[Federal Register Volume 63, Number 113 (Friday, June 12, 1998)]
[Notices]
[Pages 32260-32265]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15707]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23244; File No. 812-10866]


Allmerica Investment Trust, et al.; Notice of Application

June 5, 1998.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order pursuant to Section 6(c) of 
the Investment Company Act of 1940 (the ``1940 Act'').

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SUMMARY OF APPLICATION: Applicants seek an order pursuant to Section 
6(c) of 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, to the extent necessary to permit shares of 
any current or future series of the Trust and shares of any other 
investment company that is offered as a funding medium for insurance 
products and for which the Adviser, or any of its affiliates, or their 
successors or assigns, may now or in the future serve as manager, 
investment adviser, administrator, principal underwriter or sponsor 
(the Trust and such other investment companies referred to collectively 
as the ``Insurance Products Funds'') to be sold and held by variable 
annuity and variable life insurance separate accounts (``Separate 
Accounts'') of both affiliated and unaffiliated life insurance 
companies (``Participating Insurance Companies'') and qualified pension 
and retirement plans outside of the separate account context 
(``Qualified Plans'' or ``Plans'').
APPLICANTS: Allmerica Investment Trust (the ``Trust'') and Allmerica 
Investment Management Company, Inc. (the ``Adviser'').

FILING DATE: The application was originally filed on November 13, 1997, 
and an amended and restated application was filed on March 9, 1998.

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 SEC 
and serving Applicants with a copy of the request, in person or by 
mail. Hearing requests should be received by the SEC by 5:30 p.m. on 
June 30, 1998, 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 writer's 
interest, the reason for the request, and the issues contested. Persons 
who wish to be notified of a hearing may request notification of a 
hearing by writing to the Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW, Washington, DC 20549. 
Applicants, c/o George M. Boyd, Esq., 440 Lincoln Street, Worcester, MA 
01653.

FOR FURTHER INFORMATION CONTACT:
Michael B. Koffler, Attorney, or Mark Amorosi, 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 SEC, 450 Fifth St., NW, Washington, DC 
20549 (tel. (202) 942-8090).

Applicants' Representations

    1. The Trust, a Massachusetts business trust established on October 
11, 1984, is registered with the Commission as an open-end diversified 
management investment company. The Trust currently consists of fourteen 
separate series, or portfolios.
    2. The Adviser is registered with the Commission as an investment 
adviser under the Investment Adviser Act of 1940 and serves as the 
investment manager for each of the Trust's portfolios. The Adviser is 
an indirect wholly-owned subsidiary of Allmerica Financial Corporation, 
a publicly traded Delaware holding company for a group of affiliated 
companies, the largest of which is First Allmerica Financial Life 
Insurance Company.
    3. Currently, shares of the Trust may be purchased only by the 
separate accounts established by First Allmerica Financial Life 
Insurance Company (``First Allmerica'') or Allmerica Financial Life 
Insurance and Annuity Company, an indirect wholly-owned subsidiary of 
First Allmerica, for the purpose of funding variable annuity and 
variable life insurance policies.
    4. The Insurance Products Funds will offer shares to Separate 
Accounts of Participating Insurance Companies in support of variable 
annuity contracts and variable life insurance policies (including 
single premium, scheduled premium, modified single premium and flexible 
premium contracts) (collectively, ``Variable Contracts''). Persons who 
hold Variable Contracts are referred to herein as ``Contract Owners.''
    5. The Insurance Products Funds also will offer shares directly to 
Qualified Plans outside of the separate account context. Fund shares 
sold to Plans which are subject to the Employee Retirement Income 
Security Act of 1974, as amended (``ERISA''), would be held by the 
truste(s) of the Plan, as mandated by Section 403(a) ERISA. ``Plan 
Participants'' or ``Participants'' include participants in qualified 
pension or retirement plans.

Applicants' Legal Analysis

    1. 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 or provisions of the 1940 Act or of any rule or regulation 
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.

