[Federal Register Volume 62, Number 184 (Tuesday, September 23, 1997)]
[Notices]
[Pages 49711-49717]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-25133]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22823; File No. 812-10692]


Variable Annuity Portfolios, et al.; Notice of Application

September 17, 1997.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the 
``Commission'').

ACTION: Notice of Application for an order under Section 6(c) of the 
Investment Company Act of 1940 (the ``1940 Act'') granting relief 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.

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SUMMARY OF APPLICATION: Applicants seek exemptive relief to the extent 
necessary to permit shares of the Variable Annuity Portfolio (the 
``Trust'') to be sold to and held by: (1) separate accounts (``Separate 
Accounts'') funding variable annuity and variable life insurance 
contracts issued by both affiliated and unaffiliated life insurance 
companies (``Participating Insurance Companies''); (2) qualified 
pension and retirement plans; and (3) subadvisers to certain series of 
the Trust.

APPLICANTS: Variable Annuity Portfolios and Citibank, N.A. 
(``Citibank'').

FILING DATE: The application was filed on June 5, 1997, and an 
amendment was filed on September 5, 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 on this application by writing to the 
Secretary of the Secretary of the SEC and serving Applicants with a 
copy of the request, in person or by mail.

[[Page 49712]]

Hearing requests must be received by the Commission by 5:30 on October 
14, 1997, and accompanied by proof or service on the Applicants in the 
form of an affidavit or, for lawyers, a certificate of service. 
Hearings requests should state the nature of the requester's interest, 
the reason for the request and the issues contested. Persons who wish 
to be notified of a hearing may request notification by writing to the 
Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, Lea Anne Copenhefer, Esq., Bingham, Dana & Gould, 
LLP, 150 Federal Street, Boston, Massachusetts, 02110.

FOR FURTHER INFORMATION CONTACT: Megan L. Dunphy, Attorney, or Mark 
Amorosi, Branch Chief, Office of Insurance Products, Division of 
Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: Following is a summary of the application. 
The complete application is available for a fee from the Public 
Reference Branch of the SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549 (tel. (202) 942-8090).

Applicant's Representations

    1. Trust is organized as a Massachusetts business trust and is 
registered under the 1940 Act as an open-end, management investment 
company. The Trust currently offers shares in five separate investment 
portfolios and may in the future offer shares in additional portfolios 
(collectively, the ``Portfolios'').
    2. Citibank serves as investment adviser to each Portfolio. 
Responsibility for the day to day investment management of certain 
securities has been delegated to other investment advisers (the 
``Subadvisers'').
    3. Shares of the Portfolios will initially be offered only to 
Citicorp Life Variable Annuity Separate Account and First Citicorp Life 
Variable Annuity Separate Account, separate accounts of Citicorp Life 
Insurance Company and First Citicorp Life Insurance Company (the 
``Citicorp Insurance Companies''). The Citicorp Insurance Companies are 
indirect subsidiaries of Citicorp, a bank holding company organized 
under the laws of Delaware. The Trust intends to offer shares of the 
Portfolios to separate accounts of other insurance companies, including 
insurance companies that are not affiliated with the Citicorp Insurance 
Companies, to serve as investment vehicles for various types of 
insurance products (``variable contracts'').
    4. Each Portfolio may offer its shares to qualified pension or 
retirement plans (``Plans'') described in Treasury Regulation 
Sec. 1.817-6(f)(3)(iii).
    5. Each Portfolio may offer its shares to any Subadviser, or its 
affiliates, either directly or through a qualified pension or 
retirement plan. Any shares in a Portfolio purchased by a Subadviser 
will be automatically redeemed if and when the Subadviser's subadvisory 
agreement with that Portfolio terminates.
    6. Citibank may act as an investment adviser to one or more of the 
Plans which purchases shares of the Portfolios. A Subadviser may act as 
an investment adviser to one or more Plans which may invest in the 
Portfolios.

