Federal Register / Vol. 65, No. 222 / Thursday, November 16, 2000 / Notices 69349

4 17 CFR 200.30–3(a)(1).

Street, N.W., Washington, D.C. 20549–

0609, facts bearing upon whether the

application has been made in

accordance with the rules of the Amex

and what terms, if any, should be

imposed by the Commission for the

protection of investors. The

Commission, based on the information

submitted to it, will issue an order

granting the application after the date

mentioned above, unless the

Commission determines to order a

hearing on the matter.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.4

Jonathan G. Katz,

Secretary.

[FR Doc. 00–29288 Filed 11–15–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Rel. No. IC–24734; File No. 812–12228]

Summit Mutual Funds, Inc., et al.,

Notice of Application

November 9, 2000.

AGENCY: Securities and Exchange

Commission (the ‘‘Commission’’).

ACTION: Notice of application for an

order pursuant to Section 6(c) of the

Investment Company Act of 1940, as

amended (the ‘‘1940 Act’’) providing

exemptions 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.

Applicants: Summit Mutual Funds,

Inc. (the ‘‘Fund’’) and Summit

Investment Partners, Inc. (the

‘‘Adviser’’).

Summary of Application: The Fund

and the Adviser seek an order

exempting them and certain life

insurance companies (‘‘Participating

Insurance Companies’’) and their

separate accounts 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 (including any

comparable provisions of a permanent

rule that replaces Ruled 6e–3(T) or Rule

6e–2, as subsequently amended) to the

extent necessary to permit series of

shares of any current or future

investment portfolio of the Fund to be

sold to and held by (a) variable annuity

and variable life insurance separate

accounts of both affiliated and

unaffiliated life insurance companies,

and (b) qualified pension and retirement

plans, including, without limitation,

those trusts, plans accounts, contracts or

annuities described in sections 401(a),

403(a), 403(b), 408(a), 408(b), 414(d),

457(b), 408(k), or 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) outside of the separate

account context (‘‘Qualified Plans’’).

Filing Date: The application was filed

on August 21, 2000; an amendment

substantially conforming to this Notice

will be filed during the pendency of the

Notice period.

Hearing or Notification of Hearing: An

order granting the application will be

issued unless the Commission orders a

hearing. Interested persons may request

a hearing by writing to the Secretary of

the Commission and serving Applicants

with a copy of the request, personally or

by mail. Hearing requests must be

received by the Commission by 5:30

p.m. on December 1, 2000, and should

be accompanied by proof of service on

Applicants in the form of an affidavit or,

for lawyers, a certificate of service.

Hearing requests should state the nature

of the 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

Commission.

ADDRESSES: Secretary, Securities and

Exchange Commission, 450 Fifth Street,

NW., Washington, DC 20549–0609; the

Fund, P.O. Box 40409, Cincinnati, Ohio

45240–0409; and the Adviser, 312 Elm

Street, Suite 2525, Cincinnati, Ohio

45202.

FOR FURTHER INFORMATION CONTACT:

Rebecca A. Marquigny, Senior Counsel,

or Keith Carpenter, Branch Chief, Office

of Insurance Products, Division of

Investment Management, at (202) 942–

0670.

SUPPLEMENTARY INFORMATION: The

following is a summary of the

application. The complete application is

available for a fee from the Public

Reference Branch of the Commission,

450 Fifth Street, NW., Washington, DC

20549–0102 (telephone (202) 942–8090).

Applicant’s Representations

1. The Fund, formerly known as

Carillon Fund, Inc., is a management

investment company with 22 separate

investment portfolios (‘‘Portfolios’’),

each with its own investment objective.

Nine of the Portfolios (the ‘‘Insurance

Portfolio’’) currently serve as funding

vehicles for registered variable annuity

contracts and registered variable life

insurance contracts issued by The

Union Central Life Insurance Company

(‘‘Union Central’’). The other 13

Portfolios (the ‘‘Public Portfolios’’) are

offered directly to the public and also

serve as funding vehicles for

unregistered variable annuity contracts

and variable life insurance policies of

Union Central. The Public Portfolios are

not used to fund registered variable

annuity contracts. None of the relief

requested here would apply to any

current or future Public Portfolios. The

Fund is registered under the Act (File

No. 811–04000), and the offering of its

shares is registered under the Securities

Act of 1933 (File No. 2–90309). The

Fund’s shares are issuable into separate

series, each series representing interests

in a separate Portfolio. In addition to the

nine current Insurance Portfolios, the

Fund may create additional Insurance

Portfolios in the future and Applicants

seek relief that would encompass both

existing Insurance Portfolios and new

Insurance Portfolios created in the

future. References herein to ‘‘Insurance

Portfolios’’ encompasses both existing

Insurance Portfolios and ones that may

be created in the future.

