Document ID: SEC-2007-0854-0001
Agency: sec
Document Type: Notice
Title: Principal Variable Contracts Fund, Inc. et al., Notice of Application
Posted Date: 2007-06-22T04:00Z

[Federal Register: June 22, 2007 (Volume 72, Number 120)]
[Notices]               
[Page 34489-34494]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22jn07-90]                         

[[Page 34489]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-27852; File No. 812-13338]

 
Principal Variable Contracts Fund, Inc. et al., Notice of 
Application

June 18, 2007.
AGENCY: Securities and Exchange Commission (``SEC'' or the 
``Commission'').

ACTION: Notice of Application for exemption pursuant to Section 6(c) of 
the Investment Company Act of 1940, as amended (the ``1940 Act''), from 
the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the Act and 
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder.

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Applicants: Principal Variable Contracts Fund, Inc. (the ``Fund'') and 
Principal Management Corporation (``Investment Adviser'' and together 
with the Fund, ``Applicants'').

Summary of Application: Applicants request an order pursuant to Section 
6(c) of the 1940 Act exempting certain life insurance companies and 
their separate accounts that currently invest in or may hereafter 
invest in the Fund from the provisions of Sections 9(a), 13(a), 15(a) 
and 15(b) of the Act and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) 
thereunder, to the extent necessary to permit shares of the Fund 
(``Shares''), and shares of any investment company that is designed to 
fund insurance products and for which the Investment Adviser or any of 
its affiliates, may serve in the future as investment adviser, 
investment manager, subadviser, administrator, principal underwriter or 
sponsor (collectively ``Insurance Funds'') to be sold to and held by: 
(a) Separate accounts funding variable annuity contracts and variable 
life insurance policies (collectively ``Variable Contracts'') issued by 
both affiliated life insurance companies and unaffiliated life 
insurance companies; (b) trustees of qualified group pension and group 
retirement plans outside of the separate account context, (``Qualified 
Plans''); (c) separate accounts that are excepted from the definition 
of investment company by Section 3(c) of the 1940 Act; (d) the 
Investment Adviser or any successor in interest to the Investment 
Adviser (``Adviser'') for the purpose of providing seed capital to an 
Insurance Fund; and (e) any other account of a Participating Insurance 
Company (``General Accounts'').

Filing Date: The Application was filed on October 31, 2006 and amended 
and restated on June 18, 2007.

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 
Commission by 5:30 p.m. on July 14, 2007, 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 who wish to be notified of a hearing may 
request notification by writing to the Secretary of the Commission.

ADDRESSES: The Commission: Secretary, Securities and Exchange 
Commission, 100 F Street, NE., Washington, DC 20549-1090; Applicants: 
c/o John W. Blouch, Esq., Dykema Gossett PLLC, Suite 300 West, 1300 I 
Street, NW., Washington, DC 20005.

FOR FURTHER INFORMATION CONTACT: Rebecca A. Marquigny, Senior Counsel, 
or Joyce M. Pickholz, Branch Chief, Office of Insurance Products, 
Division of Investment Management, at (202) 551-6795.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
Application. The complete Application is available for a fee from the 
Commission's Public Reference Branch, SEC's Public Reference Branch, 
100 F Street, NE., Room 1580, Washington, DC 20549 (telephone (202) 
551-8090).

