Federal Register / Vol. 65, No. 92 / Thursday, May 11, 2000 / Notices 30453

1Warburg, Pincus Trust, et al., Investment

Company Act Release No. IC–21607 (Dec. 19, 1995)

(order), Investment Company Act Release No. IC–

21522 (Nov. 20, 1995) (notice). Trust II was not a

named party to the prior exemptive application

because it had not yet been organized. Trust II has

relied on the Existing Order because the prior

application requested relief for shares of any other

investment company or series thereof designed of

fund insurance products and for which Warburg

Pincus Asset Management, Inc. or its affiliates

serves as investment adviser.

SECURITIES AND EXCHANGE

COMMISSION

[Docket No. Rel. No. IC–24442; File No. 812–

11826]

Warburg, Pincus Trust, et al.

May 5, 2000.

AGENCY: Securities and Exchange

Commission (the ‘‘SEC’’ or the

‘‘Commission’’).

ACTION: Notice of application for an

order under 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 an order to permit shares of

Warburg, Pincus Trust I (‘‘Trust I’’) and

Warburg, Pincus Trust II (‘‘Trust II’’)

(each, a ‘‘Trust’’ and together with Trust

I, the ‘‘Trusts’’) and shares of any other

investment company or series thereof

that is designed to fund insurance

products and for which Credit Suisse

Asset Management, LLC (‘‘CSAM’’) or

any of its affiliates may serve,

immediately upon commencement of

operation as a registered investment

company or in the future, as investment

adviser, administrator, manager,

principal underwrite or sponsor (the

Trusts, their respective existing and

future investment portfolios and such

other investment companies or

investment portfolios thereof hereinafter

referred to, individually, as a ‘‘Fund’’

and collectively as ‘‘Funds’’) to be sold

to and held by (a) variable annuity and

variable life insurance separate accounts

of both affiliated and unaffiliated life

insurance companies; and (b) qualified

pension and retirement plans outside of

the separate account context (‘‘Qualified

Plans’’). The order would supersede an

existing order (the ‘‘Existing Order’’)

previously granted by the Commission

to Trust I on December 19, 1995.

Applicants: Warburg, Pincus Trust,

Warburg, Pincus Trust II and Credit

Suisse Asset Management, LLC.

Filing Date: The application was filed

on October 28, 1999, and amended and

restated on May 3, 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 on this application by writing

to the Secretary of the SEC and serving

Applicants with a copy of the request,

in person or by mail. Hearing requests

must be received by the Commission by

5:30 p.m. on May 26, 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 interest, the reason for the request

and the issues contested. Persons may

request notification of the date of a

hearing by writing to the Secretary of

the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth

Street, N.W., Washington, D.C. 20549–

0609. Applicants, 153 East 53rd Street,

New York, New York 10022.

FOR FURTHER INFORMATION CONTACT:

Zandra Y. Bailes, Senior Counsel, or

Susan M. Olson, Branch Chief, Division

of Investment Management, Office of

Insurance Products, at (202) 942–0670.

SUPPLEMENTARY INFORMATION: Following

is a summary of the application. The

complete application is available for a

fee from the Public Reference Branch of

the SEC, 450 Fifth Street, N.W.,

Washington, D.C. 20549 (tel. (202) 942–

8090).

Applicants’ Representations

1. The Existing Order 1 was granted to

certain Funds, including Trust I, and

Warburg Pincus Asset Management, Inc.

(‘‘Warburg’’) to permit those Funds to

offer their respective shares to (a)

variable annuity and variable life

insurance separate accounts of both

affiliate and unaffiliated life companies

and (b) qualified pension and retirement

plans outside of the separate account

context. On February 15, 199, the parent

companies of Warburg entered into an

agreement with Credit Sussie Group

(‘‘Credit Sussie’’), a global financial

service company based in Switzerland,

under which Credit Suisse would

acquire Warbug (the ‘‘Acquisition’’). In

conjunction with the Acquisition, Credit

Suisse merged Warburg into its existing

U.S. asset management business, which

was converted from Credit Suisse Asset

Management, a New York general

partnership, into CSAM, prior to the

consummation of the merger. The

Acquisition and merger of CSAM and

Warburg occurred simultaneously on

July 6, 1999.