2. The Adviser, formerly known as

Carillon Advisers, Inc., was

incorporated under the laws of Ohio on

August 18, 1986, as successor to the

advisory business of Carillon

Investments, Inc., the investment

adviser for the Fund since 1984. The

Adviser is a wholly-owned subsidiary of

Union Central, a mutual life insurance

company organized in 1867 under the

laws of Ohio. The Adviser is registered

under the Investment Advisers Act of

1940 and serves as investment adviser

to each of the Portfolios.

3. Participating Insurance Companies

are the life insurance companies to

which shares of the Insurance Portfolios

will be offered. The Participating

Insurance Companies will establish

their own separate accounts and design

their own variable annuity and variable

life insurance contracts (‘‘Contracts’’).

Each such Contract will undoubtedly

have certain unique features and will

probably differ from other Contracts

supported by the Insurance Portfolios

with respect to insurance guarantees,

premium structure, charges, options,

distribution method, marketing

techniques, sales literature, etc.

4. Each Participating Insurance

Company will be the legal obligation of

satisfying all applicable requirements

under state and federal law. It is

anticipated that Participating Insurance

Companies will rely on Rule 6e–2 or 6e–

3(T) under the Act, although some may

rely on individual exemptive orders as

well, in connection with variable life

insurance contracts. The role of the

69350 Federal Register / Vol. 65, No. 222 / Thursday, November 16, 2000 / Notices

Fund, so far as the federal securities

laws are applicable, will be limited to

that of offering shares of the Insurance

Portfolios to separate accounts of

various insurance companies and to

Qualified Plans and fulfilling any

conditions the Commission may impose

upon granting the order requested

herein.

Applicants’ Legal Analysis

5. Under current tax laws, the

Insurance Portfolios are afforded an

opportunity to increase their asset base

through the sale of shares of the

Insurance Portfolios to Qualified Plans.

Section 817(h) of the Code, imposes

certain diversification standards on the

underlying assets of variable annuity

contracts and variable life policies held

in the Insurance Portfolios.

6. Qualified Plans may choose any of

the Insurance Portfolios as the sole

investment under the Plan or as one of

several investments. Plan participants

may or may not be given an investment

choice depending on the Plan itself.

Shares of any of the Insurance Portfolios

sold to certain Qualified Plans would be

held by the trustee(s) of those Plans as

mandated by Section 403(a) of the

Employee Retirement Income Security

Act (‘‘ERISA’’). As described elsewhere

herein, there will be no pass-through

voting to the participants in such

Qualified Plans. The Adviser will not

act as investment adviser to any of the

Qualified Plans that will purchase

shares of any of the Insurance Portfolios.

7. 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 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 Separate Accounts and

Qualified Plans could not have been

envisioned at the time of the adoption

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

given the then-current tax law.

8. In connection with 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)

provides partial exemptions from

Sections 9(a), 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 investment

company’s shares. The exemptions

granted to a separate 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 that offer their 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 with respect to a

scheduled premium variable life

insurance separate account that owns

shares of an investment company that

also offers its shares to a variable

annuity separate account of the same or

of any affiliated or unaffiliated

insurance company. The use of a

common management investment

company as the underlying investment

medium for both variable annuity and

variable life insurance separate accounts

is commonly referred to, and is referred

to herein, as ‘‘mixed funding.’’

9. In addition, the relief granted by

Rule 6e–2(b)(15) is not available if

shares of the underlying investment

company are offered to variable annuity

or variable life insurance separate

accounts of unaffiliated insurance

companies. The use of a common

investment company as the underlying

investment medium for separate

accounts of unaffiliated insurance

companies is commonly referred to, and

is referred to herein, as ‘‘shared

funding.’’

10. The relief granted by Rule 6e–

2(b)(15) is in no way affected by the

purchase of shares of the Insurance

Portfolios by Qualified Plans. However,

because the relief under Rule 6e–

2(b)(15) is available only where shares

are offered exclusively to separate

accounts, additional exemptive relief is

necessary if the shares of the Insurance

Portfolios are also to be sold to Plans.

11. Applicants request an order of the

Commission exempting scheduled

premium variable life insurance

separate accounts (and, to the extent

necessary, any investment adviser,

principal underwriter and depositor of

such a separate account) from Sections

9(a), 13(a), 15(a) and 15(b) of the Act,

and Rule 6e–2(b)(15) thereunder, to the

extent necessary to permit shares of the

Insurance Portfolios, which will also be

sold directly to Qualified Plans, to be

offered and sold in connection with

both mixed funding and shared funding.

12. 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) provides partial exemptions

from Sections 9(a), 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

investment company’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 that

offer their shares ‘‘exclusively to

separate accounts of the life insurer, or

of any affiliated life insurance company,

offering either scheduled premium

variable life insurance contracts or

flexible premium variable life insurance

contracts, or both; or which also offer

their shares to variable annuity separate

accounts of the life insurer or of an

affiliated life insurance company.’’

