43562 Federal Register / Vol. 62, No. 157 / Thursday, August 14, 1997 / Notices

prescribe, distribute long-term capital

gains more often than once every twelve

months. Rule 19b–1(a) permits a

registered investment company, with

respect to any one taxable year, to make

one capital gains distribution, as

defined in section 852(b)(3)(C) of the

Code. Rule 19b–1(a) also permits a

supplemental distribution to be made

pursuant to section 855 of the Code not

exceeding 10% of the total amount

distributed for the year. Rule 19b–1(f)

permits one additional long-term capital

gains distribution to be made to avoid

the excise tax under section 4982 of the

Code.

2. Applicant asserts that the limitation

on the number of net long-term capital

gains distributions in rule 19b–1 in

effect prohibits applicant from

including available net long-term capital

gains in certain of its quarterly

distributions. As a result, applicant

must fund these quarterly distributions

with returns of capital (to the extent net

investment income and realized shortterm capital gains are insufficient to

cover a quarterly distribution).

Applicant further asserts that, in order

to distribute all of its long-term capital

gains within the limits on the number

of long-term capital gains distributions

in rule 19b–1, applicant may be

required to make certain of its quarterly

distributions in excess of the fixed

percentage called for by its policy.

Alternatively, applicant states that it

may be forced to retain long-term capital

gains and pay the applicable taxes.

3. Applicant asserts that the

application of rule 19b–1 to its

Quarterly Distribution Policy may cause

anomalous results and create pressure to

limit the realization of long-term capital

gains based on considerations unrelated

to investment goals. Applicant requests

relief to permit it to make up to five

distributions of long-term capital gains

in any one taxable year, provided

applicant maintains in effect a

distribution policy calling for quarterly

distributions of a fixed percentage of

applicant’s net asset value. Applicant

represents that a fifth distribution will

be made only if necessary to avoid the

excise tax under Section 4982 of the

Code.

4. Applicant believes that the

concerns underlying section 19(b) and

rule 19b–1 are not present in applicant’s

situation. One of these concerns is that

shareholders might not be able to

distinguish frequent distributions of

capital gains and dividends from

investment income. Applicant states

that the Quarterly Distribution Policy

has been fully and repeatedly described

in applicant’s communications to its

shareholders, including annual reports

and its prospectus. In addition, a

statement showing the amount and

source of distributions received during

the year is included with applicant’s

IRS Form 1099–DIV report sent to each

shareholder who received distributions

during the year (including shareholders

who sold shares during the year).

Applicant believes that its shareholders

fully understand that their distributions

are not tied to applicant’s net

investment income and realized capital

gains and do not represent yield or

investment return.

5. Another concern underlying

section 19(b) and rule 19b–1 is that

frequent capital gains distributions

could facilitate improper sales practices,

including in particular, the practice of

urging an investor to purchase fund

shares on the basis of an upcoming

distribution (‘‘selling the dividend’’),

when the distribution would result in

an immediate corresponding reduction

in net asset value and would be, in

effect, a return of the investor’s capital.

Applicant believes that this concern

does not apply to closed-end investment

companies, such as applicant, which do

not continuously distribute shares.

6. Applicant states that increased

administrative costs also are a concern

underlying section 19(b) and rule 19b–

1. Applicant asserts that it will continue

to make quarterly distributions

regardless of whether capital gains are

included in any particular distribution.

7. Section 6(c) of the Act provides that

the SEC may exempt any person,

security, or transaction, or any class or

classes of persons, securities, or

transactions, from any provisions of the

Act, if and to the extent such exemption

is necessary or appropriate in the public

interest and consistent with the

protection of investors and the purposes

fairly intended by the policy and

provisions of the Act. For the reasons

stated above, applicant believes that the

requested exemption meets the

standards set forth in section 6(c).

Applicant’s Condition

Applicant agrees that the order

granting the requested relief shall

terminate upon the effective date of a

registration statement under the

Securities Act of 1933 for any future

public offering by applicant of its shares

other than: (i) A non-transferable rights

offering to shareholders of applicant,

provided that such offering does not

include solicitation by brokers or the

payment of any commissions or

underwriting fee; and (ii) an offering in

connection with a merger,

consolidation, acquisition, or

reorganization; unless applicant has

received from the staff of the

Commission written assurance that the

order will remain in effect.

For the Commission, by the Division of

Investment Management, pursuant to

delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–21566 Filed 8–13–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. IC–22783; File No. 812–10680]

Mutual Fund Variable Annuity Trust, et

al.

August 7, 1997.

AGENCY: Securities and Exchange

Commission (the ‘‘Commission’’).

