[Federal Register Volume 65, Number 197 (Wednesday, October 11, 2000)]
[Notices]
[Pages 60479-60488]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-26032]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-24676; 812-11924]


Hartford Capital Appreciation HLS Fund Inc., et al.

October 3, 2000.
AGENCY: U.S. Securities & Exchange Commission (``Commission'').

ACTION: Notice of application for an order of exemption under section 
6(c) of the Investment Company Act of 1940 (the ``Act'') for exemptions 
from the provisions of sections 9(a), 13(a), 15(a) and 15(b) of the Act 
and Rules 6e-2b(15) and 6e-3(T)(b)(15) thereunder.

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Summary of Application

    Applicants seek an order pursuant to section 6(c) of the Investment 
Company Act of 1940, as amended (the ``Act'') exempting each life 
insurance company separate account supporting variable life insurance 
contracts (and its insurance company depositor) that may invest in 
shares of an Existing Fund or a ``Future Fund,'' as defined below, from 
the provisions of sections 9(a), 13(a), 15(a), and 15(b) of the Act, 
and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent 
necessary to permit such separate accounts (``VLI accounts'') to hold 
shares of any Existing Fund or Future Fund when the following other 
types of investors also hold shares that Existing Fund or Future Fund: 
(1) A VLI account of a life insurance company that is not an affiliated 
person of the insurance company depositor of any VLI account, (2) an 
Existing Fund's or Future Fund's investment adviser (representing seed 
money investments in the Existing Fund or Future Fund), (3) a life 
insurance company separate account supporting variable annuity 
contracts (a ``VA account''), and/or (4) a qualified pension or 
retirement plan (a ``Plan'' or ``Qualified Plan''), as defined below.
    Applicants: Hartford Capital Appreciation HLS Fund, Inc., Hartford 
Dividend and Growth HLS Fund, Inc., Hartford Series Fund, Inc., 
Hartford Index HLS Fund, Inc., Hartford International Opportunities HLS 
Fund,

[[Page 60480]]

Inc., Hartford MidCap HLS Fund, Inc., Hartford Small Company HLS Fund, 
Inc., Hartford Stock HLS Fund, Inc., Hartford Advisers HLS Fund, Inc., 
Hartford International Advisers HLS Fund, Inc., Hartford Bond HLS Fund, 
Inc., Hartford Mortgage Securities HLS Fund, Inc. and Hartford Money 
Market HLS Fund, Inc. (each, an ``Existing Fund'' and collectively, the 
``Existing Funds'') and HL Investment Advisors, L.L.C. ``HL 
Advisors'').
    Relevant Section of the Act: Exemption requested under section 6(c) 
of the Act from the provisions of sections 9(a), 13(a), 15(a), and 
15(b) of the Act and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder.
    Filing Dates: the application was filed on December 22, 1999, and 
amended and restated on March 27, 2000, and August 24, 2000.

Hearing and Notification of Hearing

    An order granting the application will be issued unless the 
Commission orders a hearing. Interested persons may request a hearing 
by writing to the Commission's Secretary and serving the Existing Funds 
or HL Advisors with a copy of the request, personally or by mail. 
Hearing requests should be received by the Commission by 5:30 p.m. on 
October 30, 2000, and should be accompanied by proof of service on the 
Applicants in the form of an affidavit or, for lawyers, a certificate 
of service. Hearing requests should state the nature of writer'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 Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549. Applicants, c/o Hartford 
Investment Management Company, 55 Farmington Avenue, 11th Floor, 
Hartford, Connecticut 06105, Attention: Kevin J. Carr, Esq.

FOR FURTHER INFORMATION CONTACT: Lorna MacLeod, Branch Chief, Division 
of Investment Management, Office of Insurance Products, at (202) 942-
0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application; the complete application is available for a fee from the 
Public Reference Branch of the Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (tel. (202) 942-8090).

Applicants' Representations

    1. As used herein, a Future Fund is any investment company (or 
investment porfolio or series thereof), other than an Existing Fund, 
designed to be sold to VLI accounts and to which Applicants or their 
affiliates may in the future serve as investment advisers, investment 
sub-advisers, investment managers, administrators, principal 
underwriters or sponsors. As used herein, Plan or qualified Plan means 
any trust, plan, account, contract or annuity described in sections 
401(a), 403(a), 403(b), 408(a), 408(b), 414(d), 457(b), 408(k), 
501(c)(18) of the Internal Revenue Code of 1986, as amended (the 
``Code'')), and any other trust, plan, account, contract or annuity 
that is determined to be within the scope of Treasury Regulation 1.817-
5(f)(3)(iii).
    2. Each Existing Fund, except the Global Leaders Fund, Growth and 
Income Fund and High Yield Fund, is a Maryland corporation which is 
registered under the Act as an open-end management investment company. 
Each of the Global Leaders Fund, Growth and Income Fund and High Yield 
Fund is a diversified series of Hartford Series Fund, Inc., a Maryland 
corporation, which is a series fund registered under the Act. HL 
Advisors, a Connecticut corporation, is the investment adviser for each 
of the Existing Funds and is registered as an investment adviser under 
the Investment Advisers Act of 1940. Hartford Securities Distribution 
Company, Inc., a Connecticut corporation, serves as distributor of the 
Existing Funds.
    3. The Existing Funds and Future Funds may offer their shares to 
VLI accounts and VA accounts (``Participating Separate Accounts'') of 
various life insurance companies (``Participating Insurance 
Companies'') to serve as an investment medium to support variable life 
insurance contracts and variable annuity contracts (together, 
``Variable Contracts'') issued through such accounts. Each VLI acocunt 
and VA account will be established as a segregated asset account by a 
Participating Insurance Company pursuant to the insurance law of the 
Company's state of domicile. As such, the assets of each will be the 
property of the Participating Insurance Company and that portion of the 
assets of such an account equal to the reserves and other contract 
liabilities with respect to the account will not be chargeable with 
liabilities arising out of any other business that the Participating 
Insurance Company may conduct. The income, gains and losses, realized 
or unrealized from such an account's assets will be credited to or 
charged against the account without regard to other income, gains or 
losses of the Participating Insurance Company. If a VLI account or VA 
account is registered as an investment company, it will be a ``separate 
account'' as by Rule 0-1(e) (or any successor rule) under the Act and 
will be registered as a unit investment trust. For purposes of the Act, 
the Participating Insurance Company that establishes such a registered 
VLI account or VA account is the depositor and sponsor of the account 
as those terms have been interpreted by the Commission with respect to 
variable life insurance and variable annuity separate accounts.
    4. The Existing Funds and Future Funds will only sell their shares 
to registered VLI accounts and registered VA accounts if each 
Participating Insurance Company sponsoring such a VLI account or VA 
account enters into a participation agreement with the Fund. The 
participation agreements will define the relationship between each 
Existing or Future Fund and each Participating Insurance Company and 
will memorialize, among other matters, the fact that, except where the 
agreement specifically provides otherwise, the participating insurance 
company will remain responsible for establishing and maintaining any 
VLI account or VA account covered by the agreement and for complying 
with all applicable requirements of state and federal law pertaining to 
such accounts and to the sale and distribution of variable contracts 
issued through such accounts. The participation agreements also will 
memorialize, among other matters, the fact that, with regard to 
compliance with federal securities laws, unless the agreement 
specifically states otherwise, the Existing or Future Fund's 
obligations relate solely to offering and selling its shares to VLI 
accounts and VA accounts covered.
    5. The use of a common management investment company (or investment 
portfolio thereof) as an investment medium for both VLI accounts and VA 
accounts of the same insurance company, or of two or more insurance 
companies that are affiliated persons of each other, is referred to 
herein as ``mixed funding.'' The use of a common management investment 
company (or investment portfolio thereof) as an investment medium for 
VLI accounts and/or VA accounts of two or more insurance companies that 
are not affiliated persons of each other, is referred to herein as 
``shared funding.''
    6. Applicants propose that each Existing Fund and any Future Fund 
may offer and sell its shares directly to Qualified Plans. Changes in 
the federal tax law have created the opportunity for each Existing Fund 
and any Future Fund to substantially increase its net assets by selling 
shares to Qualified Plans. Most of the plans will be pension

