Federal Register / Vol. 61, No. 130 / Friday, July 5, 1996 / Notices 35275

1EMPC anticipates that such fuels will include

those likely to be involved in transactions

concerning natural gas, such as oil and other

hydrocarbons, wood chips, wastes and other

combustible substances.

2 In the future, EPMC may help electric utilities

find the best way to meet Clean Air Act

requirements through a combination of new gas

technologies, emission credits, cross-fuel

management and wholesale electricity purchases

and sales.

front fees that may be paid for any Letter

of Credit to up to one percent of the face

amount of such Letter of Credit. These

terms and conditions include, inter alia,

assignments by SERI of contractual

rights held be SERI under certain

agreements entered into among SERI,

Entergy and the Operating Subsidiaries

as additional security for holders of any

series of Bonds or in connection with

the issuance of Tax-Exempt Bonds.

Entergy Corporation, et al. (70–8863)

Entergy Corporation (‘‘Entergy’’), 639

Loyola Avenue, New Orleans, Louisiana

70113, a registered holding company,

and Entergy Power Marketing

Corporation (‘‘EPMC’’), 900 South

Shackleford Road, Suite 210, Little

Rock, Arkansas 72211, a proposed

wholly owned nonutility subsidiary

company of Entergy, have filed an

application-declaration under sections

6(a), 7, 9(a), 10, 12(b) and 13(b) of the

Act and rules 45, 54, 87(b)(1), 90 and 91

thereunder.

Presently, EPMC has an order from

the Federal Energy Regulatory

Commission (‘‘FERC’’) certifying it as an

exempt wholesale generator (‘‘EWG’’) in

accordance with the requirements of the

Act. Entergy, which owns 100% of the

authorized and issued common stock of

EPMC, has invested in EPMC and

complied with the applicable

requirements of section 32 and rule 53,

of the Act, However, due to the

uncertainty surrounding the

requirement that EWGs be engaged

solely and exclusively in the business of

owning and/or operating eligible

facilities and selling electric energy at

wholesale, EPMC states that it will elect

to decertify, and not maintain its status

as a EWG.

As a result thereof, Entergy now

proposes to finance EPMC, as a wholly

owned nonutility subsidiary company,

and EPMC will engage in wholesale

brokering and marketing of energy

commodities. EPMC will not own any

utility assets, not will it own or operate

any electric or gas utility company, as

defined under the Act.

Specifically, EPMC proposes to

provide, on behalf of associate and

nonassociate companies, choices to

major customers with respect to the

purchase, sale, borrowing and lending

of electricity, natural gas and other

fuels, and the management of their

operations. In connection with these

activities, EPMC will purchase, sell,

supply, market, broker, or otherwise

trade electricity, gas or other fuels,1

provide electricity or fuel management

services, and engage in activities or

perform services, related to the

foregoing. In addition, EPMC proposes

to provide instantaneous supply and

sales options to electric generators; help

customers manage price changes in

electricity and fuel relative to time and

location; and assist electric utilities and

nonutility generators by managing fuel

supply and transportation contracts,

banking electricity until needed and

providing price and deliver flexibility.2

EPMC also anticipates that it may

engage in fuel delivery or fuel

conversion, activities, whereby EPMC

would deliver fuel supplies to a utility

or non-utility generator for the

conversion of such fuel into electric

energy which then would be delivered

to EPMC for resale. With respect to

traditional power brokering activities,

EPMC will act as an agent or broker for

utilities, non-utility generators and

other power marketers, to effectuate

such parties’ sales and purchases of

electric energy at wholesale. With

respect to retail activities, the applicants

request that the Commission reserve

jurisdiction pending completion of the

record.

In order top finance the abovementioned activities, Entergy seeks

authority to make capital contributions

to EPMC in an amount up to $20

million, and to provide up to $150

million in credit support, in the form of

guarantees, for certain of EPMC’s

proposed transactions. Entergy’s

investment in EPMC will constitute

EPMC’s total capitalization.

EPMC proposes to engage in risk

management transactions, including

swaps, options and futures contracts

that will assist its customers in hedging

against adverse price impacts, However,

EPMC will employ risk-reduction

measures to limit potential losses that

could be incurred through its activities.

