Federal Register / Vol. 65, No. 236 / Thursday, December 7, 2000 / Notices 76677

E. Description of Matching Program

OPM provides a monthly electronic

finder file to SSA containing data on

those individuals for whom OPM

requests post 1956 military service

benefit information. These elements will

be matched against SSA records. SSA

furnishes OPM by electronic reply file

benefit information on these

individuals, including the amount of the

SSA benefit attributable to the post 1956

military service (which constitutes the

CSRS or FERS annuity reduction

amount).

F. Privacy Safeguards and Security

The personal privacy of the

individuals whose names are included

in the tapes is protected by strict

adherence to the provisions of the

Privacy Act of 1974 and OMB’s

‘‘Guidance Interpreting the Provisions of

Public Law 100–503, the Computer

Matching and Privacy Protection Act of

1988’’. Access to the records used in the

data exchange is restricted to only those

authorized employees and officials who

need it to perform their official duties.

Records matched or created will be

stored in an area that is physically safe

from access by unauthorized personnel

during duty hours as well as nonduty

hours or when not in use. Records used

in this exchange and any records

created by this exchange will be

processed under the immediate

supervision and control of authorized

personnel in a manner which will

protect the confidentiality of the

records.

Both OPM and SSA have the right to

make onsite inspections or make other

provisions to ensure that adequate

safeguards are being maintained by the

other agency.

F. Inclusive Dates of the Matching

Program

This computer matching program is

subject to review by the Congress and

OMB. OPM’s report to these parties

must be received at least 40 days prior

to the initiation of any matching

activity. If no objections are raised by

either Congress or OMB, and the

mandatory 30 day public notice period

for comment for this Federal Register

notice expires, with no significant

receipt of adverse public comments

resulting in a contrary determination,

then this computer matching program

becomes effective. By agreement

between OPM and SSA, the matching

program will be in effect and continue

for 18 months with an option to renew

for 12 additional months under the

terms set forth in 5 U.S.C. 552a(o)(2)(D).

[FR Doc. 00–31149 Filed 12–6–00; 8:45 am]

BILLING CODE 6325–01–P

SECURITIES AND EXCHANGE

COMMISSION

[Release No. IC–24778; File No. 812–12194]

Advantus Series Fund, Inc., et al.

November 30, 2000.

AGENCY: Securities and Exchange

Commission (the ‘‘Commission’’).

ACTION: Notice of application for an

order under Section 6(c) of the

Investment Company Act of 1940, as

amended (the ‘‘1940 Act’’), for

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: Advantus Series Fund, Inc.

(‘‘Advantus Fund’’), an open-end,

management investment company, and

Advantus Capital Management, Inc.

(‘‘Advantus Capital’’), the investment

adviser of Advantus Fund.

SUMMARY OF APPLICATION: Applicants

seek an order granting 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, to the extent necessary to

permit shares of any current or future

series of the Advantus Fund and of any

future open-end investment companies

for which Advantus Capital or any

affiliated person of Advantus Capital

serves as investment adviser, manager,

principal underwriter, or sponsor

(collectively, ‘‘the Future Funds,’’

collectively with Advantus Fund, the

‘‘Funds’’ or individually a ‘‘Fund’’) to be

sold to and held by (a) separate accounts

funding variable annuity and variable

life insurance contracts issued by both

affiliated and unaffiliated life insurance

companies (the separate accounts,

hereinafter ‘‘Separate Accounts,’’ and

the life insurance companies,

hereinafter ‘‘Participating Life Insurance

Companies’’), and (b) qualified plans

outside of the separate account context

(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) (‘‘Qualified Plans’’ or

‘‘Plans’’). Applicants request that the

exemptive relief being requested apply

to any series of shares of the Funds that

may be created in the future. The only

registered open-end management

investment company that currently

intends to rely on the requested order is

Advantus Fund.

Filing Date: The application was filed

on July 31, 2000, and amended and

restated on November 15, 2000 and

November 28, 2000.

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 26, 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.

Applicants, Minnesota Life Insurance

Company, c/o Donald F. Gruber, Esq.,

Assistant General Counsel, 400 Robert

Street North, St. Paul, Minnesota

55101–2098.

FOR FURTHER INFORMATION CONTACT: Ann

L. Vlcek, Senior Counsel, or Lorna J.

MacLeod, 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 SEC’s Public

Reference Branch, 450 Fifth Street, NW.,

Washington, DC 20549–0102 (202–942–

8090).

Applicants’ Representations

1. Advantus Fund is a no-load, openend, management investment company

registered under the 1940 Act. Advantus

Fund is organized as a Minnesota

corporation established under

Minnesota law on February 21, 1985.

Prior to a change in Advantus Fund’s

name in 1997, Advantus Fund was

known as the MIMLIC Series Fund, Inc.

2. Advantus Fund is a series

company, consisting of nineteen

separate portfolios, each with its own

investment objectives (each a

‘‘Portfolio’’). Each Portfolio issues a

76678 Federal Register / Vol. 65, No. 236 / Thursday, December 7, 2000 / Notices

1Applicants state that some Separate Accounts to

which the Fund may offer its shares may be exempt

from registration under the 1940 Act.

separate series of Advantus Fund’s

common stock. The investment advisor

of Advantus Fund is Advantus Capital,

a Minnesota corporation. Prior to May 1,

1997, Advantus Fund obtained advisory

services from MIMLIC Asset

Management Company, formerly the

parent company of Advantus Capital.

3. Advantus Capital commenced its

business in June 1994, and provides

investment advisory services to eleven

other Advantus funds and various

private accounts. Advantus Capital was

incorporated in Minnesota in June 1994,

and is a wholly owned subsidiary of

Minnesota Life Insurance Company

(‘‘Minnesota Life’’), a Minnesota

corporation that formerly was known as

The Minnesota Mutual Life Insurance

Company.

4. Shares of Advantus Fund are

currently offered to a number of

Separate Accounts of Minnesota Life to

fund benefits under variable annuity

and variable life insurance contracts

issued by it and the Separate Accounts.

Five of those Separate accounts are

registered as unit investment trusts

under the 1940 Act. Shares of Advantus

Fund currently are not sold directly to

the public. Shares of the Funds may, in

the future, be sold to other separate

accounts or to other issuers of variable

annuity and variable life insurance

contracts. The Separate Accounts

referred to above invest in shares of the

relevant Portfolios in accordance with

allocation instructions received from the

variable annuity contract owners or

variable life insurance policy owners of

Minnesota Life.

5. Advantus Fund intends to offer

shares of its existing Portfolios and

future investment portfolios to Separate

Accounts of Participating Insurance

Companies (defined below), in order to

serve as the investment vehicle for

various types of insurance products

which may include variable annuity

contracts, single premium variable life

insurance contracts, scheduled

premium variable life insurance

contracts, modified single premium

variable life insurance policies, and

flexible premium variable life insurance

contracts (collectively referred to herein

as ‘‘variable contracts’’).1 Participating

Insurance Companies will be those

insurance companies that purchase

shares of the Funds, or of any of their

Portfolios or future Portfolios, for such

purposes. The Funds also may offer

shares of their existing Portfolios and

future investment portfolios directly to

Qualified Plans outside of the separate

account context.

