[Federal Register Volume 60, Number 247 (Tuesday, December 26, 1995)]
[Notices]
[Pages 66812-66817]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31238]



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SECURITIES AND EXCHANGE COMMISSION
[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'').

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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 wholly-owned 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 wholly-owned 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 
wholly-owned 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 

[[Page 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. 
Sec. 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. 
Sec. 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.

[[Page 66814]]

    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 open-ended 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 ``pass-through'' 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\

    \1\ Applicants request no relief for variable annuity separate 
accounts from the disqualification or pass-through voting 
provisions.
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    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 

[[Page 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 
long-term 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 

[[Page 66816]]
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 

[[Page 66817]]
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