(emphasis added). Therefore, Rule 6e–

3(T) permits mixed funding for flexible

premium variable life insurance.

However, Rule 6e–3(T) does not permit

shared funding. The relief granted by

Rule 6e–3(T)(b)(15) is not available with

respect to a flexible premium variable

life insurance separate account that

owns shares of an investment company

that also offers its shares to separate

accounts (including flexible premium

variable life insurance separate

accounts) of unaffiliated life insurance

companies.

13. The relief granted by Rule 6e–3(T)

also is in no way affected by the

purchase of shares of the Insurance

Portfolios by Qualified Plans. However,

because the relief under Rule 6e–3(T) is

available only where shares are offered

exclusively to separate accounts,

additional exemptive relief is necessary

if the shares of the Insurance Portfolios

are also to be sold to Plans.

14. Applicants request an order

exempting flexible premium variable

life insurance separate accounts (and, to

the extent necessary, any investment

adviser, principal underwriter and

depositor of such a separate account)

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

of the Act, and Rule 6e–3(T)(b)(15) (and

any comparable permanent rule)

thereunder, to the extent necessary to

permit shares of the Insurance

Portfolios, which will also be sold

directly to Qualified Plans, to be offered

and sold to separate accounts in

connection with shared funding.

15. The Commission has granted

numerous exemptions similar to those

requested herein with respect to the

mixed and shared funding component

of this Application, including ones

where the fund’s shares also would be

sold directly to Qualified Plans.

16. Section 6(c) authorizes the

Commission to exempt any person,

security or transaction or any class or

Federal Register / Vol. 65, No. 222 / Thursday, November 16, 2000 / Notices 69351

classes of persons, securities or

transactions from the provisions of the

Act and the rules promulgated

thereunder if and to the extent that such

exemption is necessary or appropriate

in the public interest and consistent

with the protection of investors and the

purposes fairly intended by the policy

and provisions of the Act. Applicants

are not aware of any stated rationale for

the exclusion of 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 the exclusion

of separate accounts and investment

companies engaged in mixed funding

from the exemptive relief provided

under Rule 6e–2(b)(15). Indeed, the

Commission’s proposed amendments to

Rule 6e–2 would eliminate the

exclusion of mixed funding from the

relief provided under Rule 6e–2(b)(15)

and, as noted above (see supra note 5),

numerous exemptions permitting both

mixed and shared funding have been

granted since the adoption of

Rules 6e–2 and 6e–3(T).

17. Similarly, Applicants are not

aware of any stated rationale for

excluding Participating Insurance

Companies from the exemptive relief

requested because the Insurance

Portfolios may also sell their respective

shares to Qualified Plans. If the Fund

were to sell shares of the Insurance

Portfolios only to Qualified Plans, no

exemptive relief would be necessary.

The relief provided under Rules 6e–

2(b)(15) and 6e–2(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. Exemptive relief is

requested in the Application only

because the separate accounts investing

in the Insurance Portfolios are

themselves investment companies that

rely upon the relief under Rules 6e–2

and 6e–3(T) and do not wish to be

denied such relief if the Insurance

Portfolios sell shares to Qualified Plans.

18. Applicants believe that the same

policies and considerations that led the

Commission to grant such exemptions

to other applicants are present here.

Moreover, for the reasons stated below,

Applicants believe that the requested

exemptions are appropriate in the

public interest and consistent with the

protection of investors and the purposes

fairly intended by the policy and

provisions of the Act.

19. 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). However, Rules 6e–

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

and (ii) provide partial exemptions from

Section 9(a) under certain

circumstances, subject to the limitations

discussed above on mixed and shared

funding. These exemptions limit the

disqualification to affiliated individuals

or companies that directly participate in

the management or administration of

the underlying investment company.

20. The exemptions contained in

Rules 6e–2(b)(15) and 6e–3(T)(b)(15)

recognize that it is unnecessary to apply

Section 9(a) to the thousands of

individuals who may be involved in a

large insurance company but would

have no connection with the investment

company funding the separate accounts.

Applicants believe that it is unnecessary

to limit the applicability of the rules

merely because shares of the Insurance

Portfolios may be sold in connection

with mixed and shared funding. The

Participating Insurance Companies are

not expected to play any role in the

management of the Insurance Portfolios

and would play only an indirect role in

the administration of the Fund (e.g., by

performing certain shareholder

servicing and recordkeeping functions

for which they may be reimbursed by

the Adviser). Therefore, applying the

restrictions of Section 9(a) serves no

regulatory purpose. Indeed, applying

such restrictions would increase the

monitoring costs incurred by the

Participating Insurance Companies and,

therefore, would reduce the net rates of

return realized by Contract owners.

