66812 Federal Register / Vol. 60, No. 247 / Tuesday, December 26, 1995 / Notices

For the Commission, by the Division of

Investment Management, pursuant to

delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–31237 Filed 12–22–95; 8:45 am]

BILLING CODE 8010–01–M

[Rel. No. IC–21608; No. 812–9658]

Safeco Life Insurance Company et al.

December 19, 1995.

AGENCY: Securities and Exchange

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

ACTION: Notice of Application for an

Order under the Investment Company

Act of 1940 (‘‘1940 Act’’).

APPLICANTS: Safeco Life Insurance

Company (‘‘Safeco’’), Safeco Resource

Variable Account B (‘‘Account B’’),

Safeco Separate Account C (‘‘Account

C’’), First Safeco National Life Insurance

Company of New York (‘‘First Safeco’’),

Safeco Resource Series Trust (‘‘Trust’’),

Safeco Asset Management Company

(‘‘Asset Management’’).

RELEVANT 1940 ACT SECTIONS: Order

requested under Section 6(c) of the 1940

Act for exemptions from Sections 9(a),

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

and Rules 6e–2(a)(2), 6e–2(b)(15), and

6e–3(T)(b)(15) thereunder.

SUMMARY OF APPLICATION: Applicants

seek exemptive relief to the extent

necessary to permit shares of the Trust

and any other investment company that

is offered to fund variable insurance

products and for which Asset

Management, or any of its affiliates, may

serve as investment advisor,

administrator, manager, principal

underwriter, or sponsor to be sold to

and held by the separate accounts

(‘‘Separate Accounts’’) funding variable

annuity and variable life insurance

contracts (‘‘Variable Contracts’’) issued

by Safeco, First Safeco, or any existing

or future affiliated or unaffiliated life

insurance company (‘‘Participating

Insurance Companies’’) or to existing or

future qualified pension and retirement

plans outside of the separate account

context (‘‘Qualified Plans’’ or ‘‘Plans’’).

In addition, Applicants seek exemptive

relief to permit the assets of separate

accounts of Safeco and First Safeco to be

derived from the sale of scheduled

premium variable life insurance

contracts and flexible premium variable

life insurance contracts.

FILING DATE: The application was filed

on July 10, 1995, and was amended on

November 20, 1995. Applicants have

represented that they will file an

amendment during the notice period to

make the representations contained

herein.

HEARING OR NOTIFICATION OF HEARING: An

order granting the application will be

issued unless the Commission orders a

hearing. Interested person may request a

hearing by writing to the SEC’s

Secretary and serving Applicants with a

copy of the request, personally or by

mail. Hearing requests should be

received by the SEC by 5:30 p.m. on

January 15, 1996, 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 may request notification of a

hearing by writing to the Secretary of

the SEC.

ADDRESSES: Secretary, SEC, 450 5th

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

Applicants: Bibb L. Strench, Esq.,

Safeco Asset Management Company,

Safeco Plaza, Seattle, Washington

98185.

FOR FURTHER INFORMATION CONTACT:

Pamela K. Ellis, Senior Counsel, or

Wendy Finck Friedlander, Deputy

Chief, both at (202) 942–0670, Office of

Insurance Products (Division of

Investment Management).

SUPPLEMENTARY INFORMATION: Following

is a summary of the application. The

complete application is available for a

fee from the SEC’s Public Reference

Branch.

Applicants’ Representations

1. The Trust is a Delaware business

trust registered under the 1940 Act as an

open-end management investment

company.

2. The Trust currently consists of five

separate series, each series representing

an interest in a separate investment

portfolio (‘‘Portfolios’’). The Board of

Trust may establish additional series of

shares at any time, each with its own

investment objective and policies.

3. Asset Management serves as

investment adviser to each Portfolio of

the Trust, and is registered with the

Commission as an investment adviser

under the Investment Advisers Act of

1940. Asset Management is a

Washington corporation and a whollyowned subsidiary of Safeco.

4. Safeco, also a Washington

corporation, is a holding company

whose primary subsidiaries are engaged

in the insurance and related financial

services businesses. Safeco is a whollyowned subsidiary of Safeco Corporation.

5. Account B and Account C are

separate accounts of Safeco, and are

registered with the Commission as unit

investment trusts under the 1940 Act.

6. First Safeco is a New York stock life

insurance company and is a whollyowned subsidiary of Safeco Corporation.