[[Page 32261]]

    2. Applicants request that the Commission issue an order pursuant 
to Section 6(c) of the 1940 Act exempting the Applicants and the 
Participating Insurance Companies and their Separate Accounts (and, to 
the extent necessary, any investment adviser, principle underwriter or 
depositor for such accounts) from the provisions of Sections 9(a), 
13(a), 15(a) and 15(b) thereof, and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) thereunder, to the extent necessary to permit shares of the 
Insurance Products Funds to be offered and sold to, and held by (1) 
variable annuity and variable life insurance separate accounts of the 
same life insurance company or of any affiliated life insurance company 
(``mixed funding''); (2) separate accounts of unaffiliated life 
insurance companies (including both variable annuity and variable life 
separate accounts) (``shared funding''); and (3) qualified pension and 
retirement plans outside the separate account context.
    3. In connection with the funding of scheduled premium variable 
life insurance contracts issued through a separate account registered 
under the 1940 Act as a unit investment trust, Rule 6e-2(b)(15) 
provides partial exemptions from Sections 9(a), 13(a), 15(a) and 15(b) 
of the 1940 Act. These exemptions 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 any affiliated life insurance company. 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 a management investment company that also offers its shares 
to a variable annuity separate account or a flexible premium variable 
life insurance separate account of the same insurance company or an 
affiliated insurance company. The relief granted by Rule 6e-2(b)(15) 
also is not available if the variable life insurance separate account 
owns shares of an underlying management investment company that also 
offers its shares to variable annuity or variable life insurance 
separate accounts of unaffiliated life insurance companies or to Plans.
    4. In connection with the funding of 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 9(a), 13(a), 15(a) and 15(b) of the 
1940 Act. These exemptions 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. Therefore, the exemptions provided by Rule 6e-
3(T)(b)(15) are available if the underlying management investment 
company is engaged in mixed funding, but are not available if the 
investment company is engaged in shared funding or sells its shares to 
Plans.
    5. Applicants state that the current tax law permits Insurance 
Products Funds to increase their asset base through the sale of shares 
of Plans. Section 817(h) of the Internal Revenue Code of 1986, as 
amended (the ``Code''), imposes certain diversification standards on 
the underlying assets of Variable Contracts. The Code provides that 
such contracts shall not be treated as an annuity contract or life 
insurance contract for any period (and any subsequent period) during 
which the investments are not adequately diversified in accordance with 
regulations prescribed by the Treasury Department. Treasury regulations 
provide that, in order to meet the diversification requirements, all of 
the beneficial interests in an investment company must be held by the 
segregated asset accounts of one or more insurance companies. The 
regulations contain certain exceptions to this requirement, however, 
one of which permits shares of an investment company to be held by the 
trustee of a qualified pension or retirement plan without adversely 
affecting the ability of shares in the same investment company also to 
be held by the separate accounts of insurance companies in connection 
with their variable annuity and variable life insurance contracts 
(Treas. Reg. Sec. 1.817.-5(f)(3)(iii)).
    6. Applicants state that the promulgation of Rules 6e-2 and 6e-3(T) 
preceded the issuance of these Treasury regulations. Applicants assert 
that, given the then current tax law, the sale of shares of the same 
underlying fund to separate accounts and to Plans could not have been 
envisioned at the time of the adoption of Rules 6e-2(b)(15) and 6e-
3(T)(b)(15).

Disqualification

    7. Section 9(a)(3) of the 1940 Act provides that it is unlawful for 
any company to act as investment adviser to 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). Rule 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 on mixed and shared funding. 
These exemptions limit the application of the eligibility restrictions 
to affiliated individuals or companies that directly participate in the 
management or administration of the underlying investment company.
    8. Applicants state that the partial relief from Section 9(a) 
provided by Rules 6e-2(b)(15) and 6e-3(T)(b)(15), 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 assert that it is not necessary for the 
protection of investors or the purposes fairly intended by the policy 
and provisions of the 1940 Act to apply the provisions of Section 9(a) 
to many individuals in a large insurance company complex, most of whom 
will have no involvement in matters pertaining to investment companies 
managed, administered, or invested in by that organization. Applicants 
state that it also is unnecessary to apply Section 9(a) to individuals 
in various unaffiliated insurance companies (or affiliated companies of 
Participating Insurance Companies) that may utilize an Insurance 
Products Fund as the funding medium for Variable Contracts. Applicants 
assert that there is no regulatory purpose in extending the monitoring 
requirements because of mixed or shared funding or investment by Plans. 
Those individuals who participate in the management or administration 
of an Insurance Products Fund will remain the same regardless of which 
separate accounts or insurance companies use the Insurance Products 
Fund. Furthermore, the increased monitoring costs would reduce the net 
rates of return realized by Contract Owners and Plan Participants.

