19796 Federal Register / Vol. 60, No. 76 / Thursday, April 20, 1995 / Notices

the Act. Sections 26(a)(2)(C) and 27(c)(2)

of the Act, in relevant part, prohibit a

registered unit investment trust, its

depositor or principal underwriter, from

selling periodic payment plan

certificates unless the proceeds of all

payments, other than sales loads, are

deposited with a qualified bank and

held under arrangements which prohibit

any payment to the depositor or

principal underwriter except a

reasonable fee, as the Commission may

prescribe, for performing bookkeeping

and other administrative duties

normally performed by the bank itself.

2. Applicants request exemptions

from Sections 26(a)(2)(C) and 27(c)(2) of

the Act to the extent necessary to permit

the deduction of a charge up to .75%

from (i) the assets of the Separate

Account with respect to the Contracts

and Future Contracts and (ii) from the

assets of Other Separate Accounts in

connection with Future Contracts, to

compensate the Company for the

assumption of mortality and expense

risks. In addition, Applicants also

request that the exemptive relief

requested extend to any other brokerdealer, whether currently existing or

hereinafter created, which may serve in

the future as principal underwriter of

Contracts or Future Contracts.

Applicants assert that the requested

exemptions are necessary and

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.

3. With respect to the level of the

mortality and expense risk charge,

Applicants hereby represent that they

have reviewed publicly available

information regarding the aggregate

level of mortality and expense risk

charges under variable annuity contracts

comparable to the Contracts currently

being offered in the insurance industry,

taking into consideration such factors as

current charge levels, the manner in

which charges are imposed, the

presence of charge level or annuity rate

guarantees and the markets in which the

Contracts will be offered. Based upon

the foregoing, Applicants further

represent that the mortality and expense

risk charge contemplated under the

Contracts are within the range of

industry practice for comparable

contracts. Applicants will maintain at

their principal office and will make

available to the Commission upon

request a memorandum setting forth in

detail the products analyzed in the

course of, and the methodology and

results of, the comparative survey.

4. Similarly, prior to issuing any

Future Contracts, Applicants will

represent that the mortality and expense

charges under any Future Contracts will

be within the range of industry practice

for comparable contracts. Applicants

will maintain at their principal office

and will make available to the

Commission upon request a

memorandum setting forth in detail the

products analyzed in the course of, and

the methodology and results of, the

comparative survey.

5. Applicants acknowledge that, if a

profit is realized from the mortality and

expense risk charge, all or a portion of

such profit may be available for any

lawful purpose including shortfalls in

the costs of distributing the Contracts.

The Company represents that there is a

reasonable likelihood that the proposed

distribution financing arrangements will

benefit the Separate Account and

Owners. The Company represents that

the basis for that conclusion is set forth

in a memorandum which will be

maintained at its home office and will

be available to the Commission upon

request.

6. Applicants further represent that

the Separate Account, and any Other

Separate Accounts, will only invest in

underlying funds which have

undertaken to have a board of directors/

trustees, a majority of whom are not

interested persons of any such fund,

formulate and approve any plan under

Rule 12b–1 under the Act to finance

distribution expenses.

7. Applicants assert that extending

relief to Future Contracts, Other

Separate Accounts, and any other

broker-dealer, whether currently

existing or hereinafter created, which

may serve in the future as principal

underwriter of Contracts or Future

Contracts is appropriate in the public

interest because it would promote

competitiveness in the variable annuity

market by eliminating the need for the

Company to file redundant exemptive

applications, thereby reducing

administrative expenses and

maximizing the efficient use of its

resources. The delay and expense

involved in having to repeatedly seek

exemptive relief would impair the

Company’s ability to effectively take

advantage of business opportunities as

they arise. If the Company were

repeatedly required to seek exemptive

relief with respect to the same issues

addressed in the Application, investors

would not receive any additional benefit

or protection. Therefore, Applicants

believe 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 Act.

Conclusion

For the reasons set forth above,

Applicants represent that the

exemptions requested are necessary and

appropriate in the public interest and

consistent with the protection of

investors and purposes fairly intended

by the policy and provisions of the Act.

For the Commission, by the Division of

Investment Management, pursuant to

delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–9842 Filed 4–19–95; 8:45 am]

BILLING CODE 8010–01–M

[Rel. No. IC–21011; File No. 812–9272]

Montgomery Asset Management, L.P.

et al.