7. The Portfolios currently are sold to

Account B and Account C as investment

vehicles for variable annuity contracts

issued by Safeco. Applicants propose

that the Portfolios serve as investment

vehicles for various types of Variable

Contracts. Portfolio shares will be

offered to Separate Accounts of

Participating Insurance Companies,

including Safeco and First Safeco,

which enter into participation

agreements with the Trust. In addition,

Applicants propose that the Trust offer

and sell shares in its Portfolios directly

to Qualified Plans.

8. Applicants state that each

Participating Insurance Company will

have the legal obligation of satisfying all

applicable requirements under state law

and the federal securities laws in

connection with any Variable Contract

issued by such company. Applicants

further state that the role of the Trust

under this arrangement will consist of

offering its shares to the Separate

Accounts and fulfilling any conditions

the Commission may impose upon

granting the order requested in the

application.

9. In addition, Applicants state that

the Trust desires to avail itself of the

opportunity to increase its asset base

through the sale of its shares to

Qualified Plans, consistent with

applicable tax law. The Qualified Plans

may choose any of the Portfolios as the

sole investment option under the

Qualified Plan or as one of several

investment options. Qualified Plan

participants may or may not be given an

investment choice among available

alternatives depending on the Qualified

Plan itself. Shares of any Portfolio sold

to such Qualified Plans would be held

by the trustee(s) of such Qualified Plan

as mandated by Section 403(a) of the

Employee Retirement Income Security

Act (‘‘ERISA’’). Asset Manager will not

act as investment adviser to any of the

Qualified Plans that will purchase

shares of the Trust.

Applicants’ Legal Analysis

1. Applicants request that the

Commission issue an order under

Section 6(c) of the 1940 Act exempting

them 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) to the extent

necessary to permit mixed and shared

funding, as defined below. In addition,

Applicants seek exemption from Rule

6e–2(a)(2) to the extent necessary to

permit the assets of the separate
Federal Register / Vol. 60, No. 247 / Tuesday, December 26, 1995 / Notices 66813

accounts of Safeco Life and First Safeco

to be derived from the sale of both

scheduled premium and flexible

premium variable life insurance

contracts.

Rule 6e–2: Mixed and Shared Funding

2. Rule 6e–2(b)(15) provides partial

exemptive relief from Sections 9(a),

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

to separate accounts registered under

the 1940 Act as unit investment trusts

to the extent necessary to offer and sell

scheduled premium variable life

insurance contracts. The relief provided

by the rule also extends to a separate

account’s investment adviser, principal

underwriter, and sponsor or depositor.

3. The exemptions granted by Rule

6e–2(b)(15) are available only to a

management investment company

underlying a separate account

(‘‘Underlying Fund’’) that offers its

shares exclusively to variable life

insurance separate accounts of a life

insurer, or of any other affiliated life

insurance company, issuing scheduled

premium variable life insurance

contracts. The relief granted by Rule 6e–

2(b)(15) is not available to a separate

account issuing scheduled premium

variable life insurance contracts if the

Underlying Fund also offers its shares to

a separate account issuing variable

annuity or flexible premium variable

life insurance contracts. The use of a

common Underlying Fund as an

investment vehicle for both variable

annuity contracts and scheduled or

flexible premium variable life insurance

contracts is referred to herein as ‘‘mixed

funding.’’

4. Additionally, the relief granted by

Rule 6e–2(b)(15) is not available to

separate accounts issuing scheduled

premium variable life insurance

contracts if the Underlying Fund also

offers its shares to unaffiliated life

insurance company separate accounts

funding Variable Contracts. The use of

a common fund as an underlying

investment vehicle for separate accounts

of unaffiliated insurance companies is

referred to herein as ‘‘shared funding.’’

Moreover, because the relief granted by

Rule 6e–2(b)(15) is available only where

shares of the Underlying Fund are

offered exclusively to Separate

Accounts of insurance companies,

additional exemptive relief is necessary

if the shares of the Trust also are to be

sold to Qualified Plans.

Relief for Separate Accounts

5. Applicants also state that a separate

account is eligible for the relief granted

by Rule 6e–2(b)(15) only if it meets the

conditions of Rule 6e–2(a)(2), which

required the assets of the separate

account to be derived solely from the

sale of variable life insurance contracts

and advances made by the life insurer

in connection with the operation of

such separate account. ‘‘Variable life

insurance contracts’’ as defined by the

Rule 6e–2(c)(1) includes ‘‘scheduled

premium’’ variable life insurance

contracts, but not ‘‘flexible premium’’

life insurance contracts. Consequently, a

separate account that funds single

premium and scheduled premium

variable life insurance contracts and

flexible premium life insurance

contracts would not be deemed to have

its assets derived solely from the sale of

‘‘variable life insurance contracts.’’