Specifically, EPMC will: (1) Seek to

minimize the financial exposure of

Entergy through its guarantees; and (2)

not engage in speculative trading in the

energy market and will use market

hedging measures solely to minimize

risk and will limit hedging activity to no

more than the total amount of its

commodities subject to market price

fluctuation.

EPMC proposes to enter into a service

contract with Entergy Enterprises, Inc.

(‘‘EEI’’), whereby EEI will provide

EPMC with administrative services,

including maintaining books and

records and preparing corporate filings.

EEI will provide such services on an atcost basis in accordance with rules 90

and 91 of the Act.

For the Commission, by the Division

of Investment Management, pursuant to

delegated authority.

Jonathan G. Katz,

Secretary.

[FR Doc. 96–17151 Filed 7–3–96; 8:45 am]

BILLING CODE 8010–01–M

[Rel. No. IC–22045; No. 812–9988]

Royce Capital Trust, et al.

June 27, 1996.

AGENCY: Securities and Exchange

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

ACTION: Notice of Application for

Exemption under the Investment

Company Act of 1940 (the ‘‘1940 Act’’).

APPLICANTS: Royce Capital Trust

(‘‘Trust’’) and Quest Advisory Corp.

(‘‘Quest’’).

RELEVANT 1940 ACT SECTIONS: Order

requested under Section 6(c) granting

exemptions 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)

thereunder.

SUMMARY OF APPLICATION: Applicants

seek an order permitting shares of any

current or future series of the Trust and

shares of any other investment company

that is designed to fund variable

insurance products and for which Quest

or its affiliates may in the future serve

as investment adviser, administrator,

manager, principal underwriter or

sponsor (collectively with the Trust,

‘‘Funds’’), to be sold to and held by: (1)

variable annuity and variable life

insurance separate accounts of both

affiliated and unaffiliated insurance

companies (‘‘Participating Insurance

Companies’’); and (2) qualified pension

and retirement plans outside of the

separate account context (‘‘Plans’’).

FILING DATE: The application was filed

on February 9, 1996.

HEARING OR NOTIFICATION OF HEARING: An

order granting the application will be

issued unless the Commission orders a

hearing. Interested persons may request

a hearing by writing to the Secretary of

the Commission 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 July

22, 1996 and should be accompanied by

proof of service on Applicants in the

form of an affidavit or, for lawyers, a
35276 Federal Register / Vol. 61, No. 130 / Friday, July 5, 1996 / Notices

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: Howard J. Kashner, Esq.,

Quest Advisory Corp., 1414 Avenue of

the Americas, New York, New York

10019.

FOR FURTHER INFORMATION CONTACT:

Edward P. Macdonald, Staff Attorney, or

Wendy F. Friedlander, Deputy Chief,

Office of Insurance Products (Division

of Investment Management), at (202)

942–0670.

SUPPLEMENTARY INFORMATION: Following

is a summary of the application. The

complete application is available for a

fee from the Public Reference Branch of

the Commission.

Applicants’ Representations

1. The Trust was organized as a

Delaware Business Trust in January,

1996, and has registered with the

Commission as an open-end

management investment company.

2. Quest serves as investment adviser

to the Trust and is a registered

investment adviser under the

Investment Advisers Act of 1940.

3. The Funds propose to offer shares

of one or more of their series to

insurance company separate accounts

that fund variable annuity and variable

life insurance contracts (‘‘Contracts’’)

established by Participating Insurance

Companies. These separate accounts

may be registered as investment

companies under the 1940 Act or

exempt from registration pursuant to

Section 3(c)(1) of the 1940 Act. Each

Participating Insurance Company will

enter into a fund participation

agreement with the Funds in which the

Participating Insurance company

invests.

4. The Funds also intend to offer

shares of each series directly to Plans

outside of the separate account context.

The Plans may choose one or more

series of any of the Funds as the sole

investment under the Plan or as one of

several investments.

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 63–2(b)(15) provides

partial exemptions from Sections 9(a),

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

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

is available to a separate account’s

investment adviser, principal

underwriter, and sponsor or depositor.