2. Each Trust is a Massachusetts

business trust registered under the 1940

Act as an open-end management

investment company. Trust I is

currently comprised of six portfolios:

the Emerging Growth Portfolio, the

Emerging Markets Portfolio, the Growth

& Income Portfolio, the International

Equity Portfolio, the Post-Venture

Capital Portfolio and the Small

Company Growth Portfolio. Thrust II is

comprised of two portfolios: the Fixed

Income Portfolio and the Global Fixed

Income Portfolio. Each Trust may offer

additional portfolios in the future.

3. CSAM, a Delaware limited liability

company, is registered with the

Commission under the Investment

Advisers Act of 1940 and serves as the

investment adviser for each of the

Funds.

4. Each Trust offers its shares to and

its shares are held by separate accounts,

which are registered with the

Commission under the 1940 Act as unit

investment trusts (‘‘Separate

Accounts’’), of various life insurance

companies to serve as an investment

vehicle for life and variable annuity

contracts issued by such insurance

companies. Insurance companies whose

separate account or accounts own shares

of the Funds are referred to herein as

‘‘Participating Insurance Companies.’’

Shares of the Trust may also be held by

separate accounts that are not registered

as investment companies under the

1940 Act pursuant to an exemption

therefrom.

5. Each Participating Insurance

Company will have the legal obligation

of satisfying all applicable requirements

under both state and federal law. Each

Participating Insurance Company will

enter into a fund participating

agreement with the applicable Trust on

behalf of the Fund in which the

Participating Insurance Company

invests. The role of the Funds under this

agreement, insofar as the federal

securities laws are applicable, will

consists of offering their shares to the

Separate Accounts and fulfilling any

conditions that the Commission may

impose upon granting the order

requested in the application.

6. Applicants propose that each Trust

continue to have the ability to offer and

sell shares directly to Qualified Plans.

The Funds propose to offer shares to

any Qualified Plans that can, consistent

with applicable law, invest in the Funds

consistent with the Funds serving as

investment vehicles for Separate

Accounts.

Applicants’ Legal Analysis

1. In connection with the funding of

scheduled premium variable life

insurance contracts issued through a

Separate Account, Rule 6e–2(b)(15)

under the 1940 Act provides partial

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

15(a) and 15(b) of the 1940 Act. The

30454 Federal Register / Vol. 65, No. 92 / Thursday, May 11, 2000 / Notices

exemptions granted under Rule 6e–

(b)(15) are available, however, only

when all of the assets of the separate

account consist of the shares of one or

more registered management investment

companies which offer their shares

‘‘exclusively to variable life insurance

separate accounts of the life insurer, or

of any affiliated life insurance

company.’’ (emphasis supplied)

Therefore, the relief granted by Rule 6e–

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

a scheduled premium variable life

insurance separate account that owns

shares of an investment company that

also offers its shares to a variable

annuity separate account of the same or

of any affiliated or unaffiliated life

insurance company. The use of a

common management investment

company as the underlying investment

medium for both variable annuity and

variable life insurance separate accounts

of the same life insurance company or

of any affiliated life insurance company

is referred to herein as ‘‘mixed

funding.’’ In addition, the relief granted

by Rule 6e–2(b)(15) is not available if

shares of the underlying management

investment company are offered to

variable life insurance separate accounts

of unaffiliated life insurance companies.

The use of a common management

investment company as the underlying

investment medium for variable life

separate accounts of unaffiliated

insurance companies is referred to

herein as ‘‘shared funding’’.

2. Applicants state that the basis for

the relief granted by Rule 6e–2(b)(15) is

not affected by the purchase of shares of

the Funds by Qualified Plans. However,

because the relief under Rules 6e–

2(b)(15) and 6e–3(b)(15) is available

only where shares of the underlying

fund are offered exclusively to separate

accounts of insurance companies,

additional exemptive relief is necessary

if shares of the Funds are also to be sold

to Qualified Plans.