21. Moreover, the relief requested

herein will in no way be affected by the

proposed sale of shares of Insurance

Portfolios to Qualified Plans. The

insulation of the Fund from those

individuals who are disqualified under

the Act will remain intact even if shares

of the Insurance Portfolios are sold to

Qualified Plans. Since the Qualified

Plans are not investment companies and

will not be deemed to be affiliated

persons of the Participating Insurance

Companies solely by virtue of their

shareholdings in the Insurance

Portfolios, no additional relief is

necessary.

22. Rules 6e–2(b)(15)(iii) and 6e–

3(T)(b)(15)(iii) assume that Contract

owners are entitled to pass-through

voting privileges with respect to

investment company shares held by a

related separate account. However, if

the limitations on mixed and shared

funding are satisfied, Rules 6e–

2(b)(15(iii) and 6e–3(T)(b)(15)(iii)

provide exemptions from the passthrough voting requirements in limited

situations.

23. Rules 6e–2(b)(15)(iii)(A) and 6e–

3(T)(b)(15)(iii)(A) provide that an

insurance company may disregard the

voting instructions of its contract

owners with respect to the investments

of an underlying investment company

or any contract between an investment

company and its investment adviser,

when an insurance regulatory authority

so requires. Rules 6e–2(b)(15)(iii)(B) and

6e–3(T)(b)(15)(iii)(B) provide that the

insurance company may disregard

contract owners’ voting instructions

with regard to changes initiated by the

contract owners in the investment

company’s investment policies,

principal underwriter or investment

adviser.

24. Under the rules, voting

instructions with respect to a change in

investment policies may be disregarded

only if the insurance company makes a

good faith determination that the change

would: (a) Violate state law; (b) result in

investments that were not consistent

with the investment objectives of the

separate account; or (c) result in

investments that would vary from the

general quality and nature of

investments and investment techniques

used by other separate accounts of the

company or of an affiliated life

insurance company with similar

investment objectives. Voting

instructions with respect to a change in

an investment adviser may be

disregarded only if the insurance

company makes a good faith

determination that: (a) The adviser’s fee

would exceed the maximum rate that

may be charged against the separate

account’s assets; (b) the proposed

adviser may be expected to employ

investment techniques that vary from

the general techniques used by the

current adviser; or (c) the proposed

adviser may be expected to manage the

investment company’s investments in a

manner that would be inconsistent with

its investment objectives or in a manner

that would result in investments that

vary from certain standards.

25. Rule 6e–2 recognizes that variable

life insurance contracts have important

elements unique to insurance contracts

and are subject to extensive state

regulation of insurance. Thus, in

adopting Rule 6e–2, the Commission

expressly recognized that exemptions

from pass-through voting requirements

were necessary ‘‘to assure the solvency

of the life insurer and the 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.’’ Flexible premium variable

life insurance contracts and variable

69352 Federal Register / Vol. 65, No. 222 / Thursday, November 16, 2000 / Notices

annuity contracts are subject to

substantially the same state insurance

regulatory authority, and therefore, the

corresponding provisions of Rule 6e–

3(T) (which apply to flexible premium

insurance contracts and which permit

mixed funding) presumably were

adopted in recognition of the same

considerations as the Commission

applied in adopting Rule 6e–2.

26. These considerations are no less

important or necessary when an

insurance company funds its separate

accounts in connection with mixed and

shared funding. Such funding does not

compromise the goals of the insurance

regulatory authorities or of the

Commission. While the Commission

may have wished to reserve wide

latitude wither respect to the once

unfamiliar variable annuity product,

that product is now familiar and there

appears to be no reason for the

maintenance of prohibitions against

mixed and shared funding

arrangements. Indeed, by permitting

such arrangements, the Commission

eliminates needless duplication of startup and administrative expenses and

potentially increases an investment

company’s assets, thereby making

effective portfolio management

strategies easier to implement and

promoting other economies of scale.

27. In addition, the Insurance

Portfolio’s sale of shares to Qualified

Plans will not have any impact on the

relief requested in this regard. Shares of

the Insurance Portfolios sold to certain

Plans would be held by the Plans

trustees, as mandated by Section 403(a)

of 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) are subject to the direction

of a named fiduciary who is not a

trustee, in which case the trustees are

subject to proper direction 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, trustees have

the exclusive authority and

responsibility for voting proxies. Where

a named fiduciary appoints an

investment manager, the investment

manager has the responsibility to vote

the shares held unless the right to vote

such shares is reversed to the trustees or

the named fiduciary. In any event, there

is no pass-through voting to the

participants in such plans. Accordingly,

unlike the case with insurance company

separate accounts, the issue of the

resolution of material irreconcilable

conflicts with respect to voting is not

present with Qualified Plans.

28. 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.

For example, when different

Participating Insurance Companies are

domiciled in different states, it is

possible that the state insurance

regulatory body in a state in which one

Participating Insurance Company is

domiciled could require action that is

inconsistent with the requirements of

insurance regulators in one or more

other states in which other Participating

Insurance Companies are domiciled.