Therefore, the relief granted by Rule 6e–

2(b)(15) is not available for a separate

account the assets of which are derived

from the sale of both scheduled

premium variable life insurance

contracts and flexible premium variable

life insurance contracts. Accordingly,

Applicants request exemptive relief in

order that the separate accounts of

Safeco, and First Safeco may be derived

from the sale of both scheduled

premium and flexible premium variable

life insurance contracts.

Rule 6e–3(T)

6. Regarding the funding of flexible

premium variable life insurance

contracts issued through a separate

account, Rule 6e–3(T)(b)(15) provides

partial exemptions from Sections 9(a),

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

This exemptive relief extends to a

separate account’s investment adviser,

principal underwriter, and sponsor or

depositor. These exemptions are

available only where the Underlying

Fund of the separate account 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 with respect to a flexible

premium variable life insurance

separate account, subject to certain

conditions. However, Rule 6e–3(T) does

not permit shared funding because the

relief granted by Rule 6e–3(T)(b)(15) is

not available to a flexible premium

variable life insurance Separate Account

that owns shares of a management

company that also offers its shares to

Separate Accounts of unaffiliated life

insurance companies. Moreover,

because the relief afforded by Rule 6e–

3(T) is available only where shares of

the Underlying Fund are offered

exclusively to separate accounts of

insurance companies, additional relief

is necessary if shares of the Trust also

are to be sold to Qualified Plans.

Sale to Qualified Plans

7. Applicants state that changes in the

tax law have created the opportunity for

the Portolios to increase their asset base

through the sale of Portfolio shares to

Qualified Plans. Applicants state that

Section 817(h) of the Internal Revenue

Code of 1986, as amended (‘‘Code’’),

imposes certain diversification

standards on the assets underlying

Variable Contracts, such as those in

each Portfolio of the Trust. The Code

provides that a variable contract shall

not be treated as an annuity contract or

life insurance contract for any period for

which the underlying assets are not, in

accordance with regulations prescribed

by the Treasury Department, adequately

diversified. These diversification

requirements are applied by taking into

account the assets of the underlying

fund if all the beneficial interests in the

Underlying Fund are held by certain

designated persons. On March 2, 1989,

the Treasury Department issued

regulations that adopted diversification

requirements for underlying funds.

Treas. Reg. § 1.817–5 (1989). These

regulations provide that, in order to

meet the diversification requirements,

all of the beneficial interests in the

investment company must be held by

the segregated asset accounts of one or

more insurance companies. The

regulations do, however, contain certain

exceptions to this requirement, one of

which permits trustee(s) of a qualified

plan to hold shares of an investment

company, the shares of which also are

held by Separate Accounts of insurance

companies, without adversely affecting

the status of the investment company as

an adequately diversified underlying

investment vehicle for Variable

Contracts issued through such

segregated asset accounts. Teas. Reg.

§ 1.817–5(f)(3)(iii).

8. Applicants state that the

promulgation of Rules 6e–2(b)(15) and

6e–3(T)(b)(15) preceded the issuance of

the Treasury regulations which made it

possible for shares of an investment

company to be held by the trustee(s) of

qualified plans without adversely

affecting the ability of shares in the

same investment company also to be

held by separate accounts of insurance

companies in connection with their

variable contracts. Thus, the sale of

shares of the same investment company

to Separate Accounts and Qualified

Plans could not have been envisioned at

the time of the adoption of Rules 6e–

2(b)(15) and 6e–3(T)(b)(15) given the

then current tax law.
66814 Federal Register / Vol. 60, No. 247 / Tuesday, December 26, 1995 / Notices

1Applicants request no relief for variable annuity

separate accounts from the disqualification or passthrough voting provisions.

9. Moreover, Applicants assert that if

the Trust were to sell its shares only to

Qualified Plans, no exemptive relief

would be necessary. Applicants state

that none of the relief provided for in

Rules 6e–2(b)(15) and 6e–3(T)(b)(15)

relates to qualified plans or to

underlying fund’s ability to sell its

shares to such plans. It is only because

the Separate Accounts investing in the

Trust are themselves investment

companies which are relying upon

Rules 6e–2 and 6e–3(T) and which

propose to have the relief continue in

place that the Applicants are applying

for the requested relief.