Pass-Through Voting

    9. 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 state that pass-through voting privileges will be provided 
with respect to all Contract Owners so long as the Commission 
interprets the 1940 Act to require pass-

[[Page 32262]]

through voting privileges for Contract Owners.
    10. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) provide 
exemptions from the pass-through voting requirement in certain 
situations, assuming the limitations on mixed and shared funding 
imposed by the 1940 Act and the rules thereunder are observed. Rules 
6e-2(b)(15)(iii)(A) and 6e-3(T)(b)(15)(iii)(A)(1) provide that an 
insurance company may disregard the voting instructions of its Contract 
Owners with respect to the investments of an underlying fund or any 
contract between an investment company and its investment adviser, when 
required to do so by an insurance regulatory authority, subject to 
certain conditions. In addition, Rules 6e-2(b)(15)(iii)(B) and 6e-
3(T)(b)(15)(A)(2) provide that an insurance company may disregard 
voting instructions of Contract Owners in favor of any change in the 
investment company's investment policies, principal underwriter or 
investment adviser, subject to certain conditions.
    11. Applicants assert that Rules 6e-2 and 6e-3(T) recognize that a 
variable life insurance contract is an insurance policy, and is subject 
to extensive state regulation.
    Applicants also assert that in adopting Rule 6e-2(b)(15)(iii), the 
Commission expressly recognized that state insurance regulators have 
authority, pursuant to state insurance laws or regulations, to 
disapprove or require changes in investment policies, investment 
advisers or principal underwriters of scheduled premium variable life 
insurance contracts. The Commission deemed such exemptions necessary 
``to assume the solvency of the life insurer and performance of its 
contractual obligations by enabling an insurance regulatory authority 
or the life insurer to act when certain proposals reasonably could be 
expected to increase the risks undertaken by the life insurer.'' 
Applicants state that, in this respect, the corresponding provisions of 
Rule 6e-3(T) for flexible premium variable life insurance contracts 
were adopted in recognition of the same factors.
    12. Applicants represent that the offer and sale of the Insurance 
Products Funds to Qualified Plans will not have any impact on the 
relief requested in this regard. Where applicable, shares of the 
Insurance Products Funds sold to Qualified Plans will be held by the 
trustees of such Plans as required by Section 403(a) of the Employee 
Retirement Income Security Act of 1974 (``ERISA''). Section 403(a) also 
provides that the trustees of a Plan must have exclusive authority and 
discretion to manage and control the Plan with two exceptions: (a) when 
the Plan expressly provides that the trustees are subject to the 
direction of a named fiduciary who is not a trustee, in which case the 
trustees are subject to proper directions made in accordance with the 
terms of the Plan and not contrary to ERISA; and (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, the 
Plan trustees have 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 reserved to the trustees or the 
named fiduciary. The Qualified Plans may have their trustee(s) or other 
fiduciaries exercise voting rights attributable to investment 
securities held by the Qualified Plans in their discretion. Where a 
Plan does not provide Plan Participants with the right to give voting 
instructions, Applicants state that they do not see any potential for 
irreconcilable material conflicts of interest between or among Contract 
Owners and Plan Participants with respect to voting of the respective 
Insurance Products Fund's shares. Accordingly, Applicants note that, 
unlike the case with insurance company separate accounts, the issue of 
the resolution of material irreconcilable conflicts with respect to 
voting is not present with respect to such Plans since the Plans are 
not entitled to pass-through voting privileges.
    13. Applicants state that some Plans may provide for the 
trustee(s), an investment adviser or another named fiduciary to 
exercise voting rights in accordance with instructions from Plan 
Participants. Applicants note, however, that there is no reason to 
believe that participants in Plants generally, or those in a particular 
Plan, either as a single group or in combination with other Plans, 
would vote in a manner that would disadvantage Contract Owners. 
Applicants submit, therefore, that the purchase of shares by Plans that 
provide voting rights to Participants does not present any 
complications not otherwise occasioned by mixed and shared funding.

