

14. With respect to the Qualified

Plans, which are not registered as

investment companies under the 1940

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. Under Section

403(a) of the Employee Retirement

Income Security Act (‘‘ERISA’’), shares

of a portfolio of a fund sold to a

Qualified Plan must be held by the

trustees of the Plan. Section 403(a) also

provides that the trustee(s) 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

trustees 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. Unless one of the above the

two exceptions stated in Section 403(a)

applies, Plan trustees have the exclusive

authority and responsibility for voting

proxies.

15. Where a named fiduciary to a

Qualified 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 trustees or the named

fiduciary. The Qualified Plans may have

their trustee(s) or other fiduciaries

exercise voting rights attributable to

investment securities held by the

Qualified Plans in their discretion.

Some of the Qualified 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 participants.

16. Where a Qualified 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 Variable Contract

holders and Plan investors with respect

to voting of the respective Fund’s

shares. Accordingly, Applicants note

that unlike the case with insurance

company separate accounts, the issue of

the resolution of material irreconcilable

conflicts with respect to voting is not

present with respect to such Qualified

Plans since the Qualified Plans are not

required to pass-through voting

privileges.

17. Applicants state that even if a

Qualified Plan were to hold a

controlling interest in a Fund,

Applicants do not believe that such

control would disadvantage other

investors in such Fund to any greater

extent than is the case when any

institutional shareholder holds a

majority of the voting securities of any

open-end management investment

company. In this regard, Applicants

submit that investment in a Fund by a

Plan will not create any of the voting

complications occasioned by mixed

funding or shared funding. Unlike

mixed or shared funding, Plan investor

voting rights cannot be frustrated by

veto rights of insurers or state

regulators.

18. Where a Plan provides

participants with the right to give voting

instructions, Applicants see no reason

to believe that participants in Qualified

Plans generally or those in a particular

Plan, either as a single group or in

combination with participants in other

Qualified Plans, would vote in a manner

that would disadvantage Variable

Contract holders. The purchase if shares

of Funds by Qualified Plans that

provide voting rights does not present

any complications not otherwise

occasioned by mixed or shared funding.

19. Applicants state that 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 regulatory

body could require action that is

inconsistent with the requirements of

other states in which the insurance

company offers its policies. The fact that

different insurers may be domiciled in

different states does not create a

significantly different or enlarged

problem.

20. Applicants state that 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) under the 1940 Act permit.

Affiliated insurers may be domiciled in

different states and be subject to

differing state law requirements.

Applicants state that affiliation does not

reduce the potential, if any exists, for

differences in state regulatory

requirements. In any event, Applicants

submit that the conditions set forth in

the application and included in this

notice 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 insurer may

be required to withdraw its Separate

Account’s investment in the Trusts.

This requirement will be provided for in

agreements that will be entered into by

Participating Insurance Companies with

respect to their participation in the

relevant Fund.

24518 Federal Register / Vol. 65, No. 81 / Wednesday, April 26, 2000 / Notices

21. Rules 6e–2(b)(15) and 6e–

3(T)(b)(15) under the 1940 Act give the

insurance company the right to

disregard the voting instructions of the

contract owners. This right does not

raise any issues different from those

raised by the authority of state

insurance administrators over separate

accounts. Under Rules 6e–2(b)(15) and

6e–3(T)(b)(15), an insurer can disregard

contract owner voting instructions only

with respect to certain specified items.

Applicants assert that 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 contract owners. The

potential for disagreement is limited by

the requirements in Rules 6e–2 and 6e–

3(T) under the 1940 Act that the

insurance company’s disregard of voting

instructions by reasonable and based on

specific good-faith determinations.