The exemptions granted by Rule 6e–

2(b)(15) are available, however, 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.’’

2. The use of a common management

investment company as the underlying

investment medium for both variable

annuity and variable life insurance

separate accounts of a single insurance

company (or of two or more affiliated

insurance companies) is referred to as

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

management investment company as the

underlying investment medium for

variable annuity and/or variable life

insurance separate accounts of

unaffiliated insurance companies is

referred to as ‘‘shared funding.’’ ‘‘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. The relief granted

by Rule 6e–2(b)(15), thus, is not

available with respect to a scheduled

premium variable life insurance

separate account that owns shares of an

underlying fund that also offers its

shares to a variable annuity separate

account of the same company or of any

other affiliated or unaffiliated life

insurance company. Rule 6e–2(b)(15),

therefore, precludes mixed and shared

funding.

3. Applicants state that because the

relief under rule 6e–2(b)(15) 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 Plans.

4. In connection with flexible

premium variable life insurance

contracts issued through a UIT, rule 6e–

3(T)(b)(15) provides partial exemptions

from Sections 9(a), 13(a), 15(a) and 15(b)

of the 1940 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 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.’’ Rule

6e–3(T) thus permits mixed funding but

does not permit shared funding.

5. Applicants state that because the

relief under Rule 6e–3(T) is available

only where shares are offered

exclusively to separate accounts,

additional relief is necessary if shares of

the Funds also are to be sold to Plans.

Applicants assert that the relief granted

by paragraphs (b)(15) of Rules 6e–2 and

6e–3(T) should not be affected by the

proposed sale of Fund shares to Plans

because such sales may allow for the

development of larger pools of assets,

resulting in the potential for greater

investment and diversification

opportunities and for decreased

expenses at higher asset levels resulting

in greater cost efficiencies.

6. Applicants state that changes in the

tax law have created the opportunity for

the Funds to increase their asset base

through the sale of Fund shares to the

Plans. Applicants state that Section

817(h) of the Internal Revenue code, as

amended, (‘‘Code’’) imposes certain

diversification requirements on the

underlying assets of the Contracts held

in the Funds. The Code provides that

such Contracts shall not be treated as an

annuity contract or a life insurance

contract for any period in which the

underlying assets are not, in accordance

with regulations prescribed by the

Treasury Department, adequately

diversified. On March 2, 1989, the

Treasury Department issued regulations

which established diversification

requirements for the investment

portfolios underlying variable contracts.

Treas. Reg. 1.817–5 (1989). The

regulations provide that, 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 allows shares

in an investment company to be held by

a qualified pension or retirement plan

without adversely effecting 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 contracts. Treas. Reg.

1.817–5(f)(3)(iii).

7. Applicants state that the

promulgation of Rules 6e–2 and 6e–3(T)

under the 1940 Act preceded the

issuance of these Treasury regulations,

and that the sale of shares of the same

investment company to both separate

accounts and Plans could not have been

envisioned at the time of the adoption

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

8. Applicants therefore request relief

from Section 9(a), 13(a), 15(a) and 15(b)

of the 1940 Act, and Rules 6e–2(b)(15)
Federal Register / Vol. 61, No. 130 / Friday, July 5, 1996 / Notices 35277

and 6e–3(T)(b)(15) thereunder, to the

extent necessary to permit shares of the

Fund to be offered and sold in

connection with both mixed and shared

funding, and to be sold directly to Plans.

Relief is requested for a class or classes

of persons and transactions consisting of

Participating Insurance Companies and

their scheduled premium variable life

insurance separate accounts and flexible

premium variable life insurance

separate accounts (and, to the extent

necessary, any investment adviser,

principal underwriter, and depositor of

such separate accounts) investing in any

of the Funds.