ACTION: Notice of application for an

order of exemption under the

Investment Company Act of 1940 (the

‘‘1940 Act’’).

APPLICANTS: Mutual Fund Variable

Annuity Trust (the ‘‘Trust’’), The Chase

Manhattan Bank (the ‘‘Adviser’’) and

certain life insurance companies and

their separate accounts that do now or

may in the future purchase shares of

capital stock (‘‘Shares’’) in the Trust.

RELEVANT 1940 ACT SECTIONS: Order

requested under Section 6(c) of the 1940

Act 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 of exemption to the extent

necessary to permit Shares of the Trust

to be sold to and held by: (i) Variable

annuity and variable life insurance

separate accounts (‘‘Separate

Accounts’’) of both affiliated and

unaffiliated life insurance companies

(‘‘Participating Insurance Companies’’),

and (ii) certain qualified pension and

retirement plans outside of the separate

account context.

FILING DATE: The application was filed

on May 22, 1997.

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. September 2, 1997, and must be

accompanied by proof of service on

Applicants in the form of an affidavit or,

for lawyers, a certificate of service.

Hearing requests should state the nature

of the writer’s interest, the reason for the
Federal Register / Vol. 62, No. 157 / Thursday, August 14, 1997 / Notices 43563

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, D.C. 20549.

Applicants, c/o Simpson Thacher &

Bartlett, 425 Lexington Avenue, New

York, New York 10017, Attention:

Robert M. Kaner, Esq.

FOR FURTHER INFORMATION CONTACT:

Lorna MacLeod, Staff Attorney, or Mark

C. Amorosi, 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 Public

Reference Branch of the Commission.

Applicants’ Representations

1. The Trust is a Massachusetts

business trust organized on April 14,

1994, and is registered under the 1940

Act as an open-end, management

investment company. The Trust

currently consists of, and offers Shares

in, six separate investment portfolios,

each of which has its own investment

objective and policies, and may in the

future issue shares of additional

portfolios and/or multiple classes of

Shares of each portfolio (such existing

and future portfolios and/or classes of

shares of each are referred to

collectively as the ‘‘Portfolios’’).

2. The Trust has retained the Adviser

as an investment adviser of each of the

Portfolios. The Adviser is a bank

chartered under the laws of New York

and is a wholly-owned subsidiary of

The Chase Manhattan Corporation, a

bank holding company. The adviser

serves as the overall investment

manager of and maintains responsibility

for investment decisions of the

Portfolios, subject to the general

direction and supervision of the Board

of Trustees of the Trust (the ‘‘Board of

Trustees’’). The Adviser has entered into

investment subadvisory agreements

with two sub-advisers that make

investment decisions for their respective

Portfolios on a day-to-day basis (the

‘‘Sub-Advisers’’). Chase Asset

Management, Inc. (‘‘CAM’’), a Delaware

corporation and a wholly-owned

subsidiary of the Adviser, is the SubAdviser to each of the Portfolios other

than the International Equity Portfolio.

Chase Asset Management (London)

Limited (‘‘CAM London’’), an indirect

wholly-owned subsidiary of the

Adviser, is the Sub-Adviser to the

International Equity Portfolio. CAM and

CAM London are registered as

investment advisers under the

Investment Advisers Act of 1940.

3. Shares of the Trust are currently

offered only to the Variable Annuity

Account Two, a separate account of

Anchor National Life Insurance

Company (‘‘Anchor National’’), and FS

Variable Annuity Account Two, a

separate account of First SunAmerica

Life Insurance Company (‘‘First

SunAmerica’’). Variable Annuity

Account Two and FS Variable Annuity

Account Two are registered as unit

investment trusts under the 1940 Act.

4. The Trust may determine to offer

Shares of its Portfolios to Separate

Accounts of additional insurance

companies, including insurance

companies that are not affiliated with

Anchor National or First SunAmerica in

order to serve as the investment vehicle

for various types of insurance products,

which may include variable annuity

contracts, single premium variable life

insurance contracts, scheduled

premium variable life insurance

contracts, and flexible premium variable

life insurance contracts (collectively

referred to herein as ‘‘Contracts’’).

Participating Insurance Companies will

establish their own Separate Accounts

and design their own Contracts.

5. The Trust also may offer Shares to

the trustees (or custodians) of certain

qualified pension and retirement plans

(the ‘‘Plans’’). Neither the Advisor nor

the Sub-Adviser will act as an

investment adviser to any of the Plans

which will purchase Shares of the Trust.

6. The Trust’s role with respect to the

Separate Accounts and the Plans will be

limited to that of offering its Shares to

the Separate Accounts and the Plans

and fulfilling any conditions the

Commission may impose upon granting

the order requested in the application.