April 14, 1995.

AGENCY: Securities and Exchange

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

ACTION: Notice of Application for

Exemption under the Investment

Company Act of 1940 (the ‘‘1940 Act’’

or ‘‘Act’’).

APPLICANTS: Montgomery Asset

Management, L.P. (‘‘Montgomery’’) and

The Montgomery Funds III (the

‘‘Fund’’).

RELEVANT 1940 ACT SECTIONS: Order

requested under Section 6(c) for

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

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

and 6e–3(T)(b)(15) thereunder.

SUMMARY OF APPLICATION: Applicants

seek an order of exemption to the extent

necessary to permit shares of the Fund

and shares of certain other investment

companies for which Montgomery or an

affiliate of Montgomery serves as

investment adviser, administrator,

manager, principal underwriter or

sponsor (collectively with the Fund, the

‘‘Funds’’) to be sold to and held by

variable annuity and variable life

insurance separate accounts of both

affiliated and unaffiliated life insurance

companies and qualified pension and

retirement plans.

FILING DATE: The application was filed

on October 12, 1994.

HEARING OR NOTIFICATION OF HEARING: An

order granting the application will be

issued unless the SEC orders a hearing.

Interested persons 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 must be received

by the SEC by 5:30 p.m. on May 9, 1995,

and should be accompanied by proof of

service on the Applicants, in the form

of an affidavit or, for lawyers, a
Federal Register / Vol. 60, No. 76 / Thursday, April 20, 1995 / Notices 19797

certificate of service. Hearing requests

should state the nature of writer’s

interest, the reason for the request, and

the issues contested. Persons may

request notification of the date of the

hearing by writing to the SEC’s

Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth

Street, NW., Washington, DC 20549.

Applicants, 600 Montgomery Street, San

Francisco, California 94111.

FOR FURTHER INFORMATION CONTACT:

Joyce Merrick Pickholz, Senior Counsel,

on (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 Public Reference Branch of

the SEC.

Applicants’ Representations

1. The Fund, a Delaware trust, is a

registered open-end management

investment company with two

separately managed series. Additional

series may be added in the future. The

Fund’s registration statement on Form

N–1A (File No. 33–84450) was filed on

September 27, 1994 and is incorporated

by reference into the application.

2. Montgomery, a California limited

partnership, is an investment adviser

registered under the Investment

Advisers Act of 1940. Montgomery

serves as the investment advisor and

manager of the Fund.

3. Shares of each series of the Fund(s)

may be offered to insurance company

separate accounts that fund variable

annuity or variable life insurance

contracts (‘‘Contracts’’), regardless of

whether such insurance companies are

affiliated with each other (‘‘Participating

Insurance Companies’’). Each

Participating Insurance Company will

have the legal obligation of satisfying all

applicable requirements under state and

federal law. Applicants anticipate that,

in connection with their scheduled

premium and flexible premium variable

life insurance contracts, Participating

Insurance Companies will rely on Rule

6e–2 or Rule 6e–3(T) under the 1940

Act, although some may rely on

individual exemptive orders as well.

The role of the Funds, so far as the

federal securities laws are applicable,

will be limited to that of offering their

shares to separate accounts of various

insurance companies, and Qualified

Plans, and fulfilling any conditions that

the Commission may impose upon

granting the order requested in the

application.

4. Shares of the Funds may also be

offered to qualified pension and

retirement plans outside of the separate

account context (‘‘Qualified Plans’’ or

‘‘Plan’’). Qualified Plans may choose

any of the Funds as the sole investment

under the Plan or as one of several

investments. Plan participants may or

may not be given an investment choice

depending on the Plan itself. Shares of

any of the Funds sold to Qualified Plans

would be held by the trustee(s) of said

Plans as mandated by Section 403(a) of

the Employee Retirement Income

Security Act (‘‘ERISA’’). Montgomery

will not act as investment adviser to any

of the Qualified Plans that will purchase

shares of any of the Funds. There will

be no pass-through voting to the

participants in Qualified Plans.

Applicants’ Legal Analysis

1. 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

(‘‘UIT’’), Rule 6e–2(b)(15) provides

partial exemptions from Sections 9(a),

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

relief provided by Rule 6e–2(b)(15) is

available to a separate account’s

investment advisor, principal

underwriter and sponsor or depositor.