Grounds for Relief

10. Accordingly, Applicants seek an

order under Section 6(c) of the 1940

Act. Section 6(c) authorizes the

Commission to grant exemptions from

the provisions of the 1940 Act, and rules

thereunder, if and to the extent that an

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.

11. Section 9(a) of the 1940 Act makes

it unlawful for any company to serve as

an investment adviser to, or principal

underwriter for, any registered openended investment company if an

affiliated person of that company is

subject to any disqualification specified

in Sections 9(a)(1) or 9(a)(2).

Subparagraphs (b)(15)(i) and (ii) of

Rules 6e–2 and 6e–3(T) provide

exemptions from Section 9(a) under

certain circumstances, subject to

limitations on mixed and shared

funding. The relief provided by

subparagraphs (b)(15)(i) of Rules 6e–2

and 6e–3(T) permits a person

disqualified under Section 9(a) to serve

as an officer, director, or employee of

the life insurer, or any of its affiliates,

so long as that person does not

participate directly in the management

or administration of the underlying

fund. The relief provided by

subparagraph (b)(15)(ii) of Rules 6e–2

and 6e–3(T) permits the life insurer to

serve as the underlying fund’s

investment adviser or principal

underwriter, provided that none of the

insurer’s personnel who are ineligible

pursuant to Section 9(a) are

participating in the management or

administration of the fund.

12. Applicants state that the partial

relief granted under subparagraphs

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

the requirements of Section 9(a), in

effect, limits the 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 Rules 6e–2 and 6e–3(T)

recognize that it is not necessary for the

protection of investors or for the

purposes of the 1940 Act to apply the

provisions of Section 9(a) to the many

individuals in an insurance company

complex, most of whom typically will

have no involvement in matters

pertaining to an investment company in

that organization. Applicants further

submit that there is no regulatory reason

to apply the provisions of Section 9(a)

to the many individuals in various

unaffiliated Participating Insurance

Companies that may utilize the

Portfolios as the funding medium for

Variable Contracts because of mixed and

shared funding.

13. Subparagraphs (b)(15)(iii) of Rules

6e–2 and 6e–3(T) provide partial

exemptions from Section 13(a), (15(a),

and 15(b) of the 1940 Act to the extent

that those sections have been deemed by

the Commission to require ‘‘passthrough’’ voting with respect to

management investment company

shares held by a separate account, to

permit the insurance company to

disregard the voting instructions of its

Variable Contract owners in certain

limited circumstances.1

14. Voting instructions may be

disregarded under subparagraphs

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

if they would cause the Underlying

Fund to make, or refrain from making,

certain investments which would result

in changes to the subclassification or

investment objectives of the Underlying

Fund, or to approve or disapprove any

contract between a fund and its

investment advisers, 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

each Rule.

15. Under subparagraph (b)(15)(iii)(B)

of Rule 6e–2 and subparagraph

(b)(15)(iii)(A)(2) of Rule 6e–3(T), an

insurance company may disregard

Variable Contract owners’ voting

instructions if the Variable Contract

owners initiate any change in the

Underlying Fund’s investment

objectives, principal underwriter, or

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 each Rule.

16. Applicants further assert that the

proposed sale of shares of the Trust to

Qualified Plans does not impact of the

relief requested. As previously noted,

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

permit an insurer to disregard Variable

Contract owner voting instructions in

certain circumstances. Offering shares of

the Trust to Qualified Plans would not

affect the circumstances and conditions

under which any veto right would be

exercised by a Participating Insurance

Company. Furthermore, as stated above,

shares of the Trust would be sold only

to Qualified Plans for which such shares

would be held by the trustee(s) of such

plans as mandated by Section 403(a) of

ERISA. Section 403(a) 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 trustee(s) are subject to

the direction of a named fiduciary who

is not a trustee, in which case the

trustee(s) are subject to proper

directions of such fiduciary 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 Plans is delegated to one

or more investment managers under

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

of the two exceptions stated in Section

403(a) applies, Qualified Plan trustee(s)

have the exclusive authority and

responsibility for voting proxies. When

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 trustee(s)

or the named fiduciary. In any event,

Applicants assert that pass-through

voting to the participants in such

Qualified Plans is not required under

ERISA or the securities laws.

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 Qualified Plans.

17. Applicants state that no increased

conflicts of interest would be present by

the granting of the requested relief.