Disqualification

9. Section 9(a) of the 1940 Act

provides that it is unlawful for any

company to serve as an investment

adviser to or principal underwriter for

any registered open-end investment

company if an affiliated person of that

company is subject to a disqualification

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

Rules 6e–2(b)(15) and 6e–3(T)(b)(15)

provide exemption from Section 9(a)

under certain circumstances, subject to

the limitations on mixed and shared

funding. The relief provided by Rules

6e–2(b)(15)(i) and 6e–3(T)(b)(15)(i)

permit 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 Rules 6e–2(b)(15)(ii) and 6e–

3(T)(b)(15)(ii) permit 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) participate in

the management or administration of

the Fund.

10. Applicants state that the partial

relief from Section 9(a) of the 1940 Act

found in Rules 6e–2(b)(15) and 6e–

3(T)(b)(15) thereunder, in effect, limits

the amount of monitoring necessary to

ensure compliance with Section 9 to

that which is appropriate in light of the

policy and purposes of that section.

Applicants state that those rules

recognize that it is not necessary for the

protection of investors or the purposes

fairly intended by the policy or

provisions of the 1940 Act to apply the

provisions of Section 9(a) to the many

individuals employed by the

Participating Insurance Companies,

most of whom will have no involvement

in matters pertaining to investment

companies within that organization.

Applicants note that the Participating

Insurance Companies are not expected

to play any role in the management or

administration of the Funds. Therefore,

Applicants assert, applying the

restrictions of Section 9(a) serves no

regulatory purpose. Applicants state

that the relief requested should not be

affected by the proposed sale of shares

of the Funds to the Plans because the

Plans are not investment companies and

are not, therefore, subject to Section

9(a).

Pass-Through Voting

11. Rules 6e–2(b)(15)(iii) and 6e–

3(T)(b)(15)(iii) under the 1940 Act

assume the existence of a pass-through

voting requirement with respect to

management investment company share

held by a separate account. The

application states that the Participating

Insurance Companies will provide passthrough voting privileges to all Contract

owners so long as the Commission

interprets the 1940 Act to require such

privileges.

12. Rules 6e–2(b)(15)(iii) and 6e–

3(T)(b)(15)(iii) under the 1940 Act

provide exemptions from the passthrough voting requirement with respect

to several significant matters, assuming

observance of the limitations on mixed

and shared funding imposed by the

1940 Act and the rules thereunder.

Rules 6e–2(b)(15)(iii)(A) and 6e–

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

insurance company may disregard the

voting instructions of its Variable

Contract owners with respect to the

investments of an underlying fund, or

any contract between a fund and its

investment adviser, when required to do

so by an insurance regulatory authority.

Rules 6e–2(b)(15)(iii)(B) and 6e–

3(T)(b)(15)(iii)(B) provide that the

insurance company may disregard

voting instructions of its Contract

owners if the Contract owners initiate

any change in the investment

company’s investment policies,

principal underwriter, or any

investment adviser, provided that

disregarding such voting instructions is

reasonable and subject to the other

provisions of paragraphs (b)(15)(ii) and

(b)(7)(ii)(B) and (C) of each rule.

13. Applicants state that shares of the

Funds sold to Plans will be held by the

trustees of such Plans as required by

Section 403(a) of ERISA. Section 403(a)

also provides that the trustees must

have exclusive authority and discretion

to manage and control the Plan with two

exceptions: (a) When the Plan expressly

provides that the trustees are subject to

the direction of a named fiduciary who

is not a trustee, in which case the

trustees are subject to proper directions

made in accordance with the terms of

the Plan and not contrary to ERISA; and

(b) when the authority to manage,

acquire or dispose of assets of the Plan

is delegated to one or more investment

managers pursuant to Section 402(c)(3)

of ERISA. Unless one of the two

exceptions stated in Section 403(a)

applies, 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 to the named

fiduciary. In any event, there is no passthrough voting to the participants in

such Plans. 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 Plans because the Plans are

not entitled to pass-through voting

privileges. Applicants further assert that

investments in the Funds by Plans will

not create any of the voting

complications occasioned by mixed and

shared funding because Plan investor

voting rights cannot be frustrated by

veto rights of insurers or state

regulators.