22. Applicants state that a particular

insurer’s disregard of voting

instructions, nevertheless, could

conflict with the majority of contract

owners’ voting instructions. The

insurer’s action possibly could be

different than the determination of all or

some of the other insurers (including

affiliated insurers) that the voting

instructions of contract owners should

prevail, and either could preclude a

majority vote approving the change or

could represent a minority view. If the

insurer’s judgment represents a minority

position or would preclude a majority

vote, then the insurer may be required,

at the relevant Trust’s election, to

withdraw its Separate Account’s

investment in such Fund. No charge or

penalty will be imposed as a result of

such withdrawal. This requirement will

be provided for in the agreements

entered into with respect to

participation by the Participating

Insurance Companies in each Fund.

23. Applicants submit that there is not

reason why the investment policies of a

Fund would or should be materially

different from what these policies

would or should be if a Fund funded

only variable annuity contracts or

variable life insurance policies, whether

flexible premium or scheduled premium

policies. Each type of insurance product

is designed as a long-term investment

program. Applicants represent that each

Fund will be managed to attempt to

achieve the investment objective or

objectives of such Fund, and not to

favor or disfavor any particular

Participating Insurance Company or

type of insurance product.

24. Applicants state that no one

investment strategy can be identified as

appropriate to a particular insurance

product. Each pool of variable annuity

and variable life insurance contract

owners is composed of individuals of

diverse financial status, age, insurance,

and investment goals. A Fund

supporting even one type of insurance

product must accommodate these

diverse factors in order to attract and

retain purchasers. Permitting mixed and

shared funding will provide economic

justification for the continuation of the

relevant Fund. Mixed and shared

funding will broaden the base of

contract owners which will facilitate the

establishment of additional Funds

serving diverse goals.

25. Applicants do not believe that the

sale of the shares of the Funds to

Qualified 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 that

which would otherwise exist between

variable annuity and variable life

insurance contract owners. In

considering the appropriateness of the

requested relief, Applicants have

analyzed the following issues to assure

themselves that there either were no

conflict of interest or that there existed

the ability by the affected parties to

resolve the issues without harm to the

contract owners in the Separate

Accounts or to the participants under

the Qualified Plans.

26. As noted above, Section 817(h) of

the Code imposes certain diversification

standards on the underlying assets of

Variable Contracts held in an

underlying mutual fund. The Code

provides that a Variable Contract shall

not be treated as an annuity contract or

life insurance, as applicable, for any

period (and any subsequent period) for

which the investments are not, in

accordance with regulations prescribed

by the Treasury Department, adequately

diversified.

27. Regulations issued under Section

817(h) provide that, in order to meet the

statutory diversification requirements,

all of the beneficial interests in the

investment company must be held by

the segregated asset accounts of one or

more insurance companies. However,

the Regulations contain certain

exceptions to this requirement, one of

which allows shares in an underlying

mutual fund to be held by the trustees

of a qualified pension or retirement plan

without adversely affecting the ability of

such shares also to be held by separate

accounts of insurance companies in

connection with their Variable

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

Thus, the Regulations specifically

permit ‘‘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 Regulations, nor

Revenue Rulings thereunder, present

any inherent conflicts of interest.

28. Applicants note that while there

are differences in the manner in which

distributions from Variable Contracts

and Qualified Plans are taxed, these

differences will have no impact on the

Trusts. When distributions are to be

made, and a Separate Account or

Qualified Plan is unable to net purchase

payments to make the distributions, the

Separate Account and Qualified Plan

will redeem shares of the relevant Fund

at their respective net asset value in

conformity with Rule 22c–1 under the

1940 Act (without the imposition of any

sales charge) to provide proceeds to

meet distribution needs. A Participating

Insurance Company then will make

distributions in accordance with the

terms of its Variable Contract, and a

Qualified Plan then will make

distributions in accordance with the

terms of the Plan.

29. Applicants considered whether it

is possible to provide an equitable

means of giving voting rights to contract

owners in the Separate Accounts and to

Qualified Plans, and determined it is

possible. In connection with any

meeting of shareholders, the Trusts will

inform each shareholder, including each

Separate Account and Qualified Plan, of

information necessary for the meeting,

including this respective share of

ownership in the relevant Fund. Each

Participating Insurance Company then

will solicit voting instructions in

accordance with Rules 6e–2 and 6e–

3(T), as applicable, and its agreement

with a Trust concerning participation in

the relevant Fund. Shares held by

Qualified Plans will be voted in

accordance with applicable law. The

voting rights provided to Qualified

Plans with respect to shares of a Fund

would be no different from the voting

rights that are provided to Qualified

Plans with respect to shares of funds

sold to the general public.