Applicant's Legal Analysis

    1. Applicants request that the Commission issues an order under 
Section 6(c) of the 1940 Act granting exemptions from Sections 9(a), 
13(a), 15(a) and 15(b) thereof, and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) thereunder, to the extent necessary to permit shares of the 
Portfolios or of any Other Portfolios to be offered and sold to, and 
held by: (1) both variable annuity separate accounts and variable life 
insurance separate accounts of the same life insurance company or of 
affiliated life insurance companies (``mixed funding''); (2) separate 
accounts of unaffiliated life insurance companies (including both 
variable annuity separate accounts and variable life insurance separate 
accounts) (``shared funding''); (3) trustees of Plans; and (4) 
Subadvisers to the Portfolios.
    2. Section (6)(c) authorizes the Commission to grant exemptions 
from the provisions of the 1940 Act, and rules thereunder, if and to 
the extent that an 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 1940 Act.
    3. 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 (the ``Trust Account''), 
Rule 6e-2(b)(15) provides 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 the management investment company underlying 
the Trust Account (``underlying fund'') offers its shares ``exclusively 
to variable life insurance separate accounts of the life insurer, or of 
any affiliated life insurance company'' (emphasis added). 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 an underlying fund that also offers its shares to a variable annuity 
or a flexible premium variable life insurance separate account of the 
same insurance company or an affiliated or unaffiliated life insurance 
company. Also, 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 fund that also offers its shares to Plans or to 
the Portfolios' Subadvisers.
    4. In connection with the funding of flexible premium variable life 
insurance contracts issued through a Trust Account, Rule 6e-3(T)(b)(15) 
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 the Trust Account's underlying fund offers its 
shares ``exclusively to separate accounts of the life insurer, or of 
any affiliated life insurance company, offering either scheduled or 
flexible contracts, or both; or which offer their shares to variable 
annuity separate accounts of the life insurer or of an affiliated life 
insurance company'' (emphasis added). Thus, Rule 6e-3(T) grants an 
exemption if the underlying fund engages in mixed funding, but not if 
it engages in shared funding or sells its shares to Plans or to the 
Portfolios' Subadvisers.
    5. Applicants state that the current tax law permits the Portfolios 
or any Other Portfolios 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 standards on 
the underlying assets of variable contracts held in the Portfolios. The 
Code provides that such variable 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 the 
Treasury regulations. To meet the diversification requirements, all of 
the beneficial interests in an underlying fund must be held by the 
segregated asset accounts of one or more insurance companies. Treas. 
Reg. Sec. 1.817-5. The regulations do contain certain exceptions to 
this requirement, however, one of which allows shares in an investment 
company to be held by the trustee of a qualified pension or retirement 
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

[[Page 49713]]

with their variable 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. Section 9(a)(3) of the 1940 Act provides that it is unlawful for 
any company to serve as investment adviser to or principal underwriter 
for any registered open-end investment company if an affiliated person 
of that company is subject to a disqualification enumerated in Section 
9(a)(1) or (2). Rules 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 exemptions limit the application of the eligibility restrictions 
to affiliated individuals or companies that directly participate in the 
management of the underlying management company.
    8. Applicants assert 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. 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 the many individuals in an insurance company complex, 
most of whom will have no involvement in matters pertaining to 
investment companies in that organization. Applicants also assert that 
it is unnecessary to apply the restrictions of Section 9(a) to 
individuals in various unaffiliated insurance companies (or affiliated 
companies of Participating Insurance Companies) that may utilize a 
Portfolio as the funding medium for variable contracts.
    9. Applicants maintain that there is no regulatory purpose in 
extending the Section 9(a) monitoring requirements because of mixed and 
shared funding and sales to Plans. The Participating Insurance 
Companies and participating Plans are not expected to play any role in 
the management or administration of the Portfolios. Those individuals 
who participate in the management or administration of the Portfolios 
will remain the same regardless of which separate accounts, insurance 
companies or Plans use the Portfolios. The increased monitoring costs 
would reduce the net rates of return realized by contract owners and 
Plan participants. In addition, since the Plans are not investment 
companies and will not be deemed affiliates by virtue of their 
shareholdings, no additional relief is required with respect to Plans.
    10. Applicants further state that no regulatory purpose is served 
by extending the Section 9(a) monitoring requirements in the context of 
the Portfolios selling shares to the Subadvisers. Rules 6e-2 and 6e-
3(T) provide relief from the eligibility restrictions of Section 9(a) 
only for officers, directors or employees of Participating Insurance 
Companies or their affiliates. Applicants state that it is not 
anticipated that any of the Subadvisers will be the Participating 
Insurance Companies or their affiliates, and if they were, the 
eligibility restrictions would apply to those who participate directly 
in the management or administration of the Portfolios. Applicants also 
maintain that the monitoring requirements should not extend to all 
officers, directors and employees of the Participating Insurance 
Companies and their affiliates simply because the Portfolios sell 
certain shares to the Shareadvisers. This monitoring would not benefit 
contract owners and Plan participants and would only increase costs, 
thereby reducing net rates of return.
    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. Rules 
6e-2(b)(15)(iii)(A) and 6e-3(T)(b)(15)(iii)(A)(1) provide that an 
insurance company may disregard the voting instructions of its contract 
owners in connection with the voting of shares of an underlying fund if 
such instructions would require such shares to be voted to cause such 
companies to make (or refrain from making) certain investments which 
would result in changes in the subclassification or investment 
objectives of such companies or to approve or disapprove any contract 
between a Portfolio and its investment adviser, when required to do so 
by an insurance regulatory authority, subject to certain requirements. 
Rules 6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2) provide that an 
insurance company may disregard the voting instructions of its contract 
owners if the contract owners initiate any change in the 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).
    12. Rule 6e-2 recognizes that a variable life insurance contract 
has important elements unique to insurance contracts; and is subject to 
extensive state regulation. 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 change 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, the corresponding 
provisions of Rule 6e-3(T) were adopted in recognition of the same 
factors.
    13. Applicants further represent that the offer and sale of the 
Portfolio's shares to Plans will not have any impact on the relief 
requested in this regard. Shares of the Portfolios 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 (``ERISA''). 
Section 403(a) also provides that the trustee(s) must have exclusive 
authority and discretion to manage and control the Plan 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

