Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 / Notices 35625

4. Applicant requests relief to permit

it to make up to four distributions of net

long-term capital gains in any one

taxable year, so long as it maintains in

effect the Distribution Policy.

Applicant’s Legal Analysis

1. Section 19(b) of the Act provides

that a registered investment company

may not, in contravention of such rules,

regulations, or orders as the

Commission may prescribe, distribute

long-term capital gains more often than

once every twelve months. Rule 19b–

1(a) under the Act permits a registered

investment company, with respect to

any one taxable year, to make one

capital gains distribution, as defined in

section 852(b)(3)(C) of the Internal

Revenue Code of 1986, as amended (the

‘‘Code’’). Rule 19b–1(a) also permits a

supplemental distribution to be made

pursuant to section 855 of the Code not

exceeding 10% of the total amount

distributed for the year. Rule 19b–1(f)

permits one additional long-term capital

gains distribution to be made to avoid

the excise tax under section 4982 of the

Code.

2. Applicant asserts that rule 19b–1,

by limiting the number of net long-term

capital gains distributions that applicant

may make with respect to any one year,

would prevent the normal operation of

its Distribution Policy whenever

applicant’s realized net long-term gains

in any year exceed the total of the fixed

quarterly distributions that under rule

19b–1 may include such capital gains.

As a result, applicant states that it must

fund these quarterly distributions with

returns on capital (to the extent net

investment income and realized shortterm capital gains are insufficient to

cover a quarterly distribution).

Applicant further asserts that the longterm capital gains in excess of the fixed

quarterly distributions permitted by rule

19b–1 then must either be added as an

‘‘extra’’ to one of the permitted capital

gains distributions, thus exceeding the

total annual amount called for by the

Distribution Policy, or retained by

applicant (with applicant paying taxes

on the retained amounts). Applicant

asserts that the application of rule 19b–

1 to its Distribution Policy may cause

anomalous results and create pressure to

limit the realization of long-term capital

gains to the total amount of the fixed

quarterly distributions that under the

rule may include such gains.

3. Applicant believes that the

concerns underlying section 19(b) and

rule 19b–1 are not present in applicant’s

situation. One of these concerns is that

shareholders might not be able to

distinguish frequent distributions of

capital gains and dividends from

investment income. Applicant states

that the Distribution Policy has been

disclosed in a special letter to its

shareholders, and applicant will

disclose the Policy in future quarterly

and annual reports to shareholders.

Applicant further states that, in

accordance with rule 19a–1 under the

Act, a separate statement showing the

source of the distribution (net

investment income, net realized capital

gain or return of capital) will

accompany each distribution (or the

conformation of the reinvestment under

applicant’s dividend reinvestment

plan). In addition, a statement showing

the amount and source of each quarterly

distribution received during the year

will be disclosed to each shareholder of

applicant who received distributions

during the year (including shareholders

who shares during the year). Applicant

expects to include disclosure describing

the amount and source of distributions

under the Distribution Policy on a

cumulative basis for the full fiscal year

either in (i) the statement showing the

amount and source of the quarterly

distribution paid in the last quarter of

each fiscal year, or (ii) in a separate

statement mailed to shareholders

shortly after year-end.

4. Another concern underlying

section 19(b) and rule 19b–1 is that

frequent capital gains distributions

could facilitate improper fund

distribution practices, including, in

particular, the practice of urging an

investor to purchase fund shares on the

basis of an upcoming distribution

(‘‘selling the dividend’’) where the

distribution would result in an

immediate corresponding reduction in

net asset value and would be, in effect,

a return of the investor’s capital.

Applicant submits that this concern

does not apply to closed-end investment

companies, such as applicant, which do

not continuously distribute shares.

5. Applicant states that increased

administrative costs also are a concern

underlying section 19(b) and rule 19b–

1. Applicant asserts, however, that it

will continue to make quarterly

distributions regardless of whether

capital gains are included in any

particular distribution.