Applicants’ Legal Analysis

1. In connection with the funding of

scheduled premium variable life

insurance contracts issued through a

separate account registered under the

1940 Act as a unit investment trust,

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 exemptions granted

by Rule 6e–2(b)(15) are available only

where 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 if the scheduled

premium variable life insurance

separate account owns shares of a

management investment company that

also offers its shares to a variable

annuity separate account of the same

insurance company or an affiliated

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.’’

2. In addition, the relief granted by

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

scheduled premium variable life

insurance separate account owns shares

of an underlying management

investment company 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

company as the underlying investment

medium for variable annuity and/or

variable life insurance separate accounts

of one insurance company and separate

accounts funding variable contracts of

one or more unaffiliated life insurance

companies is referred to herein as

‘‘shared funding.’’

3. The relief granted by Rule 6e–

2(b)(15) also is not available if the

scheduled premium variable life

insurance separate account owns shares

of an underlying management company

that also offers its shares to Plans.

4. In connection with flexible

premium variable life insurance

contracts issued through a separate

account registered under the 1940 Act

as a unit investment trust, Rule 6e–

2(T)(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 exemptions granted by Rule 6e–

3(T)(b)(15) are available only where 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 separate accounts of the

life insurer, or of any affiliated life

insurance company, offering either

scheduled premium variable life

insurance contracts or flexible premium

variable life insurance 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)(b)(15) grants the exemptions if the

underlying fund engages in mixed

funding, but not if it engages in shared

funding or sells its shares to Plans.
43564 Federal Register / Vol. 62, No. 157 / Thursday, August 14, 1997 / Notices

5. Applicants state that the current tax

law permits the Trust to increase its

asset base through the sale of Shares to

Plans. Section 817(h) of the Internal

Revenue Code of 1986, as amended (the

‘‘Code’’) imposes certain diversification

requirements on the underlying assets of

the Contracts invested in the Trust. The

Code provides that such Contracts shall

not be treated as an annuity contract or

life insurance contract for any period in

which the underlying assets are not

adequately diversified as prescribed by

Treasury regulations. To meet the

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. Treas. Reg. § 1.817–5. The

regulations do, however, contain certain

exceptions to this requirement, one of

which allows shares in an investment

company to be held by the trustee of a

Plan without adversely affecting the

ability of shares in the same investment

company also to be held by the separate

accounts of insurance companies in

connection with their contracts. Treas.

Reg. § 1–817–5(f)(3)(iii).

6. The promulgation of Rules 6e–2

and 6e–3(T) preceded the issuance of

these Treasury regulations. Applicants

state that given the then-current tax law,

the sale of shares of the same

investment company to both separate

accounts and Plans could not have been

envisioned at the time of the adoption

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

7. Accordingly, Applicants hereby

request an order of the Commission

exempting the variable life insurance

Separate Accounts of Participating

Insurance Companies (and, to the extent

necessary, any principal underwriter

and depositor of such a Separate

Account) and the other Applicants from

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

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

6e–3(T) thereunder (and any permanent

rule comparable to Rule 6e–3(T)), to the

extent necessary to permit Shares of the

Trust to be offered and sold to, and held

by: (i) Both variable annuity Separate

Accounts and variable life insurance

Separate Accounts of the same life

insurance company or of affiliated life

insurance companies (i.e., mixed

funding); (ii) Separate Accounts of

unaffiliated life insurance companies

(including both variable annuity

Separate Accounts and variable life

insurance Separate Accounts) (i.e.,

shared funding); and (iii) trustees of

Plans.

Disqualification

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 any

registered open-end investment

company if an affiliated person of that

company is subject to a disqualification

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

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

6e–3(T)(b)(15) (i) and (ii) provide partial

exemptions from Section 9(a), subject to

the limitations discussed above on

mixed and shared funding. These rules

provide: (i) That the eligibility

restrictions of Section 9(a) shall not

apply to persons who are officers,

directors or employees of the life insurer

or its affiliates who do not participate

directly in the management or

administration of the underlying fund;

and (ii) that an insurer shall be

ineligible to serve as an investment

adviser or principal underwriter of the

underlying fund only if an affiliated

person of the life insurer who is

disqualified by Section 9(a) participates

in the management or administration of

the fund.

9. Applicants state that the partial

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

6e–3(T)(b)(15) from the requirements of

Section 9, 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 when the life

insurer serves as investment adviser to

or principal underwriter for the

underlying fund. Applicants state 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 many individuals in a typical

insurance company complex, most of

whom will have no involvement in

matters pertaining to underlying

investment companies.

10. Applicants submit that there is no

regulatory purpose in denying the

partial exemptions because of mixed

and shared funding and sales to Plans.