6. The Participating Insurance

Companies will establish their own

Separate Accounts and design their own

variable contracts. Each participating

Insurance Company will have the legal

obligation of satisfying all requirements

applicable to such insurance company

under the Federal securities laws. It is

anticipated that Participating Insurance

Companies, in connection with variable

life insurance contracts, may rely on

individual exemptive orders as well.

The role of each of the Funds, so far as

the Federal securities law are

applicable, will be limited to that of

offering its Portfolio shares, as described

below, 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.

7. The Separate Accounts of the

Participating Insurance Companies will

invest in shares of the Funds in

accordance with allocation instructions

received from the contract owners of the

variable contracts (collectively, the

‘‘contract owners’’). Additional

information regarding Advantus Fund is

contained in its prospectus and

statement of additional information,

copies of which are included in

Advantus Fund’s registration statement

under the Securities Act of 1933, as

amended, and the 1940 Act (File Nos.

2–96990 and 811–4279), which is

incorporated herein by reference.

8. As noted above, the Funds may also

sell their shares directly to Qualified

Plans. As described below, changes in

the tax law have created an opportunity

for a Fund to increase its asset base

through the sale of its shares to such

Qualified Plans.

9. Section 817(h) of the Code imposes

certain diversification standards on the

underlying assets of variable contracts

held in segregated asset accounts. The

Code provides that a variable contract

shall not be treated as an annuity or life

insurance contract for any period (and

any subsequent period) for which the

investments, in accordance with

regulations prescribed by the Treasury

Department, are not adequately

diversified. The Treasury Department

has issued regulations (Treas. Reg.

1.817—5) (the ‘‘Treasury Regulations’’)

which establish diversification

requirements for the investment

portfolios underlying variable contracts.

The Treasury Regulations provide that,

in order to rely on certain look-through

provisions of the diversification

requirements, all of the beneficial

interests in the underlying investment

company must be held by the segregated

asset accounts of one or more insurance

companies. The Treasury Regulations,

however, also contain certain

exceptions to this requirement, one of

which allows shares in the investment

company to be held by the trustee of a

qualified pension or retirement plan

without adversely affecting the ability of

shares in the same investment company

also to be held by insurance company

separate accounts (Treas. Reg. 1.817–

5(f)(3)(iii).

10. The promulgation of Rules 6e–

2(b)(15) and 63–3(T)(b)(15) under the

1940 Act 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 also to be

held by the separate accounts of

insurance companies in connection

with their variable contracts. Applicants

submit that the sale of shares of the

same investment company to Separate

Accounts and to Qualified Plans would

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.

11. Applicants submit further that the

relief requested in the order should not

be affected by the proposed sale of

shares of the Funds to Qualified Plans

and, in fact, may allow for the

development of larger pools of assets

resulting in greater cost efficiencies.

Accordingly, Applicants are requesting

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

15(b) and Rules 6e–2(b)(15) and 6e–

3(T)(b)(15) thereunder, to the extent

necessary to permit shares of the Funds

to be offered and sold to, and held by,

Qualified Plans as well as insurance

company separate accounts.

Applicants’ Legal Analysis

1. In connection with the funding of

variable life insurance contracts issued

through a separate account registered

under the 1940 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). Section 9(a) provides

that it is unlawful for any company to

serve as an investment advisor or

principal underwriter of any registered

open-end investment company if an

affiliated person of that company is

subject to a disqualification enumerated

in Sections 9(a)(1) or (2), Rules 6e–

2(b)(15)(i) and (ii) provide partial

exemptions from Section 9(a). Rule 6e–

2(b)(15)(iii) provides a partial

exemption from Sections 13(a), 15(a),

and 15(b), to the extent those sections

have been deemed by the Commission

to require ‘‘pass-through’’ voting with

Federal Register / Vol. 65, No. 236 / Thursday, December 7, 2000 / Notices 76679

2Applicants state that the exemptions provided

by Rule 6e–2 also are available to the investments

advisor, principal underwriter, and sponsor or

depositor of the separate account.

respect to an underlying fund’s shares.

The exemptions granted to a separate

account 2 by Rule 6e–2(b)(15) are

available only where all of the assets of

the separate account consist of the

shares of one or more registered

management investment companies

which offer their shares ‘‘exclusively to

variable life insurance separate accounts

of the life insurer, or of any affiliated

life insurance company’’ (emphasis

supplied). Therefore, the relief granted

by Rule 6e–2(b)(15) is not available with

respect to a variable life insurance

separate account that owns shares of a

management company that also offers

its shares (a) to a variable annuity

separate account of any insurance

company (i.e., to engage in ‘‘mixed

funding’’), (b) to a variable life

insurance or variable annuity separate

account of any unaffiliated life

insurance company (i.e., to engage in

‘‘shared funding’’), or (c) directly to

Qualified Plans.

2. Applicants submit that the relief

granted by Rule 6e–2(b)(15) is in no way

affected by the sale of Fund shares in

connection with mixed or shared

funding or by direct sales to Qualified

Plans. Applicants, therefore, are seeking

an order to permit the Participating

Insurance Companies to rely on the

relief granted in Rule 6e–2(b)(15).

Applicants submit that, if the Funds

were to sell their shares only to

Qualified Plans, that no exemptive relief

would be necessary. None of the relief

provided for in Rule 6e–2(b)(15) relates

to qualified pension and retirement

plans or to a registered investment

company’s ability to sell its shares to

such plans. It is only because the

Separate Accounts investing in the

Funds are themselves investment

companies which desire to rely upon

Rule 6e–2 that the Applicants are

seeking the order. Accordingly, an order

is requested exempting variable life

insurance Separate Accounts (and, to

the extent necessary, any principal

underwriter and depositor of such an

account) from Sections 9(a), 13(a), 15(a),

and 15(b), and Rule 6e–2(b)(15)

thereunder, to the extent necessary to

permit the sale of Funds shares to (a)

variable annuity Separate Accounts and

variable life insurance Separate

Accounts of the same life insurance

company or of affiliated life insurance

companies; (b) Separate Accounts of

unaffiliated life insurance companies;

and (c) Qualified Plans.

3. In connection with flexible

premium variable life insurance

contracts issued through a separate

account registered under the 1940 Act

as a unit investment trust, Rule 6e–

3(T)(b)(15) provides partial exemptions

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

the extent that those sections have been

deemed by the Commission to require

‘‘pass-through’’ voting with respect to

an underlying fund’s shares. In

addition, Rule 6e–3(T)(b)(15) provides a

partial exemption from Section 9(a) to

the extent that such section would

render a company ineligible to serve an

investment advisor or principal

underwriter of any registered open-end

management investment company,

where an officer, director, employee or

affiliated person of such company is

subject to a disqualification enumerated

in Section 9(a), but the individual

subject to such disqualification does not

participate directly in the management

or administration of the underlying

registered management investment

company. The exemptions granted to a

separate account by Rule 6e–3(T)(b)(15)

are available only where all of the assets

of the separate account consist of the

shares of one or more registered

management investment companies

which offer their shares ‘‘exclusively to

separate accounts of the life insurer, or

of any affiliated life insurance company

offering either scheduled (premium

variable life insurance) contracts or

flexible (premium variable life

insurance) contracts, or both; or which

also offer their shares to variable

annuity separate accounts of the life

insurer or of an affiliated life insurance

company’’ (emphasis supplied).