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. In this regard,

Applicants assert 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

Variable Contracts. Accordingly,

Applicants submit that the fact that

different insurers may be domiciled in
Federal Register / Vol. 60, No. 247 / Tuesday, December 26, 1995 / Notices 66815

different states does not create a

significantly different or enlarged

problem.

18. Applicants state further that,

under paragraph (b)(15) of Rules 6e–2

and 6e–3(T), the right of an insurance

company to disregard Variable Contract

owners’ voting instructions does not

raise any issues different from those

raised by the authority of state

insurance administrators over separate

accounts, and that affiliation does not

eliminate the potential, if any, for

divergent judgments as to the

advisability or legality of a change in

investment policies, principal

underwriter, or investment adviser.

Applicants state that 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. If a Participating

Insurance Company’s decision to

disregard Variable Contract owners’

instructions represents a minority

position or would preclude a majority

vote approving a particular change,

however, such Participating Insurance

Company may be required, at the

election of the relevant Portfolio, to

withdraw its investment in that

Portfolio. No charge or penalty will be

imposed as result of such withdrawal.

19. Applicants submit that mixed and

shared funding should benefit Variable

Contract owners by: (a) eliminating a

significant portion of the costs of

establishing and administering separate

funds; (b) permitting the expansion of

the variety of funding options available

under existing Variable Contracts; and

(c) encouraging more insurance

companies to offer Variable Contracts,

resulting in increased competition with

respect to both variable contract design

and pricing, which can be expected to

result in more product variation and

tower charges.

20. Applicants state that there is no

reason why the investment policies of

the Portfolios with mixed funding

would or should be materially different

from what they would or should be if

the Portfolios funded only variable

annuity contracts or variable life

insurance policies. Each type of

insurance product is designed as a longterm investment program. Moreover,

Applicants assert that the Portfolios will

continue to be managed in an attempt to

achieve their investment objectives, and

not to favor any particular Participating

Insurance Company or type of insurance

product. Applicants therefore argue that

there is no reason to believe that

conflicts of interest would result from

mixed funding.

21. In addition, Applicants assert that

the sale of shares of the Trust to

Qualified Plans will not increase the

potential for material, irreconcilable

conflicts of interest between or among

different types of investors. Section 817

is the only section in the Code where

separate accounts are discussed. Section

817(h) of the Code imposes certain

diversification standards on Underlying

Funds of Variable Contracts. Treasury

regulation 1.817–5(f)(3)(iii) specifically

permits ‘‘qualified pension or retirement

plans’’ and Separate Accounts to share

the same Underlying Fund. Applicants,

therefore, have concluded that neither

the Code, nor the Treasury regulations

or revenue rulings thereunder, present

any inherent conflicts of interest

between or among Qualified Plan

participants and Variable Contract

owners if Qualified Plans and the

Separate Accounts of Variable Contracts

all invest in the same Underlying Fund.

22. Applicants assert that while there

are differences in the manner in which

distributions are taxed for Variable

Contracts and Qualified Plans, these tax

consequences do not raise any conflicts

of interest. When distributions are

made, and the Separate Account or the

Qualified Plan is unable to net purchase

payments to make the distributions, the

Separate Account or the Qualified Plan

will redeem shares of the Portfolios at

their respective net asset value. The

Qualified Plan then will make

distributions in accordance with the

terms of the Variable Contract.

23. With respect to voting rights,

Applicants state that it is possible to

provide an equitable means of giving

rights to Variable Contract owners and

participants in the Qualified Plans. In

connection with any meeting of

shareholders, the Trust will inform each

shareholder, including each Separate

Account and Qualified Plan, of the

information necessary for the meeting,

including their respective share of

ownership in the respective portfolios of

the Trust. A Participating Insurance

Company will solicit voting instructions

in accordance with the ‘‘pass-through’’

voting requirement. Qualified Plans and

Separate Accounts will each have the

opportunity to exercise voting rights

with respect to their shares in the

Portfolios of the Trust, although only

the Separate Accounts are required to

pass through their vote to Contract

owners. The voting rights provided to

Qualified Plans with respect to shares of

the Trust 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 argue that the ability of

the Portfolios to sell their shares directly

to Qualified Plans does not create a

‘‘senior security’’ as defined by Section

18(g) of the 1940 Act. As noted above,

regardless of the rights and benefits of

participants under Qualified Plans, or

Variable Contract owners under

Variable Contracts, the Qualified Plans

and the Separate Accounts have rights

only with respect to their respective

shares of the Portfolio. They can only

redeem such shares at their net asset

value. No shareholder of the Portfolios

has any preference over any other

shareholder with respect to distribution

of assets or payment of dividends.