The exemptions granted by Rule 6e–

2(b)(15) are available only where the

management investment company

underlying the UIT offers its shares

‘‘exclusively to variable life insurance

separate accounts of the life insurer, or

of any affiliated life insurance

company.’’ 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

commonly referred to as ‘‘mixed

funding.’’ The use of a common

management investment company as the

underlying investment medium for

variable annuity and variable life

insurance separate accounts of

unaffiliated insurance companies is

commonly referred to as ‘‘shared

funding.’’ ‘‘Mixed and shared funding’’

denotes the use of a common

management investment company to

fund the variable annuity and variable

life insurance separate accounts of

affiliated and unaffiliated insurance

companies. Rule 6e–2(b)(15) precludes

mixed as well as shared funding.

2. In connection with flexible

premium variable life insurance

contracts issued through a separate

account registered under the 1940 Act

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

partial exemptions from Sections 9(a),

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

exemptions granted to a separate

account by Rule 6e–3(T)(b)(15) are

available only where all of the assets of

the separate account consist of the

shares of one or more registered

management investment companies

which offer their shares ‘‘exclusively to

separate accounts of the life insurer, or

of any affiliated life insurance company,

offering either scheduled of 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.’’

Thus, Rule 6e–3(T)(b)(15) permits

mixed funding but precludes shared

funding.

3. According to the Applicants, the

relief granted by Rule 6e–2(b)(15) and

Rule 6e–3(T)(b)(15) is in no way affected

by the purchase of shares of the Funds

by Qualified Plans. However, because

the relief under these Rules is available

only where shares are offered

exclusively to separate accounts of

insurance companies, additional

exemptive relief is necessary if shares of

the Funds are also to be sold to

Qualified Plans. 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).

However, Rules 6e–2(b)(15)(i) and (ii)

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

partial exemptions from Section 9(a)

under certain circumstances, subject to

the limitations on mixed and shared

funding. These exemptions limit the

disqualification to affiliated individuals

or companies that directly participate in

the management or administration of

the underlying investment company.

4. Applicants argue that the

exemptions contained in Rules 6e–

2(b)(15) and 6e–3(T)(b)(15) recognize

that is it unnecessary to apply Section

9(a) to the thousands of individuals who

may be involved in a large insurance

company but would have no connection

with the investment company funding

the separate accounts. Applicants

believe that it is unnecessary to limit the

applicability of the rules merely because

shares of the Funds may be sold in

connection with mixed and shared

funding. Applicants submit that the

Participating Insurance Companies are

not expected to play any role in the

management or administration of the

Funds and, therefore, applying the

restrictions of Section 9(a) serves no

regulatory purpose. Applicants state

that applying such restrictions would

increase the monitoring costs incurred

by the Participating Insurance
19798 Federal Register / Vol. 60, No. 76 / Thursday, April 20, 1995 / Notices

Companies and, therefore, would reduce

the net rates of return realized by

Contract owners. Applicants also state

that the requested relief will in no way

be affected by the proposed sale of

shares of the Funds to Qualified Plans.

The insulation of the Fund from those

individuals who are disqualified under

the Act remains in place. Since the

Qualified Plans are not investment

companies and will not be deemed to be

affiliated solely by virtue of their

shareholdings, no additional relief is

necessary.

5. Rules 6e–2(b)(15)(iii) and 6e–

3(T)(b)(15)(iii) assume that Contract

owners are entitled to pass-through

voting privileges with respect to

investment company shares held by a

related separate account. Both Rules 6e–

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

provide that an insurance company may

disregard the voting instructions of its

Contract owners with respect to the

investments of an underlying

investment company or any contract

between an investment company and its

investment adviser, when an insurance

regulatory authority requires. Rules 6e–

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

provide that the insurance company

may disregard contract owners’ voting

instructions with regard to changes

initiated by the contract holders in the

investment company’s investment

policies, principal underwriter or

investment adviser. Under the rules,

voting instructions with respect to a

change in investment policies may be

disregarded only if the insurance

company makes a good faith

determination that such change would:

(1) violate state law; (2) result in

investments that were not consistent

with the investment objectives of the

separate account; or (3) result in

investments that would vary from the

general quality and nature of

investments and investment techniques

used by other separate accounts of the

company or of an affiliated life

insurance company with similar

investment objectives. Voting

instructions with respect to a change in

an investment adviser may be

disregarded only if the insurance

company makes a good faith

determination that: (1) the adviser’s fee

would exceed the maximum rate that

may be charged against the separate

account’s assets; (2) the proposed

adviser may be expected to employ

investment techniques that vary from

the general techniques used by the

current adviser; or (3) the proposed

adviser may be expected to manage the

investment company’s investments in a

manner that would be inconsistent with

its investment objectives or in a manner

that would result in investments that

vary from certain standards.