Applicants further assert that sales to

those entities do not change the fact that

the purposes of the 1940 Act are not

advanced by applying the prohibitions

of Section 9(a) to persons in a life

insurance complex who have no

involvement in the underlying fund.

Pass-Through Voting

11. Rules 6e–2(b)(15)(iii) and 6e–

3(T)(b)(15)(iii) assume the existence of a

pass-through voting requirement with

respect to management investment

company shares held by a separate

account. Applicants state that passthrough voting privileges will be

provided with respect to all Contract

owners so long as the Commission

interprets the 1940 Act to require passthrough voting privileges for Contract

owners.

12. Rules 6e–2(b)(15)(iii) and 6e–

3(T)(b)(15)(iii) provide exemptions from

the pass-through voting requirement

with respect to several significant

matters, assuming the limitations

discussed above on mixed and shared

funding are observed. Rules 6e–

2(b)(15)(iii)(A) and 6e–3(T)(15)(b)(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 a fund and its

investment adviser, when required to do

so by an insurance regulatory authority

and subject to certain requirements.

Rules 6e–2(b)(15)(iii)(B) and 6e–

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

insurance company may disregard

voting instructions of contract owners if

the contract owners initiate any change

in such insurance company’s

investment policies, principal

underwriter, or any investment adviser

(provided that disregarding such voting

instructions is reasonable and complies

with the other provisions of Rules 6e–

2 and 6e–3(T)).

13. Applicants state that Rule 6e–2

recognizes that a variable life insurance

contract has important elements unique

to insurance contracts, and is subject to

extensive state regulation of insurance.

applicants assert that in adopting Rule

6e–2(b)(15)(iii), the Commission

expressly recognized that state

insurance regulators have authority,

pursuant to state insurance laws or

regulations, to disapprove or require

changes in investment policies,

investment advisers, or principal

underwriters. The Commission also

expressly recognized that state

insurance regulators have authority to

require an insurer to draw from its

general account to cover costs imposed

upon the insurer by a change approved

by contract owners over the insurer’s

objection. The Commission, therefore,

deemed such exemptions necessary to

‘‘assure the solvency of the life insurer

and performance of its contractual

obligations by enabling an insurance

regulatory authority or the life insurer to

act when certain proposals reasonably

could be expected to increase the risks

undertaken by the life insurer.’’

Applicants state that in this respect,

flexible premium variable life insurance

contracts are identical to scheduled

premium variable life insurance

contracts; therefore, Applicants assert

that the corresponding provisions of

Rule 6e–3(T) undoubtedly were adopted

in recognition of the same factors.

14. Applicants further represent that

the offer and sale of Shares of the Trust
Federal Register / Vol. 62, No. 157 / Thursday, August 14, 1997 / Notices 43565

to Plans will not have any impact on the

relief requested in this regard. Shares of

the Trust sold to Plans would be held

by the trustees of the Plans as required

by Section 403(a) of the Employee

Retirement Income Security Act of 1974,

as amended (‘‘ERISA’’), or applicable

provisions of the Code. Section 403(a) of

ERISA also provides that trustee(s) must

have exclusive authority and discretion

to manage and control the Plan

investments with two exceptions: (a)

When the Plan expressly provides that

the trustee(s) is (are) subject to the

direction of a named fiduciary who is

not a trustee, in which case the

trustee(s) is (are) subject to proper

directions made in accordance with the

terms of the Plan and not contrary to

ERISA; and (b) 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 two exceptions stated in Section

403(a) applies, Plan trustees have the

exclusive authority and responsibility

for voting proxies. Where a named

fiduciary 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 to the named

fiduciary. In any event, ERISA permits

but does not require pass-through voting

to the participants in Plans.

Accordingly, 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

plans because they are not entitled to

pass-through voting privileges.

15. Applicants explain that some

Plans, however, may provide

participants with the right to give voting

instructions. Applicants note, however,

that there is no reason to believe that

participants in Plans generally, or those

in a particular Plan, either as a single

group or in combination with other

Plans, would vote in a manner that

would disadvantage Contract owners.

Applicant submit that, therefore, the

purchase of the Shares of the Trust by

Plans that provide voting rights to

participants does not present any

complications not otherwise occasioned

by mixed and shared funding.

Conflicts of Interest

16. Applicants submit that no

increased conflicts of interest would be

presented by the granting of the

requested relief. Applicants assert 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. Applicants note that 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.

17. Applicants submit 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) 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,

the conditions proposed in the

application, which are adapted from the

conditions included in Rule 6e–

3(T)(b)(15), 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 regulatory

decision conflicts with the majority of

other state regulators, then the affected

insurer will be required to withdraw its

Separate Account’s investment in the

Trust.