Applicants state that in absence of an

exemption form Section 18(f), all shares

of the Trust that will be sold to Separate

Accounts or Qualified Plans will be of

the same class of shares.

25. Applicants have determined that

no conflicts of interest exist between the

Variable Contract owners of the

Separate Accounts and Qualified Plan

participants with respect to the state

insurance commissioners’ veto powers

over investment objectives. The basic

premise of corporate democracy and

shareholder voting is that not all

shareholders may agree with a

particular proposal. The state insurance

commissioners have been given the veto

power in recognition of the fact the

insurance companies usually cannot

simply redeem their separate accounts

out of one fund and invest in another

fund. Generally, time-consuming,

complex transactions must be

undertaken to accomplish such

redemptions and transfers. Conversely,

the trustee(s) of Qualified Plans or the

participants in participant-directed

Qualified Plans could make the decision

quickly and could implement the

redemption of their shares from the

Portfolios 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.

26. Applicants state that they do not

see any greater potential for material

irreconcilable conflicts arising between

the interests of participants under the

Qualified Plans and Variable Contract

owners of the Separate Accounts from

possible future changes in the federal

tax laws than that which already exists

between Variable Contract owners.

27. Applicants assert that no policy

reasons justify prohibiting a separate

account funding scheduled and flexible

variable life insurance contracts form

relying on rule 6e–2. The interests of

scheduled premium variable life

Contract owners and flexible premium

Variable Contract owners and the

regulatory frameworks of rules 6e–2 and

6e–3(T) are sufficiently parallel that the
66816 Federal Register / Vol. 60, No. 247 / Tuesday, December 26, 1995 / Notices

use of the same separate account to fund

both types of contracts should not

prejudice the owners of any contracts.

28. Applicants also assert that the

requested relief is appropriate and in

the public interest because the relief

will promote competitiveness in the

variable life insurance market. Various

factors have limited the number of

insurance companies that offer Variable

Contracts. These factors include the

costs of organizing and operating a

funding medium, the lack of expertise

with respect to investment management,

and the lack of name recognition by the

public of certain insurers as investment

experts to whom the public feels

comfortable entrusting their investment

dollars. Applicants argue that use of

Portfolios as common investment

vehicles for Variable Contracts helps to

alleviate these concerns because

Participating Insurance Companies

benefit not only from the investment

and administrative expertise of the

Trust’s investment adviser, but also

from the cost efficiencies and

investment flexibility afforded by a large

pool of funds. Making the Portfolios

available for mixed and shared funding

may encourage more insurance

companies to offer Variable Contracts

and, accordingly, could result in

increased competition with respect to

both Variable Contract design and

pricing, which can be expected to result

in more product variation and lower

charges. Mixed and shared funding also

would benefit Variable Contract owners

by eliminating a significant portion of

the costs of establishing and

administering separate mutual funds.

Furthermore, Applicants assert that the

sale of shares of the Trust to Qualified

Plans, in addition to Separate Accounts

of Participating Insurance Companies,

would result in an increased amount of

assets available for investment by the

Trust. This may benefit Variable

Contract owners by promoting

economies of scale, by permitting

increase safety of investments through

greater diversification, and by making

the addition of new Portfolios more

feasible.

Applicants’ Conditions

The Applicants have consented to the

following conditions:

1. A majority of the Board of the Trust

(‘‘Board’’) shall consist of persons who

are not ‘‘interested persons’’ of the Trust

as defined by section 2(a)(19) of the

1940 Act and rules thereunder, and as

modified by any applicable orders of the

Commission, except that, if this

condition is not met by reason of death,

disqualification, or bona fide resignation

of any director(s), then the operation of

this conditions shall be suspended: (i)

for a period of 45 days, if the vacancy

or vacancies may be filled by the Board;

(ii) for a period of 60 days, if a vote of

shareholders is required to fill the

vacancy or vacancies; or (iii) for such

longer period as the Commission may

prescribe by order upon application.

2. The Board will monitor the

Portfolios for the existence of any

material irreconcilable conflict between

the interests of the Variable Contract

owners of all Separate Accounts

investing in any of the Portfolios. A

material irreconcilable conflict may

arise for a variety of reasons, including:

(a) state insurance regulatory authority

action; (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 a Portfolio are being

managed; (e) a difference among voting

instructions given by Variable Contract

owners; or (f) a decision by a

Participating Insurance Company to

disregard Variable Contract owners’

voting instructions.