Applicants note that, therefore, Rule 6e–

3(T) permits mixed funding with respect

to a flexible premium variable life

insurance separate account, subject to

certain conditions, but does not permit

shared funding or sales to Qualified

Plans.

4. Applicants submit that the relief

granted by Rule 6e–3(T)(b)(15) is in no

way affected by the purchase of shares

of the Funds by Qualified Plans.

However, in that the relief under Rule

6e–3(T)(b)(15) is available only where

shares are offered exclusively to

separate accounts, Applicants believe

that additional exemptive relief is

necessary if the shares of the Funds are

also to be sold to Qualified Plans.

Applicants, therefore, are seeking the

order to permit the Participating

Insurance Companies to rely on the

relief granted in Rule 6e–3(T)(b)(15).

5. Accordingly, Applicants are

requesting the order granting flexible

premium variable life insurance

Separate Accounts of Participating

Insurance Companies (and, to the extent

necessary, any principal underwriter

and depositor of such an account) and

the Applicants from Sections 9(a), 13(a),

15(a), and 15(b) of the 1940 Act, and

Rule 6e–3(T)(b)(15) thereunder, to the

extent necessary to permit the sale of

Fund shares to (a) variable annuity

Separate Accounts and variable life

insurance Separate Accounts of the

same life insurance company or of

affiliated life insurance companies; (b)

Separate Accounts of affiliated life

insurance companies; and (c) Qualified

Plans.

6. Applicants state that, consistent

with the Commission’s authority under

Section 6(c) of the 1940 Act to grant

exemptive orders to a class or classes or

persons and transactions, their

application requests relief for the class

consisting of insurers and Separate

Accounts’ investing in the Funds (and

principal underwriters and depositors of

such accounts). Applicants maintain

that there is ample precedent, in a

variety of contexts, for granting

exemptive relief not only to the

applicants in a given case, but also to

members of the class not currently

identified that may be similarly situated

in the future. The Applicants state that

the Commission has granted class

exemptions in the context of mixed and

shared funding similar to the class relief

requested herein where the underlying

mutual fund used for funding variable

contracts also would be sold to qualified

pension and retirement plans.

7. Section 6(c) of the 1940 Act

provides, in part, that the Commission,

by order upon application, may

conditionally or unconditionally

exempt any person, security, or

transaction, or any class or classes of

persons, securities, or transactions, from

any provision of the 1940 Act, or the

rules or regulations 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 1940 Act.

8. Applicants represent that they are

not aware of any stated rationale for

excluding Participating Insurance

Companies and Separate Accounts from

the exemptive relief requested herein

because the Funds also may sell their

shares to Qualified Plans. Applicants

maintain that, if the Funds were to sell

their shares only to Qualified Plans, no

exemptive relief would be necessary.

Applicants state that the relief provided

under Rules 6e–2(b)(15) and 6e–

3(T)(b)(15) does not relate to qualified

pension and retirement plans or to a

registered investment company’s ability

76680 Federal Register / Vol. 65, No. 236 / Thursday, December 7, 2000 / Notices

to sell its shares to such plans.

Applicants note that exemptive relief is

requested in this application only

because the Separate Accounts investing

in the Funds are themselves investment

companies seeking relief under Rules

6e–2 and 6e–3(T) and do not wish to be

denied such relief if the Funds sell their

shares to Qualified Plans.

9. Applicants submit 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 submit that the exemptions

requested are appropriate and in the

public interest, consistent with the

protection of investors, and consistent

with the purposes fairly intended by the

policy and provisions of the 1940 Act.

Applicants, therefore, request that the

Commission issue an order under

Section 6(c) of the 1940 Act granting the

exemptions requested.

10. Section 9(a) provides that it is

unlawful for any company to serve as

investment advisor or principal

underwriter of any registered open-end

investment company if an affiliated

person of that company is subject to a

disqualification enumerated in Section

9(a)(1) or (2). Rules 6e–2(b)(15)(i) and

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

provide exemptions from Section 9(a)

under certain circumstances, subject to

the limitations discussed above on

mixed and shared funding imposed by

the 1940 Act and the rules thereunder.

These exemptions limit the application

of the eligibility restrictions to affiliated

individuals or companies that directly

participate in the management of the

underlying management company.

11. Rules 6e–2(b)(15)(i) and 6e–

3(T)(b)(15)(i) provide, in effect, that the

fact that an individual disqualified

under Section 9(a)(1) or Section 9(a)(2)

is an officer, director, or employee of an

insurance company, or any of its

affiliates, would not, by virtue of

Section 9(a)(3), disqualify the insurance

company or any of its affiliates from

serving in any capacity with respect to

an underlying investment company,

provided that the disqualified

individual did not participate directly

in the management or administration of

the underlying investment company.

12. Similarly, Rules 6e–2(b)(15)(ii)

and 6e–3(T)(b)(15)(ii) provide, in effect,

that the fact that any company

disqualified under Section 9(a)(1) or

Section 9(a)(2) is affiliated with the

insurance company would not, by virtue

of Section 9(a)(3), disqualify the

insurance company from serving in any

capacity with respect to an underlying

investment company, provided that the

disqualified company did not

participate directly in the management

or administration of the investment

company.

13. Applicants state that the partial

relief granted in Rules 6e–2(b)(15) and

6e– 3(T)(b)(15) from the requirements of

Section 9, in effect, limits the amount of

monitoring necessary to ensure

compliance with Section 9 to that which

is appropriate in light of the policy and

purposes of Section 9. Applicants

maintain that these 1940 Act rules

recognize that it is not necessary to

apply the provisions of Section 9(a) to

individuals in a large insurance

company complex, most of whom will

have no involvement in matters

pertaining to investment companies in

that organization. Applicants also state

that these 1940 Act rules further

recognize that it is also unnecessary to

apply Section 9(a) to individuals in

various unaffiliated insurance

companies (or affiliated companies of

Participating Insurance Companies) that

may utilize the Funds as funding media

for variable contracts. Applicants

submit that there is no regulatory

purpose in extending the Section 9(a)

monitoring requirements because of

mixed or shared funding. Applicants

represent that the Participating

Insurance Companies are not expected

to play any role in the management or

administration of the Funds, and that

those individuals who participate in the

management or administration of

Advantus Fund and, it is expected, of

any Future Fund, will remain the same

regardless of which Separate Accounts

or insurance companies use such Funds.

Applicants submit that applying the

monitoring requirements of Section 9(a)

because of investment by Separate

Accounts of other insurers would be

unjustified and would not serve any

regulatory purpose. Applicants also

state that the increased monitoring costs

would reduce the net rates of return

realized by contract owners.

14. With respect to Qualified Plans,

Applicants submit that the relief

requested herein from Section 9(a) in no

way will be affected by the proposed

additional use of the shares of the Funds

in connection with Qualified Plans.

Applicants maintain that the insulation

of the Funds from those individuals

who are disqualified under 1940 Act

remains in place. Applicants state that,

since the Qualified Plans are not

investment companies and will not be

deemed to be affiliated solely by virtue

of their shareholdings, no additional

relief from Section 9(a), with respect to

Qualified Plans, is necessary.