14. Applicants state that some Plans

may provide participants with the right

to give voting instructions. Applicants

submit that there is no reason to believe

that participants in Plans generally, or

those in a particular Plan, either as a

single group or in combination with

other Plans, would vote in a manner

that would disadvantage Contract

owners. Accordingly, Applicants assert

that the purchase of Fund shares by

Plans that provide voting rights to

participants does not present any

complication not otherwise occasioned

by mixed and shared funding.

Conflicts of Interest

15. Applicants state that no increased

conflicts of interest would be present by

the granting of the requested relief.

Applicants assert that shared funding

does not present any issues that do not

already exist where a single insurance

company is licensed to do business in

several states. Applicants note that

where 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. Applicants submit that this

possibility is no different and no greater

than exists where a single insurer and
35278 Federal Register / Vol. 61, No. 130 / Friday, July 5, 1996 / Notices

its affiliates offer their insurance

products in several states.

16. Applicants further submit that

affiliation does not reduce the potential

for differences among state regulatory

requirements. In any event, the

conditions (adapted from the conditions

included in Rule 6e–3(T)(b)(15)

discussed below) are designed to

safeguard against any adverse effects

that these differences may produce. If a

particular state insurance regulator’s

decision conflicts with the decisions of

a majority of other state regulators, the

affected insurer may be required to

withdraw its separate account’s

investment in the relevant Funds.

17. Applicants also argue that

affiliation does not eliminate the

potential, if any exists, for divergent

judgments as to when a Participating

insurance Company could disregard

Contract owner voting instructions.

Potential disagreement is limited by the

requirement that the Participating

Insurance Company’s disregard of

voting instructions be both reasonable

and based on specific good faith

determinations. However, if a

Participating Insurance Company’s

decision to disregard Contract owner

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

investment in that Fund. No charge or

penalty will be imposed as a result of

such withdrawal.

18. Applicants submit that there is no

reason why the investment policies of a

Fund with mixed funding would or

should be materially different from what

those policies would or should be if

such investment company or series

thereof funded only variable annuity or

variable life insurance contracts.

Applicants therefore argue that there is

no reason to believe that conflicts of

interest would result from mixed

funding. Moreover, Applicants

represent that the Funds will not be

managed to favor or disfavor any

particular insurance company or type of

Contract.

19. Applicants note that Section

817(h) of the Code imposes certain

diversification standards on the

underlying assets of variable annuity

contracts and variable life insurance

contracts held in the portfolios of

management investment companies.

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

which established diversification

requirements for such portfolios,

specifically permits ‘‘qualified pension

or retirement plans’’ and separate

accounts to share the same underlying

investment company. Therefore,

Applicants have concluded that neither

the Code, nor the Treasury regulations,

nor the revenue rulings thereunder,

present any inherent conflicts of

interests if Plans, variable annuity

separate accounts and variable life

insurance separate accounts all invest in

the same management investment

company.

20. Applicants note that while there

are differences in the manner in which

distributions are taxed for variable

annuity contracts, variable life

insurance contracts and Plans these tax

consequences do not raise any conflicts

of interest. When distributions are to be

made, and the separate account or the

Plan is unable to net purchase payments

to make the distributions, the separate

account or the Plan will redeem shares

of the Funds at their respective net asset

values. The Plan will then make

distributions in accordance with the

terms of the Plan. A Participating

Insurance Company will make

distributions in accordance with the

terms of the variable contract.

21. Applicants state that they do not

see any greater potential for material

irreconcilable conflicts arising between

the interests of Plan participants and

owners of the Contracts issued by the

separate accounts of Participating

Insurance Companies from possible

future changes in the federal tax laws

than that which already exists between

variable annuity contract owners and

variable life insurance contract owners.

22. With respect to voting rights,

Applicants state that it is possible to

provide an equitable means of giving

such voting rights to Contract owners

and to Plans. Applicants represent that

a Fund will inform each shareholder,

including each separate account and

Plan, of information necessary for the

shareholder meeting, including their

respective share ownership in the Fund.

A Participating Insurance Company will

then solicit voting instructions in

accordance with the ‘‘pass-through’’

voting requirements of Rules 6e–2 and

6e–3(T).