[[Page 60481]]

or retirement plans intended to qualify under sections 401(a) and 
501(a) of the Code. Many of the plans will include a cash or deferred 
arrangement (permitting salary reduction contributions) intended to 
qualify under section 401(k) of the Code. The plans that qualify under 
sections 401(a) and 501(a) will also be subject to, and will be 
designed to comply with, the provisions of the Employee Retirement 
Income Security Act of 1974 (``ERISA'') applicable to either defined 
benefit or to defined contribution profit-sharing plans, specifically 
``Title I--Protection of Employee Benefit Rights.'' These plans 
therefore will be subject to regulatory provisions under the Code and 
ERISA regarding, for example, reporting and disclosure, participation 
and vesting, funding, fiduciary responsibility, and enforcement. 
Existing Fund and any Future Fund shares sold to such Qualified Plans 
would be held by the Trustees of said Plans as required by section 
403(a) of ERISA. As noted elsewhere in this Application, pass through 
voting is generally not required to be provided to participants in 
Qualified Plans pursuant to ERISA.
    7. More particularly, section 817(h) of the Code imposes certain 
diversification standards on the assets underlying Variable Contracts, 
such as those in the Existing Funds. The Code provides that Variable 
Contracts will not be treated as annuity contracts or life insurance 
contracts, as the case may be, for any period (or any subsequent 
period) for which the underlying assets are not, in accordance with 
regulations issued by the Treasury Department, adequately diversified. 
On March 3, 1989, the Treasury Department issued regulations (Treas. 
Reg. 1.817-5) which established specific diversification requirements 
for investment portfolios underlying Variable Contracts. The 
regulations generally provide that, in order to meet these 
diversification requirements, all of the beneficial interests in the 
investment company must be held by the segregated asset accounts of one 
or more life insurance companies. Notwithstanding this, the regulations 
also contain an exception to this requirement that permits trustees of 
a qualified pension or retirement plan to hold shares of an investment 
company, the shares of which are also held by insurance company 
segregated asset accounts, without adversely affecting the status of 
the investment company as an adequately diversified underlying 
investment for Variable Contracts issued through such segregated asset 
accounts (Treas. Reg. 1.817-5(f)(3)(iii)).
    8. As a result of this exception to the general diversification 
requirement, qualified pension and retirement plans may select the 
Existing Funds as investment options without endangering the tax status 
of Variable Contracts issued through Participating Separate Accounts as 
life insurance or annuities, respectively. The use of a common 
management investment company (or investment portfolio thereof) as an 
investment medium for VLI accounts, VA accounts and Qualified Plans, is 
referred to herein as ``extended mixed and shared funding.''

Applicants' Legal Analysis

    1. In connection with the funding of scheduled premium variable 
life insurance contracts issued through a separate account registered 
under the Act as a unit investment trust, Rule 6e-2(b)(15) under the 
Act provides partial exemptions from sections 9(a), 13(a), 15(a), and 
15(b) of the Act. Section 9(a) of the Act provides that it is unlawful 
for any company to serve as an investment adviser or principal 
underwriter of any registered open-end investment company if an 
affiliated person of that company is subject to a disqualification 
enumerated in section 9(a)(1) or (2). Rules 6e-2(b)(15)(i) and (ii) 
provide partial exemptions from section 9(a) of the Act, the Rule 6e-
2(b)(15)(iii) provides a partial exemption from sections 13(a), 15(a), 
and 15(b) of the Act to the extent those sections have been deemed by 
the Commission to require ``pass-through'' voting with respect to an 
underlying fund's shares.
    2. The exemptions granted to a registered VLI account by Rule 6e-
2(b)(15) are available only where all of the assets of the separate 
account consist of the shares of one or more registered management 
investment companies which offer their shares ``exclusively to variable 
life insurance separate accounts of the life insurer, or of any 
affiliated life insurance company'' (emphasis supplied), and then, only 
where scheduled premium variable life insurance contracts are issued 
through such VLI accounts. Therefore, the relief granted by Rule 6e-
2(b)(15) is not available with respect to a scheduled premium VLI 
account that owns shares of a management company that also offers its 
shares to a VA account of the same insurance company or any other 
insurance company. Likewise, the relief granted by Rule 6e-2(b)(15) is 
not available with respect to a scheduled premium VLI account that owns 
shares of a management company that also offers its shares to a VLI 
account of the same insurance company or any other insurance company 
that issues flexible premium variable life insurance contracts.
    3. In addition, the relief granted by Rule 6e-2(b)(15) under the 
Act is not available with respect to a scheduled premium VLI account 
that owns shares of an underlying management company that also offers 
its shares to VLI or VA accounts funding Variable Contracts of one or 
more unaffiliated life insurance companies. Furthermore, Rule 6e-
2(b)(15) does not contemplate that shares of the underlying fund might 
also be sold to Qualified Plans.
    4. In connection with flexible premium variable life insurance 
contracts issued through a separate account registered under the Act as 
a unit investment trust, Rule 6e-3(T)(b)(15) under the Act provides 
partial exemptions from section 9(a), and from sections 13(a), 15(a), 
and 15(b) of the Act to the extent that those sections have been deemed 
by the Commission to require ``pass-through'' voting with respect to an 
underlying fund's shares. The exemptions granted to a separate account 
by Rule 6e-3(T)(b)(15) are available only where all of the assets of 
the separate account consist of the shares of one or more registered 
management investment companies which offer their shares ``exclusively 
to separate accounts of the life insurer, or of any affiliated life 
insurance company offering either scheduled [premium variable life 
insurance] contracts or flexible [premium variable life insurance] 
contracts, or both; or which also offer their shares to VA accounts of 
the life insurer or of an affiliated life insurance company'' (emphasis 
supplied). Therefore, Rule 6e-3(T) permits mixed funding with respect 
to a flexible premium VLI account, subject to certain conditions. Rule 
6e-3(T), however, does not permit shared funding because the relief 
granted by Rule 6e-3(T)(b)(15) is not available with respect to a 
flexible premium VLI account that owns shares of a management company 
that also offers its shares to separate accounts (including variable 
annuity and flexible premium and scheduled premium variable life 
insurance separate accounts) of unaffiliated life insurance companies. 
Also, Rule 6e-3(T) does not contemplate extended mixed and shared 
funding.
    5. Applicants maintain, as discussed below, that there is no policy 
reason for the sale of Existing Fund and Future Fund shares to 
Qualified Plans to prohibit or otherwise limit a Participating 
Insurance Company from relying on the relief provided by Rules 6e-
2(b)(15) and 6e-3(T)(b)(15).