3. Participating Insurance Companies

and Asset Manager (or any other

investment manager of the Trust) and

any Qualified Plan that executes a fund

participation agreement upon becoming

an owner of 10% or more of the assets

of any underlying Portfolio of the Trust

(‘‘Participants’’) will report any

potential or existing conflicts, of which

they become aware, to the Board.

Participants will be obligated to assist

the Board in carrying out its

responsibilities under these conditions

by providing the Board with all

information reasonably necessary for it

to consider any issues raised. This

responsibility includes, but is not

limited to, an obligation by each

Participant to inform the Board

whenever Variable Contract owners’ or

Plan participants’ voting instructions

are disregarded. The responsibility to

report such information and conflicts

and to assist the Board will be a

contractual obligation of all Participants

investing in a Portfolio under their

participation agreements, and those

participation agreements shall provide

that such responsibilities will be carried

out with a view only to the interests of

the Variable Contract owners or Plan

participants.

4. If a majority of the Board, or a

majority of the independent trustees of

the Board (‘‘Independent Trustees’’),

determine that a material irreconcilable

conflict exists, the relevant Participant

shall, at its expense and to the extent

reasonably practicable (as determined

by a majority of Independent Trustees),

take whatever steps are necessary to

remedy or eliminate the irreconcilable

material conflict, up to and including;

(a) withdrawing the assets allocable to

some or all of the Separate Accounts or

Plans, as appropriate, from the

Portfolios and reinvesting those assets

in a different investment medium

(including another Applicant, if any) or

submitting the question whether such

segregation should be implemented to a

vote of all affected Variable Contract

owners or Plan participants and, as

appropriate, segregating the assets of

any appropriate group (i.e., annuity

contract owners, life insurance contract

owners, Variable Contract owners, or

Plan participants) that votes in favor of

such segregation, or offering to the

affected Variable Contract owners or

Plan participants, as appropriate the

option of making such a change; and (b)

establishing a new registered

management investment company or

managed separate account. If a material

irreconcilable conflict arises because of

a Participant’s decision to disregard

Variable Contract owners’ or Plan

participants’ voting instructions, and

that decision represents a minority

position or would preclude a majority

vote, the Participant may be required, at

the election of the relevant Portfolio, to

withdraw its Separate Account’s

Investment therein, 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

determination by the Board that an

irreconcilable material conflict exists

and to bear the cost of such remedial

action shall be a contractual obligation

of all Participants under their

participation agreements governing

participation in the Portfolios and these

responsibilities will be carried out with

a view only to the interests of the

Variable Contract owners or Plan

participants.

For purposes of this condition, a

majority of Independent Trustees shall

determine whether or not any proposed

action adequately remedies any

irreconcilable material conflict, but in

no event will the Trust or Asset

Manager be required to establish a new

funding medium for any Variable

Contract or Plan investment. No

Participant shall be required by this

condition to establish a new funding

medium for any Variable Contract or

Plan investment if an offer to do so has

been declined by a vote of a majority of

Variable Contract owners materially
Federal Register / Vol. 60, No. 247 / Tuesday, December 26, 1995 / Notices 66817

1 15 U.S.C. 78s(b)(1) (1988).

2 17 CFR 240.19b–4 (1994).

3See Securities Exchange Act Release No. 36248

(September 19, 1995), 60 FR 49653.

4On December 13, 1995, the PHLX submitted a

letter indicating that the Exchange’s Automated

Options Market (‘‘AUTOM’’) system and AUTO-X

have sufficient capacity to accommodate the

proposed rule change. Specifically, the PHLX states

that its equity and index option trading floor

currently trades approximately 75,000 contracts per

day; a small percentage of those orders are filled

through AUTO-X. According to the PHLX, AUTOM

currently is approximately 30% utilized during

peak market activity and can easily support any

additional volume associated with the proposal. See

Letter from William H. Morgan, Vice President,

Trading Systems, PHLX, to Michael Walinskas,

Branch Chief, Office of Market Supervision,

Commission, dated December 12, 1995 (‘‘December

12 Letter’’).

5See Securities Exchange Act Release No. 32906

(September 15, 1993), 58 FR 49345 (September 22,

Continued

affected by the irreconcilable material

conflict.

5. The determination by the Board of

the existence of an irreconcilable

material conflict and its implications

shall be made known promptly in

writing to all Participants.

6. Participating Insurance Companies

will provide pass-through voting

privileges to all Variable Contract

owners so long as the Commission

continues to interpret the 1940 Act as

requiring pass-through voting privileges

for variable contract owners.