15. Applicants state that Rules 6e–

2(b)(15)(iii) and 6e–3(T)(b)(15)(iii)

assume the existence of a pass-through

voting requirement with respect to

management investment company

shares held by a separate account.

Applicants represent that pass-through

voting privileges will be provided by

Participating Insurance Companies with

respect to all variable contract owners

so long as the Commission interprets the

1940 Act to require pass-through voting

privileges for variable contract owners.

16. Applicants state that Rules 6e–

2(b)(15)(iii) and 6e–3(T)(b)(15)(iii)

provide exemptions from the passthrough voting requirement with respect

to several significant matters, assuming

the limitations discussed above on

mixed and shared funding are observed.

17. Applicants furthermore state that

Rules 6e–2(b)(15)(iii)(A) and 6e–

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

insurance company may disregard the

voting instructions of its contract

owners with respect to the investments

of an underlying fund, or any contract

between a fund and its investment

advisor, when required to do so by an

insurance regulatory authority (subject

to the provisions of paragraphs (b)(5)(i)

and (b)(7)(ii)(A) of Rule 6e–2 and 6e–

3(T)).

18. Applicants state that Rules 6e–

2(b)(15)(iii)(B) and 6e–

3(T)(b)(15)(iii)(A)(2) provide that, with

respect to registered management

investment companies whose shares are

held by a separate account of an

insurance company, the insurance

company may disregard voting

instructions of contract owners if the

contract owners initiate any change in

such investment company’s investment

policies, principal underwriter, or any

investment advisor (provided that

disregarding such voting instructions is

reasonable and subject to the other

provisions of paragraphs (b)(5)(ii),

(b)(7)(ii)(B), and (b)(7)(ii)(C) of Rules 6e–

2 and 6e–3(T)).

19. Applicants note that, in the case

of such a change in the investment

company’s investment policies, the

insurance company, in order to

disregard contract owner voting

instructions, must make a good-faith

determination that such a change either

would: (a) Violate state law, or (b) result

in investments that either (i) would not

be consistent with the investment

objectives of the separate account or (ii)

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.

Applicants state that voting instructions

with respect to a change in an

investment advisor or principal

underwriter may be disregarded only if

Federal Register / Vol. 65, No. 236 / Thursday, December 7, 2000 / Notices 76681

3 Investment Company Act Release No. 9104

(December 30, 1975) (proposing Rule 6e–2 under

the 1940 Act).

the insurance company makes a goodfaith determination that: (a) The

advisor’s fee would exceed the

maximum rate that may be charged

against the separate account’s assets; (b)

the proposed advisor may be expected

to employ investment techniques that

vary from the general techniques used

by the current advisor; or (c) the

proposed advisor may be expected to

manage the investment company’s

investments in a manner that would be

inconsistent with the investment

company’s investment objectives or in a

manner that would result in

investments that vary from certain

standards.

20. Applicants state that Rule 6e–2

recognizes that a variable life insurance

contract, as an insurance contract, has

important elements unique to insurance

contracts and is subject to extensive

state regulation of insurance. Applicants

believe that, in adopting Rule 6e–

2(b)(15)(iii), the Commission expressly

recognized that state insurance

regulators have authority, pursuant to

state insurance laws or regulations, to

disapprove or require changes in

investment policies, investment

advisors, or principal underwriters.

Applicants maintain that the

Commission also expressly has

recognized that state insurance

regulators have authority to require an

insurer to draw from its general account

to cover costs imposed upon the insurer

by a change approved by contract

owners over the insurer’s objection. The

Applicants note that the Commission,

therefore, deemed such exemptions

necessary ‘‘to ensure the solvency of the

life insurer and performance of its

contractual obligation 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.’’ 3 Applicants state that, in this

respect, flexible premium variable life

insurance contracts are identical to

scheduled premium variable life

insurance contracts. Applicants

therefore maintain that the

corresponding provisions of Rule 6e–

3(T) (which apply to flexible premium

insurance contracts and which permit

mixed funding) undoubtedly were

adopted in recognition of the same

considerations as the Commission

applied in adopting Rule 6e–2.

21. Applicants believe that these

considerations are no less important or

necessary when an insurance company

funds its separate accounts in

connection with mixed and shared

funding. Applicants not that such mixed

and shared funding does not

compromise the goals of the insurance

regulatory authorities or of the

Commission. Applicants state that,

while the Commission may have wished

to reserve wide latitude with 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. Applicants further state

that, 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 that are easier to implement

and promoting other economies of scale.

22. Applicants maintain that their

proposal also to sell shares of the Funds

to Qualified Plans will not have any

impact on the relief requested in this

regard. Applicants represent that shares

of the Funds would be held by the

trustees of Qualified Plans as mandated

by Section 403(a) of ERISA. Applicants

note that Section 403(a) also provides

that the trustee(s) of a qualified pension

or retirement plan must have exclusive

authority and discretion to manage and

control the plan with two exceptions: (a)

when the plan expressly provides that

the trustee(s) is subject to the direction

of a named fiduciary who is not a

trustee, in which case the trustee is

subject to proper directions made in

accordance with the terms of the plan

and not contrary to ERISA; and (b) when

the authority to manage, acquire, or

dispose of assets of the plan is delegated

to one or more investment mangers

pursuant to Section 402(c)(3) of ERISA.

Applicants state that, unless one of the

two exceptions stated in Section 403(a)

applies, qualified pension and

retirement plan trustees have the

exclusive authority and responsibility

for voting proxies. Applicants further

state that, when a named fiduciary

appoints an investment manger, the

investment manager has the

responsibility to vote the shares held by

the plan unless the right to vote such

shares is reserved to the trustees or the

named fiduciary and that, in any event,

there is no pass-through voting to the

participants in such qualified pension

and retirement plans.

23. Accordingly, since Qualified Plan

participants are not entitled to passthrough voting privileges, Applicants

submit that, unlike the case with

insurance company separate accounts,

the issue of the resolution of material

irreconcilable conflicts with respect to

voting is not present with respect to

Qualified Plans.

24. Applicants state that the

prohibitions on mixed and shared

funding might reflect concern regarding

possible different investment

motivations among investors.