[[Page 60482]]

Notwithstanding, Rule 6e-2 and Rule 6e-3(T) each specifically provides 
that the relief granted thereunder is available only where shares of 
the underlying fund are offered exclusively to insurance company 
separate accounts. In this regard, Applicants request exemptive relief 
to the extent necessary to permit shares of the Existing Funds and 
Future Funds to be sold to Qualified Plans while allowing Participating 
Insurance Companies and their Participating Separate Accounts to enjoy 
the benefits of the relief granted in Rules 6e-2(b)(15) and 6e-
3(T)(b)(15).
    6. Applicants note that if the Existing Funds and Future Funds were 
to sell their shares only to Qualified Plans, exemptive relief under 
Rule 6e-2 and Rule 6e-3(T) would not be necessary. The relief provided 
for under Rule 6e-2(b)(15) and Rule 6e-3(T)(b)(15) does not relate to 
qualified pension and retirement plans or to a registered investment 
company's ability to sell its shares to such plans. Applicants also 
note that the promulgation of Rules 6e-2(b)(15) and 6e-3(T)(b)(15) 
preceded the issuance of the Treasury Regulations which made it 
possible for shares of an investment company to be held by the trustee 
of a qualified pension and retirement plan without adversely affecting 
the ability of shares in the same investment company to also be held by 
the separate accounts of insurance companies in connection with their 
variable contracts. Thus, the sale of shares of the same investment 
company to both separate accounts and Qualified Plans was not 
contemplated at the time of the adoption of Rules 6e-2(b)(15) and 6e-
3(T)(b)(15).
    7. Applicants are not aware of any reason for excluding separate 
accounts and investment companies engaged in shared funding from the 
exemptive relief provided under Rules 6e-2(b)(15) and 6e-3(T)(b)(15) or 
for excluding separate accounts and investment companies engaged in 
mixed funding from the exemptive relief provided under Rule 6e-
2(b)(15). Similarly, Applicants are not aware of any reason for 
excluding Participating Insurance Companies from the exemptive relief 
requested because the Existing Funds and Future Funds may also sell 
their shares to qualified pension and retirement plans. Rather, 
Applicants assert that the proposed sale of shares of the Existing 
Funds and Future Funds to Qualified Plans, in fact, may allow for the 
development of larger pools of assets resulting in the potential for 
greater investment and diversification opportunities, and for decreased 
expenses at higher asset levels resulting in greater cost efficiencies.
    8. Applicants recognize that the reason the Commission did not 
grant more extensive relief in the area of mixed and shared funding 
when it adopted Rule 6e-3(T) is because of the Commission's uncertainty 
in this area with respect to such issues as conflicts of interest. 
Applicants believe that Commission concern is not warranted in the 
context of permitting Qualified Plans to invest in the Existing Funds 
or Future Funds. Applicants have concluded that the addition of 
Qualified Plans as eligible shareholders should not increase the risk 
of material irreconcilable conflicts among shareholders. (See ``Lack of 
Conflicts--Qualified Plans,'' below.) Even if a material irreconcilable 
conflict involving Qualified Plans arose, the trustees of (or 
participants in) the Qualified Plans could simply redeem their shares 
and make alternative investments.
    9. Consistent with the Commission's authority under Section 6(c) of 
the Act to grant exemptive orders to a class or classes of persons and 
transactions, Applicants request relief for the class consisting of 
Participating Insurance Companies and their separate accounts investing 
in the Existing Funds and Future Funds as well as their principal 
underwriters that currently invest or in the future will invest in the 
Existing Funds and Future Funds.
    10. There is ample precedent, in a variety of contexts, for 
granting exemptive relief not only to the applicants in a given case, 
but also to members of the class not currently identified that may be 
similarly situated in the future. Such class relief has been granted in 
various contexts and from a wide variety of the Act's provisions, 
including class exemptions in the context of mixed and shared funding. 
Such class exemptions have included, among other things, exemptions 
permitting the sale of shares by unnamed underlying funds to 
Participating Separate Accounts and Qualified Plans.
    11. The Commission has previously granted exemptive orders 
permitting open-end management investment companies to offer their 
shares directly to qualified Plans in addition to offering their shares 
to separate accounts of affiliated or unaffiliated insurance companies 
which issue either or both variable annuity contracts or variable life 
insurance contracts. The Order sought in this Application is identical 
to these precedents with respect to the conditions Applicants proposed 
to be imposed on Participating Separate Accounts and Qualified Plans in 
connection with investment in the Funds. The Commission has also 
granted exemptions similar to those requested herein where a fund's 
shares would not be sold directly to Qualified Plans. Applicants 
believe that the same policies and considerations that led the 
Commission to grant such exemption to other applicants are present 
here.
    12. Section 9(a) of the Act provides that it is unlawful for any 
company to serve as investment adviser or principal underwriter of any 
registered open-end investment company if an affiliated person of that 
company is subject to a disqualification enumerated in section 9(a)(1) 
or (2). Rules 6e-2(b)(15)(i) and (ii) and Rule 6e-3(T)(b)(15)(i) and 
(ii) under the Act provide exemptions from section 9(a) under certain 
circumstances, subject to limitations on mixed and shared funding. 
These exemptions limit the application of the eligibility restrictions 
to affiliated individuals or companies that directly participate in the 
management of the underlying management company.
    13. Rules 6e-2(b)(15)(i) and 6e-3(T)(b)(15)(i) under the Act 
provide, in effect, that the fact that an individual disqualified under 
section 9(a)(1) or (2) of the Act is an officer, director, or employee 
of an insurance company, or any of its affiliates, would not, by virtue 
of section 9(a)(3) of the act, disqualify the insurance company or any 
of its affiliates from sserving in any capacity with respect to an 
underlying investment company, provided that the disqualified 
individual did not participate directly in the management or 
administration of the underlying investment company. Similarly, Rules 
6e-2(b)(15)(ii) and 6e-3(T)(b)(15)(ii) under the Act provide, in 
effect, that the fact that any company disqualified under section 
9(a)(1) or (2) of the Act is affiliated with the insurance company 
would not, by virtue of section 9(a)(3) of the Act, disqualify the 
insurance company from serving in any capacity with respect to an 
underlying investment company, provided that the disqualified company 
did not participate directly in the management or administration of the 
investment company.
    14. The partial relief granted in Rules 6e-2(b)(15) and 6(e)-
3(T)(b)(15) under the Act from requirements of Section 9 of the Act 
limits, in effect, the amount of monitoring of an insurer's personnel 
that would otherwise be necessary to ensure compliance with section 9. 
Those Rules recognize that it is not necessary for the protection of 
investors or the purposes fairly intended by the policy and provisions 
of the Act to apply the provisions of section 9(a) to the many 
individuals involved in an