6. Rule 6e–2 recognizes that variable

life insurance contracts have important

elements unique to insurance contracts

and are subject to extensive state

regulation of insurance. Thus,

Applicants assert that in adopting Rule

6e–2, the Commission expressly

recognized that exemptions from passthrough voting requirements were

necessary to assure the solvency of the

life insurer and the performance of its

contractual obligations by enabling an

insurance regulatory authority or the life

insurer to act when certain proposals

reasonably could be expected to

increase the risks undertaken by the life

insurer. Applicants argue that flexible

premium variable life insurance

contracts and variable annuity contracts

are subject to substantially the same

state insurance regulatory authority, and

therefore, the corresponding provisions

of Rule 6e–3(T) presumably were

adopted in recognition of the same

considerations as the Commission

applied in adopting Rule 6e–2.

According to the Applicants, these

considerations are no less important or

necessary when an insurance company

funds its separate accounts in

connection with shared and mixed

funding. Such funding does not

compromise the goals of the insurance

regulatory authorities or of the

Commission. While the Commission

may have wished to reserve wide

latitude with respect to the once

unfamiliar variable annuity product,

that product is now familiar and there

appears to be no reason for the

maintenance of prohibitions against

mixed and shared funding

arrangements. Indeed, permitting such

arrangements, eliminates needless

duplication of start-up and

administrative expenses and potentially

increases an investment company’s

assets, thereby making effective

portfolio management strategies easier

to implement and promoting other

economies of scale.

7. Applicants submit that the Funds’

sale of shares to Qualified Plans will not

have any impact on the relief requested.

Shares of the Funds sold to such Plans

would be held by the trustees of said

Plans as mandated by Section 403(a) of

ERISA. Section 403(a) also provides that

the trustee(s) must have exclusive

authority and discretion to manage and

control the plan with two exceptions:

(1) when the 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 trustees

are subject to proper directions made in

accordance with the terms of the plan

and not contrary to ERISA, and (2) when

the authority to manage, acquire or

dispose of assets of the plan is delegated

to one or more investment managers

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

Unless one of the two exceptions stated

in Section 403(a) applies, plan trustees

have the exclusive authority and

responsibility for voting proxies. Where

a named fiduciary appoints an

investment manager, the investment

manager has the responsibility to vote

the shares held unless the right to vote

such shares is reserved to the trustees or

the named fiduciary. In any event, there

is no pass-through voting to the

participants in such plans. Accordingly,

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.

8. Applicants assert that no increased

conflicts of interest would be present if

the Commission grants the requested

exemptive relief. Shared funding does

not present any issues that do not

already exist where a single insurance

company is licensed to do business in

several states. For example, when

different Participating Insurance

Companies are domiciled in different

states, it is possible that the state

insurance regulatory body in a state in

which one Participating Insurance

Company is domiciled could require

action that is inconsistent with the

requirements of insurance regulators in

one or more other states in which other

Participating Insurance Companies are

domiciled. That possibility, however, is

no different and no greater than exists

when a single insurer and its affiliates

offer their insurance products in several

states, as currently is permitted.

9. Applicants argue that affiliations do

not reduce the potential, if any exists,

for differences in state regulatory

requirements. In any event, the

conditions discussed below (which are

adapted from the conditions included in

Rule 6e–3(T)(b)(15)) are designed to

safeguard against any adverse effects

that differences among state regulatory

requirements may produce. If a

particular state insurance regulator’s

decision conflicts with the majority of

other state regulators, the affected

insurer may be required to withdraw its

separate account’s investment in the

relevant Funds. Similarly, affiliation

does not eliminate the potential, if any

exists, for divergent judgments as to

when a Participating Insurance

Company could disregard Contract

owner voting instructions. The potential

for disagreement is limited by the

requirement that disregarding voting
Federal Register / Vol. 60, No. 76 / Thursday, April 20, 1995 / Notices 19799

instructions be reasonable and based on

specified good faith determinations.