Applicant's Representations

    1. Each Insurance Fund is, or will be, registered under the 1940 
Act as an open-end management investment company. The Fund (File No. 
811-01944) is registered under the 1940 Act as an open-end management 
investment company comprised of 41 investment portfolios (individually 
a ``Portfolio'' and collectively, the ``Portfolios''). The Fund has 
filed a Registration Statement on Form N-1A to register the sale of the 
Fund's shares under the Securities Act of 1933 (the ``1933 Act'') (File 
No. 002-35570).
    2. The Investment Adviser, a wholly owned subsidiary of Principal 
Financial Group, is registered with the Commission under the Investment 
Advisers Act of 1940. Pursuant to a management agreement with the Fund 
with respect to each Portfolio, the Investment Adviser has entered into 
sub-advisory agreements with sub-advisors for each of the Portfolios. 
The Investment Adviser also serves as investment adviser to Principal 
Investors Fund, Inc.
    3. Applicants represent that the Fund intends to, and other 
Insurance Funds may in the future, offer Shares to separate accounts of 
affiliated and unaffiliated insurance companies in order to fund 
Variable Contracts. Applicants further represent that these separate 
accounts are, or will be, registered as investment companies under the 
1940 Act or will be exempt from such registration (individually a 
``Separate Account'' and collectively the ``Separate Accounts''). 
Insurance companies whose Separate Account(s) may now or in the future 
own Shares are referred to herein as ``Participating Insurance 
Companies.''
    4. Applicants represent that the Participating Insurance Companies 
have established, or will establish, their own Separate Accounts and 
design their own Variable Contracts. Each Participating Insurance 
Company has, or will have, the legal obligation to satisfy all 
applicable requirements under both State and Federal law. Each 
Participating Insurance Company may rely on Rule 6e-2 or Rule 6e-3(T) 
under the 1940 Act, although in connection with the establishment and 
maintenance of Separate Accounts funding variable life insurance 
policies, some Participating Insurance Companies may rely on individual 
exemptive orders as well.
    5. Applicants state that each Participating Insurance Company on 
behalf of its Separate Accounts has entered, or will enter, into a 
participation agreement with each Insurance Fund in which it invests 
which will govern participation by the Participating Insurance Company 
in such Insurance Fund (a ``Participation Agreement''). The role of the 
Insurance Fund under this arrangement, insofar as Federal securities 
laws are applicable, will consist of offering Shares to the Separate 
Accounts and fulfilling any conditions that the Commission may impose 
upon granting the order requested in the Application.
    6. Applicants propose that the Insurance Funds also be permitted to 
offer and/or sell Shares to Qualified Plans administered by a Trustee. 
Section 817(h) of the Internal Revenue Code of 1986, as amended (the 
``Code''), imposes certain diversification standards on the underlying 
assets of Separate Accounts funding Variable Contracts. In particular, 
the Code provides that Variable Contracts shall not be treated as an 
annuity contract or life insurance policy for any period (and any 
subsequent period) for which the underlying assets are not, in 
accordance

[[Page 34490]]

with regulations prescribed by the Treasury Department, adequately 
diversified. On March 2, 1989, the Treasury Department issued 
regulations (individually a ``Treasury Regulation'' and collectively 
the ``Treasury Regulations''), specifically Treasury Regulation Section 
1.817-5, that established diversification requirements for Variable 
Contracts, which require the Separate Accounts upon which these 
contracts or policies are based to be diversified as provided in the 
Treasury Regulations. In the case of Separate Accounts that invest in 
underlying investment companies, the Treasury Regulations provide a 
``look through'' rule that permits the Separate Account to look to the 
underlying investment company for purposes of meeting the 
diversification requirements, provided that the beneficial interests in 
the investment company are held only by the segregated asset accounts 
of one or more insurance companies. However, the Treasury 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 
Separate Accounts funding Variable Contracts (Treas. Reg. Section 
1.817-5(f)(3)(iii)). Another exception allows the investment manager of 
the investment company and certain companies related to the investment 
manager to hold shares of the investment company, an exception that is 
often used to provide the capital required by Section 14(a) of the 1940 
Act.
    7. Qualified Plans may choose the Shares offered as the sole 
investment under the Qualified Plan or as one of several investments. 
Qualified Plan participants may or may not be given an investment 
choice depending on the terms of the Qualified Plan itself. Exercise of 
voting rights by participants in any such Qualified Plans, as opposed 
to the trustees of such Qualified Plans, cannot be mandated by the 
Applicants. Each Qualified Plan must be administered in accordance with 
the terms of the Qualified Plan and as determined by its trustee or 
trustees. To the extent permitted under applicable law, an Adviser or 
an affiliated person of the Adviser may act as investment adviser or 
trustee to Qualified Plans that purchase Shares.
    8. Applicants propose that the Insurance Funds also be permitted to 
offer and/or sell Shares to an Adviser. The Treasury Regulations permit 
such sales as long as the return on Shares held by the Adviser is 
computed in the same manner as for Shares held by the Separate 
Accounts, and the Adviser does not intend to sell the Shares to the 
public. The Treasury Regulations restrict sales to an Adviser to Shares 
held only in connection with the creation of an Insurance Fund. 
Applicants represent that they anticipate that sales will be made to an 
Adviser for the purpose of providing necessary capital required by 
Section 14(a) of the 1940 Act. Applicants also represent that any 
Shares purchased by an Adviser will automatically be redeemed if and 
when the Adviser's investment advisory agreement terminates.
    9. Applicants propose that the Insurance Funds also be permitted to 
offer and/or sell Shares to General Accounts. The Treasury Regulations 
permit sales to General Accounts as long as the return on Shares held 
by General Accounts is computed in the same manner as for Shares held 
by a Separate Account, and the General Accounts do not intend to sell 
the Shares to the public. Applicants represent that they anticipate 
that sales may be made to General Accounts for purposes of the creation 
of the Insurance Funds.