[[Page 49714]]

such shares is reserved to the trustees or to the named fiduciary. In 
any event, ERISA does not require pass-through voting to the 
participants in Plans. Accordingly, Applicants note that, unlike the 
case with insurance company separate accounts, the issue of the 
resolution of material irreconcilable conflicts with respect to voting 
is not present with Plans because they are not entitled to pass-through 
voting privileges.
    14. Some Plans, however, may provide participants with the right to 
give voting instructions. However, Applicants note 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. 
Therefore, Applicants submit that the purchase of Portfolio shares by 
Plans that provide voting rights to their participants does not present 
any complications not otherwise occasioned by mixed and shared funding.
    15. Applicants state that the prohibitions on mixed and shared 
funding may reflect some concern with possible divergent interests 
among different classes of investors. Applicants submit that shared 
funding does not present any issues that do not already exist where a 
single insurance company is licensed to do business in several states. 
In this regard, Applicants not 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. Accordingly, Applicants submit that the fact that different 
insurers may be domiciled in different states does not create a 
significantly different or enlarged problem.
    16. 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 discussed below are designed 
to safeguard against, and provide procedures for resolving, any adverse 
effects that differences among state regulatory requirements may 
produce.
    17. Rule 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. 
This right does not raise any issues different from those raised by the 
authority of state insurance administrators over separate accounts. 
Affiliation does not eliminate the potential for divergent judgments as 
to the advisability or legality of a change in investment policies, 
principle 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 instruction be reasonable and based on specific good-faith 
determinations.
    18. A particular insurer's disregard of voting instructions 
nevertheless could conflict with the majority of contract owner voting 
instructions. If the insurer's judgment represents a minority position 
or would preclude a majority vote, then the insurer may be required, at 
the election of the Portfolio, to withdraw its separate account's 
investment in such Portfolio, and no charge or penalty will be imposed 
as a result of such withdrawal.
    19. Applicants submit that investment by the Plans in any of the 
Portfolios will present no conflict. Applicants assert that the 
likelihood that voting instructions of insurance company separate 
account holders will 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 Portfolios. Moreover, Applicants state that even if a material 
irreconcilable conflict involving Plans arises, the Plans may simply 
redeem their shares and make alternative investments.
    20. Applicants submit that investments by the Subadvisers will 
similarly present no conflict. Applicants state that each Subadviser 
will agree to vote its shares of a Portfolio in the same proportion as 
all contract owners having voting rights with respect to that Portfolio 
or in such other manner as may be required by the Commission or its 
staff.
    21. Applicants state that there is no reason why the investment 
policies of any Portfolio would or should be materially different from 
what those policies would or should be if any such Portfolio funded 
only variable annuity contracts or variable life insurance products, 
whether flexible premium or scheduled premium contracts. In this 
regard, Applicants note that each type of variable contract is designed 
as a long-term investment program, and that Plans also have long-term 
investment goals. Moreover, Applicants submit that the Portfolios will 
be managed to attempt to achieve their investment objectives, and not 
to favor or disfavor any particular Participating Insurance Company or 
type of insurance product.
    22. Applicants further note that Section 817(h) imposes certain 
diversification standards on the underlying assets of 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, Applicants have concluded 
that neither the Code, nor the Treasury Regulations, nor the revenue 
rulings thereunder present any inherent conflicts of interest if Plans, 
variable annuity separate account and variable life insurance separate 
accounts all invest in the same management investment company.
    23. Applicants note that while there are differences in the manner 
in which distributions are taxed for variable annuity contracts, 
variable life insurance contracts and Plans, these tax consequences do 
not raise any conflicts of interest. When distributions are to be made, 
and the Separate Account or the Plan is unable to net purchase payments 
to make the distributions, the Separate Account or the Plan will redeem 
shares of the Portfolios at their respective net asset value. The Plans 
will then make distributions in accordance with the terms of the Plan, 
and a Participating Insurance Company will make distributions in 
accordance with the terms of the variable contract.
    24. 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 variable contract and each Plan, of its respective share 
of ownership in the respective Portfolio. Each Participating Insurance 
Company will then solicit voting instructions in accordance with the 
``pass-through'' voting requirement.
    25. Applicants submit that the ability of the Portfolios to sell 
their respective shares directly to Plans does not create a ``senior 
security,'' as that term is defined under Section 18(g) of the 1940 
Act, with respect to any contract owner as opposed to a participant 
under a Plan. Regardless of the rights and benefits of participants and 
contract owners under the respective Plans and