However, if a Participating Insurance

Company’s decision to disregard

Contract owner voting instructions

represents a minority position or would

preclude a majority vote approving a

particular change, such Participating

Insurance Company may be required, at

the election of the relevant Fund, to

withdraw its separate account’s

investment in that fund and no charge

or penalty will be imposed as a result

of such withdrawal.

10. Applicants assert that there is no

reason why the investment policies of a

Fund with mixed funding would or

should be materially different from what

they would or should be if such

investment company or series thereof

funded only variable annuity or only

variable life insurance contracts. Hence,

there is no reason to believe that

conflicts of interest would result from

mixed funding. Moreover, the Funds

will not be managed to favor or disfavor

any particular insurer or type of

Contract.

11. According to the Applicants, on

March 2, 1989, the Treasury Department

issued Regulations (Treas. Reg. 1.817–

5), which established diversification

requirements for the investment

portfolios underlying variable annuity

and variable life contracts

(‘‘Regulations’’). The 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. However, the Regulations

also contain certain exceptions to this

requirement, one of which allows shares

in an investment company to be held by

the trustee of a qualified pension or

retirement plan without adversely

affecting the ability of shares in the

same investment company to also be

held by the separate accounts of

insurance companies in connection

with their variable annuity and variable

life contracts (Treas. Reg. 1.817–

5(f)(3)(iii)). The Applicants state that the

promulgation of Rules 6e–2(b)(15) and

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

the Treasury Regulations. 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.

12. According to the Applicants,

Section 817(h) of the Internal Revenue

Code of 1986 (‘‘Code’’) is the only

section in the Code where separate

accounts are discussed. Section 817(h)

imposes certain diversification

standards on the underlying assets of

variable annuity contracts and variable

life contracts held in the portfolios of

management investment companies.

Treasury Regulation 1.817–5(f)(3)(iii),

which established diversification

requirements for such portfolios,

specifically permits, among other

things, ‘‘qualified pension or retirement

plans’’ and separate accounts to share

the same underlying management

investment company. Therefore, neither

the Code, the Treasury Regulations nor

Revenue Rulings thereunder present any

inherent conflicts of interest if Qualified

Plans, variable annuity separate

accounts and variable life separate

accounts all invest in the same

management investment company.

13. Applicants submit that while

there are differences in the manner in

which distributions are taxed for

variable annuity contracts, variable life

insurance contracts and Qualified Plans,

the tax consequences do not raise any

conflicts of interest. When distributions

are to be made, and the separate account

or the Qualified Plan cannot net

purchase payments to make the

distributions, the separate account or

the Plan will redeem shares of the Fund

at their net asset value. The Qualified

Plan will then make distributions in

accordance with the terms of the Plan.

The life insurance company will

surrender values from the separate

account into the general account to

make distributions in accordance with

the terms of the variable contract.

14. Applicants state that the ability of

the Funds to sell their respective shares

directly to Qualified Plans does not

create a ‘‘senior security,’’ as such term

is defined under Section 18(g) of the

1940 Act, with respect to any Contract

owner as opposed to a participant under

a Qualified Plan. Regardless of the rights

and benefits of participants under the

Qualified Plans, or Contract owners

under Contracts, the Qualified Plans

and the separate accounts have rights

only with respect to their respective

shares of the Fund. They can only

redeem such shares at their net asset

value. No shareholder of any of the

Funds has any preference over any other

shareholder with respect to distribution

of assets or payment of dividends.

15. Applicants submit that there are

no conflicts between the Contract

owners of the separate accounts and the

participants under the Qualified Plans

with respect to the state insurance

commissioners’ veto powers (direct with

respect to variable life and indirect with

respect to variable annuities) over

investment objectives. The basic

premise of shareholder voting is that not

all shareholders may agree that there are

any inherent conflicts of interest

between shareholders. The state

insurance commissioners have been

given the veto power in recognition of

the fact that insurance companies

cannot simply redeem their separate

accounts out of one fund and invest in

another. Time-consuming, complex

transactions must be undertaken to

accomplish such redemptions and

transfers. On the other hand, trustees of

Qualified Plans can make the decision

quickly and implement the redemption

of their shares from a Fund and reinvest

in another funding vehicle without the

same regulatory impediments or, as is

the case with most Plans, even hold

cash pending suitable investment. Based

on the foregoing, Applicants assert that

even if there should arise issues where

the interests of Contract owners and the

interest of Qualified Plans are in

conflict, the issues can be almost

immediately resolved because the

trustees of the Qualified Plans can, on

their own, redeem the shares out of the

Fund.