3. In connection with the funding of

flexible premium variable life insurance

contracts issued through a separate

account registered under the 1940 Act

as a unit investment trust, Rule 6e–

3(T)(b)(15) provides partial exemptions

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

of the 1940 Act. However, these

exemptions are available only where all

of the assets of the separate account

consist of shares of one or more

registered management investment

companies which offers their shares

‘‘exclusively to separate accounts of the

life insurer, 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’’

(emphasis supplied). Therefore, Rule

6e–3(T) permits mixed funding with

respect to a flexible premium variable

life insurance separate account subject

to certain conditions. However, Rule

6e–3(T) does not permit shared funding

because the relief granted by Rule 6e–

3(T)(b)(15) is not available with respect

to a flexible premium variable life

insurance separate account that owns

shares of an investment company that

also offers its shares to separate

accounts (including variable annuity

and flexible premium and scheduled

premium variable life insurance

separate accounts) of unaffiliated life

insurance companies.

4. In addition, Applicants state that

because the relief granted under Rule

6e–3(T)(b)(15) is available only when

shares of the underlying fund are

offered exclusively to separate accounts,

exemptive relief is necessary if shares of

the Funds are also to be sold to

Qualified Plans.

5. Applicants state that changes in the

tax law subsequent to the adoption of

Rules 6e–2(b)(15) and 6e–3(T)(b)(15)

afford the Trusts the opportunity to

increase their respective asset bases by

selling shares of the Funds to Qualified

Plans. Section 817(h) of the Internal

Revenue code of 1986, as amended (the

‘‘Code’’), imposes certain diversification

standards on the assets underlying

variable annuity contracts and variable

life insurance contracts such as those

held in the Funds. The Code provides

that a variable contract shall not be

treated as an annuity contract or life

insurance contract for any period (or

any subsequent period) for which the

investments of 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. 1.817–5) which established

diversification requirements for

investment companies’ portfolios

underlying variable contracts. The

Regulations provide that, in order to

meet the diversification requirements,

all of the beneficial interests in the

underlying investment company must

be held by the segregated asset account

of one or more life insurance

companies. However, the Regulations

also contain certain exceptions to this

requirement, one of which allows shares

of an investment company to be held by

the trustee of a qualified pension or

retirement plan, without adversely

affecting the status of the investment

company as an adequately diversified

underlying investment for variable life

contracts issued through such

segregated asset accounts (Treas. Reg.

1.817–5(f)(3)(iii).

6. Applicants also 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 to

be held by the trustee of a Qualified

Plan without adversely affecting the

ability of shares in the same investment

company to also be held by the separate

accounts of insurance companies in

connection with their variable contracts.

7. In general, Section 9(a) of the 1940

Act disqualifies any person convicted of

certain offenses, and any company

affiliated with that person, from serving

in various capacities with respect to an

underlying registered management

investment company. More specifically,

Section 9(a)(3) provides that it is

unlawful for any company to serve as

investment adviser to or principal

underwriter for any registered open-end

investment company if an affiliated

person of the company is subject to a

disqualification enumerated in Sections

9(a)(1) or (2) of the 1940 Act. However,

Rules 6e–2(b)(15)(i) and (ii) and 6e–

3(T)(b)(15)(i) and (ii) 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 or administration of the

underlying investment company.

8. Applicants state that Rules 6e–

2(b)(15) and 6e–3(T)(b)(15) recognize

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 the many individuals

involved in a large insurance company

complex, most of whom typically will

have no involvement in matters

pertaining to investment companies

funding the Separate Accounts. The

Participating Insurance Companies are

not expected to play any role in the

management or administration of the

Funds. Therefore, Applicants assert that

applying the restrictions of Section 9(a)

serves no regulatory purpose.

Applicants further assert that such

restrictions could reduce the net rates of

return realized by contractowners due to

increased monitoring costs.