[[Page 60483]]

insurance company complex, most of whom typically will have no 
involvement in matters pertaining to investment companies funding the 
separate accounts. Those Rules further recognize that it also is 
unnecessary to apply section 9(a) of the Act to individuals in various 
unaffiliated insurance companies (or affiliated companies of 
Participating Insurance Companies) that may utilize a Fund as the 
funding medium for Variable Contracts. There is no regulatory purpose 
in extending the section 9(a) monitoring requirements because of mixed 
or shared funding. Neither the Participating Insurance Companies) that 
may utilize a Fund as the funding medium for Variable Contracts. There 
is no regulatory purpose in extending the section 9(a) monitoring 
requirements because of mixed or shared funding. Neither the 
Participating Insurance Companies nor the Qualified Plans are expected 
to play any role in the management or administration of the Existing 
Funds or the Future Funds.
    15. Those individuals who participate in the management or 
administration of the Existing Funds and the Future Funds will remain 
the same regardless of which Separate Accounts, insurance companies or 
Qualified Plans use such Funds. Applying the requirements of Section 
9(a) of the Act because of investment by the separate accounts of other 
insurers and Qualified Plans would be unjustified and would not serve 
any regulatory purpose. Furthermore, the increased monitoring costs 
would reduce the net rates of return realized by contractowners. 
Moreover, in the case of Qualified Plans, the Plans, unlike the 
separate accounts, are not themselves investment companies, and 
therefore are not subject to section 9 of the Act. Furthermore, it is 
not anticipated that a Qualified Plan would be an affiliated person of 
an Existing Fund or any Future Fund except by virtue of its holding 5% 
or more of a Fund's shares.
    16. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) under the Act 
assume the existence of a pass-through voting requirement with respect 
to management investment company shares held by a separate account. 
Pass-through voting privileges will be provided with respect to all 
variable contractowners so long as the Commission interprets the Act to 
require pass-through voting privileges for variable contractowners.
    17. Rules 6e-2(b)(15)(iii) and Rules 6e-3(T)(15)(iii) provide 
exemptions from the pass-through voting requirement with respect to 
several significant matters, assuming the limitations discussed above 
on mixed and shared funding are observed. Rules 6e-2(b)(15)(iii) and 
Rules 6e-3(T)(15)(iii)(A) provide that the insurance company may 
disregard the voting instructions of its contractowners with respect to 
the investment of an underlying fund, or any contract between a fund 
and its investment adviser, when required to do so by an insurance 
regulatory authority (subject to the provisions of paragraphs (b)(5)(i) 
and (b)(7)(ii)(A) of the Rules.) Rules 6e-2(b)(15)(iii)(B) and Rules 
6e-3(T)(b)(15)(iii)(A)(2) provide that the insurance company may 
disregard the voting instructions of contractowners if the 
contractowners initiate certain changes in an underlying fund's 
investment policies, principal underwriter or any investment adviser 
(provided that disregarding such voting instructions is reasonable and 
subject to the other provisions of paragraphs (b)(5)(ii), 
(b)(7)(ii)(B), and (b)(7)(ii)(C) of the Rules.)
    18. Rules 6e-2 and 6e-3(T) under the Act recognize that a variable 
life insurance contract, as an insurance contract, has important 
elements unique to insurance contracts, and is subject to extensive 
state regulation of insurance. In adopting Rule 6e-2(b)(15)(iii), the 
Commission recognized that state insurance regulators have authority, 
pursuant to state insurance laws or regulations, to disapprove or 
require changes in investment policies, investment advisers, or 
principal underwriters. The Commission also expressly recognized that 
state insurance regulators have authority to require an issuer to draw 
from its general account to cover costs imposed upon the insurer by a 
change approved by contractowners 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.'' In this respect, 
Rule 6e-3(T)'s corresponding provisions for flexible premium variable 
life insurance undoubtedly were adopted in recognition of the same 
factors.
    19. With respect to the Qualified Plans, which are not registered 
as investment companies under the Act, there is no requirement to pass 
through voting rights to plan participants. Indeed, to the contrary, 
applicable law expressly reserves voting rights associated with the 
assets of most Plans to certain specified persons. Under Section 403(a) 
of ERISA, shares of a fund sold to a Qualified Plan covered by ERISA 
must be held by the trustees of the Plan. Section 403(a) also provides 
that the trustee(s) must have exclusive authority and discretion to 
manage and control the Plan with two exceptions: (1) When the Plan 
expressly provides that the trustee(s) are subject to the direction of 
a named fiduciary who is not a trustee, in which case the trustees are 
subject to proper directions made in accordance with the terms of the 
Plan and not contrary to ERISA, and (2) 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 above two exceptions stated in section 403(a) applies, Plan 
trustees have the exclusive authority and responsibility for voting 
proxies. Where a named fiduciary to an ERISA covered Qualified Plan 
appoints an investment manager, the investment manager has the 
responsibility to vote the shares held unless the right to vote such 
shares is reserved to the trustees or the named fiduciary. The 
Qualified Plans may have their trustee(s) or other fiduciaries exercise 
voting rights attributable to investment securities held by the 
Qualified Plans in their discretion. Some of the ERISA covered 
Qualified Plans, however, may provide for the trustee(s), an investment 
adviser (or advisers) or another named fiduciary to exercise voting 
rights in accordance with instructions from participants.
    20. Where a Qualified Plan does not provide participants with the 
right to give voting instructions, Applicants do not see any potential 
for material irreconcilable conflicts of interest between or among 
variable contract holders and Plan investors with respect to voting of 
the respective Fund's shares. Accordingly, unlike the case with 
insurance company separate accounts, the issue of the resolution of 
material irreconcilable conflicts with respect to voting is not present 
with respect to such Qualified Plans since the Qualified Plans are not 
entitled to pass-through voting privileges.
    21. Even if a Qualified Plan were to hold a controlling interest in 
an Existing Fund or a Future Fund, Applicants do not believe that such 
control would disadvantage other investors in such Fund to any greater 
extent than is the case when any institutional shareholder holds a 
majority of the voting securities of any open-end management investment 
company. In this regard, Applicants submit that investment in an 
Existing Fund or a Future Fund by a Plan will not create any of the 
voting complications occasioned by mixed