[[Page 49715]]

contracts, the Plans and the Separate Accounts have rights only with 
respect to their share of the Portfolios. Such shares may be redeemed 
only at 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.
    26. Finally, Applicants state that there are no conflicts between 
contract owners and participants under the Plans with respect to the 
state insurance commissioners' powers over investment objectives. The 
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 shares of one underlying fund 
held by their Separate Accounts and invest the proceeds in another 
underlying fund. Complex and time-consuming transactions must be 
undertaken to accomplish such redemptions and transfers. Conversely, 
trustees of Plans may redeem shares of an investment vehicle, and 
reinvest the proceeds in another investment vehicle without the same 
regulatory impediments; most Plans may even hold cash pending suitable 
investment. Based on the foregoing, Applicants represent that should 
issues arise where the interests of contract owners and the interest of 
Plans conflict, the issues can be resolved almost immediately because 
trustees of the Plans can redeem shares out of the Portfolios 
independently.
    27. Applicants submit that mixed and shared funding should provide 
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 Portfolios' investment adviser, but 
also from the cost efficiencies and investment flexibility afforded by 
a large pool of funds. Mixed and shared funding also would permit a 
greater amount of assets available for investment by the Portfolios 
thereby promoting economies of scale, by permitting increased safety 
through greater diversification or by making the addition of Portfolios 
more feasible. Therefore, making the Portfolio available for mixed and 
shared funding may 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.
    28. 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 qualified Plans and 
Subadvisers, will have any adverse federal income tax consequences.