Applicants note that when Rule 6e–2

was adopted, variable annuity separate

accounts could invest in mutual funds

whose shares also were offered to the

general public. Applicants maintain

that, at the time of the adoption of Rule

6e–2, the Commissions staff therefore

contemplated underlying funds with

public shareholders, as well as with

variable life insurance separate account

shareholders. Applicants state that the

Commission staff may have been

concerned with the potentially different

investment motivations of public

shareholders and variable life insurance

contract owners, and that there also may

have been some concern with respect to

the problems of permitting a state

insurance regulatory authority to affect

the operations of a publicly-available

mutual fund and to affect the

investment decisions of public

shareholders. Applicants maintain that,

for reasons unrelated to the 1940 Act,

however, Internal Revenue Service

Revenue Ruling 81–225 (September 25,

1981) effectively deprived variable

annuities funded by publicly-available

mutual funds of their tax-benefited

status. The Tax Reform Act of 1984

codified the prohibition against the use

of publicly-available mutual funds as an

investment medium for variable

contracts (including variable life

contracts). Applicants state that Section

817(h) of the Code of 1986, in effect,

requires that the investment made by

variable annuity and variable life

insurance separate accounts be

‘‘adequately diversified.’’ If a separate

account is organized as a unit

investment trust that invests in a single

fund or series, then the separate account

will not be diversified. Applicants note

that, in this situation, however, Section

817(h) of the Code, in effect, provides

that the diversification test will be

applied at the underlying fund level,

rather than at the separate account level,

but only if ‘‘all of the beneficial

interests’’ in the underlying fund ‘‘are

held by one or more insurance

companies (or affiliated companies) in

their general account or in segregated

asset accounts * * *.’’ Applicants state

that, accordingly, a unit investment

trust separate account that invests solely

in a publicly-available mutual fund will

not be adequately diversified. In

addition, Applicants state that any

76682 Federal Register / Vol. 65, No. 236 / Thursday, December 7, 2000 / Notices

underlying mutual fund, including any

fund that sells shares to separate

accounts, in effect, would be precluded

from selling its shares to the public.

Applicants conclude that, consequently,

there will be no public shareholders of

the Funds.

25. Applicants state that the rights of

an insurance company or of a state

insurance regulator to disregard the

voting instructions of contract owners

are not inconsistent with either mixed

funding of different insurance products

or shared funding by unaffiliated

insurers.

26. Applicants state that the

Commission’s primary concern with

respect to mixed and shared funding

issues is that of potential conflicts of

interest. Applicants submit that, as

discussed below, no increased conflicts

of interest would be present if the

Commission grants the requested relief.

27. Applicants submit that shared

funding by unaffiliated insurance

companies does not present any issues

that do not already exist where a single

insurance company is licensed to do

business in several or all states.

Applicants state that a particular state

insurance regulatory body could require

action that is inconsistent with the

requirements of other states in which

the insurance company offers its

policies. Applicants maintain that the

fact that different insurers may be

domiciled in different states does not

create a significantly different or

enlarged problem.

28. Applicants state that shared

funding by unaffiliated insurers, in this

respect, is no different than the use of

the same investment company as the

funding vehicle for affiliated insurers,

which Rules 6e–2(b)(15) and 6e–

3(T)(b)(15) permit. Applicants note that

affiliated insurers may be domiciled in

different states and be subject to

differing state law requirements, and

that affiliation does not reduce the

potential, if any exists, for differences in

state regulatory requirements.

Applicants submit that, in any event,

the conditions discussed below (which,

according to the Applicants, are adapted

from the conditions included in Rule

6e–3(T)(b)(15) and are virtually

identical to the conditions imposed in

connection with other mixed and shared

funding orders) are designed to

safeguard against, and provide

procedures for resolving, any adverse

effects that differences among state

regulatory requirements may produce.

Applicants state that, if a particular state

insurance regulator’s decision conflicts

with the majority of other state

regulators, then the affected insurer will

be required to withdraw its separate

account’s investment in the affected

fund. Applicants represent that this

requirement will be provided for in

agreements that will be entered into by

Participating Insurance Companies with

respect to their participation in the

Funds.

29. Applicants maintain that Rules

6e–2(b)(15) and 6e–3(T)(b)(15) give the

insurance company the right to

disregard the voting instructions of the

contract owners, and that this right does

not raise any issues different from those

raised by the authority of state

insurance administrators over separate

accounts. Applicants state that, under

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

insurer can disregard contract owner

voting instructions only with respect to

certain specified items. Applicants

further state that affiliation does not

eliminate the potential, if any exists, for

divergent judgments as to the

advisability or legality of a change in

investment policies, principal

underwriter, or investment advisor

initiated by contract owners. According

to the Applicants, the potential for

disagreement is limited by the

requirements in Rules 6e–2 and 6e–3(T)

that the insurance company’s disregard

of voting instructions be reasonable and

based on specific good-faith

determinations.

30. Applicants note that, nevertheless,

a particular insurer’s disregard of voting

instructions could conflict with the

majority of contract owner voting

instructions. Applicants state that the

insurer’s action possibly could be

different than the determination of all or

some of the other insurers (including

affiliated insurers) that the voting

instructions of contract owners should

prevail, and either could preclude a

majority vote approving the change or

could represent a minority view.

Applicants further state that, if the

insurer’s judgment represents a minority

position or would preclude a majority

vote, then the insurer may be required,

at the affected Fund’s election, to

withdraw its Separate Account’s

investment in the Fund and no charge

or penalty will be imposed as a result

of such withdrawal. Applicants

represent that this requirement will be

provided for in the agreements entered

into with respect to participation by

insurance companies in the Funds.

31. Applicants submit that there is no

reason why the investment policies of

the Funds would or should be

materially different from what these

policies would or should be if the Funds

funded only variable annuity contracts

or variable life insurance policies,

whether flexible premium or scheduled

premium policies. Applicants note that

each type of insurance product is

designed as a long-term investment

program.

32. Applicants represent that each

Portfolio will be managed to attempt to

achieve the investment objective or

objectives of such Portfolio, and not to

favor or disfavor any particular

Participating Insurance Company or

type of insurance product. Applicants

state that there is no reason to believe

that different features of various types of

contracts, including the ‘‘minimum

death benefit’’ guarantee under certain

variable life insurance and variable

annuity contracts,will lead to different

investment policies for different types of

variable contracts. First, Applicants

state that minimum death benefit

guarantees generally are specifically

provided for by particular charges, and

always are supported by general account

reserves as required by state insurance

law. Second, Applicants state that

certain variable annuity contracts also

have minimum death benefit guarantees

and that, to the extent that the degree of

risk may differ as between variable

annuity contracts and variable life

insurance policies, the differing

insurance charges imposed, in effect,

adjust any such differences and equalize

the insurers’ exposure in either case.

Third, Applicants note that the sale,

persistency, and ultimate success of all

variable insurance products depend, at

least in part, on satisfactory investment

performance, which provides an

incentive for the insurer to optimize

investment performance. Fourth,

Applicants maintain that, under existing

statutes and regulations, an insurance

company and its affiliates can offer a

variety of variable annuity and life

insurance contracts, some with death

benefit guarantees of different types and

significance (and different degrees of

risk for the insurer), some without death

benefit guarantees, all funded by a

single mutual fund.

33. Applicants assert that,

furthermore, no one investment strategy

can be identified as appropriate to a

particular insurance product. According

to the Applicants, each pool of variable

annuity and variable life insurance

contract owners is composed of

individuals of diverse financial status,

age, insurance, and investment goals.

Applicants state that a fund supporting

even one type of insurance product

must accommodate these diverse factors

in order to attract and retain purchasers.

Applicants maintain that permitting

mixed and shared funding will provide

economic justification for the

continuation of Advantus Fund and, it

is expected, of any Future Fund.

Applicants state that, in addition,

Federal Register / Vol. 65, No. 236 / Thursday, December 7, 2000 / Notices 76683

permitting mixed and shared funding

also will facilitate the establishment of

additional portfolios serving diverse

goals, and that the broader base of

contract owners can be expected to

provide economic justification for the

creation of additional portfolios with a

greater variety of investment objectives

and policies.