16. According to the Applicants,

various factors have kept more

insurance companies from offering

variable annuity and variable life

insurance contracts than currently do

so. These factors include the costs of

organizing and operating a funding

medium, the lack of expertise with

respect to investment management

(principally with respect to stock and

money market investments) and the lack

of public name recognition as

investment experts. In particular, some

smaller life insurance companies may

not find it economically feasible, or

within their investment or

administrative expertise, to enter the

Contract business on their own. The

Applicants submit that use of the Funds

as common investment media for

Contracts would ameliorate these

concerns.

17. Applicants assert the Participating

Insurance Companies would benefit not

only from the investment advisory and

administrative expertise of Montgomery,

but also from the cost efficiencies and

investment flexibility afforded by a large

pool of funds. Therefore, making the

Funds available for mixed and shared

funding will encourage more insurance

companies to offer Contracts. This

should result in increased competition

with respect to both Contract design and

pricing, which can be expected to result

in more product variation and lower

charges. Applicants also assert that

Contract owners would benefit because

mixed and shared funding eliminates a

significant portion of the costs of

establishing and administering separate

funds. Moreover, sale of the shares of
19800 Federal Register / Vol. 60, No. 76 / Thursday, April 20, 1995 / Notices

Funds to Qualified Plans should result

in an increased amount of assets

available for investment by such Funds.

This, in turn, should inure to the benefit

of Contract owners by promoting

economies of scale, by permitting

greater safety through greater

diversification, and by making the

addition of new portfolios to the Fund

more feasible.

Applicants’ Conditions

Applicants have consented to the

following conditions if the requested

order is granted.

1. A majority of the Trustees or Board

of Directors (each, a ‘‘Board’’) of each

Fund will consist of persons who are

not ‘‘interested persons’’ thereof, as

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

and the Rules thereunder and as

modified by any applicable orders of the

Commission, except that if this

condition is not met by reason of the

death, disqualification, or bona fide

resignation of any trustee or director,

then the operation of this condition

shall be suspended (a) for a period of 45

days if the vacancy or vacancies may be

filled by the Board; (b) for a period of

60 days if a vote of shareholders is

required to fill the vacancy or vacancies;

or (c) for such longer period as the

Commission may prescribe by order

upon application.

2. Each Board will monitor its

respective Fund for the existence of any

material irreconcilable conflict between

the interests of the Contract owners of

all separate accounts investing in the

Fund. An irreconcilable material

conflict may arise for a variety of

reasons, including: (a) an action by any

state insurance regulatory authority; (b)

a change in applicable federal or state

insurance, tax, or securities laws or

regulations, or a public ruling, private

letter ruling, no action or interpretive

letter, or any similar action by

insurance, tax, or securities regulatory

authorities; (c) an administrative or

judicial decision in any relevant

proceeding; (d) the manner in which the

investments of the Fund are being

managed; (e) a difference in voting

instructions given by variable annuity

Contract owners and variable life

insurance Contract owners; or (f) a

decision by a Participating Insurance

Company to disregard the voting

instructions of Contract owners.

3. Participating Insurance Companies

and Montgomery and its affiliated

advisers will report any potential or

existing conflicts to the Board of any

relevant Fund. Participating Insurance

Companies will be responsible for

assisting the appropriate Board in

carrying out its responsibilities under

these conditions by providing the Board

with all information reasonably

necessary for the Board to consider any

issues raised. This includes, but is not

limited to, an obligation by a

Participating Insurance Company to

inform the Board whenever it has

determined to disregard Contract owner

voting instructions. The responsibility

to report such information and conflicts

and to assist the Boards will be

contractual obligations of all

Participating Insurance Companies

under their agreements governing

participation in the Funds, and these

responsibilities will be carried out with

a view only to the interests of Contract

owners.