6. Section 6(c) provides that the

Commission may exempt any person,

security, or transaction or any class or

classes of persons, securities, or

transactions from any provision of the

Act, or from any rule thereunder, if such

exemption is necessary or appropriate

in the public interest and consistent

with the protection of investors and the

purposes fairly intended by the policy

and provisions of the Act. For the

reasons stated above, applicant believes

that the requested relief satisfies this

standard.

Applicant’s Condition

Applicant agrees that any

Commission order granted the requested

relief will terminate upon the effective

date of a registration statement under

the Securities Act of 1933 for any future

public offering by applicant of its shares

other than: (i) a non-transferable rights

offering to shareholders of applicant,

provided that such offering does not

include solicitation by brokers or the

payment of any commissions or

underwriting fee; and (ii) an offering in

connection with a merger,

consolidation, acquisition, or

reorganization.

For the Commission, by the Division of

Investment Management, pursuant to

delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–17385 Filed 6–29–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Rel. No. IC–23269; File No. 812–11092]

Variable Insurance Products Fund, et

al.

June 24, 1998.

AGENCY: Securities and Exchange

Commission (‘‘SEC’’ or the

‘‘Commission’’).

ACTION: Notice of application for an

amended order under Section 6(c) of the

Investment Company Act of 1940 (the

‘‘1940 Act’’) for exemptions from

Sections 9(a), 13(a), 15(a) and 15(d) of

the 1940 Act, and Rules 6e–2(b)(15) and

6e–3(T)(b)(15) thereunder.

SUMMARY OF APPLICATION: Applicants

seek an amended order to permit shares

of the Variable Insurance Products

Fund, Variable Insurance Products Fund

II, and Variable Insurance Products

Fund III (together, the ‘‘Funds’’), as well

as shares of any future funds for which

Fidelity Management & Research

Company (‘‘FMR’’) or any affiliate of

FMR serves as the investment manager,

advisor, principal underwriter, or

sponsor (‘‘Future Funds’’) to be issued

to and held by qualified pension and

retirement plans outside the Separate

account context (‘‘Qualified Plans’’).

APPLICANTS: Variable Insurance Products

Fund (‘‘VIPF’’), Variable Insurance

Products Fund II (‘‘VIPF II’’), and

Variable Insurance Products Fund III

(‘‘VIPF III’’).
35626 Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 / Notices

FILING DATE: The application was filed

on March 24, 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 on this application by writing

to the Secretary of the SEC and serving

Applicants with a copy of the request,

in person or by mail. Hearing requests

must be received by the Commission by

5:30 p.m. on July 20, 1998, and

accompanied by proof of service on the

Applicants in the form of an affidavit or,

for lawyers, a certificate of service.

Hearing requests should state the nature

of the interest, the reason for the request

and the issues contested. Persons may

request notification of the date of a

hearing by writing to the Secretary of

the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth

Street, N.W., Washington, D.C. 20549.

Applicants, 82 Devonshire Street, N7A,

Boston, MA 02109.

FOR FURTHER INFORMATION CONTACT:

Michael B. Koffler, Attorney, or Mark C.

Amorosi, Branch Chief, Division of

Investment Management, Office of

Insurance Products, at (202) 942–0670.

SUPPLEMENTARY INFORMATION: 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 Street, N.W.,

Washington, D.C. 20549 (tel. (202) 942–

8090).

Applicants’ Representations

1. Each of the Funds is a

Massachusetts business trust and is

registered under the 1940 Act as an

open-end diversified management

investment company. VIPF and VIPF II

presently consist of five portfolios each,

and VIPF III currently consists of three

portfolios. Additional portfolios may be

added in the future. The Funds

currently serve as the underlying

investment vehicle for separate accounts

supporting variable annuity contracts

and variable life insurance policies

issued by various insurance companies.

2. FMR, an investment adviser

registered under the Investment

Advisers Act of 1940, serves as the

investment adviser for each of the

Funds.

3. The Commission previously

granted exemptive relief (the ‘‘Original

Orders’’) to the extent necessary to

permit shares of the Funds and Future

Funds to be sold to and held by separate

accounts of both affiliated and

unaffiliated life insurance companies in

support of variable annuity contracts,

scheduled premium variable life

insurance contracts and flexible

premium variable life insurance

contracts (collectively, ‘‘Variable

Contracts’’). Separate accounts owning

shares of the Funds and their insurance

company depositors are referred to

herein as ‘‘Participating Separate

Accounts’’ and ‘‘Participating Insurance

Companies,’’ respectively.