30. Applicants concluded that the

ability of the Trusts to sell shares of

each Fund directly to Qualified Plans

does not create a senior security.

‘‘Senior security’’ is defined under

Section 18(g) of the 1940 Act of include

‘‘any stock of a class having priority

over any other class as to distribution of

assets or payment of dividends.’’

Regardless of the rights and benefits of

participants under Qualified Plans, or

contract owners under Variable

Contracts, the Qualified Plans and the

Separate Accounts only have rights with

Federal Register / Vol. 65, No. 81 / Wednesday, April 26, 2000 / Notices 24519

respect to their respective shares of the

Funds. They only can redeem such

shares at net asset value. No shareholder

of a Fund has any preference over any

other shareholder with respect to

distribution of assets or payment of

dividends.

31. Applicants also considered

whether there are any conflicts between

the contract owners of the Separate

Accounts and the participants under the

Qualified Plans with respect to the state

insurance commissioners’ veto powers

over investment objectives. Applicants

note that the basic premise of corporate

democracy and shareholder voting is

that not all shareholders may agree with

a particular proposal. Although the

interests and opinions of shareholders

may differ, this does not mean that

inherent conflicts of interest exist

between or among such shareholders.

State insurance commissioners have

been given the veto power in

recognition of the fact that insurance

companies usually cannot simply

redeem their separate accounts out of

one fund and invest in another.

Generally, time-consuming, complex

transactions must be undertaken to

accomplish such redemptions and

transfers.

32. Conversely, the trustees of

Qualified Plans or the participants in

participant-directed Qualified Plans can

make the decision quickly and redeem

their interests in a Fund and reinvest in

another funding vehicle without the

same regulatory impediments faced by

the Separate Accounts or, as is the case

with most Qualified Plans, even hold

cash pending suitable investment.

Therefore, issues where the interests of

contract owners and the interests of

Qualified Plans are in conflict can be

almost immediately resolved since the

trustees of (or participants in) the

Qualified Plans can, on their own,

redeem the shares out of the Funds.

33. Applicants considered whether

there is a potential for future conflicts

of interest between Participating

Insurance Companies and Qualified

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 participants in the

Qualified Plans and contract owners of

the Separate Accounts from future

changes in the federal tax laws than that

which already exists between variable

annuity contract owners and variable

life insurance contract owners.

34. Applicants recognize that the

foregoing is not an all inclusive list, but

rather is representative of issues which

they believe are relevant to the

application. Applicants believe that the

discussion contained in the application

demonstrates that the sale of shares of

the Funds to Qualified Plans does not

increase the risk of material

irreconcilable conflicts of interest.

Further, Applicants submit that the use

of the Funds with respect to Qualified

Plans is not substantially dissimilar

from the Funds’ anticipated use, in that

Qualified Plans, like Variable Contracts,

are generally long-term retirement

vehicles.

35. Applicants state that various

factors have kept more insurance

companies from offering variable

annuity and variable life insurance

contracts than currently offer such

contracts. These factors include the

costs of organizing and operating a

funding medium, the lack of expertise

with respect to investment management

(principally with respect to stock and

money market investments), and the

lack of name recognition by the public

of certain insurers as investment experts

with whom the public feels comfortable

entrusting their investment dollars. Use

of a Fund, as a common investment

media for Variable Contracts would

reduce or eliminate these concerns.