4. If it is determined by a majority of

the Board of a Fund, or by a majority of

its disinterested trustees or directors,

that a material irreconcilable conflict

exists, the relevant Participating

Insurance Companies will, at their

expense and to the extent reasonably

practicable (as determined by a majority

of the disinterested trustees or

directors), take whatever steps are

necessary to remedy or eliminate the

irreconcilable material conflict, which

steps could include: (a) withdrawing the

assets allocable to some or all of the

accounts from the Fund or any series

and reinvesting such assets in a

different investment medium, which

may include another series of a Fund or

another Fund, or submitting the

question of whether such segregation

should be implemented to a vote of all

affected Contract owners and, as

appropriate, segregating the assets of

any appropriate group (i.e., variable

annuity Contract owners or variable life

insurance Contract owners of one or

more Participating Insurance

Companies) that votes in favor of such

segregation, or offering to the affected

Contract owners the option of making

such a change; and (b) establishing a

new registered management investment

company or managed separate account.

If a material irreconcilable conflict

arises because of a Participating

Insurance Company’s decision is to

disregard Contract owner voting

instructions and that decision

represents a minority position or would

preclude a majority vote, the

Participating Insurance Company may

be required, at the election of the Fund,

to withdraw its account’s investment in

such Fund, and no charge or penalty

will be imposed as a result of such

withdrawal. The responsibility of taking

remedial action in the event of a Board

determination of an irreconcilable

material conflict and bearing the cost of

such remedial action will be a

contractual obligation of all

Participating Insurance Companies

under their agreements governing

participating in the Funds and these

responsibilities will be carried out with

a view only to the interests of Contract

owners.

For purposes of this condition 4, a

majority of the disinterested members of

the applicable Board will determine

whether or not any proposed action

adequately remedies any irreconcilable

material conflict, but in no event will

the Fund be required to establish a new

funding medium for any Contract. No

Participating Insurance Company shall

be required by this condition 4 to

establish a new funding medium for any

Contract if an offer to do so has been

declined by vote of a majority of

Contract owners materially and

adversely affected by the irreconcilable

material conflict.

5. Any Board’s determination of the

existence of an irreconcilable material

conflict and its implications will be

made known promptly and in writing to

all Participating Insurance Companies.

6. Participating Insurance Companies

will provide pass-through voting

privileges to all Contract owners so long

as the Commission interprets the 1940

Act to require pass-through voting

privileges for variable contract owners.

Accordingly, the Participating Insurance

Companies will vote shares of the Funds

held in their accounts in a manner

consistent with voting instructions

timely received from Contract owners.

Participating Insurance Companies will

be responsible for assuring that each of

their accounts participating in a Fund

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 accounts

investing in the Fund will be a

contractual obligation of all

Participating Insurance Companies

under the agreements governing

participation in the Fund. Each

Participating Insurance Company will

vote shares for which it has not received

voting instructions as well as shares

attributable to it in the same proportion

as it votes shares for which it has

received instructions.

7. All reports of potential or existing

conflicts received by a Board, and all

Board action with regard to determining

the existence of a conflict, notifying

Participating Insurance Companies 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
Federal Register / Vol. 60, No. 76 / Thursday, April 20, 1995 / Notices 19801

available to the Commission upon

request.

8. Each Fund will notify all

Participating Insurance Companies that

separate account prospectus disclosure

regarding potential risks of mixed and

shared funding may be appropriate.

Each Fund will disclose in its

prospectus that: (a) Shares of the Fund

are offered to insurance company

separate accounts to fund both variable

annuity and variable life insurance

contracts and to Qualified Plans, (b) due

to differences of tax treatment and other

considerations, the interests of various

Contract owners participating in the

Funds and the interests of Qualified

Plans investing in the funds may

conflict, and (c) the Board of such fund

will monitor for the existence of any

material conflicts and determine what

action, if any, should be taken.

9. Each Fund will comply with all

provisions of the 1940 Act requiring

voting by shareholders (which for these

purposes, shall be the persons having

voting interests in the shares of the

Funds), and, in particular, each Fund

will either provide for annual meetings

(except to the extent that the

Commission may interpret Section 16 of

the 1940 Act not to require such

meetings) or comply with Section 16(c)

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

and if applicable, Section 16(b) of the

1940 Act. Further each Fund will act in

accordance with the Commission’s

interpretation of the requirements of

Section 16(a) with respect to periodic

elections of directors and with whatever

rules the Commission may promulgate

with respect thereto.

