Federal Register / Vol. 62, No. 184 / Tuesday, September 23, 1997 / Notices 49711

any person who filed a petition) may

file a response to any petition for

review, not to exceed 30 pages, within

10 days after filing of the petition. If no

petition is received within the

designated 15-day period, the Director

will issue the final amendment to the

Certificate of Compliance without

further delay. If a petition for review is

received, the decision on the

amendment application will become

final in 60 days, unless the Commission

grants the petition for review or

otherwise acts within 60 days after

publication of this Federal Register

Notice.

A petition for review must be filed

with the Secretary, U.S. Nuclear

Regulatory Commission, Washington,

DC 20555–0001, Attention: Rulemakings

and Adjudications Staff, or may be

delivered to the Commission’s Public

Document Room, the Gelman Building,

2120 L Street, NW, Washington, DC, by

the above date.

For further details with respect to the

action see: (1) The application for

amendment; and (2) the Commission’s

Compliance Evaluation Report. These

items are available for public inspection

at the Commission’s Public Document

Room, the Gelman Building, 2120 L

Street, NW, Washington, DC, and at the

Local Public Document Room.

Date of amendment request: August

11, 1997.

Brief description of amendment: The

amendment proposes to revise

Compliance Plan Issue 3, Action 7

which provides for the modification of

the C–360 autoclave controls to add a

low instrument air pressure switch to

initiate containment upon loss of

instrument air. Instead of adding a low

instrument air pressure switch, USEC

proposes to provide a second channel

for high pressure containment that does

not rely on instrument air. USEC also

proposes to extend the due date from

August 31, 1997 to October 31, 1997.

Basis for finding of no significance:

1. The proposed amendment will not

result in a change in the types or

significant increase in the amounts of

any effluents that may be released

offsite.

The proposed change involves the

High Pressure Isolation and Steam

Pressure Control Systems. The change

will not affect the function of the

system. Because there are no effluent

releases associated with this change, the

proposed change will not affect

effluents.

2. The proposed amendment will not

result in a significant increase in

individual or cumulative occupational

radiation exposure.

The proposed changes will not

significantly increase any exposure to

radiation. Therefore, the changes will

not result in a significant increase in

individual or cumulative radiation

exposure.

3. The proposed amendment will not

result in a significant construction

impact.

The proposed changes will not result

in any building construction, only

equipment modification, therefore, there

will be no construction impacts.

4. The proposed amendment will not

result in a significant increase in the

potential for, or radiological or chemical

consequences from, previously analyzed

accidents.

The proposed changes will not

increase the probability of occurrence or

consequence of any postulated accident

currently identified in the safety

analysis report. The proposed change

will reduce the failure modes of the

High Pressure Isolation and Steam

Pressure Control Systems. The

extension of the completion date will

not significantly increase the probability

of an accident. The existing Justification

for Continued Operation will remain in

effect during the two-month extension.

There is no significant increase in the

potential for or radiological or chemical

consequences from previously evaluated

accidents.

5. The proposed amendment will not

result in the possibility of a new or

different kind of accident.

The function of the High Pressure

Isolation and Steam Pressure Control

systems will not be changed by the

modifications. The proposed changes

will not create any new or different type

of accident.

6. The proposed amendment will not

result in a significant reduction in any

margin of safety.

The safety limit associated with the

modifications remains unchanged. The

proposed change will provide for two

safety channels for initiating autoclave

containment that do not rely on

instrument air. These changes do not

decrease the margins of safety.

7. The proposed amendment will not

result in an overall decrease in the

effectiveness of the plant’s safety,

safeguards or security programs.

Implementation of the proposed

changes do not change the safety,

safeguards, or security programs.

Therefore, the effectiveness of the

safety, safeguards, and security

programs is not decreased.

Effective date: The amendment to

Certificate of Compliance GDP–1

becomes effective immediately after

being signed by the Director, Office of

Nuclear Material Safety and Safeguards.

Certificate of Compliance No. GDP–1:

Amendment will revise the Compliance

Plan Issue 3, Action 7 on the autoclave

upgrades to extend the due date by two

months and to allow for mechanicalelectrical pressure switches instead of

pneumatic switches.

Local Public Document Room

location: Paducah Public Library, 555

Washington Street, Paducah, Kentucky

42003.

Dated at Rockville, Maryland, this 15th day

of September 1997.

For the Nuclear Regulatory Commission.

Carl J. Paperiello,

Director, Office of Nuclear Material Safety

and Safeguards.

[FR Doc. 97–25213 Filed 9–22–97; 8:45 am]

BILLING CODE 7590–01–P

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.

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.
49712 Federal Register / Vol. 62, No. 184 / Tuesday, September 23, 1997 / Notices

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 § 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. § 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
Federal Register / Vol. 62, No. 184 / Tuesday, September 23, 1997 / Notices 49713

with their variable 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. 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
49714 Federal Register / Vol. 62, No. 184 / Tuesday, September 23, 1997 / Notices

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 longterm 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
Federal Register / Vol. 62, No. 184 / Tuesday, September 23, 1997 / Notices 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 timeconsuming 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 passthrough 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
49716 Federal Register / Vol. 62, No. 184 / Tuesday, September 23, 1997 / Notices

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 passthrough 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
Federal Register / Vol. 62, No. 184 / Tuesday, September 23, 1997 / Notices 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

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39084; File No. SR–MSRB–

97–5]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Municipal Securities Rulemaking

Board Relating to Interpretation of

Rule G–37 on Political Contributions

and Prohibitions on Municipal

Securities Business

September 16, 1997.