23. Applicants argue that the ability of

the Funds to sell their respective shares

directly to Plans does not create a

‘‘senior security’’, as such term is

defined under Section 18(g) of the 1940

Act, with respect to any Contract owner

as opposed to a participant under a

Plan. Regardless of the rights and

benefits of Plan participants and

Contract owners under their respective

Plans and Contracts, the Plans and

separate accounts have rights only with

respect to their shares of the Funds.

Such share may be redeemed only at 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.

24. Applicants state that there are no

conflicts of interest between Contract

owners and Plan participants with

respect to the state insurance

commissioners’ veto powers over

investment objectives. The state

insurance commissioners have been

given the veto power to prevent

insurance companies indiscriminately

redeeming their separate accounts out of

one Fund and investing those assets in

another Fund. Generally, to accomplish

such redemptions and transfers,

complex and time consuming

transactions must be undertaken.

Conversely, trustees of Plans or the

participants in participant-direct Plans

can make the decision quickly and

implement redemption of shares from a

Fund and reinvest the monies in

another funding vehicle without the

same regulatory impediments or, as in

the case with most Plans, even hold

cash pending a suitable investment.

Based on the foregoing, Applicants

represent that even should there arise

issues where the interests of Contract

owners and the interests of the Plans

and Plan participants conflict, the issues

can be almost immediately resolved in

that trustees of the Plans can,

independently, redeem shares out of the

Funds.

25. Applicants state that various

factors have kept certain insurance

companies from offering Contracts.

According to Applicants, these factors

include: the cost of organizing and

operating an investment funding

medium; the lack of expertise with

respect to investment managers; and the

lack of public name recognition as

investment experts. Specifically,

Applicants state that 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. Applicants argue the use of the

Funds as common investment media for

the Contracts would ease these

concerns. Participating Insurance

Companies would benefit not only from

the investment and administrative

expertise of Quest and its affiliates, but

also from the cost efficiencies and

investment flexibility afforded by a large

pool of funds. Applicants state that

making the Funds available for mixed

and shared funding may encourage

more insurance companies to offer

variable contract such as the Contracts,

which may then increase competition

with respect to both the design and the

pricing of variable contracts. Applicants

submit that this can be expected to
Federal Register / Vol. 61, No. 130 / Friday, July 5, 1996 / Notices 35279

result in greater product variation and

lower charges. Thus, Applicants argue

that Contract owners would benefit

because mixed and shared funding will

eliminate a significant portion of the

costs of establishing and administering

separate funds. Moreover, Applicants

assert that sales of shares of the Funds

to Plans should increase the amount of

assets available for investment by such

Funds. This should, in turn, promote

economies of scale, permit increased

safety of investments through greater

diversification, and make the addition

of new portfolios more feasible.

26. Applicants state that, regardless of

the types of Fund shareholders, Quest is

legally obligated to manage the Funds in

accordance with each Fund’s

investment objectives, policies and

restrictions as well as any guidelines

established by the relevant Board of

Directors or Trustees of the Funds.

Applicants assert that Quest work with

a pool of money without consideration

for the identity of shareholders, and,

thus, manage the Funds in the same

manner as any other mutual fund.

27. Applicants believe that there is no

significant legal impediment to

permitting mixed and shared funding.

Additionally, Applicants note the

previous issuance of orders permitting

mixed and share funding where shares

of a fund were sold directly to qualified

plans, such as the Plans. Applicants

note further that there is ample

precedent for extending exemptive relief

to members of a class or classes or

persons, not currently identified, that

may be similarly situated in the future.

Such class relief has been granted in

various contexts and from a wide

variety of the 1940 Act’s provisions

including class exemption in the

context of mixed and shared funding.

Applicants’ Conditions

The Applicants have consented to the

following conditions if the order

requested in the application is granted:

1. A majority of the Board of Trustees

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

of each Fund shall consist of persons

who are not ‘‘interested persons’’ of the

Funds, 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 or Trustee, then the

operation of this condition shall be

suspended: (i) for a period of 45 days,

if the vacancy or vacancies may be filled

by the appropriate Board, (ii) for a

period of 60 days, if a vote of

shareholders is required to fill the

vacancy or vacancies; or (ii) for such

longer period as the Commission may

prescribe by order upon application.