4. The use of a common management

investment company as the underlying

investment medium for both variable

annuity and variable life insurance

separate accounts of a single insurance

company (or of two or more affiliated

insurance companies) is referred to as

‘‘mixed funding.’’ The use of a common

management investment company as the

underlying investment medium for

variable annuity and/or variable life

insurance separate accounts of

unaffiliated insurance companies is

referred to as ‘‘shared funding.’’

5. The Original Orders do not

expressly address the sale of shares of

the Funds or any Future Funds to

Qualified Plans. Applicants propose

that the Funds and any Future Funds be

permitted to offer and sell shares of the

Funds to Qualified Plans.

Applicants’ Legal Analysis

1. Applicants request that the

Commission issue an amended order

pursuant to Section 6(c) of the 1940 Act,

exempting scheduled premium variable

life insurance separate accounts and

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

Rules 6e–2(b)(15) and 6e–3(T)(b)(15)

(and any comparable rule) thereunder,

respectively, to the extent necessary to

permit shares of the Funds and any

Future Funds to be sold to and held by

Qualified Plans.

2. 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 provisions 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.

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, however, only

where the management investment

company underlying the separate

account (‘‘underlying fund’’) offers its

shares exclusively to variable life

insurance separate accounts of the life

insurer, or of any affiliated life

insurance company. Therefore, Rule 6e–

2 does not permit either mixed funding

or shared funding because the relief

granted by Rule 6e–2(b)(15) is not

available with respect to a scheduled

premium variable life insurance

separate account that owns shares of an

underlying fund that also offers its

shares to a variable annuity or a flexible

premium variable life insurance

separate account of the same company

or of any affiliated life insurance

company. Rule 6e–2(b)(15) also does not

permit the sale of shares of an

underlying fund to Qualified Plans.

4. 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) also provides partial

exemptions from Sections 9(a), 13(a),

15(a) and 15(b) of the 1940 Act. These

exemptions, however, are available only

where the separate account’s underlying

fund offers its shares exclusively to

separate accounts of the life insurer, or

of any affiliated life insurance company,

offering either scheduled contracts or

flexible 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, Rule 6e–3(T) permits mixed

funding but does not permit shared

funding and also does not permit the

sale of shares of an underlying fund to

Qualified Plans.

5. Applicants note that if the Funds

were to sell their shares only to

Qualified Plans, exemptive relief under

Rule 6e–2 and Rule 6e–3(T) would not

be necessary. The relief provided for

under Rule 6e–2(b)(15) and Rule 6e–

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

pension and retirement plans or to a

registered investment company’s ability

to sell its shares to such plans.

6. Applicants state that changes in the

federal tax law have created the

opportunity for each Fund to increase

its asset base through the sale of its

shares to Qualified Plans. Section 817(h)

of the Internal Revenue Code of 1986, as

amended (the ‘‘Code’’), imposes certain

diversification standards on the assets

underlying variable Contracts. Treasury

Regulations provide that, to meet the

diversification requirements, all of the
Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 / Notices 35627

beneficial interests in the underlying

investment company must be held by

the segregated asset accounts of one or

more life insurance companies.

Notwithstanding this, the Treasury

Regulations also contain an exception to

this requirement that permits trustees of

a Qualified Plan to hold shares of an

investment company, the shares of

which are also held by insurance

company segregated asset accounts,

without adversely affecting the status of

the investment company as an

adequately diversified underlying

investment for Variable Contracts issued

through such segregated asset accounts

(Treas. Reg. 1.817–5(f)(3)(iii)).

7. Applicants state that the

promulgation of Rules 6e–2(b)(15) and

6e–3(T)(b)(15) under the 1940 Act

preceded the issuance of these Treasury

Regulations. Thus, the sale of shares of

the same investment company to both

separate accounts and Qualified Plans

was not contemplated at the time of the

adoption of Rules 6e–2(b)(15) and 6e–

3(T)(b)(15).