On September 9, 1997, the Municipal

Securities Rulemaking Board (‘‘Board’’

or ‘‘MSRB’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’) a proposed

rule change (File No. SR–MSRB–97–5),

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

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), and Rule

19b–4 thereunder. The proposed rule

change is described in Items I, II, and III

below, which Items have been prepared

by the Board. The Board has designated

this proposal as constituting a stated

policy, practice, or interpretation with

respect to the meaning, administration,

or enforcement of an existing rule of the

Board under Section 19(b)(3)(A) of the

Act, which renders the proposal

effective upon receipt of this filing by

the Commission. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Board is filing herewith a notice

of interpretation concerning rule G–37

on political contributions and

prohibitions on municipal securities

business (hereafter referred to as ‘‘the

proposed rule change’’). The proposed

rule change is as follows:

Rule G–37: Political Contributions and

Prohibitions on Municipal Securities

Business

Transition and Inaugural Expenses

1. Q: May a municipal finance

professional who is entitled to vote for

an issuer official make contributions to

pay for such official’s transition or

inaugural expenses without causing a

prohibition on municipal securities

business with the issuer?

A: Yes, under certain conditions. The

de minimis exception allows a

municipal finance professional to

contribute up to $250 per candidate per

election if the municipal finance

professional is entitled to vote that

issuer official. The de minimis

exception is keyed to an election cycle;

therefore, if a municipal finance

professional contributed $250 to the

general election of an issuer official, the

municipal finance professional would

not be able to make any contributions to

pay for transition or inaugural expenses

without causing a prohibition on

municipal securities business with the

issuer. If a municipal finance

professional made no contributions to

an issuer official prior to the election,

then the municipal finance professional

may, if entitled to vote for the

candidate, contribute up to $250 to pay

for transition or inaugural expenses and

payment of debt incurred in connection

with the election without causing a

prohibition on municipal securities

business.

Definition of Issuer Official

2. Q: An incumbent was seeking reelection as an issuer official but she lost

the election. She is now soliciting

money to pay for the debt incurred in

connection with this election. Would

there be a prohibition on engaging in

municipal securities business with the

issuer if a dealer or a municipal finance

professional provides money for the

payment of this debt?

A: No, under certain conditions. If the

incumbent is out of office at the time

she is soliciting money to pay for the

election debt, then she is no longer

considered to be within the definition of

‘‘official of an isssuer’’ and any monies

given for the payment of debt incurred

in connection with the election in this

instance is not subject to rule G–37. If

the incumbent still holds her issuer

official position at the time she is

soliciting money to pay for the election

debt, then, if a municipal finance

professional contributed $250 to her

during the general election, the

municipal finance professional would

not be able to make any contributions

for the payment of debt without causing

a prohibition on municipal securities

business with the issuer. If a municipal

finance professional made no

contributions to the incumbent prior to

the election, then the municipal finance

professional may, if entitled to vote for

the candidate, contribute up to $250 for

the payment of debt incurred in

connection with the election while the

incumbent is still in office without

causing a prohibition on municipal

securities business. A dealer may not

contribute any monies towards the

payment of debt while the incumbent is

still in office without causing a

prohibition on municipal securities

business with the issuer.

Definitions of Municipal Finance

Professional and Executive Officer

3. Q: In making the determination of

which associated persons of a dealer

meet the definitions of municipal

finance professional and executive

officer, is it correct to designate all the

executives of the dealer (e.g., President,

Executive Vice Presidents) under the

category of executive officers?

A: No. In making the determination of

whether someone is a municipal finance

professional or executive officer, one

must review the activities of the

individual and not his or her title.

Rule G–37(g)(iv) defines the term

‘‘municipal finance professional’’ as:

(A) any associated person primarily

engaged in municipal securities

representative activities, as defined in rule

G–3(a)(i);

(B) any associated person who solicits

municipal securities business, as defined

paragraph (vii);

(C) any associated person who is both (i)

a municipal securities principal or a

municipal securities sales principal and (ii)

a supervisor of any persons described in

subparagraphs (A) or (B);

(D) any associated person who is a

supervisor of any person described in

subparagraph (C) up through and including,

in the case of a broker, dealer or municipal

securities dealer other than a bank dealer, the

Chief Executive Officer or similarly situated

official and, in the case of a bank dealer, the

officer or officers designated by the board of

directors of the bank as responsible for the

day-to-day conduct of the bank’s municipal

securities dealer activities, as required

pursuant to rule G–1(a); or

(E) any associated person who is a member

of the broker, dealer or municipal securities

dealer (or, in the case of a bank dealer, the

separately identifiable department or

division of the bank, as defined in rule G–

1) executive or management committee or