Applicants assert that mixed and shared

funding should provide several benefits

to Variable Contract owners by

eliminating a significant portion of the

costs of establishing and administering

separate funds. Applicants maintain

that Participating Insurance Companies

will benefit not only from the

investment and administrative expertise

of Kelmoore, but also from the cost

efficiencies and investment flexibility

afforded by a large pool of funds. Mixed

and shared funding also would permit

a greater amount of assets available for

investment by a Fund, thereby

promoting economics of scale, by

permitting increased safety through

greater diversification, or by making the

addition of new Funds more feasible.

Therefore, making the Funds available

for mixed and shared funding will

encourage more insurance companies to

offer Variable Contracts, and this should

result in increased competition with

respect to both Variable Contract design

and pricing, which can be expected to

result in more product variation and

lower charges. Applicants also assert

that the sale of shares of the Funds to

Qualified Plans, in addition to the

Separate Accounts, will result in an

increased amount of assets available for

investment by such Funds. This may

benefit Variable Contract owners by

promoting economics of scale, by

permitting increased safety of

investments through greater

diversification, and by making the

addition of new Funds more feasible.

36. Applicants submit that, regardless

of the type of shareholder in the Fund

or Future Fund, Kelmoore is or would

be contractually and otherwise obligated

to manage the Fund or such Future

Fund solely and exclusively in

accordance with that Fund’s investment

objectives, policies and restrictions as

well as any guidelines established by

the Board of Trustee of the Trust (the

‘‘Board’’). Kelmoore will work with a

pool of money and will not take into

account the identity of the shareholders.

Thus, each Fund and any Future Fund

will be managed in the same manner as

any other mutual fund.

37. Applicants see no significant legal

impediment to permitting mixed and

shared funding. Separate accounts

organized as unit investment trusts

historically have been employed to

accumulate shares of mutual funds

which have not been affiliated with the

depositor or sponsor of the separate

account. Applicants assert that mixed

and shared funding will not have any

adverse Federal income tax

consequences.

Applicants’ Conditions

Applicants have consented to the

following conditions:

1. A majority of the Board of each

Trust will consist of persons who are

not ‘‘interested persons’’ of such Trust,

as defined by Section 2(a)(19) of the

1940 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 the

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 45 days

if the vacancy or vacancies may be filled

by the Board; (b) for a period of 60 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.

2. Each Board will monitor its

respective Trust for the existence of any

material irreconcilable conflict between

the interests of the contract owners of

all Separate Accounts and participants

of all Qualified Plans investing in such

Trust, 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, no-action or interpretative

24520 Federal Register / Vol. 65, No. 81 / Wednesday, April 26, 2000 / Notices

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 such Trust are being

managed; (e) a difference in voting

instructions given by variable annuity

contact owners, variable life insurance

contract owners, and trustees of the

plans; (f) a decision by a Participating

Insurance Company to disregard the

voting instructions of contract owners;

or (g) if applicable, a decision by a

Qualified Plan to disregard the voting

instructions of Plan participants.

3. Participating Insurance Companies,

Kelmoore, and any Qualified Plan that

executes a participation agreement upon

becoming an owner of 10 percent or

more of the assets of any Fund

(collectively, the ‘‘Participants’’) will

report any potential or existing conflicts

to the relevant Board. Participants will

be responsible for assisting the relevant

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 includes, but is not limited to, an

obligation by each Participating

Insurance Company to inform the

relevant Board whenever contract owner

voting instructions are disregarded, and,

if pass-through voting is applicable, an

obligation by each Qualified 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 agreements

with the Trusts, and these

responsibilities will be carried out with

a view only to the interests of the

contract owners. The responsibility to

report such information and conflicts,

and to assist the Board, also will be

contractual obligations of all Qualified

Plans with participation agreements,

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

a Board, or a majority of the

disinterested 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

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 the

Separate Accounts from the relevant

Fund and reinvesting such assets in a

different investment medium, including

another Fund, or in the case of

insurance company participants

submitting the question as to whether

such segregation should be

implemented to a vote of all affected

contract owners and, as appropriate,

segregating the assets of any appropriate

group (i.e., annuity contract owners or

life insurance 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; and (b) 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 contract owner voting

instructions, and that decision

represents a minority position or would

preclude a majority vote, then the

insurer may be required, at the election

of the relevant Trust, to withdraw such

insurer’s Separate Account’s investment

in such Trust, and no charge or penalty

will be imposed as a result of such

withdrawal. If a material irreconcilable

conflict arises because of a Qualified

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

Trust, to withdraw its investment in

such Trust, 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 agreements governing

participation in each Trust, and these

responsibilities will be carried out with

a view only to the interests of contract

owners and Plan participants.