18. Rules 6e–2(b)(15) and 6e–

3(T)(b)(15) give the insurance company

the right to disregard the voting

instructions of the contract owners

under certain circumstances. Applicants

assert that this right does not raise any

issues different from those raised by the

authority of state insurance

administrators over separate accounts.

Applicants submit 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) that the insurance company’s

disregard of voting instructions be

reasonable and based on specific goodfaith determinations.

19. A particular insurer’s disregard of

voting instructions, nevertheless, could

conflict with the majority of contract

owner voting instructions. The insurer’s

action possibly could be different from

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

Trust’s election, to withdraw its

Separate Account’s investment in the

Trust, with the result that no charge or

penalty would be imposed as a result of

such withdrawal.

20. Applicants submit that investment

by the Plans in any of the Portfolios will

similarly present no conflict. The

likelihood that voting instructions of

insurance company Separate Account

holders will ever be disregarded or the

possible withdrawal referred to

immediately above is extremely remote

and this possibility will be known,

through prospectus disclosure, to any

Plan choosing to invest in the Trust.

Moreover, Applicants state that even if

a material irreconcilable conflict

involving Plans were to arise, the Plans

may simply redeem their shares and

make alternative investments.

21. Applicants also submit that there

is no reason why the investment

policies of the Portfolios would or

should be materially different from what

these policies would or should be if the

Portfolios funded only variable annuity

contracts or variable life insurance

contracts, whether flexible premium or

scheduled premium contracts. Each

type of insurance product is designed as

a long-term investment program.

Similarly, the investment objectives of

Plans—as long-term investments—

coincides with that of the Contracts and

should not increase the potential for

conflicts. Applicants represent that each

Portfolio will be managed to attempt to

achieve the investment objective of the

Portfolio and not to favor or disfavor

any particular Participating Insurance

Company or type of insurance product.

22. Applicants note that no one

investment strategy can be identified as

appropriate to a particular insurance

product or to a Plan. 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.

Applicants submit that permitting

mixed and shared funding will provide

economic support for the continuation

of the Trust. In addition, permitting

mixed and shared funding also will

facilitate the establishment of additional

Portfolios serving diverse goals.

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

the Code imposes certain diversification

standards on the underlying assets of
43566 Federal Register / Vol. 62, No. 157 / Thursday, August 14, 1997 / Notices

variable annuity contracts 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

‘‘qualified pension or retirement plans’’

and insurance company separate

accounts to share the same underlying

investment company. Therefore, neither

the Code, nor the Treasury Regulations,

nor the revenue rulings thereunder,

recognize or proscribe any inherent

conflicts of interests if Plans, variable

annuity separate accounts, and variable

life insurance separate accounts all

invest in the same management

investment company.

24. While there may be differences in

the manner in which distributions are

taxed for variable annuity contracts,

variable life insurance contracts and

Plans, Applicants assert that the tax

consequences do not raise any conflicts

of interest. When distributions are to be

made, and the Separate Account or the

Plan cannot net purchase payments to

make the distributions, the Separate

Account or the Plan will redeem Shares

of the Trust at their net asset value. The

Plan will then make distributions in

accordance with the terms of the Plan

and the Participating Insurance

Company will make distributions in

accordance with the terms of the

Contract.

25. Applicants state that it is possible

to provide an equitable means of giving

voting rights to Contract owners and to

Plans. Applicants represent that the

Portfolios will inform each shareholder,

including each Separate Account and

each Plan, of its respective share of

ownership in the respective Portfolio.

Applicants further represent that, at that

time, each Participating Insurance

Company will then solicit voting

instructions in accordance with the

‘‘pass-through’’ voting requirement.

26. Applicants assert that the ability

of the Portfolios to sell their respective

shares directly to qualified plans does

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

term is defined in Section 18(g) of the

1940 Act, with respect to any Contract

owner as opposed to a participant under

a Plan. As noted above, regardless of the

rights and benefits of participants under

the Plans or Contract owners under the

Contracts, the Plans and the Separate

Accounts have rights only with respect

to their respective Shares of the Trust.

They can only redeem such Shares at

their net asset value. No shareholder of

any of the Portfolios has any preference

over any other shareholder with respect

to distribution of assets or payment of

dividends.

