[Federal Register Volume 62, Number 157 (Thursday, August 14, 1997)]
[Notices]
[Pages 43562-43568]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-21567]


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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'').

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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

[[Page 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 Sub-
Adviser 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.

[[Page 43564]]

    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. Sec. 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. Sec. 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 pass-through voting privileges will be provided 
with respect to all Contract owners so long as the Commission 
interprets the 1940 Act to require pass-through 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

[[Page 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 good-faith 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

[[Page 43566]]

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. Time-
consuming, 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 Sub-Advisers, 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

[[Page 43567]]

authority; (b) a change in applicable federal or state insurance, tax, 
or securities laws or regulations, or a public ruling, private letter 
ruling, no-action or 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 pass-through 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

[[Page 43568]]

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