9. Applicants state that Rules 6e–

2(b)(15)(iii) and 6e–3(T)(b)(15)(iii)

provide partial exemptions from

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

1940 Act to the extent that those

sections have been deemed by the

Commission to require ‘‘pass-through’’

Federal Register / Vol. 65, No. 92 / Thursday, May 11, 2000 / Notices 30455

voting with respect to management

investment company shares held by a

Separate Account to permit the

Participating Insurance Company to

disregard the voting instructions of its

contractowner in certain limited

circumstances. More specifically, Rules

6e–2(b)(15)(iii)(A) and 6e–

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

Participating Insurance Company may

disregard the voting instructions of its

contractowner in connection with the

voting shares of an underlying fund if

such instructions would require such

shares to be voted to cause such

companies to make (or refrain from

making) certain investments which

would result in changes in the

subclassification or investment

objectives of such companies or to

approve or disapprove any contract

between a fund and its investment

adviser, when required to do so by an

insurance regulatory authority and

subject to the provisions of paragraphs

(b)(5)(i) and (b)(7)(ii)(A) of the Rules. In

additions, Rules 6e–(b)(15)(iii)(B) and

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

insurance company may disregard

voting instructions of contractowners if

the contractowners initiate any change

in the investment company’s investment

policies, principal underwriter or any

investment adviser (subject to

paragraphs (b)(5)(ii) and (b)(7)(ii)(B) and

(C) of the Rules).

10. Applicants further represent that

the Funds’ sale of shares to Qualified

Plans will not have any impact on the

relief requested in this regard.

Applicants state that shares of the

Funds sold to Qualified Plans would be

held by the trustees of such Qualified

Plans as required by Section 403(a) of

ERISA. Section 403(a) also provides that

the trustee(s) must have exclusive

authority and discretion to manage and

control the Qualified Plan with two

exceptions: (a) When the Qualified Plan

expressly provides that the trustees are

subject to the direction of a named

fiduciary who is not a trustee, in which

the trustee are subject to proper

directions made in accordance with the

terms of the Qualified Plan and not

contrary to ERISA; and (b) when the

authority to manage, acquire or dispose

of asserts of the Qualified Plan is

delegated to one or more investment

managers pursuant to Section 402(c)(3)

of ERISA. Unless one of the above two

exceptions stated in Section 403(a)

applies, Qualified Plan trustees have the

exclusive authority and responsibility

for voting proxies.

11. Where a named fiduciary appoints

and investment manager, the investment

manager has the responsibility to vote

the shares held unless the right to votes

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 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.

12. When a Qualified Plan does not

provide participants with the right to

give voting instructions, Applicants

submit that there is no potential for

material irreconcilable conflicts of

interest between or among variable

contract holders and Qualified Plan

participants 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 Qualified Plans since the

Qualified Plans are not entitled to passthrough voting privileges.

13. Where a Qualified Plans provides

participants with the right to give voting

instructions, Applicants submit there is

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

contract holders. The purchase of shares

of the Funds by Qualified Plans that

provide voting rights does not present

any complications not otherwise

occasioned by mixed or shared funding.

14. Applicants assert that no

increased conflicts of interest would be

presented by the granting of the

requested relief. Shared funding does

not present any issues that do not

already exist where a single insurance

company is licensed to do business in

several states. Where insurers are

domiciled in different states, it is

possible that the particular state

insurance regulatory body in a state in

which one insurance company is

domiciled could require action that is

inconsistent with the requirement of

insurance regulators of other states in

which other insurance companies are

domiciled. Applicants state that the fact

that a single insurer and its affiliates

offer their insurance products in

different states doe not create a

significantly different or enlarged

problem.

15. Applicants submit that shared

funding is not 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 under various

circumstances. 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. For

instance, if a particular state insurance

regulator’s decision conflict with the

majority of other state regulators, the

affected insurer may be required to

withdraw its Separate Account’s

investment in the relevant Funds.