8. Section 9(a) of the 1940 Act

provides that it is unlawful for any

company to serve as investment adviser

or principal underwriter of any

registered open-end investment

company if an affiliated person of that

company is subject to a disqualification

enumerated in Section 9(a)(1) or (2).

Rules 6e–2(b)(15) and 6e–3(T)(b)(15)

provide 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 of the underlying portfolio

investment company.

9. Applicants state that the relief

granted in Rules 6e–2(b)(15) and 6e–

3(T)(b)(15) from the requirements of

Section 9 limits, in effect, the amount of

monitoring of an insurer’s personnel

that would otherwise be necessary to

ensure compliance with Section 9 to

that which is appropriate in light of the

policy and purposes of Section 9.

Applicants submit that those Rules

recognize that it is not necessary for the

protection of investors or the purposes

fairly intended by the policy and

provisions of the 1940 Act to apply the

provisions of Section 9(a) to many

individuals involved in an insurance

company complex, most of whom

typically will have no involvement in

matters pertaining to investment

companies funding the separate

accounts.

10. Applicants maintain that the relief

previously granted from Section 9(a) in

the Original Orders will in no way be

affected by the proposed sale of shares

of the Funds to Qualified Plans. Those

individuals who participate in the

management or administration of the

Funds will remain the same regardless

of which Qualified Plans use such

Funds. Applicants maintain that

applying the requirements of Section

9(a) because of investment by Qualified

Plans would not serve any regulatory

purpose. Moreover, Qualified Plans,

unlike separate accounts, are not

themselves investment companies, and

therefore are not subject to Section 9 of

the 1940 Act.

11. 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 on mixed and shared

funding are observed. 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 contractowners with respect to the

investments of an underlying fund or

any contract between a fund and its

investment adviser, when required to do

so by an insurance regulatory authority

(subject to the provisions of paragraphs

(b)(5)(i) and (b)(7)(ii)(A) of the Rules).

Rules 6e–2(b)(15)(iii)(B) and 6e–

3(T)(b)(15)(iii)(A)(2) provide that the

insurance company may disregard

contractowners’ voting instructions if

the contractowners initiate any change

in such company’s investment policies,

principal underwriter or any investment

adviser (provided that disregarding such

voting instructions is reasonable and

subject to the other provisions of

paragraphs (b)(5)(ii) and (b)(7)(ii)(B) and

(C) of the Rules).

12. Applicants assert that Qualified

Plans, which are not registered as

investment companies under the 1940

Act, have no requirement to pass

through the voting rights to plan

participants. Applicable law expressly

reserves voting rights to certain

specified persons. Under Section 403(a)

of the Employment Retirement Income

Security Act (‘‘ERISA’’), shares of a fund

sold to a Qualified Plan must be held by

the trustees of the Qualified Plan.

Section 403(a) also provides that the

trustee(s) must have exclusive authority

and discretion to manage and control

the Qualified Plan with two exceptions:

(1) when the Qualified 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 Qualified Plan and not contrary to

ERISA, and (2) when the authority to

manage, acquire or dispose of assets of

the Qualified Plan is delegated to one or

more investment managers pursuant to

Section 402(c)(3) of ERISA. Unless one

of the two above exceptions stated in

Section 403(a) applies, Qualified Plan

trustees have the exclusive authority

and responsibility for voting proxies.

Where a named fudiciary to a Qualified

Plan appoints an investment manager,

the investment manager has the

responsibility to vote the shares held

unless the right to vote such shares is

reserved to the trustees or the named

fiduciary. Where a Qualified Plan does

not provide participants with the right

to give voting instructions, Applicants

do not see any potential for material

irreconcilable conflicts of interest

between or among variable contract

holders and Qualified Plan investors

with respect to voting of the respective

Fund’s shares. Accordingly, Applicants

state 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 Qualified Plans since the Qualified

Plans are not entitled to pass through

voting privileges.