10. If and to the extent that Rules 6e–

2 and 6e–3(T) are amended (or if Rule

6e–3 under the 1940 Act is adopted) to

provide exemptive relief from any

provisions 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 by the Applicants, then the

Funds and the Participating Insurance

Companies, as appropriate, shall take

such steps as may be necessary to

comply with Rules 6e–2 and 6e–3(T) as

amended, and Rule 6e–3, as adopted, to

the extent applicable.

11. No less than annually, the

Participating Insurance Companies,

and/or Montgomery and/or its affiliated

advisors shall submit to each Board

such reports, materials or data as such

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 applicable Board.

The obligations of Participating

Insurance Companies to provide these

reports, materials and data shall be a

contractual obligation of all

Participating Insurance Companies

under the agreements governing their

participation in the Funds.

12. In the event that a Qualified Plan

should ever become an owner of 10% or

more of the assets of a Fund, such

Qualified Plan will execute a fund

participation agreement with such

Fund. A Qualified Plan shareholder will

execute an application containing an

acknowledgment of this condition at the

time of its initial purchase of shares of

the Fund.

Conclusion

For the reasons and upon the facts

stated above, Applicants believe 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 Act.

For the Commission, by the Division of

Investment Management, under delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–9841 Filed 4–19–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. IC–21008; 812–9404]

Nike Securities L.P., et al.; Notice of

Application

April 14, 1995.

AGENCY: Securities and Exchange

Commission (‘‘SEC’’).

ACTION: Notice of Application for

Exemption under the Investment

Company Act of 1940 (the ‘‘Act’’).

APPLICANTS: Nike Securities L.P. (the

‘‘Sponsor’’) and The First Trust of

Insured Municipal Bonds, The First

Trust GNMA, The First Trust of Insured

Municipal Bonds—Multi-State, The

First Trust Advantage Fund, The First

Trust Special Situations Trust, The First

Trust Combined Series (the ‘‘Trusts’’),

and their respective series.

RELEVANT ACT SECTIONS: Order requested

pursuant to section 6(c) for exemptions

from sections 2(a)(32), 2(a)(35), 22(d),

and 26(a)(2) of the Act and rule 22c–1

thereunder, and pursuant to section

11(a) for an exemption from section

11(c).

SUMMARY OF APPLICATION: Applicants

seek to impose sales charges on a

deferred basis, waive the deferred sales

charge in certain cases, and exchange

Trust units having front-end and

deferred sales charges.

FILING DATE: The application was filed

on December 30, 1994, and was

amended on March 29, 1995.

HEARING OR NOTIFICATION OF HEARING: An

order granting the application will be

issued unless the SEC orders a hearing.

Interested persons 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

May 9, 1995 and should be

accompanied by proof of service on

applicants, in the form of an affidavit or,

for lawyers, a certificate of service.

Hearing requests should state the nature

of the writer’s request, the reason for the

request, and the issues contested.

Persons may request notification of a

hearing by writing to the SEC’s

Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth

Street NW., Washington, DC 20549.

Applicants, c/o Nike Securities L.P.,

1001 Warrenville Road, suite 3000,

Lisle, Illinois 60532.

SUPPLEMENTARY INFORMATION: The

following is a summary of the

application. The complete application

may be obtained for a fee at the SEC’s

Public Reference Branch.

Applicants’ Representations

1. Each of the Trusts is a unit

investment trust sponsored by the

Sponsor. Each of the Trusts consists of

one or more separate series (‘‘Series’’).

Applicants request that the relief sought

herein apply to any future Trusts

sponsored by the Sponsor, and any

future Series of the Trusts.

2. Each Series is created by a trust

indenture among the Sponsor, a banking

institution or trust company as trustee,

and an evaluator. The Sponsor acquires

a portfolio of securities which it

deposits with the trustee in exchange for

certificates representing units of

fractional undivided interest in the

deposited portfolio (‘‘Units’’). The Units

are then offered to the public through

the Sponsor, underwriters, and dealers

at a public offering price which, during

the initial offering period, is based upon

the aggregate offering side evaluation of

the underlying securities plus a frontend sales charge. The sales charge

currently ranges from 1.85% to 5.50% of

the public offering price, generally

depending on the terms of the

underlying securities. The Sponsor may

reduce the sales charge under certain

circumstances, which will be disclosed

in the prospectus. Any such reduction