Conflicts of Interest

    14. Applicants state that no increased conflicts of interest would 
be presented by the granting of the requested relief. Applicants submit 
that shared funding does not present any issues that do not already 
exist where a single insurance company is licensed to do business in 
several states. In this regard, Applicants note that 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 other insurance 
regulators in one or more other states in which other participating 
Insurance Companies are domiciled. This possibility, however, is no 
different or greater than exists when a single insurer and its 
affiliates offer their insurance products in several states, as is 
currently permitted. Applicants submit that shared funding by 
unaffiliated insurers, in this respect, is not different than the use 
of the same investment ocmpany as the funding vechile for affiliated 
insurers, which Rules 6e-2(b)(15) and 6e-(T)(b)(15) permit.
    15. Applicants state that affiliation does not reduce the 
potential, if any exists, for differences in state regulatory 
requirements. In any event, the conditions set forth in the application 
and later in this notice (which are adapted from the conditions 
included in Rule 6e-3(T)(b)(15)) are designed to safeguard against, and 
provide procedures for resolving, 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 Products Funds. 
This requirement will be provided for in agreements that will be 
entered into by Participating Insurance Companies with respect to their 
participation in the Insurance Products Funds.
    16. Rules 6e-2(b)(15) and 6e-(T)(b)(15) give the insurance company 
the right to disregard the voting instructions of the Contract Owners. 
This right does not raise any issues different from those raised by the 
authority of state insurance administrators over separate accounts. 
Applicant's also assert that 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 
requirements in Rules 6e-2 and 6e-3(T) that the insurance company's 
disregard of voting instructions be reasonable and based on specified 
good faith determinations.

[[Page 32263]]