2. The Boards will monitor their

respective Funds for the existence of

any irreconcilable material conflict

between the interests of Contract owners

of all separate accounts and of Plan

participants and Plans investing in the

Funds, and determine what action if

any, should be taken in response to such

conflicts. A material irreconcilable

conflict may arise for a variety of

reasons, including: (a) An action by any

state insurance regulatory authority; (b)

a change in applicable federal or state

insurance, tax, or securities laws or

regulations, or a public ruling, private

letter billing, 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 Funds are managed;

(e) a difference in voting instructions

given by owners of variable annuity and

variable life insurance contracts; or (f) a

decision by a Participating Insurance

Company to disregard voting

instructions of Contract owners; and, (g)

if applicable, a decision by a Plan to

disregard the voting instructions of Plan

participants.

3. Participating Insurance Companies,

Quest (or any other investment manager

of a Fund), and any Plan that executes

a participation agreement upon

becoming an owner of 10% or more of

the issued and outstanding shares of a

Fund (‘‘Participating Plans’’) will report

any potential or existing conflicts to the

Board of any relevant Fund. Quest (or

any other investment adviser of a Fund),

Participating Insurance Companies and

Participating Plans 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 it to consider any issues

raised. This responsibility includes, but

is not limited to, an obligation by a

Participating Insurance Company to

inform the Board whenever it has

determined to disregard Contract

holders’ voting instructions and, if passthrough voting is applicable, an

obligation by a Participating Plan to

inform the Board whenever it has

determined to disregard Plan participant

voting instructions. The responsibility

to report such information and conflicts

and to assist the Board will be

contractual obligations of all

Participating Insurance Companies and

Participating Plans investing in the

Funds under their agreements governing

participating in the Funds, and such

agreements shall provide that these

responsibilities will be carried out with

a view only to the interests of the

Contract owners and, if applicable, Plan

participants.

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 and Participating

Plans will, at their expense and to the

extent reasonably practicable (as

determined by a majority of

disinterested trustees or members of the

Board), take whatever steps are

necessary to remedy or eliminate the

material irreconcilable conflict,

including: (a) Withdrawing the assets

allocable to some or all of the separate

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; (b) 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 or variable life insurance

contract owners of one or more

Participating Insurance Companies) that

votes in favor of such segregation, or

offering to the affected Contract owners

the option of making such a change; and

(c) establishing a new registered

management investment company or

managed separate account. If a material

irreconcilable conflict arises because of

a Participating Insurance Company’s

decision to 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 separate account’s

investment in the Fund, and no charge

or penalty will be imposed as a result

of such withdrawal. If a material

irreconcilable conflict arises because of

a Participating Plan’s decision to

disregard Plan participant voting

instructions, if applicable, and that

decision represents a minority position

or would preclude a majority vote, the

Participating Plan may be required, at

the election of the Fund, to withdraw its

investment in the Fund, and no charge

or penalty will be imposed as a result

of such withdrawal. To the extent

permitted by applicable law, the

responsibility of taking remedial action

in the event of a Board determination of

the existence of an irreconcilable

material conflict and bearing the cost of

such remedial action, shall be a

contractual obligation of all
35280 Federal Register / Vol. 61, No. 130 / Friday, July 5, 1996 / Notices

Participating Insurance Companies and

Participating Plans under their

agreements governing participation in

the Funds, and these responsibilities

will be carried out with a view only to

the interests of the Contract owners and,

as applicable, Plan participants.

For purposes of this Condition Four,

a majority of the disinterested members

of the applicable Board will determine

whether or not any proposed action

adequately remedies any material

irreconcilable conflict, but in no event

will the relevant Fund or Quest (or any

other investment advisor to a Fund) be

required to establish a new funding

medium for any Contract. No

Participating Insurance Company shall

be required by this Condition Four to

establish a new funding medium for any

Contract if an offer to do so has been

declined by a vote of a majority of

Contract owners materially affected by

the material irreconcilable conflict. No

Participating Plan shall be required by

this Condition Four to establish a new

funding medium for such Plan if (a) a

majority of Plan participants materially

and adversely affected by the material

irreconcilable conflict vote to decline

such offer, or (b) pursuant to governing

plan documents and applicable law, the

Participating Plan makes such decision

without Plan participant vote.