Applicants' Legal Analysis

    1. In connection with the funding of scheduled premium variable 
life insurance policies issued through a Separate Account registered as 
a unit investment trust (``UIT'') under the 1940 Act, Rule 6e-2(b)(15) 
provides partial exemptions from Sections 9(a), 13(a), 15(a), and 15(b) 
of the 1940 Act. Section 9(a)(2) of the 1940 Act makes it unlawful for 
any company to serve as an investment adviser or principal underwriter 
of any UIT, if an affiliated person of that company is subject to 
disqualification enumerated in Section 9(a)(1) or (2) of the 1940 Act. 
Sections 13(a), 15(a) and 15(b) of the 1940 Act have been deemed by the 
Commission to require ``pass-through'' voting with respect to an 
underlying investment company's shares. Rule 6e-2(b)(15) provides these 
exemptions apply only where all of the assets of the UIT are shares of 
management investment companies ``which offer their shares exclusively 
to variable life insurance separate accounts of the life insurer or of 
any affiliated life insurance company.'' Therefore, the relief granted 
by Rule 6e-2(b)(15) is not available with respect to a scheduled 
premium life insurance Separate Account that owns shares of an 
underlying fund that also offers its shares to a variable annuity 
Separate Account or a flexible premium variable life insurance Separate 
Account of the same company or any other affiliated company. The use of 
a common management investment company as the underlying investment 
vehicle for both variable annuity and variable life insurance Separate 
Accounts of the same life insurance company or of any affiliated life 
insurance company is referred to herein as ``mixed funding.''
    2. The relief granted by Rule 6e-2(b)(15) also 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 Separate Accounts funding Variable Contracts issued by one or 
more unaffiliated life insurance companies. The use of a common 
management investment company as the underlying investment vehicle for 
Separate Accounts funding Variable Contracts issued by one or more 
unaffiliated life insurance companies is referred to herein as ``shared 
funding.''
    3. Moreover, because the relief under Rule 6e-2(b)(15) is available 
only where shares are offered exclusively to variable life insurance 
Separate Accounts of a life insurer or any affiliated life insurance 
company, additional exemptive relief is necessary if the Shares are 
also to be sold to Qualified Plans, an Adviser and General Accounts 
(collectively, ``Eligible Purchasers''). Applicants note that if the 
Shares were sold only to Separate Accounts funding variable annuity 
contracts and/or Eligible Purchasers, exemptive relief under Rule 6e-
2(b)(15) would not be necessary. The relief provided for under this 
section does not relate to Eligible Purchasers or to a registered 
investment company's ability to sell its shares to Eligible Purchasers. 
The use of a common management investment company as the underlying 
investment vehicle for Separate Accounts funding Variable Contracts 
issued by affiliated and unaffiliated insurance companies, and for 
Eligible Purchasers, is referred to herein as ``extended mixed and 
shared funding.''
    4. 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 1940 Act. The exemptions 
granted by Rule 6e-3(T)(b)(15) are available only where all the assets 
of the Separate Account consist of the shares of one or more registered 
management investment companies that offer to sell their shares 
``exclusively to separate accounts of the