16. Applicants further assert that

affiliation does not eliminate the

potential, of any exist, for divergent

judgments as to the advisability or

legality of a change in investment

policies, principal underwriter, or

investment adviser initiated by

contractowners. The potential for

disagreement is limited by the

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

that an insurance company’s disregard

of voting instructions be reasonable and

based on specific good faith

determinations. However, if the

insurance company’s decision to

disregard contractowners’ voting

instructions represents a minority

position or would preclude a majority

vote, the insurer may be required, at the

election of the relevant Fund, to

withdraw its Separate Account’s

investment in such Funds, and no

charge or penalty would be imposed

upon contractowners as a result of such

withdrawal.

17. Applicants submit that no reason

exists why the investment policies of

the Funds with mixed funding would or

should be materially different from what

they would or should be if the Funds

funded only variable annuity or only

variable life insurance policies.

Applicants represent that the Funds will

be managed to attempt to achieve their

investment objectives, and will not be

managed to favor or disfavor any

particular insurer or type of insurance

product.

18. Applicants do not believe that the

sale of 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

contractowners.

30456 Federal Register / Vol. 65, No. 92 / Thursday, May 11, 2000 / Notices

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

the Code imposes certain diversification

standards on the underlying assets of

variable annuity and variable life

insurance contracts held in the

portfolios of management investment

companies. Treasury Regulation 1.817–

5(f)(3)(iii), which established

diversification requirements for such

portfolios, specifically permits, among

other things, ‘‘qualified pension or

retirement plans‘‘ and separate accounts

to share the same underlying

management investment company.

Therefore, Applicants state that neither

the Code, nor the Treasury Regulations,

nor the Revenue Rulings thereunder

present any inherent conflicts of interest

between or among Qualified Plan

participants and variable

contractowners if Qualified Plans and

variable annuity and variable life

separate accounts all invest in the same

management investment company.

20. Applicants note that while there

are differences in the manner in which

distributions from variable contracts

and Qualified Plans are taxed, the tax

consequences do not raise any conflicts

of interest. 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 the Qualified

Plan will redeem shares of the Funds at

their 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 will make distributions in

accordance with the terms of the

variable contract.

21. With respect to voting rights,

Applicants state that it is possible to

provide an equitable means of giving

voting rights to Separate Account

contractowners and to Qualified Plans.

Applicants represent that the Funds will

inform each Separate Account and

Qualified Plan of their respective share

of ownership in the respective Fund. A

Participating Insurance Company will

then solicit voting instructions

consistent with the ‘‘pass through‘‘

voting requirement. Qualified Plans and

Separate Accounts will each have the

opportunity to exercise voting rights

with respect to their shares in the

Funds, although only the Separate

Accounts are required to pass through

their vote to contractowners. The voting

rights provided to Qualified Plans with

respect to shares of Funds would be no

different from the voting rights that are

provided to Qualified Plans with respect

to shares of funds offered to the general

public.

22. Applicants submit that the ability

of the Funds to sell their respective

shares directly to Qualified Plans does

not create a ‘‘senior security,’’ as such

term is defined under Section 18(g) of

the 1940 Act, with respect to any

variable annuity or variable life

insurance contractowner as opposed to

a Qualified Plan participant. As noted

above, regardless of the rights and

benefits of Qualified Plan participants,

or contractowners under variable

contracts, the Qualified Plan and the

Separate Accounts have rights only with

respect to their respective shares of the

Funds. They can only redeem such

shares at their net asset value. No

shareholder of any Funds has any

preference over any other shareholder

with respect to distribution of assets or

payment of dividends.

23. Applicants submit that there are

no conflicts between the contractowners

of the Separate Accounts and the

Qualified Plan participants with respect

to state insurance commissioners’ veto

powers over investment objectives. 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, timeconsuming complex transactions must

be undertaken to accomplish such

redemptions and transfers. Conversely,

trustees of Qualified Plans or the

participants in participant-directed

Qualified Plans can make the decision

quickly and redeem their shares from

the Funds and reinvest in another

funding vehicle without the same

regulatory impediments or, as is the

case with most Qualified Plans, even

hold cash pending suitable investment.