[[Page 60484]]

funding or shared funding. Unlike mixed or shared funding, Plan 
investor voting rights cannot be frustrated by veto rights of insurers 
or state regulators.
    22. Some of the Qualified Plans, however, may provide for the 
trustee(s), an investment adviser (or advisers) or another named 
fiduciary to exercise voting rights in accordance with instructions 
from participants. Where a Qualified Plan provides participants with 
the right to give voting instructions, Applicants see no reason to 
believe that participants in Qualified Plans generally or those in a 
particular Qualified Plan, either as a single group or in combination 
with participants in other Qualified Plans, would vote in a manner that 
would disadvantage Variable Contract holders. In sum, the purchase of 
shares of the Existing Funds or Future Funds by Qualified Plans that 
provide voting rights does not present any complications not otherwise 
occasioned by mixed or shared funding.
    23. The prohibitions on mixed and shared funding might reflect some 
concern with possible divergent interests among different classes of 
investors. When Rule 6e-2 under the Act was adopted, variable annuity 
separate accounts could invest in mutual funds whose shares also were 
offered to the general public. Therefore, at the time of the adoption 
of Rule 6e-2, the Commission staff contemplated underlying funds with 
public shareholders and with variable life insurance separate account 
shareholders. The Commission staff may have been concerned with the 
potentially different investment motivations of public shareholders and 
variable life insurance contractowners. There also may have been some 
concern with respect to the problems of permitting a state insurance 
regulatory authority to affect the operations of a publicly-available 
mutual fund and to affect the investment decisions of public 
shareholders.
    24. However, for reasons unrelated to the Act, IRS Revenue Ruling 
81-225 (September 25, 1981) effectively deprived most variable 
annuities funded by publicly available mutual funds of their tax-
benefited status. The Tax Reform Act of 1984 codified the prohibition 
against the use of publicly available mutual funds as an investment 
medium for most variable contracts (including variable life contracts) 
in new section 817(h). Section 817(h) of the Code, in effect, requires 
that the investments made by variable annuity and variable life 
insurance separate accounts be ``adequately diversified.'' If a 
separate account is organized as a unit investment trust that invests 
in a single fund or series, the separate account will not be 
diversified. In this situation, however, section 817(h) of the Code 
provides, in effect, that the diversification test will be applied at 
the underlying fund level, rather than at the separate account level, 
but only if ``all of the beneficial interests'' in the underlying fund 
``are held by one or more insurance companies (or affiliated companies) 
in their general account or in segregated asset accounts * * *.'' 
Accordingly, a unit investment trust separate account that invests 
solely in a publicly-available mutual fund will generally not be 
adequately diversified. In addition, any underlying mutual fund, 
including the Funds, that sells shares to separate accounts, in effect, 
would be precluded from selling its shares to the public. Consequently, 
there will be no public shareholders of the Existing Funds or the 
Future Funds.
    25. Shared funding by unaffiliated insurance companies does not 
present any issues that do not already exist where a single insurance 
company is licensed to do business in several or all states. Where 
insurers are domiciled in different states, it is possible that the 
particular state insurance regulatory body in a state in which one 
insurance company is domiciled could require action that is 
inconsistent with the requirements of insurance regulators of other 
states in which other insurance companies are domiciled. The fact that 
a single insurer and its affiliates offer their insurance products in 
different states does not create a significantly different or enlarged 
problem.
    26. Shared funding by unaffiliated insurers is, in this respect, no 
different than the use of the same investment company as the funding 
vehicle for affiliated insurers, which Rules 6e-e(b)(15) and 6e-
33(T)(b)(15) permit under various circumstances. Affiliated insurers 
may be domiciled in different states and be subject to differing state 
law requirements. Affiliation does not reduce the potential, if any 
exists, for differences in state regulatory requirements. In any event, 
the conditions set forth below are designed to safeguard against, and 
provide procedures for resolving, any adverse effects that differences 
among state regulatory requirements may produce. For instance, if a 
particular state insurance regulator's decision conflicts with the 
majority of other state regulators, the affected insurer will be 
required to withdraw its participating Separate Account's investment in 
the relevant Fund.
    27. The right of an insurance company under Rules 6e-2(b)(15) and 
6e-3(T)(b)(15) under the Act to disregard contractowners' voting 
instructions does not raise any issues different from those raised by 
the authority of state insurance administrators over separate accounts. 
Under Rules 6e-2(b)(15) and 6e-3(T)(b)(15), an insurer can disregard 
contractowner voting instructions only with respect to certain 
specified items. Affiliation does not eliminate the potential, if any 
exists, for divergent judgments as to the advisability or legality of a 
change in investment policies, principal underwriter, or investment 
adviser initiated by contractowners. The potential for disagreement is 
limited by the requirements in Rules 6e-2 and 6e-3(T) under the Act 
that the insurance company's disregard of voting instructions be 
reasonable and based on specific good-faith determinations.
    28. However, a particular insurer's disregard of voting 
instructions, nevertheless, could conflict with the majority of 
contractowner voting instructions. The insurer's action could arguably 
be different from the determination of all or some of the other 
insurers (including affiliated insurers) that the contractholders' 
voting instructions should prevail, and could either preclude a 
majority vote approving the change or represent a minority view. If the 
insurer's judgment represents a minority position or would preclude a 
majority vote, the insurer may be required, at the election of the 
relevant Fund, to withdraw the Participating Separate Account's 
investment in such Fund, and no charge or penalty would be imposed as a 
result of such withdrawal. There is no reason why the investment 
policies of the Existing Funds or any Future Fund would or should be 
materially different from what these policies would or should be if it 
funded only variable annuity contracts or variable life insurance 
policies, whether flexible premium or scheduled premium policies. Each 
type of insurance product is designed as a long-term investment 
program.
    29. Neither the Existing Funds nor any Future Fund will be managed 
to favor or disfavor any particular Participating Insurance Company or 
type of Variable Contract. There is no reason to believe that different 
features of various types of contracts, including the ``minimum death 
benefit'' guarantee under certain variable life insurance contracts, 
will lead to different investment policies for different types of 
variable contracts. To the extent that the degree of risk may differ as 
between variable annuity contracts and variable