27. Applicants assert that there are no

conflicts between the Contract owners

of the separate accounts and the

participants under the Plans with

respect to state insurance

commissioners’ veto powers over

investment objectives. A basic premise

of shareholder voting is that not all

shareholders may agree with a

particular proposal. The state insurance

commissioners have been given the veto

power in recognition of the fact that

insurance companies cannot simply

redeem their separate accounts out of

one fund and invest in another. Timeconsuming, complex transactions must

be undertaken to accomplish such

redemptions and transfers. Applicants

submit that, on the other hand, trustees

of Plans can make the decision quickly

and implement the redemption of their

Shares from a Portfolio and reinvest in

another funding vehicle without the

same regulatory impediments or, as is

the case with most Plans, even hold

cash pending suitable reinvestment.

Based on the foregoing, Applicants

maintain that even if there should arise

issues where the interests of Contract

owners and the interests of participants

in Plans are in conflict, the issues can

be resolved almost immediately because

the trustees of the Plans can, on their

own, redeem the Shares out of the

Portfolio.

28. Applicants state that various

factors have kept more insurance

companies from offering variable

annuity and variable life insurance

contracts than currently offer such

contracts. According to the Applicants,

these factors include the cost of

organizing and operating a fund

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.

Applicants submit that the use of the

Trust as a common investment medium

for variable Contracts would reduce or

eliminate these concerns. Applicants

argue, in addition, that mixed and

shared funding should provide several

benefits to Contract owners by

eliminating a significant portion of the

costs of establishing and administering

separate funds. Participating Insurance

Companies will benefit not only from

the investment and administrative

expertise of the Adviser and the SubAdvisers, but also from the cost

efficiencies and investment flexibility

afforded by a larger pool of assets.

Mixed and shared funding also would

permit a greater amount of assets

available for investment by the Trust,

thereby promoting economies of scale,

by permitting increased safety through

greater diversification, and by making

the addition of new Portfolios more

feasible. Applicants assert that,

therefore, making the Trust 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 to investors. Applicants

further note that the sale of Shares of the

Trust to Plans also can be expected to

increase the amount of assets available

for investment by the Trust and thus

promote economies of scale and greater

diversification.

29. Applicants assert that there is 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 do

not believe that mixed and shared

funding, and sales to Plans, will have

any adverse federal income tax

consequences.

Applicants’ Conditions

Applicants have consented to the

following conditions if the order

requested in the Application is granted.

1. A majority of the Board of Trustees

shall consist of persons who are not

‘‘interested persons’’ of the 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

shall be suspended: (a) For a period of

45 days if the vacancy or vacancies may

be filled by the remaining Trustees; (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. The Board of Trustees will monitor

the Trust for the existence of any

material irreconcilable conflict between

the interests of the Contract owners of

all Separate Accounts investing in the

Trust and of the Plan participants

investing in the Trust. A material

irreconcilable conflict may arise for a

variety of reasons, including: (a) An

action by any state insurance regulatory
Federal Register / Vol. 62, No. 157 / Thursday, August 14, 1997 / Notices 43567

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 any

Portfolio are being managed; (e) a

difference in voting instructions given

by variable annuity Contract owners,

variable life insurance Contract owners

and trustees of Plans; (f) a decision by

an insurer to disregard the voting

instructions of Contract owners; or (g) if

applicable, a decision by a Plan to

disregard voting instructions of Plan

participants.

3. Participating Insurance Companies,

the Adviser or any other primary

investment adviser of the Portfolios, and

any Plan that executes a fund

participation agreement upon becoming

an owner of 10 percent or more of the

assets of the Trust (collectively, the

‘‘Participants’’) will report any potential

or existing conflicts to the Board of

Trustees. Participants will be

responsible for assisting the Board of

Trustees in carrying out its

responsibilities under these conditions

by providing the Board of Trustees with

all information reasonably necessary for

the Board of Trustees to consider any

issues raised. This responsibility

includes, but is not limited to, an

obligation by each Participating

Insurance Company to inform the Board

of Trustees whenever voting

instructions of Contract owners are

disregarded and, if pass-through voting

is applicable, an obligation by each Plan

to inform the Board of Trustees

whenever it has determined to disregard

Plan participant voting instructions. The

responsibility to report such

information and conflicts and to assist

the Board of Trustees will be contractual

obligations of all Participating Insurance

Companies investing in the Trust under

their respective agreements governing

participation in the Trust, and such

agreements shall provide that 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 of Trustees will

be contractual obligations of all Plans

with participation agreements, and such

agreements shall provide that these

responsibilities will be carried out with

a view only to the interests of the Plan

participants.