Therefore, Applicants conclude that

even if there should arise issues where

the interests of contractowners and the

interests of Qualified Plans are in

conflict, the issues can be almost

immediately resolved because the

trustees of (or participants in) the

Qualified Plans can, on their own,

redeem the shares out of the Funds.

24. Applicants also assert that there is

no greater potential for material

irreconcilable conflicts arising between

the interests of Qualified Plan

participants and contractowners of

Separate Accounts from possible future

changes in the federal tax laws than that

which already exists between variable

annuity contractowners and variable life

insurance contractowners.

25. Applicants state that various

factors have limited the number of

insurance companies that offer variable

annuities and variable life insurance

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 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.

Applicants submit that use of the Funds

as common investment vehicles for

variable contracts helps alleviate these

concerns because Participating

Insurance Companies benefit not only

from the investment advisory and

administrative expertise of the Funds’

investment adviser, but also from the

cost efficiencies and investment

flexibility afforded by a large pool of

funds. Therefore, making the Funds

available for mixed and shared funding

may encourage more insurance

companies to offer variable contracts,

and accordingly could 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 assert that mixed

and shared funding also would benefit

contractowners by eliminating a

significant portion of the costs of

establishing and administering separate

funds. Furthermore, Applicants assert

that the sale of shares of the Funds to

Qualified Plans in addition to Separate

Accounts of Participating Insurance

Companies will result in an increased

amount of assets available for

investment by the Funds. This may

benefit contractowners by promoting

economies of scale, by permitting

increased safety of investments through

greater diversification, and by making

the addition of new portfolios more

feasible.

Applicants’ Conditions

Applicants have consented to the

following conditions:

1. A majority of the Board of Trustees

(each, a ‘‘Board’’) of each fund shall

consist of persons who are not

‘‘interested persons’’ thereof, 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 Director,

then the operation of this condition

shall be suspended: (a) for a period of

45 days if the vacancy or vacancies may

be filled by the appropriate Board; (b)

for a period of 60 days if a vote of

Federal Register / Vol. 65, No. 92 / Thursday, May 11, 2000 / Notices 30457

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 Funds for the existence of

any material irreconcilable conflict

among the interests of the contract

holders of all Separate Accounts and of

participants of Qualified Plans investing

in the respective Funds and determine

what action, if any, should be taken in

response to any 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 Funds

are managed; (e) a difference in voting

instructions given by owners of variable

annuity contracts, owners of variable

life insurance contracts and trustees of

the Qualified Plans; (f) a decision by a

Participating Insurance Company to

disregard the voting instructions of

contract holders; or (g) if applicable, a

decision by a Qualified Plan to

disregard the voting instructions of

Qualified Plan participants.

3. The Participating Insurance

Companies, CSAM (or any other

investment manager of a Fund), and any

Plan that executes a fund participation

agreement upon becoming an owner of

10% or more of the assets of the Fund

(the ‘‘Participants’’) shall report any

potential or existing conflicts to the

Board of the relevant Trust. Participants

will be responsible for assisting the

appropriate Board in carrying out its

responsibilities under these conditions

by providing such Board with all

information reasonably necessary for

such Board to consider any issues

raised. This responsibility includes, but

is not limited to, an obligation by each

insurance company Participant to

inform the Board whenever it has

determined to disregard contract

holders’ voting instructions, and, if

pass-through voting is applicable, an

obligation of each Qualified Plan to

inform the Board whenever it has

determined to disregard Qualified Plan

participant voting instructions. The

responsibility to report such conflicts

and information, and to assist the

respective Boards, will be contractual

obligations of all Participants under

their agreements governing participation

in the Funds, and such agreements, in

the case of insurance company

Participants, shall be carried out with a

view only to the interests of contract

holders and, if applicable, Qualified

Plan participants.