[[Page 60485]]

life insurance policies, the different insurance charges imposed, in 
effect, adjust any such differences and equalize the insurers' exposure 
in either case. No one investment strategy can be identified as 
appropriate to a particular insurance product. Each pool of variable 
annuity and variable life insurance contractowners is composed of 
individuals of diverse financial status, age, insurance and investment 
goals. A fund supporting even one type of insurance product must 
accommodate those factors in order to attract and retain purchasers. 
Permitting mixed and shared funding will provide economic justification 
for the continuation of the Existing Funds and any Future Fund. Also, 
permitting mixed and shared funding will facilitate the establishment 
of additional Future Funds serving diverse goals. The broader base of 
contractowners can be expected to provide economic justification for 
the creation of additional portfolios with a greater variety of 
investment objectives and policies.
    30. Applicants do not believe that the sale of the shares of the 
Existing funds and Future Funds to Qualified Plans will increase the 
potential for material irreconcilable conflicts of interest between or 
among different types of investors. In particular, Applicants see very 
little potential for such conflicts beyond that which would otherwise 
exist between variable annuity and variable life insurance 
contractowners. Moreover, in considering the appropriateness of the 
requested relief, Applicants have analyzed the following issues to 
assure themselves that there were either no conflicts of interest or 
that there existed the ability by the affected parties to resolve the 
issues without harm to the contractowners in the Participating Separate 
Accounts or to the participants under the Qualified Plans.
    31. Applicants considered whether there are any issues raised under 
the Code or the Treasury Regulations or Revenue Rulings thereunder it 
Qualified Plans, VA accounts and VLI accounts all invest in the same 
underlying fund. As noted above, Section 817(h) of the Code imposes 
certain diversification standards on the underlying assets of variable 
contracts held in an underlying mutual fund. The Code provides that a 
variable contract shall not be treated as an annuity contract or life 
insurance, as applicable, for any period (and any subsequent period) 
for which the investments are not, in accordance with regulations 
prescribed by the Treasury Department, adequately diversified.
    32. Treasury Department Regulations issued under section 817(h) 
provide that, in order to meet the statutory diversification 
requirements, all of the beneficial interests in the investment company 
must be held by the segregated asset accounts of one or more insurance 
companies. However, the Regulations contain certain exceptions to this 
requirement, one of which allows shares in an underlying mutual fund to 
be held by the trustees of a qualified pension or retirement plan 
without adversely affecting the ability of shares in the underlying 
fund also to be held by separate account of insurance companies in 
connection with their variable contracts. (Treas. Reg. 1.817-
5(f)(3)(iii). Thus, Treasury Regulations specifically permit 
``qualified pension or retirement plans'' and separate accounts to 
invest in the same underlying fund. For this reason, Applicants have 
concluded that neither the Code, nor the Treasury Regulations or 
Revenue Rulings thereunder, present any inherent conflicts of interest.
    33. Applicants note that while there are differences in the manner 
in which distributions from Variable Contracts and Qualified Plans are 
taxed, these differences will have no impact on the Existing Funds and 
Future Funds. When distributions are to be made, and a Separate Account 
or Qualified Plan is unable to net purchase payments to make the 
distributions, the Separate Account and Qualified Plan will redeem 
shares of the Existing Funds and the Future Funds at their respective 
net asset value in conformity with Rule 22c-1 under the Act (without 
the imposition of any sales charges) to provide proceeds to meet 
distribution needs. A Qualified Plan will make distributions in 
accordance with the terms of the Plan. Moreover, there is analogous 
precedent for a situation in which the same funding vehicle was used 
for contractowners subject to different tax rules, without any apparent 
conflicts. Prior to the Tax Reform Act of 1984, a number of insurance 
companies offered variable annuity contracts on both a qualified and 
non-qualified basis through the same separate account. Underlying 
reserves of both qualified and non-qualified contracts therefore were 
commingled in the same separate account. However, long-term capital 
gains incurred in such separate accounts were taxed on a different 
basis than short-terms gains and other income with respect to the 
reserves underlying non-qualified contracts. A tax reserve at the 
estimated tax rate was established in the separate account affecting 
only the non-qualified reserves. To the best of Applicants' knowledge, 
that practice was never found to have violated any fiduciary standards. 
Accordingly, Applicants have concluded that the tax consequences of 
distributions with respect to Participating Separate Accounts and 
Qualified Plans do not raise any material irreconcilable conflicts of 
interest with respect to the use of an Existing Fund or any Future 
Fund.
    34. Applicants considered whether it is possible to provide an 
equitable means of giving voting rights to Participating Separate 
Account contractowners and to Qualified Plans, and determined it is 
possible, as indicated below. In connection with any meeting of 
shareholders, the Existing Funds and Future Funds will inform each 
shareholder, including each Participating Insurance Company and 
Qualified Plan, of information necessary for the meeting, including 
their respective share of ownership in the relevant Fund. Each 
Participating Insurance Company will then solicit voting instructions 
in accordance with Rules 6e-2 and 6e-3(T), as applicable, and its 
participation agreement with the relevant Fund. Shares held by 
Qualified Plans will be voted in accordance with applicable law. The 
voting rights provided to Qualified Plans with respect to shares of the 
Existing Funds and Future Funds would be no different from voting 
rights that are provided to Qualified Plans with respect to shares of 
funds sold to the general public.
    35. Applicants also considered whether there are any conflicts 
between the contractowners of the Participating Separate Accounts and 
Qualified Plan participants with respect to the state insurance 
commissioners' veto powers over investment objectives. Applicants note 
that the basic premise of corporate democracy and shareholder voting is 
that not all shareholders may agree with a particular proposal. 
Although the interests and opinions of shareholders may differ, this 
does not mean that inherent conflicts of interest exist between or 
among shareholders. State insurance commissioners have been given the 
veto power in recognition of the fact that insurance companies usually 
cannot simply redeem their separate accounts out of one fund and invest 
in another. Generally, time-consuming, complex transactions must be 
undertaken to accomplish such redemptions and transfers. Conversely, 
the trustees of Qualified Plans or the participants in participant-
directed Qualified Plans can make the decision quickly and redeem their 
interest in the Existing Funds and Future Funds and reinvest in another 
funding vehicle without the same regulatory impediments faced by 
separate accounts

[[Page 60486]]