34. In connection with the proposed

sale of shares of the Funds to Qualified

Plans, Applicants submit that either

there are no conflicts of interest or there

exists the ability by the affected parties

to resolve any such conflicts without

harm to the contract owners in the

Separate Accounts or to the participants

under the Qualified Plans. Section

817(h) of the Code is the culmination of

a series of Revenue Rulings aimed at the

investment control of variable contract

owners. Section 817 is the only section

in the Code where separate accounts are

discussed, and Section 817(h) imposes

certain diversification standards on the

underlying assets of variable annuity

contracts and variable life insurance

contracts held in the portfolios of

management investment companies.

Applicants state that Treasury

Regulation 1.817–5(f)(3)(iii), which

establishes the diversification

requirements for such portfolios,

specifically permits, among other

things, interests held by Trustees of a

‘‘qualified pension or retirement plan’’

and separate accounts to share the same

underlying management investment

company. Applicants, therefore,

conclude that neither the Code nor the

Treasury Regulations or Revenue

Rulings thereunder present any inherent

conflicts of interest if Qualified Plans,

variable annuity Separate Accounts, and

variable life insurance Separate

Accounts all invest in the same

management investment company.

35. Applicants maintain that, 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 of

distributions from variable contracts

and Qualified Plans do not raise any

conflicts of interest with respect to the

use of the Funds. Applicants state that,

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 Qualified Plan will

redeem shares of the affected Fund at its

net asset value. Applicants represent

that the Qualified Plan then will make

distributions in accordance with the

terms of the Qualified Plan, and that the

life insurance company will surrender

values from the separate account into

the general account to make

distributions in accordance with the

terms of the variable contract.

36. Applicants state that, 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 Qualified Plans.

Applicants further state that the transfer

agent for each 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.

According to the Applicants, the

Participating Insurance Company then

will solicit voting instructions in

accordance with Rules 6e–2 and 6e–

3(T).

37. Applicants submit that the ability

of the Funds to sell their shares directly

to Qualified Plans does not create a

‘‘senior security’’ with respect to any

variable annuity or variable life contract

owner as opposed to a participant under

a Qualified Plan. Applicants note that

the term ‘‘senior security’’ is defined

under Section 18(g) of the 1940 Act to

include ‘‘any stock of a class having

priority over any other class as to

distribution of assets or payment of

dividends.’’ Applicants state that,

regardless of the rights and benefits of

participants under the Qualified Plans

or contract owners under variable

contracts, the Qualified Plans and the

Separate Accounts, respectively, have

rights only with respect to their

respective shares of the Funds.

Applicants state that the Qualified Plans

and the Separate Accounts can redeem

such shares of the Funds only at the net

asset value of the shares, and that no

shareholder of a Fund will have any

preference over any other shareholder of

such Fund with respect to distribution

of assets or payment of dividends.

38. Applicants maintain that 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. Applicants state

that the basic premise of shareholder

voting is that not all share holders agree

with a particular proposal. According to

the Applicants, this does not mean that

there are any inherent conflicts of

interest between shareholders.

Applicants state that the state insurance

commissioners have been given the veto

power in recognition of the fact that

insurance companies cannot comply

redeem their separate accounts out of

one fund and invest in another.

Applicants note that time-consuming,

complex transactions must be

undertaken to accomplish such

redemptions and transfers. Applicants

state that, on the other hand, the

trustees of Qualified Plans can quickly

make the decisions and implement the

redemption of their plans’ shares from

the Funds and reinvest in another

funding vehicle without the same

regulatory impediments or, as is the

case with most Qualified Plans, even

hold cash pending suitable investment.

Based on the foregoing, Applicants have

concluded that, even if there should

arise issues where the interests of

Qualified Plans are in conflict, these

issues can be resolved almost

immediately in that the trustees of the

Qualified Plans can, on their own,

redeem the shares out of the Funds.

39. Applicants submit that, regardless

of the type of shareholder in a Fund, the

responsible advisor will continue to

manage a Portfolio’s investments solely

and exclusively in accordance with each

such Portfolio’s investment objectives

and restrictions as well as with any

guidelines established by the Board of

that Fund. Applicants note that

individual Portfolio manager work with

a pool of money and do not take into

account the identity of the shareholders.

Applicants represent that Advantus

Fund thus is, and any Future Fund will

be, managed in the same manner as any

other mutual fund. Applicants state

that, if shareholders are not pleased

with a mutual fund’s investment results,

or the manner in which the mutual fund

is being operated, these shareholders

may redeem their shares. Applicants

note that, since Advantus Fund is, and

any Future Fund is expected to be, sold

without the imposition of any sales

load, such redemption is to net asset

value without the imposition of any

other charge or fee. According to the

Applicants, it is the duty of the

management of a mutual fund,

including its board of directors or

trustees, as the case may be, to keep

shareholders informed through updated

prospectuses and annual and semiannual reports. Applicants state that

these periodic communications to

shareholders function as these

communications are intended.

Applicants represent that Qualified

Plans, as well as contract owners, thus

will be given up-to-date information

necessary for them to make informed

investment decisions.

40. Applicants state that the

difference between a Qualified Plan

shareholder and a contract owner whose

variable contract invests in a Fund is

that the Qualified Plan shareholder

immediately can redeem its shares in

the fund and reinvest the proceeds of

76684 Federal Register / Vol. 65, No. 236 / Thursday, December 7, 2000 / Notices

such a redemption, while the contract

owner either must wait for the

Participating Insurance Company to find

another suitable investment medium or

must exchange contracts, both of which

strategies require multiple steps and

some period of time.

41. Applicants maintain that various

factors have kept more insurance

companies from offering variable

annuity and variable life insurance

contracts than currently offer such

contracts. Applicants state that 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 name

recognition by the public of certain

insurers as investment experts with

whom the public feels comfortable

entrusting their investment dollars.

Applicants note that, for example, some

smaller life insurance companies may

not find it economically feasible, or

within their investment or

administrative expertise, to enter the

variable contract business on their own.

Applicants state that use of the Funds

as common investment media for

variable contracts, as well as for

Qualified Plans, would reduce or

eliminate these concerns. Applicants

further state that mixed and shared

funding also should provide several

benefits to variable contract owners by

eliminating a significant portion of the

costs of establishing and administering

separate funds. Also, Applicants

maintain that Participating Insurance

Companies and Qualified Plans will

benefit not only from the investment

and administrative expertise of the

responsible advisors and their affiliates,

but also from the cost efficiencies and

investment flexibility afforded by a large

pool of funds. According to the

Applicants, mixed and shared funding,

including the sale of shares of a Fund

to Qualified Plans, also would permit a

greater amount of assets available for

investment by such Fund, thereby

promoting economies of scale,

permitting increased safety through

greater diversification, and making the

addition of new Portfolios to a Fund

more feasible. Therefore, Applicants

believe that making the Funds available

for mixed and shared funding will

encourage more insurance companies to

offer variable contracts, and that this

should result in increased competition

with respect to both variable contract

design and pricing, which in turn can be

expected to result in more product

variation and lower charges.