[[Page 34491]]

life insurer, or of any affiliated life insurance companies, 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 or which offer 
their shares to any such life insurance company in consideration solely 
for advances made by the life insurer in connection with the operation 
of the separate account.'' Therefore, Rule 6e-3(T)(b)(15) permits mixed 
funding but does not permit shared funding.
    5. Moreover, because the relief under Rule 6e-3(T)(b)(15) is 
available only where Shares are offered exclusively to Separate 
Accounts funding Variable Contracts issued by a life insurer or any 
affiliated life insurance company, additional exemptive relief is 
necessary if the Shares are also to be sold to Eligible Purchasers, as 
described above. Applicants note that if the Shares were sold only to 
Separate Accounts funding variable annuity contracts and/or Eligible 
Purchasers, exemptive relief under Rule 6e-3(T)(b)(15) would not be 
necessary. The relief provided for under this section does not relate 
to Eligible Purchasers or to a registered investment company's ability 
to sell its shares to Eligible Purchasers.
    6. Applicants maintain, as discussed below, that there is no policy 
reason for the sale of the Shares to Eligible Purchasers to result in a 
prohibition against, or otherwise limit a Participating Insurance 
Company from relying on the relief provided by Rules 6e-2(b)(15) and 
6e-3(T)(b)(15). However, because the relief under Rules 6e-2(b)(15) and 
6e-3(T)(b)(15) is available only when shares are offered exclusively to 
certain Separate Accounts, additional exemptive relief may be necessary 
if the Shares are also to be sold to Eligible Purchasers. Applicants 
therefore request relief in order to have the Participating Insurance 
Companies enjoy the benefits of the relief granted in Rules 6e-2(b)(15) 
and 6e-3(T)(b)(15) even where Eligible Purchasers are investing in the 
relevant Insurance Fund. Applicants note that if the Shares were to be 
sold only to Eligible Purchasers, and/or Separate Accounts funding 
variable annuity contracts, exemptive relief under Rule 6e-2(b)(15) and 
Rule 6e-3(T)(b)(15) would be unnecessary. The relief provided for under 
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) does not relate to Eligible 
Purchasers, or to a registered investment company's ability to sell its 
shares to Eligible Purchasers.
    7. Consistent with the Commission's authority under Section 6(c) of 
the 1940 Act to grant exemptive orders to a class or classes of persons 
and transactions, the Application requests relief for the class 
consisting of Participating Insurance Companies and their Separate 
Accounts (and to the extent necessary, investment advisers, principal 
underwriters and sponsors of such Separate Accounts).
    8. In effect, the partial relief granted in Rules 6e-2(b)(15) and 
6e-3(T)(b)(15) under the 1940 Act from the requirements of Section 9 of 
the 1940 Act 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 Section 9. Those rules recognize that it is not 
necessary for the protection of investors or the purposes fairly 
intended by the policy and provisions of the 1940 Act to apply the 
provisions of Section 9(a) to individuals in a large insurance complex, 
most of whom will have no involvement in matters pertaining to 
investment companies in that organization. Applicants assert that it is 
also unnecessary to apply Section 9(a) of the 1940 Act to the many 
individuals in various unaffiliated insurance companies (or affiliated 
companies of Participating Insurance Companies) that may utilize the 
Insurance Funds as investment vehicles for Variable Contracts. 
Applicants argue that there is no regulatory purpose in extending the 
monitoring requirements to embrace a full application of Section 9(a)'s 
eligibility restrictions because of mixed funding or shared funding and 
sales to Qualified Plans, an Adviser or General Accounts. Applicants 
represent that the Participating Insurance Companies and Qualified 
Plans are not expected to play any role in the management of the 
Insurance Funds. Applicants further represent that those individuals 
who participate in the management of the Insurance Funds will remain 
the same regardless of which Separate Accounts or Qualified Plans 
invest in the Insurance Funds. Applicants argue that applying the 
monitoring requirements of Section 9(a) of the 1940 Act because of 
investment by Separate Accounts of Participating Insurance Companies or 
Qualified Plans would be unjustified, would not serve any regulatory 
purpose and could reduce the net rates of return realized by contract 
owners and Qualified Plan participants due to the increased monitoring 
costs.
    9. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) under the 1940 
Act provide exemptions from pass-through voting requirements with 
respect to several significant matters, assuming the limitations on 
mixed and shared funding are observed. Rules 6e-2(b)(15)(iii)(A) and 
6e-3(T)(b)(15)(iii)(A) provide that the insurance company may disregard 
the voting instructions of its contract owners with respect to the 
investments of an underlying fund, or any contract between such a fund 
and its investment adviser, when required to do so by an insurance 
regulatory authority (subject to the provisions of Rules 6e-2(b)(5)(i), 
6e-2(b)(7)(ii)(A), 6e-3(T)(b)(5)(i) and 6e-3(T)(b)(7)(ii)(A) under the 
1940 Act). Rules 6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2) 
provide that an insurance company may disregard the voting instructions 
of its contract owners if the contract owners initiate any change in an 
underlying fund's investment policies, principal underwriter or any 
investment adviser (provided that disregarding such voting instructions 
is reasonable and subject to the other provisions of Rules 6e-
2(b)(5)(ii), 6e-2(b)(7)(ii)(B), 6e-2(b)(7)(ii)(C), 6e-3(T)(b)(5)(ii), 
6e-3(T)(b)(7)(ii)(B), and 6e-3(T)(b)(7)(ii)(C) under the 1940 Act).
    10. Rule 6e-2 under the 1940 Act recognizes that a variable 
insurance contract, as an insurance contract, has important elements 
unique to insurance contracts and is subject to extensive state 
regulation. In adopting Rule 6e-2(b)(15)(iii), the Commission expressly 
recognized that state insurance regulators have authority, pursuant to 
state insurance laws or regulations, to disapprove or require changes 
in investment policies, investment advisers, or principal underwriters. 
The Commission also expressly recognized that state insurance 
regulators have authority to require an insurer to draw from its 
general account to cover costs imposed upon the insurer by a change 
approved by contract owners over the insurer's objection. The 
Commission, therefore, deemed such exemptions necessary ``to assure the 
solvency of the life insurer and 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.'' In this respect, 
flexible premium variable life insurance contracts are identical to 
scheduled premium variable life insurance contracts. Applicants, 
therefore, assert that the corresponding provisions of Rule 6e-3(T) 
under the 1940 Act undoubtedly were adopted in recognition of the same 
factors.
    11. Applicants also assert that the sale of Shares to Qualified 
Plans, an Adviser and General Accounts will not have any impact on the 
relief requested. With respect to Qualified Plans, which are