Applicants' Conditions

    Applicants have consented to the following conditions:
    1. A majority of the Board of Trustees of the Trust (the ``Board'') 
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 
Board; (b) for a period of 60 days, if a vote of shareholders is 
required to fill the vacancy or vacancies; or (c) for such longer 
period as the Commission may prescribe by order upon application.
    2. The Board will monitor the Trust for the existence of any 
material irreconcilable conflict among the interests of the contract 
owners of all Separate Accounts and of the Plan participants investing 
in any Portfolio. A material irreconcilable conflict may arise for a 
variety of reasons, including: (a) an action by any state insurance 
regulatory authority; (b) a change in applicable federal or state 
insurance, tax, pension or securities laws or regulations, or a public 
ruling, private letter ruling, no-action or interpretative letter, or 
any similar action by insurance, tax, pension, 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 and variable life contract owners and 
trustees of Plans; (f) a decision by a Participating Insurance Company 
to disregard the voting instructions of contract owners; or (g) if 
applicable, a decision by a Plan to disregard voting instructions of 
Plan participants.
    3. The Participating Insurance Companies, the investment adviser 
and any other investment adviser to the Trust, and any Plan that 
executes a fund participation agreement upon becoming an owner of 10% 
or more of the assets of the Trust (the ``Participants'') will report 
any potential or existing conflicts to the Board. Participants will be 
obligated to assist the Board in carrying out its responsibilities by 
providing the Board with all information reasonably necessary for the 
Board to consider any issues raised. This responsibility includes, but 
is not limited to, an obligation by each Participating Insurance 
Company to inform the Board whenever contract owner voting instructions 
are disregarded and, if pass-through voting is applicable, an 
obligation by Citibank and each Plan to inform the Board whenever it is 
determined to disregard Plan participant voting instructions. These 
responsibilities will be contractual obligations of all Participating 
Insurance Companies and Plans investing in a Portfolio under their 
agreements governing participation therein. Responsibilities will be 
carried out with a view only to the interest of contract owners and 
Plan participants.
    4. If a majority of the Board, or a majority of the disinterested 
members of the Board, determine that a material irreconcilable conflict 
exists, the relevant Participating Insurance Companies and Plans shall, 
at their expense and to the extent reasonably practicable (as 
determined by a majority of the disinterested members of the Board), 
take whatever steps are necessary to remedy or eliminate the material 
irreconcilable conflict, up to and including: (a) withdrawing the 
assets allocable to some or all of the Separate Accounts from a 
Portfolio and reinvesting such assets in a different investment medium 
(including another Portfolio, if any) or submitting the question 
whether such segregation should be implemented to a vote of all 
affected contract owners and, as appropriate, segregating the assets of 
any appropriate group (i.e., annuity contract owners, life insurance 
contract owners, or variable contract owners of one or more 
Participating Insurance Companies) that votes in favor of such 
segregation, or offering to the affected variable 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 Participating 
Insurance Company's decision to disregard contract owner voting 
instructions, and the decision represents a minority position or would

[[Page 49716]]