42. Accordingly, Applicants submit

that the relief requested herein is fully

consistent with the policy and purpose

of the 1940 Act. In connection with the

proposed sale of shares of the Funds to

Qualified Plans in particular,

Applicants further submit that the

intended use of the Funds with

Qualified Plans is not that dissimilar

from the intended use of the Funds with

variable contracts, in that Qualified

Plans, like variable contracts, are

generally long-term retirement vehicles.

Applicants further submit that the sale

of shares of the Funds to Qualified Plans

does not increase the risk of material

irreconcilable conflicts to such Funds or

to the participating Separate Accounts.

43. Applicants see no significant legal

impediment to permitting mixed and

shared funding. Applicants note that

separate accounts organized as unit

investment trusts historically have been

employed to accumulate shares of

mutual funds which have not been

affiliated with the depositor or sponsor

of the separate account. Applicants do

not believe that mixed and shared

funding will have any adverse Federal

income tax consequences.

44. Applicants submit that the

Commission has issued numerous

orders permitting mixed and shared

funding, including ones where shares of

the underlying mutual fund used for

funding variable contracts also would be

sold to qualified pension and retirement

plans. Therefore, Applicants maintain

that, 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

Sections 9(a), 13(a), 15(a), or 15(b) or

Rules 6e–2 or 6e–3(T).

Applicants’ Conditions

Applicants consent to the following

conditions:

1. A majority of each Fund’s Board

shall consist of persons who are not

‘‘interested persons’’ of the Fund, as

defined by Section 2(a)(19) of the 1940

Act, and the rules thereunder, and as

modified by any applicable orders of the

Commission, except that if this

condition is not met by reason of the

death, disqualification, or bona-fide

resignation of any director or directors,

then the operation of this condition

shall be suspended: (a) For a period of

45 days if the vacancy or vacancies may

be filed 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 of each Fund will

monitor that Fund for the existence of

any material irreconcilable conflict

between and among the interests of the

contract owners of all Separate

Accounts and the participants of all

Qualified Plans investing in that Fund.

A material irreconcilable conflict may

arise for a variety of reasons, including:

(a) An action by any state insurance

regulatory authority; (b) a change in

applicable Federal or state insurance,

tax, or securities laws or regulations, or

a public ruling, private letter ruling, noaction or interpretative letter, or any

similar action by insurance, tax, or

securities regulatory authorities; (c) an

administrative or judicial decision in

any relevant proceeding; (d) the manner

in which the investments of any series

are being managed; (e) a difference in

voting instructions given by variable

annuity contract owners, variable life

insurance contract owners and trustees

of 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 its

participants.

3. In the event that a Qualified Plan

ever should become an owner of 10

percent or more of the assets of a Fund,

such Qualified Plan will execute a fund

participation agreement with the Fund,

including agreement to comply with the

conditions set forth herein to the extent

applicable. A Qualified Plan

shareholder will execute an application

with each Fund that contains an

acknowledgment of this condition at the

time of the Qualified Plan’s initial

purchase of shares of such Fund.

4. Participating Insurance Companies,

the responsible advisors, and any

Qualified Plan that executes a fund

participation agreement upon becoming

an owner of 10% or more of the assets

of a Fund (collectively, the

‘‘Participants’’) will report any potential

or existing conflicts to the respective

responsible Board(s). Participants will

be responsible for assisting the Boards

in carrying out the responsibilities of

the Boards under these conditions by

providing the Boards with all

information reasonably necessary for the

Boards to consider any issues raised.

This includes, but is not limited to, an

obligation by each Participating

Insurance Company to inform the

respective responsible Board(s)

whenever contract owner voting

instructions are disregarded. The

responsibility to report such

information and conflicts to and to

assist the Boards will be a contractual

obligation of all Participating Insurance

Companies and Qualified Plans

investing in a Fund under their

agreements governing participation in

Federal Register / Vol. 65, No. 236 / Thursday, December 7, 2000 / Notices 76685

the Fund and these responsibilities will

be carried out with a view only to the

interests of the contract owners and, if

applicable, Qualified Plan participants.

5. If it is determined by a majority of

a Board, or a majority of the

disinterested, directors or trustees, as

appropriate, of a Board, that a material

irreconcilable conflict exists, then the

relevant Participating Insurance

Companies and Qualified Plans, at their

expense and to their expense and to the

extent reasonably practicable (as

determined by a majority of the

disinterested directors or trustees, as the

case may be), shall take whatever steps

are necessary to remedy or eliminate the

material irreconcilable conflict, up to

and including: (a) Withdrawing the

assets allocable to some or all of the

Separate Accounts from the affected

Fund or any Portfolio and reinvesting

such assets in a different investment

medium, including another Portfolio of

such Fund, or submitting the question

as to 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; (b)

withdrawing the assets allocable to

some or all of the Qualified Plans from

the affected Fund or any Portfolio and

reinvesting such assets in a different

investment medium, including another

Portfolio of the Fund; and (c)

establishing a new registered

management investment company or

managed separate account. If a material

irreconcilable conflict arises because of

a decision by a Participating Insurance

Company to disregard contract owner

voting instructions, or, if applicable, a

decision by a trustee of a Qualified Plan

to disregard Qualified Plan participant

voting instructions, and that decision

represents a minority position or would

preclude a majority vote, then the

insurer or Qualified Plan may be

required, at the affected Fund’s election,

to withdraw the insurer’s Separate

Account’s investment in the Fund or the

Qualified Plan’s investment in the Fund

and no charge or penalty will be

imposed as a result of such withdrawal.

The responsibility to take remedial

action in the event of a Board

determination of a material

irreconcilable conflict and to bear the

cost of such remedial action shall be a

contractual obligation of all

Participating Insurance Companies and

all Qualified Plans under their

agreements governing participation in

the Funds and these responsibilities

will be carried out with a view only to

the interests of contract owners and

participants in the Qualified Plans, as

applicable.

For purposes of this Condition 5, a

majority of the disinterested members of

the Board shall determine whether or

not any proposed action adequately

remedies any material irreconcilable

conflict, but, in no event, will a Fund

or its advisor be required to establish a

new funding medium for any variable

contract. No Participating Insurance

Company shall be required by this

Condition 5 to establish a new funding

medium for any variable contract if any

materially and offer to do so has been

declined by vote of a majority of the

contract owners adversely affected by

the material irreconcilable conflict.

Further, no Qualified Plan will be

required by this Condition 5 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. A Board’s determination of the

existence of a material irreconcilable

conflict and its implications shall be

made known in writing promptly to all

Participants.

7. Participating Insurance Companies

will provide pass-through voting

privileges to all variable contact owners

so long as the Commission continues to

interpret the 1940 Act as requiring passthrough voting privileges for variable

contract owners. Accordingly,

Participating Insurance Companies will

vote shares of the Funds held in their

Separate Accounts in a manner

consistent with voting instructions

timely-received from contract owners.

Each Participating Company will vote

shares of a Fund held in the

Participating Insurance Company’s

Separate Accounts for which no voting

instructions from contract owners are

timely-received, as well as shares of a

Fund which the Participating Insurance

Company itself owns, in the same

proportions as those shares of the Fund

for which voting instructions from

contract owners are timely-received.