4. If it is determined by a majority of

the Board of a Trust, or a majority of its

disinterested members, that a material

irreconcilable conflict exists, the

relevant Participant shall, at their

expense and to the extent reasonably

practicable (as determined by a majority

of the disinterested members of such

Board), take whatever steps are

necessary to eliminate the material

irreconcilable conflict, up to and

including: (a) withdrawing the assets

allocable to some or all of the Separate

Accounts from the Funds and

reinvesting such assets in a different

investment medium, which may include

another portfolio of the relevant Fund,

if any, or, in the case of insurance

company Participants, submitting the

question whether such segregation

should be implemented to a vote of all

affected contract holders and, as

appropriate, segregating the assets of

any appropriate group (i.e., annuity

contract holders, life insurance contract

holders or variable contract holders of

one of more Participant) that votes in

favor of such segregation, or offering to

the affected contract holders the option

of making such a change; (b) in the case

of participating Qualified Plans,

withdrawing the assets allocable to

some or all of the Qualified Plans from

the relevant Fund and reinvesting those

assets in a different investment medium;

and (c) establishing a new registered

management investment company or

managed separate account. If a material

irreconcilable conflict arises because of

an insurance company Participant’s

decision to disregard contract holders’

voting instructions and that decision

represents a minority position or would

preclude a majority vote, such

Participant may be required, at the

relevant Fund’s election, to withdraw its

separate account’s investment in the

Fund, 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 Qualified Plan

participant voting instructions, if

applicable, and that decision represents

a minority position or would preclude

a majority vote, the Qualified Plan may

be required, at the election of the

relevant Fund, to withdraw its

investment in such Fund, and no charge

or penalty imposed as a result of such

withdrawal.

The responsibility to take remedial

action in the event of a determination by

a Board 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

the Funds, and this responsibility will

be carried out with a view only to the

interests of contract holders and

participants in Qualified Plans, as

applicable. For purposes of this

Condition 4, a majority of the

disinterested members of a Board shall

determine whether any proposed action

adequately remedies any material

irreconcilable conflict, but in no event

will the relevant Fund or CSAM (or any

other investment adviser of the Funds)

be required to establish a new funding

medium for any variable contract. No

insurance company Participant will be

required to establish a new funding

medium for any variable contracts if an

offer to do so has been declined by the

vote of a majority of contract holders

materially affected by the irreconcilable

material conflict. Further, no Qualified

Plan shall be required by this Condition

4 to establish a new funding medium for

the Qualified Plan if: (a) a majority of

the Qualified 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 Qualified Plan makes such

decision without a Qualified Plan

participant vote.

5. The determination by a Board of

the existence of a material irreconcilable

conflict and its implications shall be

made known promptly in writing to all

Participants.

6. Insurance company Participants

will provide pass-through voting

privileges to all contract holders to the

extent that the Commission continues to

interpret the 1940 Act to require passthrough voting for contract holders.

Accordingly, such Participants, where

applicable, will vote shares of a Fund

held in its Separate Accounts in a

manner consistent with voting

instructions timely received from

contract holders. Insurance company

Participants shall 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 as provided

in the Application shall be a contractual

obligation of all insurance company

Participants under the agreement

governing participation in a Fund. Each

insurance company Participant 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 instructions. Each Qualified

30458 Federal Register / Vol. 65, No. 92 / Thursday, May 11, 2000 / Notices

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

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 42439

(Feburary 18, 2000), 65 FR 10573.

Plan shall vote as required by applicable

law and its governing Qualified Plan

documents.

7. Each Fund 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

Fund), and, in particular, each Fund

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 Funds are

not one of the trusts described in

Section 16(c) of the 1940 Act), as well

as with Section 16(a), and, if applicable,

Section 16(b) of the 1940 Act. Further,

each Fund will act in accordance with

the Commission’s interpretation of the

requirements of Section 16(a) with

respect to periodic elections of directors

(or trustees) and with whatever rules the

Commission may promulgate with

respect thereto.

8. Each Fund will notify all

Participants that disclosure in Separate

Account or Qualified Plan prospectuses,

or other disclosure documents,

regarding potential risks of mixed and

shared funding may be appropriate.