or, as is the case with most Qualified Plans, even hold cash pending 
suitable investment.
    36. Based on the foregoing, Applicants have concluded that even if 
there should rise issues where the interests of contractowners and the 
interests of Qualified Plans are in conflict, the issues can be almost 
immediately resolved since the trustees of (or participants in) the 
Qualified Plans can, on their own, redeem the shares out of the 
Existing Funds and Future Funds.
    37. Finally, Applicants considered whether there is a potential for 
future conflicts of interest between Participating Separate Accounts 
and Qualified Plans created by future changes in the tax laws. 
Applicants do not see any greater potential for material irreconcilable 
conflicts arising between the interests of participants under Qualified 
Plans and contractowners of Participating Separate Accounts from 
possible future changes in the federal tax laws than that which already 
exist between variable annuity contractowners and variable life 
insurance contractowners.
    38. Applicants recognize that the foregoing is not an all inclusive 
list but rather is representative of issues which they believe are 
relevant to this Application. Applicants believe that the discussion 
contained herein demonstrates that the sale of shares of the Existing 
Funds and Future Funds to Qualified Plans does not increase the risk of 
material irreconcilable conflicts of interest. Further, Applicants 
submit that the use of the Existing Funds and Future Funds with respect 
to Qualified Plans is not substantially dissimilar from the Funds' 
current use, in that Qualified Plans, like Variable Contracts, are 
generally long-term retirement vehicles.
    39. Applicants note that when the Commission last revised Rule 6e-
3(T) in 1987, the Treasury Department had not issued the current 
regulations (Treas. Reg. 1.817-5) which currently make it possible for 
shares of the Existing Funds and Future Funds to be sold to Qualified 
Plans without adversely affecting the tax status of the insurer's 
Variable Contracts. Applicants submit that, although proposed 
regulations had been published, the commission did not envision this 
possibility when it last examined (b)(15) of rule 6e-3(T) and might 
well have broadened the exclusivity provision of that paragraph at that 
time to include Qualified Plans had this possibility been apparent.
    40. Various factors have limited the number of insurance companies 
that offer variable annuities and variable life insurance contracts. 
These factors include the costs of organizing and operating a fund 
medium, the lack of expertise with respect to investment management 
(principally with respect to stock and money market investments), and 
the lack of name recognition by the public of certain insurers as 
investment experts with whom the public feels comfortable entrusting 
their investment dollars. For example, some smaller life insurance 
companies may not find it economically feasible, or within their 
investment or administrative expertise, to enter the Variable Contract 
business on their own.
    41. Use of the Existing Funds and Future Funds as common investment 
vehicles for Variable Contracts would reduce or alleviate the above-
mentioned concerns. Mixed and shared funding, including extended mixed 
and shared funding, also should provide several benefits to variable 
contractowners 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 Existing Funds' and Future Funds' investment adviser, 
but also from the cost efficiencies and investment flexibility afforded 
by a large pool of funds. Therefore, making the Existing Funds and 
Future Funds available for mixed and shared funding and extended mixed 
and shared funding will encourage more insurance companies to offer 
variable contracts, and this should result in increased competition 
with respect to both variable contract design and pricing, which can be 
expected to result in more product variation and lower charges.
    42. Mixed and shared funding and extended mixed and shared funding 
benefits variable contractowners by eliminating a significant portion 
of the costs of establishing and administering separate funds. 
Applicants also assert that the sale of shares of the Existing Funds 
and Future Funds to Qualified Plans in addition to Separate Accounts of 
Participating Insurance Companies will result in an increased amount of 
assets available for investment by such Funds. This may benefit 
variable contractowners through greater diversification, and by making 
the addition of new portfolios more feasible.
    43. Applicants assert that, regardless of the type of shareholder 
in an Existing Fund or any Future Fund, the investment adviser is or 
would be contractually obligated to manage such Existing Fund or Future 
Fund solely and exclusively in accordance with that Fund's investment 
objectives, policies and restrictions as well as any guidelines 
established by the Board. The investment adviser works with a pool of 
money and does not take into account the identity of the shareholders. 
Thus, the Existing Funds are and any Future Fund will be managed in the 
same manner as any other mutual fund.
    44. Applicants see no significant legal impediment to permitting 
mixed and shared funding and extended 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 and 
Applicants believe, as indicated above, that mixed and shared funding 
and extended mixed and shared funding will have no adverse federal 
income tax consequences.
    45. Applicants also note that the Commission has issued orders 
permitting mixed funding and shared funding. Applicant's proposal for 
mixed and shared funding and extended mixed and shared funding complies 
with the same conditions consented to by the applicants for such 
orders. Therefore, granting the exemptions requested herein is in the 
public interest and, as discussed above, will not compromise the 
regulatory purposes of sections 9(a), 13(a), 15(a) and 15(b) of the Act 
or Rules 6e-2 or 6e-3(T) thereunder.

Applicants' Conditions

    If the requested order is granted, Applicants consent to the 
following conditions:
    1. A majority of the members of the Board of each Existing Fund and 
Future Fund will consist of persons who are not ``interested persons'' 
of such Fund, as defined by section 2(a)(19) of the Act, and the Rules 
thereunder, 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 director or directors, 
then the operation of this condition will 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 or by 
future rule.
    2. Each Board will monitor its respective Fund for the existence of 
any material irreconcilable conflict between and among the interests of 
the contractholders of all Participating Separate Accounts and of 
participation of Qualified Plans investing in such Fund and determine 
what action, if any, should be taken in response to such

[[Page 60487]]

conflicts. A material irreconcilable conflict may arise for a variety 
of reasons, including: (a) An action by any state insurance regulatory 
authority; (b) a change in applicable federal or state insurance, tax 
or securities laws or regulations, or a public ruling, private letter 
ruling, no-action or interpretative letter, or any similar action by 
insurance, tax or securities regulatory authorities; (c) an 
administrative or judicial decision in any relevant proceeding; (d) the 
manner in which the investments of such Fund are being managed; (e) a 
difference in voting instructions given by variable annuity 
contractowners, variable life insurance contractowners and trustees of 
the Plans; (f) a decision by a Participating Insurance Company to 
disregard the voting instructions of contractowners; or (g) if 
applicable, a decision by a Qualified Plan to disregard the voting 
instructions of Plan participants.
    3. HL Advisors (or any investment adviser to a Fund), and any 
Participating Insurance Companies and Qualified Plan that executes a 
participation agreement upon becoming an owner of 10 percent or more of 
the assets of an Existing Fund or a Future Fund (collectively, 
``Participants'') will report any potential or existing conflicts to 
the relevant Board. Such Participants will be responsible for assisting 
the relevant Board in carrying out the Board's responsibilities under 
these conditions by providing the Board with all information reasonably 
necessary for the Board to consider any issues raised. This includes, 
but is not limited to, an obligation by each Participating Insurance 
Company to inform the relevant Board whenever contractowner voting 
instructions are disregarded, and, if pass-through voting is 
applicable, an obligation by each Qualified Plan to inform the Board 
whenever it has determined to disregard Plan participant voting 
instructions. The responsibility to report such information and 
conflicts, and to assist the Board, will be contractual obligations of 
all Participating Insurance Companies under their participation 
agreements with the Existing Funds and any Future Funds, and these 
responsibilities will be carried out with a view only to the interests 
of the contractowners. The responsibility to report such information 
and conflicts, and to assist the Board, also will be contractual 
obligations of all Qualified Plans with participation agreements, and 
such agreements will provide that these responsibilities will be 
carried out with a view only to the interests of Plan participants.
    4. If it is determined by a majority of a Board, or a majority of 
the disinterested members of such Board, that a material irreconcilable 
conflict exists, then the relevant Participating Insurance Company or 
Plan will, at its 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, including: (a) Withdrawing the assets 
allocable to some or all of the Participating Separate Accounts from 
the relevant Existing Fund or Future Fund and reinvesting such assets 
in a different investment medium, which may include another such Fund, 
(b) in the case of Participating Insurance Companies, submitting the 
question as to whether such segregation should be implemented to a vote 
of all affected contractowners and, as appropriate, segregating the 
assets of any appropriate group (i.e., annuity contractowners or life 
insurance contractholders of one or more Participating Insurance 
Companies) that votes in favor of such segregation, or offering to the 
affected contractowners the option of making such a change; and (c) 
establishing a new registered management investment company or managed 
separate account. If a material irreconcilable conflict arises because 
of a decision by a Participating Insurance Company to disregard 
contractowner voting instructions, and that decision represents a 
minority position or would preclude a majority vote, then the 
Participating Insurance Company may be required, at the election of the 
relevant Existing Fund or Future Fund, to withdraw such Participating 
Insurance Company's separate account's investment in such Fund, and no 
charge or penalty will be imposed as a result of such withdrawal. If a 
material irreconcilable conflict arises because of a Qualified Plan's 
decision to disregard 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 relevant Existing Fund or Future Fund, to withdraw its investment 
in such Fund, 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 will be a contractual 
obligation of all Participants under their agreements governing 
participation in the relevant Existing Fund or Future Fund and this 
responsibility, in the case of Participating Insurance Companies, will 
be carried out with a view only to the interests of contractowners and 
in the case of Qualified Plans, will be carried out with a view only to 
the interest of Plan participants.
    For purposes of this Condition 4, a majority of the disinterested 
members of a Board will determine whether or not any proposed action 
adequately remedies any material irreconcilable conflict, but, in no 
event, will any Existing Fund, any Future Fund or HL Advisors (or any 
other investment adviser to a Fund), as relevant, be required to 
establish a new funding medium for any Variable Contract. No 
Participating Insurance Company will be required by this Condition 4 to 
establish a new funding medium for any Variable Contracts if an offer 
to do so has been declined by the vote of a majority of the 
contractowners materially and adversely affected by the material 
irreconcilable conflict. Further, no Qualified Plan will be required by 
this Condition 4 to establish a new funding medium for the Plan if (a) 
a majority of the Plan participants materially and adversely affected 
by the irreconcilable material conflict vote to decline such offer, or 
(b) pursuant to documents governing the Qualified Plan, the Plan makes 
each decision without a Plan participant vote.
    5. A Board's determination of the existence of a material 
irreconcilable conflict and its implications will be made known in 
writing promptly to all Participants.
    6. Participating Insurance Companies will provide pass-through 
voting privileges to all variable contractowners so long as the 
Commission continues to interpret the Act as requiring such pass-
through voting privileges. Accordingly, such Participating Insurance 
Companies, where applicable, will vote shares of the applicable Fund 
held in its Participating Separate Accounts in a manner consistent with 
voting instructions timely received from contractowners. Participating 
Insurance Companies will be responsible for assuring that each 
Participating Separate Account investing in an Existing Fund or Future 
Fund calculates voting privileges in a manner consistent with other 
Participating Insurance Companies. The obligation to vote a Fund's 
shares and calculate voting privileges in a manner consistent with all 
other Participating Separate Accounts in the Fund will be a contractual 
obligation of all Participating Insurance Companies under their 
agreements governing their