Participating Insurance Companies shall

be responsible for assuring that each of

their Separate Accounts participating in

the Funds calculates voting privileges in

a manner consistent with other

Participants. The obligation to calculate

voting privileges in a manner consistent

with all other Separate Accounts

investing in the Funds shall be a

contractual obligation of all

Participating Insurance Companies

under their agreements governing

participation in the Funds. Trustees of

Qualified Plans will vote shares held by

Qualified Plans in accordance with the

terms of those Qualified Plans.

8. Each Fund will comply with all

provisions of the 1940 Act requiring

voting by shareholders (which for these

purposes, shall be persons having a

voting interest in their respective

Portfolios), and, in particular, each

Fund will either provide for annual

meetings (except to the extent that the

Commission may interpret Section 16 of

the 1940 Act not to require such

meetings) or comply with Section 16(c)

of the 1940 Act (although the Fund is

not one of the trusts described in the

Section 16(c) of the 1940 Act), as well

as with Section 16(a) of the 1940 Act

and, if and when applicable, Section

16(b) of the 1940 Act. Further, each

Fund will act in accordance with the

Commission’s interpretation of the

requirements of Section 16(a) with

respect to periodic elections of directors

and with whatever rules the

Commission may promulgate with

respect thereto.

9. Each Fund shall disclose in its

prospectus that (a) the Fund is intended

to be a funding vehicle for all types of

variable annuity and variable life

insurance contracts offered by various

insurance companies and certain

qualified pension and retirement plans,

(b) material irreconcilable conflicts

possibly may arise due to differences of

tax treatments and other considerations,

and (c) the Fund’s Board will monitor

events in order to identify the existence

of any material irreconcilable conflicts

and to determine what action, if any,

should be taken in response to any such

conflict. Each Fund will notify all

Participating Insurance Companies that

Separate Account prospectus disclosure

regarding potential risks of mixed and

shared funding may be appropriate.

10. If, and to the extent that, Rule 6e–

2 or Rule 6e–3(T) under the 1940 Act

are amended, or Rule 63–3 under the

1940 Act is adopted, to provide

exemptive relief from any provision of

the 1940 Act, or the rules promulgated

thereunder, with respect to mixed or

shared funding, on terms and conditions

materially different from any

exemptions granted in the order

requested in this application, then the

Funds and/or the Participants, as

appropriate, shall take such steps as

may be necessary to comply with Rules

6e–2, 6e–3(T), or Rule 6e–3, as such

rules are applicable.

76686 Federal Register / Vol. 65, No. 236 / Thursday, December 7, 2000 / Notices

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

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 42894

(June 2, 2000), 65 FR 36850 (June 12, 2000). The

pilot program was subsequently extended for an

additional 90 days, ending November 29, 2000. See

Securities Exchange Act Release No. 43229 (August

30, 2000), 65 FR 54572 (September 8, 2000).

4Facilitation cross transactions occur when a

floor broker representing the order of a public

customer of a member firm crosses that order with

a contra side order from the firm’s proprietary

account.

5Amex trading floor practices provided

specialists with a greater than equal participation in

trades that take place at a price at which the

specialist is on parity with registered options

traders in the crowd. These practices are subject to

a separate filing that seeks to codify specialist

allocation practices. See Securities Exchange Act

Release No. 42964 (June 20, 2000), 65 FR 39972

(June 28, 2000)

11. The Participants, at least annually,

shall submit to each Fund’s Board such

reports, materials, or data as the Board

reasonably may request so that the

directors or trustees, as appropriate, of

the Fund may fully carry out the

obligations imposed upon the Board by

the conditions contained in this

application and said reports, materials,

and data shall be submitted more

frequently if deemed appropriate by the

Board. The obligations of the

Participating Insurance Companies and

Qualified Plans to provide these reports,

materials, and data to a Fund’s Board,

when the Board so reasonably requests,

shall be a contractual obligation of all

Participating Insurance Companies and

Qualified Plans under their agreements

governing participation in the Funds.

12. 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

Participants of a conflict, and

determining whether any proposed

action adequately remedies a conflict,

will be properly recorded in the minutes

of the Board or other appropriate

records, and such minutes or other

records shall be made available to the

Commission upon request.

Conclusion

For the reasons summarized 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 1940 Act.

For the Commission, by the Division of

Investment Management, pursuant to

delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–31164 Filed 12–6–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43643; File No. SR–Amex–

00–59]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval to Proposed

Rule Change by the American Stock

Exchange LLC To Extend for an

Additional 90 Days Its Pilot Program

Relating to Facilitation Cross

Transactions

November 29, 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 November

29, 2000, the American Stock Exchange

LLC ( ‘‘Amex’’ or ‘‘Exchange’’ ) field

with the Securities and Exchange

Commission ( ‘‘Commission’’ ) the

proposed rule change as described in

Items I and II 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. For the

reasons discussed below, the

Commission is granting accelerated

approval of the proposed rule change.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Amex proposes to extend for an

additional 90 days its pilot program

relating to facilitation cross transactions,

described in detail in Part II.A. below.

The text of the proposed rule change is

available at the Office of the Secretary,

Amex, and at the Commission.

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

Amex 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 III below. The Exchange has

prepared summaries, set forth in

Sections A, B, and C below, of the most

significant aspects of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

The Exchange proposes to extend for

an additional 90 days its pilot program

relating to member firm facilitation

cross transactions approved by the

Commission on June 2, 2000.3 Revised

Commentary .02(d) to Amex Rule 950(d)

establishes a pilot program to allow

facilitation cross transactions inequity

options.4 The pilot program entities a

floor broker to, under certain

conditions, cross a specified percentage

of a customer order with a member

firm’s proprietary account before market

makers in the crowd can participate in

the transaction. The provision generally

applies to orders of 400 contracts or

more. However, the Exchange is

permitted to establish smaller eligible

order sizes, on a class basis, provided

that the eligible order size is not for

fewer than 50 contracts.

Under the current program, when a

trade takes place at the market provided

by the crowd, all public customer orders

on the specialist’s book or represented

in the trading crowed at the time the

market was established must be satisfied

first. Following satisfaction of any

customer orders on the specialist’s book,

the floor broker is entitled to facilitate

up to 20% of the contracts remaining in

the customer order. When a floor broker

proposes to execute a facilitation cross

at a price between the best bid and offer

provided by the crowd in response to

his initial request for market—and the

crowd then wants to part or all of the

order at the improved price—the floor

broker is entitled to priority over the

crowd to facilitate up to 40% of the

contracts. If the floor broker has

proposed the cross at a price between

the best bid and offer provided by the

crowd in response to his initial request

for a market, and the trading crowd

subsequently improves the floor

broker’s price, and the facilitation cross

is executed at that improved price, the

floor broker would only be entitled to

priority to facilitate up to 20% of the

contracts.

The program also provides that if the

facilitation transaction takes place at the

specialist’s quoted bid or offer, any

participation allocated to the specialist

pursuant to Amex trading floor practices

would apply only to the number of

contracts remaining after all public

customer orders have been filled and

the member firm’s crossing rights have

been exercised.5 However, in no case

could the total number of contracts

guaranteed to the member firm and the

specialist exceed 40% of the facilitation

transaction.

In the almost six months since the

pilot program began, the Exchange has

found it to be generally successful. The

Exchange seeks to extend the pilot