That possibility, however, is no

different and no greater than exists

when a single insurer and its affiliates

offer their insurance products in several

states, as currently is permitted.

29. Affiliations do not reduce the

potential, if any exists, for differences in

state regulatory requirements. In any

event, the conditions discussed below

(which are adapted from the conditions

included in Rule 6e-3(T)(b)(15) are

designed to safeguard against any

adverse effects that differences among

state regulatory requirements may

produce. If a particular state insurance

regulator’s decision conflicts with the

majority of other state regulators, the

affected insurer may be required to

withdraw its separate account’s

investment in the relevant Insurance

Portfolios.

30. Similarly, affiliation does not

eliminate the potential, if any exists, for

divergent judgments as to when a

Participating Insurance Company could

disregard Contract owner voting

instructions. The potential for

disagreement is limited by the

requirement that disregarding voting

instructions be reasonable and based on

specified good faith determinations.

However, if a Participating Insurance

Company’s decision to disregard

Contract owner voting instructions

represents a minority position or would

preclude a majority vote approving a

particular change, that Participating

Insurance Company may be required, at

the election of the relevant Insurance

Portfolio, to withdraw its separate

account’s investment in that fund and

no charge or penalty will be imposed as

a result of that withdrawal.

31. There is no reason why the

investment policies of an Insurance

Portfolio are mixed funding would or

should be materially different from what

they would or should be if that Portfolio

funded only variable annuity contracts

or only variable life insurance contracts.

Hence, there is no reason to believe that

conflicts of interest would result from

mixed funding. Moreover, the Insurance

Portfolios will not be managed to favor

or disfavor any particular insurer or

type of Contract.

32. No one investment strategy can be

identified as appropriate to a particular

insurance product. Each pool of

Contract owners is composed of

individuals of diverse financial status,

age, insurance and investment goals.

Those diversities are of greater

significance than any differences in

insurance products. An investment

company supporting even one type of

insurance product must accommodate

those diverse factors.

33. Section 817(h) of the Code is the

only section in the Code where separate

accounts are discussed. Section 817(h)

imposes certain diversification

standards on the underlying assets of

variable annuity contracts and variable

life contracts held in the portfolios of

investment companies. Treasury

Regulation 1.817–5(f)(3)(iii), which

established diversification requirements

for such portfolios, specifically permits,

among other things, qualified pension or

retirement plans and separate accounts

to share the same underlying investment

company. Therefore, neither the Code,

the Treasury Regulations nor Revenue

Rulings thereunder present any inherent

conflicts of interest if Qualified Plans,

variable annuity separate accounts and

variable life separate accounts all invest

in the same management investment

company.

34. While there are differences in the

manner in which distributions are taxed

for variable annuity contracts, variable

life insurance contracts and Qualified

Plans, the tax consequences do not raise

any conflicts of interest. When

distributions are to be made, and the

separate account or the Qualified Plan

cannot net purchase payments to make

the distributions, the separate account

or the Plan will redeem shares of the

Fund at their net asset value. The

Qualified Plan will than make

distributions in accordance with the

terms of the Plan and the life insurance

company will make distributions in

accordance with the terms of the

variable contract.

35. With respect to voting rights, it is

possible to provide an equitable means

of giving such voting rights to separate

account Contract owners and to the

trustees of Qualified Plans. The transfer

agent for the Fund will inform each

Participating Insurance Company of its

share ownership in each separate

account, as well as inform the trustees

of Qualified Plans of their holdings.

Each Participating Insurance Company

Federal Register / Vol. 65, No. 222 / Thursday, November 16, 2000 / Notices 69353

will then solicit voting instructions in

accordance with Rules 6e–2 and 6e–

3(T).

36. The ability of the Fund to sell

shares of the Insurance Portfolios

directly to Qualified Plans does not

create a ‘‘senior security,’’ as such term

is defined under Section 18(g) of the

Act, with respect to any Contract owner

as opposed to a participant under a

Qualified Plan. As noted above,

regardless of the rights and benefits of

participants under the Qualified Plans,

or Contract owners under Contracts, the

Qualified Plans and the separate

accounts have rights only with respect

to their respective shares of the Fund.

They can only redeem such shares at

their net asset value. No shareholder of

any of the Insurance Portfolios has any

preference over any other shareholder

with respect to distribution of assets or

payment of dividends.

37. There are no conflicts between the

Contract owners of the separate

accounts and the participants under the

Qualified Plans with respect to the state

insurance commissioners’ veto powers

(direct with respect to variable life and

indirect with respect to variable

annuities) over investment objectives.