[[Page 60488]]

participation in an Existing Fund or Future Fund. Each Participating 
Insurance Company will vote shares for which it has not received timely 
voting instructions as well as shares attributable to it in the same 
proportion as it votes those shares for which it has received voting 
instructions. Each Qualified Plan will vote as required by applicable 
law and governing Plan documents.
    7. As long as the Commission continues to interpret the Act as 
requiring pass-through voting privileges to be provided to variable 
contractowners, HL Advisors or any of its affiliates will vote its 
shares of any Existing Fund or Future Fund in the same proportion of 
all variable contract owners having voting rights with respect to the 
relevant Fund.
    8. Each Existing Fund and Future Fund will comply with all 
provisions of the Act requiring voting by shareholders (including 
persons who have a voting interest in the shares of the Existing Funds 
and any Future Fund), and, in particular, each such Fund will either 
provide for annual meetings (except to the extent that the Commission 
may interpret section 16 of the Act not to require such meetings) or 
comply with section 16(c) of the Act (although the Existing Funds and 
Future Funds are not, or will not be, the type of trust described in 
section 16(c) of the Act), as well as with section 16(a) of the Act 
and, if and when applicable, section 16(b) of the Act. Further, each 
such Fund will act in accordance with the Commission's interpretation 
of the requirements of section 16(a) with respect to periodic elections 
of directors and with whatever rules the Commission may promulgate with 
respect thereto.
    9. Each Existing Fund and Future Fund will notify all Participants 
that separate account prospectus disclosure regarding potential risks 
of mixed and shared funding may be appropriate. Each such Fund will 
disclose in its prospectus that: (a) Shares of such Fund may be offered 
to insurance company separate accounts of both variable annuity and 
variable life insurance contracts and to Qualified Plans; (b) due to 
differences in tax treatment and other considerations, the interests of 
various contractowners participating in such Fund and the interests of 
Qualified Plans investing in such Funds may conflict; and (c) such 
Funds' Board will monitor events in order to identify the existence of 
any material irreconciliable conflicts and determine what action, if 
any, should be taken in response to any such conflict.
    10. If and to the extent that Rule 6e-2 or Rule 6e-3(T) under the 
Act are amended, or proposed Rule 6e-3 under the Act is adopted, to 
provide exemptive relief from any provision of the Act, or the rules 
promulgated thereunder, with respect to mixed or shared funding, on 
terms and conditions materially different from any exemptions granted 
in the Order requested in this Application, then each Existing Fund and 
each Future Fund and/or the Participants, as appropriate, shall take 
such steps as may be necessary to comply with Rules 6e-2 or 6e-3(T), as 
amended, or Rule 6e-3, as adopted, as such rules are applicable.
    11. The Participants, at least annually, will submit to the Board 
of each Existing Fund and any Future Fund such reports, materials, or 
data as a Board may reasonably request so that the directors of the 
Board may fully carry out the obligations imposed upon a Board by the 
conditions contained in this Application, and said reports, materials 
and data will be submitted more frequently if deemed appropriate by a 
Board. The obligations of the Participants to provide these reports, 
materials and data to a Board, when it so reasonably requests, will be 
a contractual obligation of all Participants under their agreements 
governing participation in the Existing Funds and Future Funds.
    12. All reports of potential or existing conflicts received by a 
Board, and all Board action with regard to (a) determining the 
existence of a conflict, (b) notifying Participants of the existence of 
a conflict and (c) determining whether any proposed action adequately 
remedies a conflict, will be properly recorded in the minutes of the 
meetings of the relevant Board or other appropriate records, and such 
minutes or other records shall be made available to the Commission upon 
request.
    13. An Existing Fund and any Future Fund will not accept a purchase 
order from a Qualified Plan if such purchase would make the Plan 
shareholder an owner of 10 percent or more of the assets of such Fund 
unless such Plan executes an agreement with the relevant Fund governing 
participation in such Fund that includes the conditions set forth 
herein to the extent applicable. A Qualified Plan will execute an 
application containing an acknowledgement of this condition at the time 
of its initial purchase of shares of any such Fund.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Maragaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-26032 Filed 10-10-00; 8:45 am]
BILLING CODE 8010-01-M