[Federal Register Volume 65, Number 222 (Thursday, November 16, 2000)]
[Notices]
[Pages 69349-69355]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-29352]


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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.

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    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

[[Page 69350]]

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

[[Page 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 pass-through 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

[[Page 69352]]

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 start-up 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

[[Page 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, no-action or interpretive letter, or any similar action by 
insurance, tax, or securities regulatory authorities; (c) an 
administrative or judicial decision in any relevant proceeding; (d) the 
manner in which the investments of 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 pass-through voting is applicable, an

[[Page 69354]]

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

[[Page 69355]]

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