For purposes of this Condition 4, a

majority of the disinterested members of

a Board will determine whether or not

any proposed action adequately

remedies any material irreconcilable

conflict, but, in no event, will any Trust

or Kelmoore be required to establish a

new funding medium for any Variable

Contract. No Participating Insurance

Company will be required by this

Condition 4 to establish a new funding

medium 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 Qualified Plan will be required by

this Condition 4 to establish a new

funding medium 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 Qualified

Plan, the Plan makes such decision

without a Plan participant vote.

5. The Board’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 contract owners as

required by the 1940 Act. Accordingly,

such Participants, where applicable,

will vote shares of the applicable Fund

held in its Separate Accounts in a

manner consistent with voting

instructions timely received from

contract owners. Participating Insurance

Companies will be responsible for

assuring that each Separate Account

investing in a Fund calculates voting

privileges in a manner consistent with

other Participants. The obligation to

calculate voting privileges in the

application will be a contractual

obligation of all Participating Insurance

Companies under their agreement with

the Trusts governing participating in a

Fund. Each Participating Insurance

Company will vote shares for which it

has not received timely voting

instructions as well as shares it owns in

the same proportion as it votes those

shares for which it has received voting

instructions. Each Qualified Plan will

vote as required by applicable law and

governing Plan documents.

7. Each Trust will comply with all

provisions of the 1940 Act requiring

voting by shareholders, which for these

purposes, shall be the persons having a

voting interest in the shares of the

respective Fund, and, in particular, each

Trust will either provide for annual

meetings (except to the extent that the

Commission may interpret Section 16 of

the 1940 Act not to require such

meetings) or comply with Section 16(c)

of the 1940 Act (although the Trusts are

not one of the trusts of the type

described in the Section 16(c) of the

1940 Act), as well as with Section 16(a)

of the 1940 Act and, if and when

applicable, Section 16(b) of the 1940

Act. Further, each Trust will act in

accordance with the Commission’s

interpretation of the requirements of

Section 16(a) with respect to periodic

elections of trustees and with whatever

Federal Register / Vol. 65, No. 81 / Wednesday, April 26, 2000 / Notices 24521

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

2 17 CFR 240.19b–4.

rules the Commission may promulgate

with respect thereto.

8. The Trusts will notify all

Participants that separate account

prospectus disclosure or Plan

prospectus or other Plan document

disclosure regarding potential risks of

mixed and shared funding may be

appropriate. Each trust will disclose in

its prospectus that (a) Shares of such

Trust may be offered to insurance

company separate accounts of both

variable annuity and variable life

insurance contracts and, if applicable, to

Qualified Plans, (b) due to differences in

tax treatment and other considerations,

the interests of various contract owners

participating in such Trust and the

interests of Qualified Plans investing in

such Trust, if applicable, may conflict,

and (c) the Trust’s Board will monitor

events in order to identify the existence

of any material irreconcilable conflicts

and to determine what actions, if any,

should be taken in response to any such

conflict.

9. If and to the extent that Rule 6e–

2 and Rule 6e–3(T) under the 1940 Act

are amended, or proposed Rule 6e–3

under the 1940 Act is adopted, to

provide exemptive relief from any

provision of the 1940 Act, or the rules

promulgated thereunder, with respect to

mixed or shared funding, on terms and

conditions materially different from any

exemptions granted in the order

requested in the application, then the

Trusts and/or Participating Insurance

Companies, as appropriate, shall take

such steps as may be necessary to

comply with Rules 6e–2 and 6e–3(T), or

Rule 6e–3, as such rules are applicable.