    17. If the 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, such 
Participating Insurance Company may be required, at the election of the 
relevant Insurance Products Fund, to withdraw its separate account's 
investment in that Insurance Products Fund and no charge or penalty 
will be imposed upon the contract Owners as a result of such 
withdrawal. In addition, if a material irreconcilable conflict 
involving Plans arises, the Plans may simply redeem their shares and 
make alternative investments.
    18. Applicants submit that there is no reason why the investment 
policies of an Insurance Products Fund would or should be materially 
different from what annuity or variable life insurance contracts. In 
this regard, Applicants assert that the Insurance Products Funds will 
not be managed to favor or disfavor any particular Participating 
Insurance Company or type of insurance product or Plan. Each type of 
insurance product is designed as a long-term investment program. 
Similarly,the investment objective of Plans, long-term investment, 
coincides with that of the Variable Contracts and should not increase 
the potential for conflicts.
    19. Applicants submit that no one investment strategy can be 
identified as appropriate to a particular insurance product or Plan. 
Each pool of Contract Owners is composed of individuals of diverse 
financial status, age, and insurance and investment goals. A fund 
supporting even one type of insurance product must accommodate these 
diverse factors in order to attract and retain purchasers.
    20. Applicants submit that permitting mixed and share funding will 
provide economic support for the establishment of the Insurance 
Products Funds. In addition, permitting mixed and shared funding will 
facilitate the establishment of additional series of Insurance Products 
Funds serving diverse goals, since a broader base of Contract Owners 
can be expected to provide economic justification for the creation of 
additional portfolios with greater variety of investment objectives and 
policies.
    21. Applicants state that Section 817(h) of the Code imposes 
certain diversification standards on the underlying assets of variable 
annuity contracts and variable life insurance contracts held in the 
portfolios of management investment companies. Treasury Regulation 
Sec. 1.817-5(f)(iii) specifically permits ``qualified pension or 
retirement plans'' and insurance company separate accounts to share the 
same underlying investment company. Therefore, Applicants assert that 
neither the Code, nor the Treasury regulations, nor the revenue rulings 
thereunder recognize any inherent conflicts of interest if Plans, 
variable annuity separate accounts, and variable life insurance 
separate accounts all invest in the same management investment company.
    22. Applicants note that while there are differences in the manner 
in which distributions for variable annuity contracts, variable life 
insurance contracts and Plans are taxed, these differences will have no 
impact on the Insurance Products Funds and therefore do not raise any 
conflicts of interest. When distributions are to be made, and a 
Separate Account or Plan cannot net purchase payments to make the 
distributions, the Separate Account or Plan will redeem shares of the 
Insurance Products Funds at their respective net asset value to provide 
proceeds to meet distribution needs. The Plan will then make 
distributions in accordance with the terms of the Plan, and the 
Participating Insurance Company will make distributions in accordance 
with the terms of the Variable Contract. Accordingly, Applicants assert 
that the tax consequences of distributions from Variable Contracts and 
Plans do not raise any conflicts of interest with respect to the use of 
the Insurance Products Funds.
    23. Applicants represent that the Insurance Products Funs will 
inform each shareholder, including each Separate Account and Plan, of 
information necessary for any meeting of shareholders. Each 
Participating Insurance Company will then solicit voting instructions 
in accordance with the ``pass-through'' voting requirement. The voting 
rights provided to Qualified Plans with respect to shares of the 
Insurance Products Funds would be no different from the voting rights 
that are provided to Qualified Plans with respect to shares of mutual 
funds sold to the general public.
    24. Applicants submit that the ability of the Insurance Products 
Funds to sell their shares directly to Plans does not create a ``senior 
security,'' as such term is defined under Section 18(g) of the 1940 
Act, with respect to any Contract Owner as opposed to a Plan 
Participant. As noted above, regardless of the rights and benefits of 
Participants under the Plans, or Contract Owners under their Variable 
Contracts, the Plans and Separate Accounts have rights only with 
respect to their respective shares of the Insurance Products Funds. 
They can redeem such shares only at their net asset value. No 
shareholder of any of the Insurance Products Funds has any preference 
over any other shareholder with respect to distribution of assets or 
payments of dividends.
    25. Applicants assert that there are no conflicts between Contract 
Owners and Plan Participants with respect to state insurance 
commissioners' veto powers over investment objectives. Applicants note 
that the basic premise of corporate democracy and shareholder voting is 
that not all shareholders may agree with a particular proposal. 
Although the interests and opinions of shareholders may differ, this 
does not mean that inherent conflicts of interest exist between or 
among such shareholders. The state insurance commissioners have been 
given the veto power in recognition of the fact that insurance 
companies usually cannot simply redeem their separate accounts out of 
one fund and invest in another. While time-consuming, complex 
transactions must be undertaken to accomplish redemptions and transfers 
by Separate Accounts, trustees of Plans can quickly redeem their shares 
from Insurance Products Funds and reinvest in another funding vehicle 
without the same regulatory impediments or, as is the case with most 
Plans, even hold cash pending suitable alternative investment. 
Applicants maintain that even if there should arise issues where the 
interests of Contract Owners and the interests of Participants in 
Qualified Plans are in conflict, the issues can be almost immediately 
resolved because the trustees of the Plans can, on their own, redeem 
shares out of the Insurance Products Funds.
    26. Applicants submit that mixed and shared funding should provide 
benefits to Contract Owners by eliminating a significant portion of the 
costs of establishing and administering separate funds. The Separate 
Accounts of Participating Insurance Companies will benefit not only 
from the investment and administrative expertise available through the 
Insurance Products Funds, but also from the cost efficiencies and 
investment flexibility afforded by a larger pool of assets. Mixed and 
shared funding also would permit a greater amount of assets available 
for investment, thereby promoting economies of scale, permitting 
greater diversification, and making the addition of new series more 
feasible. Additionally, making the Insurance Products Funds available 
for mixed and shared funding will encourage more insurance companies to 
offer Variable Contracts, and this should result in increased 
competition with respect to both Variable Contract design and pricing, 
which can be expected to result

[[Page 32264]]

in more product variation and lower charges.