4. If it is determined by a majority of

the Board of Trustees, or by a majority

of the disinterested Trustees, that a

material irreconcilable conflict exists,

the relevant Participating Insurance

Companies and Plans will, at their own

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, which steps could include: (a)

Withdrawing the assets allocable to

some or all of the Separate Accounts

from the Trust or any Portfolio and

reinvesting such assets in a different

investment medium, including another

Portfolio of the Trust, or 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., variable

annuity Contract owners or variable 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 that

insurer may be required, at the Trust’s

election, to withdraw the insurer’s

Separate Account investment in the

Trust or relevant Portfolio(s) and no

charge or penalty will be imposed as a

result of such withdrawal. If a material

irreconcilable conflict arises because of

a Plan’s decision to disregard Plan

participant voting instructions, if

applicable, and that decision represents

a minority position or would preclude

a majority vote, the Plan may be

required, at the Trust’s election, to

withdraw its investment in the Trust or

relevant Portfolio(s) 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

determination by the Board of Trustees

of a material irreconcilable conflict and

to bear the cost of such remedial action

will be a contractual obligation of all

Participating Insurance Companies and

Plans under their agreements governing

participating in the Trust, and these

responsibilities will be carried out with

a view only to the interests of Contract

owners and Plan participants.

5. For purposes of Condition 4, a

majority of the disinterested Trustees

will determine whether or not any

proposed action adequately remedies

any material irreconcilable conflict, but

in no event will the Trust or the Adviser

be required to establish a new funding

medium for any Contract. No

Participating Insurance Company shall

be required by Condition 4 to establish

a new funding medium for any Contract

if any offer to do so has been declined

by vote of a majority of the Contract

owners materially and adversely

affected by the material irreconcilable

conflict. Further, no Plan shall be

required by Condition 4 to establish a

new funding medium for such Plan if (a)

a majority of Plan participants

materially and adversely affected by the

irreconcilable material conflict vote to

decline such offer, or (b) pursuant to

governing Plan documents and

applicable law, the Plan makes such

decision without Plan participant vote.

6. The determination of the Board of

Trustees of the existence of a material

irreconcilable conflict and its

implications will be made known in

writing promptly to all Participants.

7. Participating Insurance Companies

will provide pass-through voting

privileges to all Contract owners so long

as the Commission continues to

interpret the 1940 Act as requiring passthrough voting privileges for Contract

owners. Accordingly, Participating

Insurance Companies will vote Shares

of the Trust held in their Separate

Accounts in a manner consistent with

voting instructions timely-received from

Contract owners. Each Participating

Insurance Company will also vote

shares of the Trust held in its Separate

Accounts for which no voting

instructions from Contract owners are

timely-received, as well as Shares of the

Trust which the Participating Insurance

Company itself owns, in the same

proportion as those Shares of the Trust

for which voting instructions from

Contract owners are timely-received.

Participating Insurance Companies will

be responsible for assuring that each of

their Separate Accounts participating in

the Trust calculates voting privileges in

a manner consistent with other

Participating Insurance Companies. The

obligation to calculate voting privileges

in a manner consistent with all other

Separate Accounts investing in the

Trust will be a contractual obligation of

all Participating Insurance Companies

under their agreements governing their

participation in the Trust. Each Plan

will vote as required by applicable law

and governing Plan documents.

8. All reports of potential or existing

conflicts received by the Board of

Trustees, and all action by the Board of

Trustees with regard to determining the

existence of a conflict, notifying

Participants of a conflict, and
43568 Federal Register / Vol. 62, No. 157 / Thursday, August 14, 1997 / Notices

1The NASD filed Amendment Nos. 1 and 2 with

the Commission on May 13, 1997, and May 22,

1997, respectively, the substance of which was

incorporated into the notice. See letters from Elliott

R. Curzon, Assistant General Counsel, NASDR, to

Katherine A. England, Assistant Director, Market

Regulation, Commission, dated May 8, 1997

(‘‘Amendment No. 1’’) and May 20, 1997

(‘‘Amendment No. 2).

2 15 U.S.C. 78s(b)(1).

3 17 CFR 240.19b–4.

4Amendment No. 3 amends Rule 10330 to state

that the Director will serve a copy of the award by

using any method available and convenient to the

parties and the Director, and that is reasonably

expected to cause the award to be delivered to all

parties, or their counsel, on the same day. Methods

available include, but are not limited to, registered

or certified mail, hand delivery, and facsimile or

other electronic means. Amendment No. 3 also

amends the purpose section of the proposed rule

change to state that it is important to permit service

by means other than registered mail or personal

service, because the Office is frequently asked to

provide arbitration awards by facsimile, and could

be asked to provide service by other alternative

means. In addition, Amendment No. 3 states that

it is important that all parties be served with

arbitration awards at approximately the same time

so that there is no confusion about when the time

to seek review of an award begins to run, and

parties all have approximately the same amount of

time to prepare for and seek review of an award.