The basic premise of shareholder voting

is that not all shareholders may agree

that there are any inherent conflicts of

interest among shareholders. The state

insurance commissioners have been

given the veto power to recognition of

the fact that insurance companies

cannot simply redeem their separate

accounts out of one fund and invest in

another. Time-consuming, complex

transactions must be undertaken to

accomplish such redemptions and

transfers. On the other hand, trustees of

Qualified Plans can made the decision

quickly and implement the redemption

of their shares from an Insurance

Portfolio and reinvest in another

funding vehicle without the same

regulatory impediments or, as is the

case with most Plans, even hold cash

pending suitable investment. Based on

the foregoing, even if there should arise

issues where the interests of Contract

owners and the interests of Qualified

Plans are in conflict, the issues can be

almost immediately resolved because

the trustees of the Qualified Plans can,

on their own, redeem the shares out of

the Fund.

38. Various factors have kept more

insurance companies from offering

variable annuity and variable life

insurance contracts than currently do

so. These factors include the costs of

organizing and operating a funding

medium, the lack of expertise with

respect to investment management

(principally with respect to stock and

money market investments) and the lack

of public name recognition as

investment experts. In particular, some

smaller life insurance companies may

not find it economically feasible, or

within their investment or

administrative expertise, to enter the

variable life insurance or variable

annuity business on their own.

39. Use of the Insurance Portfolios as

common investment media for Contracts

would ameliorate these concerns.

Participating Insurance Companies

would benefit not only from the

investment advisory and administrative

expertise of the Adviser, but also from

the cost efficiencies and investment

flexibility afforded by a large pool of

funds. Therefore, making the Insurance

Portfolios available for mixed and

shared funding will encourage more

insurance companies to offer Contracts.

This should result in increased

competition with respect to both

Contract design and pricing, which can

be expected to result in more product

variation and lower charges. Contract

owners would benefit because mixed

and shared funding should eliminate a

significant portion of the costs of

establishing and administering separate

funds.

40. Moreover, sale of the shares of

Insurance Portfolios to Qualified Plans

should result in an increased amount of

assets available for investment by those

Portfolios. This, in turn, should inure to

the benefit of Contract owners by

promoting economies of scale, by

permitting greater safety through greater

diversification, and by making the

addition of new Insurance Portfolios to

the Fund more feasible.

41. Applicants see no significant legal

impediment to permitting mixed and

shared funding. Indeed, as noted above,

the Commission has issued several

orders permitting mixed and shared

funding with respect to both scheduled

and flexible premium contracts. In

addition, the Commission has

broadened its grant of exemptive relief

by issuing an order permitting mixed

and shared funding while Fund shares

are also sold directly to Qualified Plans.

Therefore, as the Commission has tacitly

acknowledged, granting the exemptions

requested herein is in the public interest

and, as discussed above, will not

compromise the regulatory purposes of

Section 9(a), 13(a), 15(a), or 15(b) of the

Act or Rule 6e–2 or 6e–3(T) thereunder.

Applicants’ Conditions

Applicants consent to the following

conditions:

1. A majority of the Fund’s board of

directors (the ‘‘Board’’) will consist of

persons who are not ‘‘interested

persons’’ thereof, as defined by Section

2(a)(19) of the 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

of bona fide resignation of any director,

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

Insurance Portfolios for the existence of

any material irreconcilable conflict

between and among the interests of the

Contract owners of all separate accounts

and participants of all Qualified Plans

investing in the Insurance Portfolios. An

irreconcilable material 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, noaction or interpretive letter, or any

similar action by insurance, tax, or

securities regulatory authorities; (c) an

administrative or judicial decision in

any relevant proceeding; (d) the manner

in which the investments of the

Insurance Portfolios are being managed;

(e) a difference in voting instructions

given by variable annuity contract

owners, variable life insurance contract

owners and trustees of the Qualified

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

Qualified Plan to disregard the voting

instructions of Qualified Plan

participants.

3. Participating Insurance Companies,

the Adviser and any Qualified Plan that

executes a fund participation agreement

upon becoming an owner of 10% or

more of the assets of an Insurance

Portfolio (collectively, ‘‘Participating

Parties’’) will report any potential or

existing conflicts of which they become

aware to the Board. Participating Parties

will be responsible for assisting the

Board in carrying out its responsibilities

under these conditions 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 a Participating Insurance

Company to inform the Board whenever

it has determined to disregard Contract

owner voting instructions, and, if passthrough voting is applicable, an

69354 Federal Register / Vol. 65, No. 222 / Thursday, November 16, 2000 / Notices

obligation of each Qualified Plan to

inform the Board whenever it has

determined to disregard Qualified Plan

participant voting instructions. The

responsibility to report such

information and conflicts and to assist

the Board will be contractual obligations

of all Participating Parties under their

agreements governing participation in

the Insurance Portfolios, and their

participation agreements with the Fund

shall provide that these responsibilities

will be carried out with a view only to

the interests of Contract owners and, if

applicable, Qualified Plan participants.