13. Even if a Qualified Plan were to

hold a controlling interest in one of the

Funds, Applicants believe that such

control would not disadvantage other

investors in such Fund to any greater

extent than is the case when any

institutional shareholder holds a

majority of the voting securities of any

open-end management investment

company. In this regard, Applicants

submit that investment in a Fund by a

Qualified Plan will not create any of the

voting complications occasioned by

mixed funding or share funding. Unlike

mixed or shared funding, Qualified Plan

investor voting rights cannot be

frustrated by veto rights of insurers or

state regulators.

14. Applicants state that some of the

Qualified Plans, however, may provide

for the trustee(s), an investment adviser

(or advisers) or another named fiduciary

to exercise voting rights in accordance

with instructions from participants.

Where a Qualified Plan provides

participants with the right to give voting

instructions, Applicants see no reason

to believe that participants in Qualified

Plans generally or those in a particular

Qualified Plan, either as a single group

or in combination with participants in

other Qualified Plans, would vote in a

manner that would disadvantage

Variable Contract holders. Applicants

maintain that the purchase of shares of

the Funds by Qualified Plans that

provide voting right does not present

any complications not otherwise

occasioned by mixed or shared funding.
35628 Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 / Notices

15. Applicants state that they do not

believe that the sale of the shares of the

Funds to Qualified Plans will increase

the potential for material irreconcilable

conflicts of interest between or among

different types of investors. In

particular, Applicants state that there is

very little potential for such conflicts

beyond that which would otherwise

exist between variable annuity and

variable life insurance contractowners.

Applicants note that the Treasury

Regulations specifically permit qualified

pension or retirement plans and

separate accounts to invest in the same

underlying fund. For this reason,

Applicants have concluded that neither

the Code, nor the Treasury Regulations

or revenue rulings thereunder, present

any inherent conflicts of interest.

16. Applicants not that while there

are differences in the manner in which

distributions from Variable Contracts

and Qualified Plans are taxed, these

differences will have no impact on the

Funds. When distributions are to be

made, and a Separate Account or

Qualified Plan is unable to net purchase

payments to make the distributions, the

Separate Account and Qualified Plan

will redeem shares of the Funds at their

respective net asset value in conformity

with Rule 22c–1 under the 1940 Act

(without the imposition of any sales

charge) to provide proceeds to meet

distribution needs. A Qualified Plan

will make distributions in accordance

with the terms of the Qualified Plan.

17. Applicants maintain that it is

possible to provide an equitable means

of giving voting rights to Participating

Separate Account contractowners and to

Qualified Plans. In connection with any

meeting of shareholders, the Funds will

inform each shareholder, including each

Participating Insurance Company and

Qualified Plan, of information necessary

for the meeting, including their

respective share of ownership in the

relevant Fund. Each Participating

Insurance Company will then solicit

voting instructions in accordance with

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

and its participation agreement with the

relevant Fund. Shares held by Qualified

Plans will be voted in accordance with

applicable law. The voting rights

provided to Qualified Plans with respect

to shares of the Funds would be no

different from the voting rights that are

provided to Qualified Plans with respect

to shares of funds sold to the general

public.

18. Applicants have concluded that

even if there should arise issues with

respect to a state insurance

commissioner’s veto powers over

investment objectives where the

interests of contractowners and the

interests of Qualified Plans are in

conflict, the issues can be almost

immediately resolved since the trustees

of (or participants in) the Qualified

Plans can, on their own, redeem the

shares out of the Funds. Applicants note

that state insurance commissioners have

been given the veto power in

recognition of the fact that insurance

companies usually cannot simply

redeem their separate accounts out of

one fund and invest in another.

Generally, time-consuming, complex

transactions must be undertaken to

accomplish such redemptions and

transfers. Conversely, the trustees of

Qualified Plans or the participants in

participant-directed Qualified Plans can

make the decision quickly and redeem

their interest in the Funds and reinvest

in another funding vehicle without the

same regulatory impediments faced by

separate accounts or, as is the case with

most Qualified Plans, even hold cash

pending suitable investment.

19. Applicants also state that they do

not see any greater potential for material

irreconcilable conflicts arising between

the interests of participants under

Qualified Plans and contractowners of

Participating Separate Accounts from

possible future changes in the federal

tax laws than that which already exist

between variable annuity

contractowners and variable life

insurance contractowners.