Accordingly, Participating Insurance

Companies will vote shares of a

Portfolio held in their Separate

Accounts in a manner consistent with

timely voting instructions received from

Variable Contract owners. Each

Participating Insurance Company also

will vote share of a Portfolio held in its

Separate Accounts for which no timely

voting instructions from Variable

Contract owners are received, as well as

shares it owns, in the same proportion

as those shares for which voting

instructions are received. Participating

Insurance Companies shall be

responsible for assuring that each of

their Separate Accounts participating in

a Portfolio calculates voting privileges

in a manner consistent with other

Participating Insurance Companies. The

obligation to calculate voting privileges

in a manner consistent with all other

Separate Accounts investing in a

Portfolio shall be a contractual

obligation of all Participating Insurance

Companies under their participation

agreements.

7. The Trust will notify all

Participants that prospectus disclosure

regarding potential risks of mixed and

shared funding may be appropriate. The

Trust shall disclose in its Prospectus

that: (a) its shares may be offered to

insurance company Separate Accounts

that fund Variable Contracts of

Participating Insurance Companies that

may or may not be affiliated with one

another, and to Qualified Plans; (b)

because of differences of tax treatment

or other considerations, the interests of

various Variable Contract owners and

Qualified Plan participants might at

some time be in conflict; and (c) the

Board will monitor for any material

conflicts and determine what action, if

any, should be taken.

8. All reports received by the Board

regarding potential or existing conflicts,

and all action of the Board with respect

to determining the existence of a

conflict, notifying Participants of a

conflict, and determining any proposed

action adequately remedies a conflict,

will be properly recorded in the minutes

or other appropriate records, and such

minutes or other records shall be made

available to the Commission upon

request.

9. If and to the extent Rule 6e–2 or

Rule 6e–3(T) are amended, or Rule 6e–

3 is adopted, to provided exemptive

relief from any provision of the 1940

Act or the rules thereunder with respect

to mixed and shared funding on terms

and conditions materially different from

any exemptions granted in the order

requested, then the Portfolios and/or the

Participants, as appropriate, shall take

such steps as may be necessary to

comply with Rule 6e–2 and Rule 6e–

3(T), as amended, and Rule 6e–3, as

adopted, to the extend such rules are

applicable.

10. The Trust will comply with all

provisions of the 1940 Act requiring

voting by shareholders (which, for these

purposes, shall be the persons having a

voting interest in the shares of the

Trust), and, in particular, the Trust will

provide for meetings as required by

applicable State law or the Act,

including Section 16(c) of the 1940 Act

(although the Trust is not one of the

trusts described in that section) as well

as with Section 16(a) and, if and when

applicable, Section 16(b). Further, each

Portfolio 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 adopt with respect

thereto.

11. The Participants shall, at least

annually, submit to the Board such

reports, materials or data as the Board

may reasonably request so that the

Board may fully carry out the

obligations imposed upon it by these

stated conditions, and said 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 upon reasonable

request of the Board shall be a

contractual obligation of all Participants

under their participation agreements.

12. If a Qualified Plan becomes an

owner of ten percent or more of the

assets of a Portfolio, such Qualified Plan

will execute a fund participation

agreement with the Trust on the behalf

of such Portfolio. A Qualified Plan shall

execute an application containing an

acknowledgement of this condition

upon such Qualified Plan’s initial

purchase of the shares of any Portfolio.

Conclusion

For the reasons stated above,

Applicants assert that the requested

exemptions, in accordance with the

standards of Section 6(c), 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. 95–31238 Filed 12–22–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–36601; File No. SR–PHLX–

95–39]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change by

the Philadelphia Stock Exchange, Inc.,

Relating to Increasing the Maximum

Size of Options Orders Eligible for

Automatic Execution

December 18, 1995.

On August 21, 1995, the Philadelphia

Stock Exchange, Inc. (‘‘PHLX’’ or

‘‘Exchange’’) submitted to 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

increase the maximum automatic

execution (‘‘AUTO-X’’) order size

eligibility for public customer market

and marketable limit orders for all

equity and index options from 25

contracts to 50 contracts.

Notice of the proposed rule change

was published for comment in the

Federal Register on September 26,

1995.3 No comments were received on

the proposal.4

Generally, public customer market

and marketable limit orders for up to 25

option contracts are eligible for

execution through the AUTO-X feature

of AUTOM.5 The PHLX proposes to