Also, Amendment No. 3 states that parties should

not be required to accept service of awards through

means that are inconvenient or unavailable to them,

nor should the Office be required to serve an award

in a manner that is not readily available. See letter

from Elliott R. Curzon, Assistant General Counsel,

NASD Regulation, to Katherine A. England,

Assistant Director, Market Regulation, Commission,

dated July 14, 1997 (‘‘Amendment No. 3’’).

5Amendment No. 4 states that NASDR’s Office of

Dispute Resolution intends to modify its case

tracking system to add a status code that will show

when a claim, defense, or proceeding has been

dismissed with prejudice and whether the dismissal

was a sanction for failing to comply with an order.

In order to allow for sufficient time to implement

this change to the system, NASDR will make the

proposed rule changes in this rule filing effective

within forty-five days following Commission

approval. See letter from Elliott Curzon, Assistant

General Counsel, to Katherine A. England, Assistant

Director, Market Regulation, Commission, dated

July 23, 1997 (‘‘Amendment No. 4’’).

determining whether any proposed

action adequately remedies a conflict,

will be properly recorded in the minutes

of the meetings of the Board of Trustees

or other appropriate records, and such

minutes or other records shall be made

available to the Commission upon

request.

9. The Trust will notify all

Participating Insurance Companies that

separate account disclosure in their

respective Separate Account

prospectuses may be appropriate to

advise accounts regarding the potential

risks of mixed and shared funding. The

Trust shall disclose in its prospectus

that: (a) The Trust is intended to be a

funding vehicle for variable annuity and

variable life insurance contracts offered

by various insurance companies and for

Plans; (b) due to differences of tax

treatment and other considerations, the

interests of various Contract owners

participating in the Trust and the

interests of Plans investing in the Trust

may conflict; and (c) the Board of

Trustees 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.

10. The Trust will comply with all

provisions of the 1940 Act that require

voting by shareholders (which, for these

purposes, will be the persons having a

voting interest in the Shares of the

Trust), and, in particular, the Trust will

either provide for annual shareholder

meetings (except insofar as 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 Trust is

not one of the trusts 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, the 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 rules the

Commission may promulgate with

respect thereto.

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

2 or 6e–3(T) under the 1940 Act is

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

Trust and/or Participating Insurance

Companies, as appropriate, shall take

such steps as may be necessary to

comply with such Rules 6e–2 and 6e–

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

3 as adopted, to the extent that such

Rules are applicable.

12. The Participants, at least annually,

will submit to the Board of Trustees

such reports, materials, or data as the

Board of Trustees may reasonably

request so that the Board of Trustees

may fully carry out the obligations

imposed upon it by the conditions

contained in the application. Such

reports, materials, and data will be

submitted more frequently if deemed

appropriate by the Board of Trustees.

The obligations of the Participants to

provide these reports, materials, and

data to the Board of Trustees, when the

Board of Trustees so reasonably

requests, shall be a contractual

obligation of all Participants under their

agreements governing participation in

the Trust.

13. If a Plan should ever become a

holder of ten percent or more of the

assets of the Trust, such Plan will

execute a participation agreement with

the Trust. A Plan will execute an

application containing an

acknowledgment of this condition upon

such Plan’s initial purchase of the

Shares of the Trust.

Conclusion

For the reasons set forth above,

Applicants assert that the requested

exemptions are appropriate in the

public interest and consistent with the

protection of investors and purposes

fairly intended by the policy and

provisions of the Act.

For the Commission, by the Division of

Investment Management, pursuant to

delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–21567 Filed 8–13–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38907; File No. SR–NASD–

97–34]

Order of Granting Approval; Notice of

Filing and Order Granting Accelerated

Approval

August 6, 1997.

Self-Regulatory Organizations; National

Association of Securities Dealers, Inc.; Order

Granting Approval to Proposed Rule Change

and Notice of Filing and Order Granting

Accelerated Approval of Amendment Nos. 3

and 4 to Proposed Rule Change Relating to

Miscellaneous Amendments to Arbitration

Procedures and Clarifications of the Code of

Arbitration Procedure.

I. Introduction

On May 5, 1997,1 the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’) submitted

to the Securities and Exchange

Commission (‘‘Commission’’), pursuant

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

Exchange Act of 1934 (‘‘Act’’) 2 and Rule

19b–4 thereunder,3 a proposed rule

change to amend and clarify its

arbitration procedures.

Notice of the proposed rule change,

together with the substance of the

proposal, was published for comment in

Securities Exchange Act Release No.

38692 (May 29, 1997), 62 FR 30920

(June 5, 1997). No comments were

received on the proposal. The NASD

subsequently filed Amendment Nos. 3

and 4 on July 15, 1997 4 and July 25,

1997, respectively.5