20. Applicants state that the sale of

shares of the Funds to Qualified Plans

in addition to separate accounts of

Participating Insurance Companies will

result in an increased amount of assets

available for investment by the Funds.

This may benefit variable

contractowners by promoting economies

of scale, by permitting safety of

investments through greater

diversification, and by making the

addition of new portfolios more feasible.

21. Applicants assert that, regardless

of the type of shareholder in each Fund,

FMR is or would be contractually and

otherwise obligated to manage each

Fund solely and exclusively in

accordance with that Fund’s investment

objectives, policies and restrictions as

well as any guidelines established by

the Board of Directors of such Fund (the

‘‘Board’’). FMR works with a pool of

money and (except in a few instances

where this may be required in order to

comply with state insurance laws) does

not take into account the identity of the

shareholders. Thus, each Fund will be

managed in the same manner as any

other mutual fund. Applicants therefore

see no significant legal impediment to

permitting the sale of shares of the

Funds to Qualified Plans.

Conditions for Relief

Applicants consent to the following

conditions:

1. Any Qualified Plan that executes a

fund participation agreement upon

becoming an owner of 10% or more of

the assets of a portfolio (or class thereof)

of a Fund (a ‘‘Participant’’) shall report

any potential or existing conflicts to the

applicable Board. A Participant will be

responsible for assisting the Board in

carrying out its responsibilities under

these conditions by providing the Board

with all information reasonably

necessary for the Board to consider any

issues raised. If pass-through voting is

applicable, this includes, but is not

limited to, an obligation by each

Particpant to inform the Board

whenever it has determined to disregard

the voting instructions of its

participants. The responsibility to report

such conflicts and information, and to

assist the Board will be the contractual

obligations of the Participant under its

agreement governing participation in

the Fund and such agreement shall

provide that such responsibilities will

be carried out with a view only to the

interests of participants in such

Qualified Plan.

2. Each Board will monitor its

respective Fund for the existence of any

material irreconcilable conflict among

the interests of the contractowners of all

the separate accounts investing in the

Fund and participants in Qualified

Plans investing in the Funds. 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,

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 Fund are being

managed; (e) a difference in voting

instructions given by variable life

insurance contractowners; (f) a decision

by a Participating Insurance Company to

disregard the voting instructions of

contractowners; or (g) if applicable, a

decision by a Qualified Plan to

disregard the voting instructions of its

participants.

3. If it is determined by a majority of

a Board of a Fund, or by a majority of

its disinterested trustees or directors,

that a material irreconcilable conflict

exists, the relevant Qualified Plans

shall, at their expense and to the extent

reasonably practicable (as determined
Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 / Notices 35629

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

2 17 CFR 240.19b–4.

3See letter from Stephanie C. Mullins, Attorney,

CBOE, to Mike Walinskas, Deputy Associate

Director, Division of Market Regulation

(‘‘Division’’), Commission, dated May 26, 1998

(‘‘Amendment No. 1’’). In Amendment No. 1, the

CBOE amends the filing by clarifying that: (1) an

option stop order is triggered by a trade, as well as

by a bid or offer; (2) while the options markets do

have access to information from other exchanges,

they do not have an electronic linkage that provides

for the transmission of orders similar to the

Intermakert Trading System; and (3) while the

CBOE does not explicitly prohibit trade-throughs,

Rule 6.73(a) requires a floor broker ‘‘to use due

diligence to execute the order at the best price or

prices available to him in accordance with the

rules.’’ and in some circumstances, a floor broker

may determine that he should try to execute his

order on another market.

by a majority of the disinterested

trustees or directors), 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 Qualified Plans from

the Fund or any portfolio thereof and

reinvesting such assets in a different

investment medium, which may include

another portfolio of a Fund; and (b)

establishing a new registered

management investment company or

managed separate account.

4. If a material irreconcilable conflict

arises because of a Qualified Plan’s

decision to disregard its participants’

voting instructions, if applicable, and

that decision represents a minority

position or would preclude a majority

vote, the Qualified Plan may be

required, at the election of the Fund, to

withdraw its investment in such Fund,

and no charge or penalty will be

imposed as a result of such withdrawal.