Each Fund shall disclose in its

prospectus that: (a) shares of the Fund

may be offered to insurance company

separate accounts of both annuity and

life insurance variable contracts, an

Qualified Plans; (b) due to differences of

tax treatment and other considerations,

the interests of various contract holders

participating in the Funds and the

interests of Qualified Plans investing in

the Funds may at some time be in

conflict; and (c) the 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

conflict.

9. The Participants shall at least

annualy submit to each Board such

reports, materials or data as such Boards

may reasonably request so that such

Boards may fully carry out obligations

imposed upon them by the conditions

contained in the Application. Such

reports, materials and data shall be

submitted more frequently if deemed

appropriate by the Boards. The

obligations of the Participants to

provide these reports, materials and

data to the appropriate Board when it so

reasonably requests, shall be a

contractual obligation of all Participants

under the agreement governing their

participation in the Funds.

10. All reports received by a board

with respect to potential or existing

conflicts and all board action with

regard to (a) determination of the

existence of a conflict, (b) notification of

Participants of the existence of a conflict

and (c) determination of whether any

proposed action adequately remedies a

conflict, will be properly recorded in

the minutes of the meetings of the

appropriate Board or other appropriate

records, and such minutes or other

records will be made available to the

Commission upon request.

11. If and to the extent Rule 6–92 or

6–93(T) is amended, or proposed Rule

6–93 is adopted, to provide exemptive

relief from any provision of the 1940

Act or the rules thereunder with respect

to mixed and shared funding on terms

and conditions materially different from

any exemptions granted in the order

requested by Applicants, then the Funds

and/or the Participants, as appropriate,

shall take such steps as may be

necessary to comply with Rule 6–92 or

6–93(T), as amended, or Rule 6–93, as

adopted, to the extent such rules are

applicable.

12. None of the Funds will accept a

purchase order from a Qualified Plan if

such purchase would make the

Qualified Plan shareholder an owner of

10% or more of the assets of a Fund

unless such Qualified Plan executes a

fund participation agreement with such

Fund that includes the conditions set

forth herein to the extent applicable. A

Qualified Plan will execute an

application containing an

acknowledgment of this condition at the

time of its initial purchase of shares of

a Fund.

Conclusion

For the reasons summarized above,

Applicants assert that the requested

exemptions are necessary or appropriate

in the public interest, consistent with

the protection of investors, and

consistent with 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. 00–11864 Filed 5–10–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34– 42750; File No. SR–CBOE–

99–60]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change by

the Chicago Board Options Exchange,

Inc. Relating to the Maintenance

Standards for the Dow Jones High

Yield Select Ten Index

May 2, 2000.

I. Introduction

On November 9, 1999, the Chicago

Board Options Exchange, Inc. (‘‘CBOE’’

or ‘‘Exchange’’) submitted to the

Securities and Exchange Commission

(‘‘Commission’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’) 1 and Rule 19b–4 2

thereunder, a proposed rule change. In

its proposal, the CBOE seeks to clarify

certain procedures regarding the

maintenance of the Dow Jones High

Yield Select 10 Index (‘‘Index’’). The

proposed rule change was published for

comment in the Federal Register on

February 28, 2000.3 The Commission

received no comments on the proposed

rule change and this order approves the

proposal.

II. Description of the Proposal

The CBOE currently lists and trades

European-style, cash-settled options on

the Dow Jones High Yield Select 10

Index, an equal weighted index

composed of the ten highest yielding

stocks from the 30 stocks in the Dow

Jones Industrial Average (‘‘DJIA’’). The

Index was designed to replicate a

popular contrarian strategy that assumes

that the ten highest yielding stocks in

the DJIA are oversold and therefore,

undervalued relative to the other stocks

in the average. The index is

reconstituted annually and the stocks

comprising the index are retained for a

full year.

Normally, the Index represents a

subset of the DJIA. However, Dow Jones

can change the components of the DJIA

at any time, and in some cases remove

stocks that also happen to be

components of the Index. The strategy

upon which the Index is based, and the

convention followed by investors and

money managers, calls for the portfolio

to be held for a full year even if certain

components are no longer part of the

DJIA.

The maintenance procedures set forth

in SR–CBOE–97–63 state that if it