Applicants' Conditions

    Applicants have consented to the following conditions:
    1. A majority of each Insurance Products Fund's Board of Trustees 
or Directors (each, a ``Board'') will consist of persons who are not 
``interested persons'' thereof, 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 the 
trustee(s) or directors(s), 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. Each Insurance Products Fund's Board will monitor its respective 
fund for the existence of any material irreconcilable conflict between 
and among the interests of Contract Owners of all Separate Accounts and 
of Plan Participants investing in the respective Insurance Products 
Fund, and determine what action, if any, should be taken in response to 
such conflicts. A material irreconcilable conflict may arise for a 
variety of reasons, including: (a) an action by any state insurance 
regulatory authority; (b) a change in applicable federal or state 
insurance, tax, or securities laws or regulations, or a public ruling, 
private letter ruling, no-action or 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 Products Funds 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 Participating 
Qualified Plan (as defined below) to disregard the voting instructions 
of Plan Participants.
    3. The Adviser (or any other investment adviser of an Insurance 
Products Fund), any Participating Insurance Company and any Plan that 
executes a fund participation agreement upon becoming an owner of 10% 
or more of the assets of an Insurance Products Fund (referred to herein 
as a ``Participating Qualified Plan'') will report any potential or 
existing conflicts to the Board. The Adviser, Participating Insurance 
Companies, and Participating Qualified Plans will be obligated to 
assist the appropriate 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 each 
Participating Insurance Company to inform the Board whenever Contract 
Owner voting instructions are disregarded and, if pass-through voting 
is applicable, an obligation by each Participating Qualified Plan to 
inform the Board whenever it has determined to disregard Plan 
Participant voting instructions. The responsibility to report such 
information and conflicts and to assist the Boards will be contractual 
obligations of all Participating Insurance Companies and Participating 
Qualified Plans investing in the Insurance Products Funds under their 
respective agreements governing participation in the Insurance Products 
Funds, and such agreements will provide that these responsibilities 
will be carried out with a view only to the interests of Contract 
Owners and Plan Participants, as applicable.
    4. If a majority of an Insurance Products Fund's Board members, or 
a majority of its disinterested directors, determine that a material 
irreconcilable conflicts exists, the relevant Participating Insurance 
Companies, adviser and Participating Qualified Plans, at their expense 
and to the extent reasonably practicable (as determined by a majority 
of the disinterested directors of the fund), will take whatever steps 
are necessary to remedy or eliminate the material irreconcilable 
conflict. Such steps could include: (a) withdrawing the assets 
allocable to some or all of the Separate Accounts from the Insurance 
Products Fund or any of its series and reinvesting such assets in a 
different investment medium, which may include another series of the 
Insurance Products Fund or another Insurance Products Fund; (b) in the 
case of Participating Insurance Companies, submitting the question as 
to whether such segregation should be implemented to a vote of all 
affected Contract Owners and, as appropriate, segregating the assets of 
any appropriate group (i.e., variable annuity 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; and (c) 
establishing a new registered management investment company or managed 
separate account. If a material irreconcilable conflicts arises because 
of a decision by a Participating Insurance Company to disregard 
Contract Owner voting instructions, and this decision represents a 
minority position or would preclude a majority vote, the Participating 
Insurance Company may be required, at the election of the Insurance 
Products Fund, to withdraw its Separate Account's investment in such 
fund, or any series thereof, and no change or penalty will be imposed 
as a result of such withdrawal. If a material irreconcilable conflicts 
arises because of a Participating 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 Participating Qualified Plan may be required, at the election 
of the Insurance Products Fund, to withdraw its investment in such 
fund, or any series thereof, and no charge or penalty will be imposed 
as a result of such withdrawal. To the extent permitted by applicable 
law, the responsibility to take remedial action in the event of a Board 
determination of a material irreconcilable conflict and to bear the 
cost of such remedial action will be a contractual obligation of all 
Participating Insurance Companies and Participating Qualified Plans 
under their agreements governing participation in the Insurance 
Products Funds and these responsibilities will be carried out with a 
view only to the interests of the Contract Owners and Plan 
Participants, as applicable.
    5. For purposes of Condition 4, a majority of the disinterested 
members of the applicable Board will determine whether or not any 
proposed action adequately remedies any material irreconcilable 
conflict, but in no event will an Insurance Products Fund or the 
Adviser (or any other investment adviser of an Insurance Products Fund) 
be required to establish a new funding medium for any Variable 
Contract. No Participating Insurance Company will be required by 
Condition 4 to establish a new funding medium for any Variable Contract 
if a majority of Contract Owners materially and adversely affected by 
the material irreconcilable conflict vote to decline such offer. No 
Participating Qualified Plan will be required by Condition 4 to 
establish a new funding medium for such plan if (a) a majority of Plan 
Participants materially and adversely affected by the material 
irreconcilable conflict vote to