To the extent permitted by applicable

law, the responsibility of taking

remedial action in the event of a Board

determination of a material

irreconcilable conflict and bearing the

cost of such remedial action, will be a

contractual obligation of all Participants

under their agreements governing

participation in the Fund, and these

responsibilities will be carried out with

a view only to the interests of

participants in such Qualified Plans. For

purposes of this condition, 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 the relevant Fund, or FMR be

required to establish a new funding

medium for any Variable Contract.

Further, no Qualified Plan shall be

required by this condition to establish a

new funding medium for any Qualified

Plan if: (a) a majority of its participants

materially and adversely affected by the

irreconcilable material conflict vote to

decline such offer, or (b) pursuant to

governing Qualified Plan documents

and applicable law, the Qualified Plan

mades such decision without a vote of

its participants.

5. Any Board’s determination of the

existence of a material irreconcilable

conflict and its implications will be

make known promptly and in writing to

all Qualified Plans.

6. Each Qualified Plan will vote as

required by applicable law and

governing Qualified Plan documents.

7. All reports of potential or existing

conflicts received by a Board and all

Board actions with regard to

determining the existence of a conflict

of interest, notifying Qualified Plans of

a conflict, and determining whether any

proposed action adequately remedies a

conflict, will be properly recorded in

the minutes of the appropriate Board or

other appropriate records, and such

minutes or other records shall be made

available to the Commission upon

request.

8. Each Fund will disclose in its

prospectus that: (a) shares of the Fund

may be offered to insurance company

separate accounts on a mixed and

shared basis and to Qualified Plans; (b)

material irreconcilable conflicts may

arise between the interests of various

contractowners participating in the

Fund and the interests of Qualified

Plans investing in the Fund; and (c) the

Board of such Fund will monitor events

in order to identify the existence of any

material conflict and determine what

action, if any, should be taken in

response to such material irreconcilable

conflict.

9. No less than annually, the

Participants shall submit to each Board

such reports, materials or data as the

Board may reasonably request so that

the Board may carry out fully the

obligations imposed upon it by the

conditions contained in the application.

Such reports, materials and data shall be

submitted more frequently if deemed

appropriate by the Board. The

obligations of the Participants to

provide these reports, materials and

data shall be a contractual obligation of

all Participants under the agreements

governing their participation in the

Funds.

10. None of the Funds will accept a

purchase order from a Qualified Plan if

such purchase would make the

Qualified Plan shareholder an owner of

10% or more of the assets of a portfolio

(or class thereof) of such Fund unless

such Qualified Plan executes a fund

participation agreement with the

relevant Fund that includes the

conditions set forth herein to the extent

applicable. A Qualified Plan will

execute a shareholder participation

agreement containing an

acknowledgment of this condition at the

time of its initial purchase of shares of

such Fund.

Conclusion

For the reasons summarized above,

Applicants asserts 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. 98–17386 Filed 6–29–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40111); File No. SR–CBOE–

97–41]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval of Amendment

No. 1 to the Proposed Rule Change by

the Chicago Board Options Exchange,

Inc., Relating to the Definition of Stop

Orders

June 23, 1998.

I. Introduction

On August 25, 1997, the Chicago

Board Options Exchange, Inc. (‘‘CBOE

or Exchange’’), filed with the Securities

and Exchange Commission (‘‘SEC or

‘‘Commission’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’) 1 and Rule 19b–4

thereunder,2 a proposed rule change to

amend its Rule 6.53 (‘‘Rule’’), governing

the definition of option stop orders, to

clarify that option stop orders on the

CBOE are triggered when the option

contract reaches a specified price ‘‘on

the CBOE floor.’’ The proposed rule

change was published for comment in

Securities Exchange Act Release No.

39100 (September 19, 1997), 62 FR

50644 (September 26, 1997). No

comments were received on the

proposal.

On May 26, 1998, the Exchange

submitted Amendment No. 1 to the

proposed rule change.3 This order

approves the proposal and approves