4. If it is determined by a majority of

the Board, or by a majority of its

disinterested directors, that a material

irreconcilable conflict exists, the

relevant Participating Parties will, at

their expense and to the extent

reasonably practicable (as determined

by a majority of the disinterested

directors), take whatever steps are

necessary to remedy or eliminate the

irreconcilable material conflict, which

steps could include: (a) Withdrawing

the assets allocable to some or all of the

separate accounts from the Insurance

Portfolio(s) and reinvesting such assets

in a different investment medium,

which may include another Insurance

Portfolio; (b) submitting the question of

whether such segregation should be

implemented to a vote of all affected

Contract owners and, as appropriate,

segregating the assets of any appropriate

group (i.e., variable annuity contract

owners or variable life insurance

contract owners of one or more

Participating Insurance Companies) that

votes in favor of such segregation, or

offering to the affected Contract owners

the option of making such a change; (c)

in the case of Qualified Plans,

withdrawing the assets allocable to

some or all of the Qualified Plans from

the affected Insurance Portfolio and

reinvesting those assets in a different

investment medium, including another

Insurance Portfolio; and (d) 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 that decision

represents a minority position or would

preclude a majority vote, the

Participating Insurance Company may

be required, at the election of the Fund,

to withdraw its separate account’s

investment in one or more Insurance

Portfolios, and no charge or penalty will

be imposed as a result of that

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 Fund, to

withdraw its investment in an Insurance

Portfolio and no charge or penalty will

be imposed as a result of such

withdrawal. The responsibility of taking

remedial action in the event of a Board

determination of an irreconcilable

material conflict and bearing the cost of

such remedial action will be a

contractual obligation of all

Participating Parties under their

respective participation agreements and

these responsibilities will be carried out

with a view only to the interests of

Contract owners and participants in

Qualified Plans.

5. For purposes of condition 4, a

majority of the disinterested directors of

the Board will determine whether or not

any proposed action adequately

remedies any irreconcilable material

conflict, but in no event will the Fund

or the Adviser be required to establish

a new funding medium for any Contract.

No Participating Insurance company

shall be required by this condition 4 to

establish a new funding medium for any

Contract if an offer to do so has been

declined by vote of a majority of

Contract owners materially and

adversely affected by the irreconcilable

material 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 Plan

participants materially and adversely

affected by the irreconcilable material

conflict vote to decline that offer; or (b)

pursuant to documents governing the

Qualified Plan, the Plan makes that

decision without a Plan participant

vote.

6. The Board’s determination of the

existence of an irreconcilable material

conflict and its implications will be

made known promptly in writing to all

Participating Parties.

7. Participating Insurance Companies

will provide pass-through voting

privileges to all Contract owners so long

as the Commission interprets the Act to

require pass-through voting privileges

for Contract owners. Accordingly, the

Participating Insurance Companies will

vote shares of an Insurance Portfolio

held in their separate accounts in a

manner consistent with voting

instructions timely received from

Contract owners. Participating

Insurance Companies will be

responsible for assuring that each of

their registered separate accounts

calculates voting privileges in a manner

consistent with other Participating

Insurance Companies. The obligation to

calculate voting privileges in a manner

consistent with all other registered

separate accounts investing in the

Insurance Portfolios will be a

contractual obligation of all

Participating Insurance Companies

under the agreements governing

participation in the Insurance Portfolios.

Each Participating Insurance Company

will vote shares for which it has not

received voting instructions, as well as

shares attributable to it, in the same

proportion as it votes shares for which

it has received instructions. Each

Qualified Plan will vote as required by

applicable law and governing Plan

documents.

8. The Fund will notify all

Participating Insurance Companies that

separate account prospectus disclosure,

or Qualified Plan prospectus disclosure

or other Qualified Plan document

disclosure, regarding potential risks of

mixed and shared funding may be

appropriate. The Fund will disclose in

its prospectus that: (a) Its shares are

offered to Qualified Plans and to

separate accounts that fund both

annuity and life insurance contracts of

affiliated and unaffiliated Participating

Insurance Companies; (b) due to

differences in tax treatment and other

considerations, the interests of various

contract owners participating in an

Insurance Portfolio and the interests of

Qualified Plans investing in such

Insurance Portfolio, if applicable, may

conflict as a result of the mixed and

shared funding arrangement; and (c) the

Fund’s Board will monitor for the

existence of any material conflicts and

determine what action, if any, should be

taken.

9. All reports of potential or existing

conflicts received by a Board, and all

Board action with regard to determining

the existence of a conflict, notifying

Participating Insurance Companies and

Qualified Plans 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 emended (or if Rule

6e–3 under the Act is adopted) to

provide exemptive relief from any

provision of the 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 by Applicants, then the Fund

and/or the Participating Insurance

Companies, as appropriate, shall take

Federal Register / Vol. 65, No. 222 / Thursday, November 16, 2000 / Notices 69355

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

2 17 CFR 240.19b–4.

such steps as may be necessary to

comply with Rules 6e–2 and 6e–3(T), as

amended, and Rule 6e–3, as adopted, to

the extent applicable.