5. Quest, all Participating Insurance

Companies, and Participating Plans will

be promptly informed in writing of any

Board’s determination that a material

irreconcilable conflict exists, and its

implications.

6. Participating Insurance Companies

will provide pass-through voting

privileges to all Contract owners so long

as the Commission continues to

interpret the 1940 Act as requiring passthrough voting privileges for Contract

owners. Accordingly, the Participating

Insurance Companies will vote shares of

a Fund held in their separate 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 separate accounts calculates voting

privileges in a manner consistent with

all other Participating Insurance

Companies. The obligation to calculate

voting privileges in a manner consistent

with all other separate 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. Each Participating

Plan will vote as required by applicable

law and governing plan documents.

7. All reports of potential or existing

conflicts of interest received by a Board,

and all Board action with regard to

determining the existence of a conflict,

notifying Quest, Participating Insurance

Companies and Participating Plans of a

conflict, and determining whether any

proposed action adequately remedies a

conflict, will be properly recorded in

the minutes of the appropriate Board or

other appropriate records, and such

minutes or other records shall be made

available to the Commission upon

request.

8. Each Fund will notify all

Participating Companies that separate

account prospectus disclosure regarding

potential risks of mixed and shared

funding may be appropriate. Each Fund

shall disclose in its prospectus that: (a)

Its shares may be offered to insurance

company separate accounts that fund

both variable annuity and variable life

insurance contracts, and to Plans; (b)

due to differences of tax treatment and

other considerations, the interests of

various Contracts owners participating

in the Fund and the interests of Plans

investing in the Fund may conflict; and,

(c) the Board will monitor the Fund for

any material conflicts of interest 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 a

voting interest in the shares of the Fund)

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

(although the Fund is one of the trusts

described in Section 16(c) of the 1940

Act), as well as with Section 16(a) and,

if applicable, Section 16(b) of the 1940

Act. Further, the Fund will act in

accordance with the Commission’s

interpretation of the requirements of

Section 16(a) with respect to periodic

elections of directors (or trustees) and

with whatever rules the Commission

may promulgate with respect thereto.

10. If and to the extent Rule 6e–2 or

Rule 6e–3(T) is amended, or Rule 6e–

3(T) is adopted, to provide 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 by Applicants, then the Fund

and the Participating Insurance

Companies, as appropriate, shall take

such steps as may be necessary to

comply with Rule 6e–2 or Rule 6e–3(T),

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

to the extent such rules are applicable.

11. No less than annually, Quest (or

any other investment adviser of a Fund),

the Participating Insurance Companies

and Participating Plans shall submit to

the Boards such reports, materials, or

data as the Boards may reasonably

request so that the Boards may carry out

fully the obligations imposed upon

them by the conditions stated in the

application. Such reports, materials, and

data shall be submitted more frequently

if deemed appropriate by the Boards.

The obligations of Quest, Participating

Insurance Companies and Participating

Plans to provide these reports,

materials, and data to the Boards shall

be a contractual obligation of Quest, all

Participating Insurance Companies and

Participating Plans under the

agreements governing their participation

in the Fund.

12. If a Plan should become an owner

of 10% or more of the issued and

outstanding shares of a Fund, such Plan

will execute a participation agreement

with the applicable Fund including the

conditions set forth herein to the extent

applicable. A Plan 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 stated above,

Applicants assert that the requested

exemptions 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)

thereunder, are appropriate in the

public interest 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. 96–17150 Filed 7–3–96; 8:45 am]

BILLING CODE 8010–01–M

[Rel. No. IC–22046; 811–1500]

Sherman, Dean Fund, Inc.; Notice of

Application

June 28, 1996.

AGENCY: Securities and Exchange

Commission (‘‘SEC’).

ACTION: Notice of application for

deregistration under the Investment

Company Act of 1940 (the ‘‘Act’’).