preclude a majority vote, the Participating Insurance Company may be 
required, at the election of the Portfolio, to withdraw its Separate 
Account's investment therein, and no charge or penalty will be imposed 
as a result of such withdrawal. If a material irreconcilable conflict 
arises because of a Plan's decision to disregard Plan participant 
voting instructions, if applicable, and that decision represents a 
minority position or would preclude a majority vote, the Plan may be 
required, at the election of the Portfolio, to withdraw its investment 
therein and no charge or penalty will be imposed as a result of such 
withdrawal. The responsibility to take remedial action in the event of 
a Board determination of a material irreconcilable conflict and to bear 
the cost of such remedial action shall be a contractual obligation of 
all Participating Insurance Companies and Plans under their agreements 
governing their participation in a Portfolio. Responsibilities will be 
carried out with a view only to the interests of contract owners and 
Plan participants.
    For purposes of condition 4, a majority of the disinterested 
members of the Board shall determine whether or not any proposed action 
adequately remedies any irreconcilable material conflict, but in no 
event will the Trust or the investment adviser be required to establish 
a new funding medium for any variable contract. No Participating 
Insurance Company shall be required by condition 4 to establish a new 
funding medium for any variable contract if an offer to do so has been 
declined by a vote of a majority of the contract owners materially 
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 material irreconcilable conflict vote to 
decline such offer, or (b) pursuant to governing Plan documents and 
applicable law, the Plan makes such decision without a vote by Plan 
participants.
    5. The determination by the Board of the existence of an 
irreconcilable material conflict and its implications shall be made 
known promptly in writing to all Participants.
    6. 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 variable contract owners. Accordingly, the Participating 
Insurance Companies will vote shares of each Portfolio held in their 
Separate Accounts in a manner consistent with timely voting 
instructions received from contract owners. Each Participating 
Insurance Company also will vote shares of each Portfolio held in its 
Separate Accounts for which no timely voting instructions from contract 
owners are received, as well as shares it owns, in the same proportion 
as those shares for which voting instructions are received. 
Participating Insurance Companies shall be responsible for assuring 
that each of their Separate Accounts participating in a Portfolio 
calculates voting privileges in a manner consistent with other 
Participating Insurance Companies. Each Plan will vote as required by 
applicable law and governing Plan documents. 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.
    7. As long as the Commission continues to interpret the 1940 Act as 
requiring pass-through voting privileges for contract owners, each 
Subadviser will vote its shares of any Portfolio in the same proportion 
as all contract owners having voting rights with respect to that 
Portfolio; provided, however, that the Subadviser shall vote its shares 
in such other manner as may be required by the Commission or its staff.
    8. Each Portfolio will notify all Participating Insurance Companies 
that separate account prospectus disclosure regarding potential risks 
of mixed and shared funding may be appropriate. Each Portfolio shall 
disclose in its prospectus that: (a) its shares may be offered to 
Separate Accounts that fund both annuity and life insurance contracts 
of affiliated and unaffiliated Participating Insurance Companies and 
variable life insurance contracts offered by various insurance 
companies and for qualified pension and retirement plans; (b) due to 
differences of tax treatment or other considerations, the interests of 
various contract owners participating in the Portfolios and the 
interests of Plans in the Portfolios might at some time be in conflict; 
and (c) the Board will monitor the Trust for any material conflicts and 
determine what action, if any, should be taken.
    9. All reports received by the Board regarding potential or 
existing conflicts, and all Board action with respect to determining 
the existence of a conflict, notifying Participants of a conflict, and 
determining whether any proposed action adequately remedies a conflict, 
will be properly recorded in the minutes of the Board or other 
appropriate records, and such minutes or other records shall be made 
available to the Commission upon request.
    10. If and to the extent that Rules 6e-2 and 6e-3(T) are amended, 
or Rule 6e-3 is adopted, to provide exemptive relief from any provision 
of the 1940 Act or the rules thereunder with respect to mixed and 
shared funding on terms and conditions materially different from any 
exemptions granted in the order requested, then each Portfolio, and/or 
the Participating Insurance Companies, as appropriate, shall take such 
steps as may be necessary to comply with Rule 6e-2 and 6e-3(T), as 
amended, and Rule 6e-3, as adopted, to the extent such rules are 
applicable.
    11. The Trust will comply with all provisions of the 1940 Act 
requiring voting by shareholders (which, for these purposes, shall be 
the persons having a voting interest in the shares of the Trust) and, 
in particular, the Trust will either provide for annual meetings 
(except insofar as the Commission may interpret Section 16 not to 
require such meetings) or comply with Section 16(c) of the 1940 Act 
(although, as noted above, the Trust is a Massachusetts business trust 
which was organized in 1996 under a Declaration of Trust which provides 
for the election of Trustees by shareholders except in certain 
circumstances, and as such is not one of the trusts described in 
Section 16(c)) as well as with Section 16(a) and, if and when 
applicable, Section 16(b). 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 directors (or trustees) and 
with whatever rules the Commission may promulgate with respect thereto.
    12. The Participants, and where appropriate the investment adviser 
and any other investment adviser to the Trust, at least annually, shall 
submit to the Board such reports, materials, or data as the Board 
reasonably may request so that it may fully carry out the obligations 
imposed upon it by the conditions contained in the application and said 
reports, materials and data shall be submitted more frequently if 
deemed appropriate by the Board. The obligations of the Participants to 
provide these reports, materials, and data to the Board, when it so 
reasonably requests, shall be a contractual obligation of all 
Participants under their agreements governing their participating in 
each Portfolio.
    13. If a Plan should ever become a holder of 10% or more of the 
assets of a Portfolio, such Plan will execute a participation agreement 
with the Trust. A Plan will execute an application

[[Page 49717]]

containing an acknowledgment of this condition upon such Plan's initial 
purchase of the shares of any Portfolio.

Conclusion

    For the reasons stated above, Applicants assert that the requested 
exemptions 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)(b)(15) thereunder are appropriate in 
the public interest and consistent with the protection of investors and 
the purposes fairly intended by the policy and provision of the 1940 
Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-25133 Filed 9-22-97; 8:45 am]
BILLING CODE 8010-01-M