[[Page 32265]]

decline such offer or (b) pursuant to governing Plan documents and 
applicable law, the Participating Qualified Plan makes such decision 
without Plan Participant vote.
    6. A Board's determination of the existence of a material 
irreconcilable conflict and its implications will be made known 
promptly in writing to the Adviser and to all Participating Insurance 
Companies and all Participating Qualified Plans.
    7. Participating Insurance Companies will provide pass-through 
voting privileges to all Contract Owners so long as the Commission 
continues to interpret the 1940 Act as requiring pass-through voting 
privileges for Contract Owners. Accordingly, Participating Insurance 
Companies will vote shares of Insurance Products Funds held in their 
Separate Accounts in a manner consistent with timely voting 
instructions received from Contract Owners. In addition, each 
Participating Insurance Company will vote shares of Insurance Products 
Fund held in its Separate Accounts for which it has not received timely 
voting instructions from Contract Owners, as well as shares which the 
Participating Insurance Company itself owns, in the same proportion as 
those shares for which it has received voting instructions. 
Participating Insurance Companies will be responsible for assuring that 
each of their Separate Accounts investing in an Insurance Products Fund 
calculates voting privileges in a manner consistent with the Separate 
Accounts of all other Participating Insurance Companies investing in 
that fund. The obligation to calculate voting privileges in a manner 
consistent with all other Separate Accounts investing in an Insurance 
Products Fund will be a contractual obligation of all Participating 
Insurance Companies under their agreements governing participation in 
the Insurance Products Fund. Each Participating Qualified Plan will 
vote as required by applicable law and governing Plan documents.
    8. All reports of potential or existing conflicts received by a 
Board, and all Board action with regard to (a) determining the 
existence of a conflict, (b) notifying the Adviser and Participating 
Insurance Companies and Participating Qualified Plans of a conflict, 
and (c) determining whether any proposed action adequately remedies a 
conflict, will be properly recorded in the minutes of the meetings of 
the appropriate Board or other appropriate records. Such minutes or 
other records will be made available to the Commission upon request.
    9. Each Insurance Products Fund will notify all Participating 
Insurance Companies that Separate Account prospectus disclosure 
regarding potential risks of mixed and shared funding may be 
appropriate. Due to differences in tax treatment and other 
considerations, each Insurance Products Fund will disclose in its 
prospectus that: (a) its shares are intended to be a funding vehicle 
for both variable annuity and variable life insurance contracts offered 
by various Participating Insurance Companies and for Qualified Plans; 
(b) material irreconcilable conflicts may arise among various Contract 
Owners and Plan Participants investing in the Insurance Products Fund; 
and (c) the Board will monitor the Insurance Products Fund for any 
material irreconcilable conflicts and determine what action, if any, 
should be taken in response to any such conflict.
    10. Each Insurance Products Fund will comply with all provisions of 
the 1940 Act requiring voting by shareholders (which, for these 
purposes, will be the persons having a voting interest in shares of the 
Insurance Products Funds). In particular, each Insurance Products Fund 
either will provide for annual shareholder meetings (except insofar as 
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 Insurance Products Funds are not one of the trusts described in 
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 Insurance Products Fund will act in accordance with the 
Commission's interpretation of the requirements of Section 16(a) with 
respect to periodic elections of Board members and with whatever rules 
the Commission may promulgate with respect thereto.
    11. If and to the extent that Rule 6e-2 or Rule 6e-3(T) under the 
1940 Act is amended, or Rule 6e-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 the application, then the Insurance 
Products Funds and/or the Participating Insurance Companies, as 
appropriate, will take such steps as may be necessary to comply with 
Rule 6e-2 or Rule 6e-3(T), as amended, or proposed rule 6e-3 as 
adopted, to the extent such rules are applicable.
    12. The Adviser, the Participating Insurance Companies and 
Participating Qualified Plans, at least annually, will submit to each 
Board such reports, materials or data as each Board may reasonable 
request so that the Board may fully carry out the obligations imposed 
upon it by the conditions stated in the application. Such reports, 
materials and data will be submitted more frequently if deemed 
appropriate by the Board. The obligations of the Participating 
Insurance Companies and Participating Qualified Plans to provide these 
reports, materials and data upon reasonable request of a Board shall be 
a contractural obligation of all Participating Insurance Companies and 
Participating Qualified Plans under their agreements governing their 
participation in the Insurance Products Funds.
    13. If a Plan or Plan Participant should become an owner of 10% or 
more of the assets of an Insurance Products Fund, such Plan or Plan 
Participant will execute a participation agreement with such fund which 
includes the conditions set forth herein to the extent applicable. A 
Plan or Plan Participant will execute an application containing an 
acknowledgment of this condition upon initial purchase of the shares of 
any Insurance Products Fund.

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. 98-15707 Filed 6-11-98; 8:45 am]
BILLING CODE 8010-01-M