11. The Fund will comply with all

provisions of the Act requiring voting by

shareholders (which, for these purposes,

shall be the persons having a voting

interest in shares of the Insurance

Portfolios), and, in particular, the 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 Fund is not an investment

company of the type described in

Section 16(c) of the Act), as well as with

Section 16(a), and, if applicable, Section

16(b) of the Act. Further, the 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.

12. No less than annually, the

Participating Insurance Companies and/

or the Adviser shall submit to the Board

such reports, materials, or data as the

Board may reasonably request so that

the Board may carry out fully the

obligations imposed upon it by the

conditions contained in these express

conditions. Such reports, materials, and

data shall be submitted more frequently

if deemed appropriate by the Board. The

obligations of the Participating Parties to

provide these reports, materials, and

date to the Board shall be a contractual

obligation of all Participating Parties

under the agreements governing their

participation in the Insurance Portfolios.

13. In the event that a Qualified Plan

shareholder should ever become an

owner of 10% or more of the assets of

an Insurance Portfolio, that Qualified

Plan shareholder will execute a fund

participation agreement with the Fund

including the conditions set forth herein

to the extent applicable. A Qualified

Plan shareholder will execute an

application containing an

acknowledgment of this condition at the

time of its initial purchase of shares of

the Insurance Portfolio.

Conclusion

For the reasons and upon the facts

stated above, Applicants assert that the

requested exemptions are appropriate in

the public interest and consistent with

the protection of investors and the

purposes fairly intended by the policy

and provisions of the Act.

For the Commission by the Division of

Investment Management pursuant to

delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–29352 Filed 11–15–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43530; File No. SR–CHX–

00–28]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Chicago Stock Exchange, Inc., to

Amend its Rule Relating to Automatic

Execution of Agency Limit Orders for

Dual Trading System Issues

November 7, 2000.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on

September 14, 2000, the Chicago Stock

Exchange, Inc. (‘‘CHX’’ or ‘‘Exchange’’)

filed with the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

the proposed rule change as described

in Items I, II, and III below, which Items

have been prepared by the Exchange.

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 Exchange proposes to amend its

rule relating to automatic execution of

agency limit orders for Dual Trading

System issues in the event of a tradethrough. Specifically, the Exchange

proposes to amend Article XX, Rule

37(b)(6). The text of the proposed rule

change is below. Proposed additions are

in italics. Proposed deletions are in

brackets.

Guaranteed Execution System And

Midwest Automated Execution System

Rule 37.

* * * * *

(b) Automated Executions. The

Exchange’s Midwest Automated

Execution System (the MAX System)

may be used to provide an automated

delivery and execution facility for

orders that are eligible for execution

under the Exchange’s BEST Rule

(Article XX, Rule 37(a)) and certain

other orders. In the event that an order

that is subject to the BEST Rule is sent

through MAX, it shall be executed in

accordance with the parameters of the

BEST Rule and the following. In the

event that an order that is not subject to

the BEST Rule is sent through MAX, it

shall be executed in accordance with

the parameters of the following:

* * * * *

(6) Execution of Dual Trading System

Issues. In Dual Trading Systems issues

there shall be a fifteen (15) second delay

between the time a market order is

entered into MAX and the time it is

automatically executed. In the event

that the spread between the ITS BEST

Bid and ITS Best Offer in a stock eligible

for automatic execution in MAX, is

equal to the minimum variation at the

time an order is entered into MAX, that

order shall be executed immediately

(i.e., in 0 seconds without the 15 second

delay). All agency market orders and all

limit orders that are marketable when

entered into the MAX System, that are

of a size less than or equal to the autoexecution threshold and are eligible for

execution under the BEST Rule will

automatically be filled at the ITS Best

Bid (for a sell order) or ITS Best Offer

(for a buy order) or better. All other

agency limit orders will be

[automatically] filled at the limit price

when there is a price penetration of the

limit price in the primary market. A

specialist may elect automatic execution

of such agency limit orders on an issueby-issue basis. [However, if the price

differential between the trade-through

price and the last sale is more than 1⁄4

point or 1% of the value of the tradethrough price, whichever is less, a

second print at a trade-through price

which is less than 1⁄4 point (or 1%) away

from the previous trade-through price is

necessary before the MAX system will

automatically execute the agency limit

order.] For purposes of this Rule,

‘‘agency order’’ shall mean an order for

the account for a customer but shall not

include professional orders as defined

in Article XXX, Rule 2, interpretation

and policy .04.

* * * * *

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

Exchange included statements

concerning the purpose of, and basis for,

the proposed rule change, and discussed

any comments it received on the

proposed rule change. The text of these

statements may be examined at the

places specified in Item IV below. The

Exchange has prepared summaries, set

forth in Sections A, B, and C below, of