10. The Participants, at least annually,

will submit to the Board such reports,

materials, or data as a Board reasonably

may request so that the trustees of the

Board may fully carry out the

obligations imposed upon a Board by

the conditions contained in the

application, and said reports, materials,

and data will be submitted more

frequently if deemed appropriate by a

Board. The obligations of the

Participants to provide these reports,

materials, and data to a Board, when it

so reasonably requests, will be a

contractual obligation of all Participants

under this agreements governing

participation in the Funds.

11. All reports of potential or existing

conflicts received by a Board, 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.

12. The Trusts will not accept a

purchase order from a Qualified Plan if

such purchase would make the Plan

shareholder an owner of 10 percent or

more of the assets of such Fund unless

such Plan executes an agreement with

the relevant Trust governing

participation in such Fund that includes

the conditions set forth herein to the

extent applicable. A Plan or Plan

Participant will execute an application

containing an acknowledgment of this

condition at the time of its initial

purchase of shares of any Fund.

Conclusion

For the reasons summarized above,

Applicants believe that the requested

exemptions, in accordance with the

standards of Section 6(c), 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 1940 Act.

For the Commission, by the Division of

Investment Management, pursuant to

delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–10255 Filed 4–25–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42706; File No. SR–CHX–

00–09]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by The

Chicago Stock Exchange, Inc. Relating

to Operating Times of Price

Improvement Programs

April 19, 2000.

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

Securities Exchange Act of 1934 (the

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

notice hereby is given that on April 10,

2000, the Chicago Stock Exchange, Inc.

(‘‘CHX’’ or ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(the ‘‘Commission’’) the proposed rule

change as described in Items I, II and III

below, which Items have been prepared

by the CHX. 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

Article XX, rule 37 of the Exchange’s

rules to change the starting time of each

of the Exchange’s automatic price

improvement programs from 8:45 a.m.,

Central Time to the beginning of the

Exchange’s primary trading session,

which occurs at 8:30 a.m., Central Time.

The text of the proposed rule change is

as follows:

Additions are italicized; deletions

[bracketed]

ARTICLE XX

Regular Trading Sessions

* * * * *

Guaranteed Execution System and Midwest

Automated Execution System

Rule 37.

* * * * *

(b) Automated Executions. The Exchange’s

Midwest Automated Execution System (the

MAX System) may be used to provide an

automated delivery and execution facility for

orders that are eligible for execution under

the Exchange’s BEST Rule (Article XX, Rule

37(a)) and certain other orders. In the event

that an order that is subject to the BEST Rule

is sent through MAX, it shall be executed in

accordance with the parameters of the BEST

Rule and the following. In the event that an

order that is not subject to the BEST Rule is

sent through MAX, it shall be executed in

accordance with the parameters of the

following:

* * * * *

(d) Super MAX Plus. Super MAX Plus

shall be a voluntary automatic execution

program within the MAX System. SuperMax

Plus shall be available for Dual Trading

System securities and Nasdaz/NM

Securities.***

* * * * *

(3) Operating Time. SuperMax Plus will

operate each day that the Exchange is open

for trading from [8:45 a.m. (C.T.)] the

commencement of the Primary Trading

Session until the close of the Primary

Trading Session; provided, however, that

preopening orders shall not be eligible for

SuperMax Plus price improvement. ***

* * * * *

(e) SuperMAX. Except as provided below

where SuperMAX is required to be enabled,

SuperMAX shall be a voluntary automatic

execution program within the MAX system.

SuperMAX shall be avaiable for Dual Trading

System securities for which SuperMAX plus

has been enabled. In the event that

SuperMAX Plus has been enabled for a

particular Dual Trading System security and

the maximum order size has been set at an

amount that is less than 499 shares,

SuperMAX shall be automatically enabled.

***

* * * * *

(2) Operating Time. SuperMAX will

operate each day that the Exchange is open