[[Page 34492]]

not registered as investment companies under the 1940 Act, shares of a 
portfolio of an investment company sold to a Qualified Plan must be 
held by the trustee(s) of the Qualified Plan pursuant to Section 403(a) 
of the Employee Retirement Income Security Act of 1974 (``ERISA''). 
Applicants note that (1) Section 403(a) of ERISA endows Qualified Plan 
trustees with the exclusive authority and responsibility for voting 
proxies provided neither of two enumerated exceptions to that provision 
applies; (2) some of the Qualified Plans may provide for the 
trustee(s), an investment adviser (or advisers), or another named 
fiduciary to exercise voting rights in accordance with instructions 
from participants; and (3) there is no requirement to pass through 
voting rights to Qualified Plan participants.
    12. Applicants argue that an Adviser and General Accounts are 
similar in that they are not subject to any pass-through voting 
requirements. Applicants, therefore, conclude that unlike the case with 
insurance company Separate Accounts, the issue of resolution of 
material irreconcilable conflicts with respect to voting is not present 
with Eligible Purchasers.
    13. Applicants represent that where a Qualified Plan does not 
provide participants with the right to give voting instructions, the 
trustee or named fiduciary has fiduciary responsibility to vote the 
shares held by the Qualified Plan in the best interest of the Qualified 
Plan participants. Accordingly, Applicants argue that even if an 
Adviser or an affiliate of an Adviser were to serve in the capacity of 
trustee or named fiduciary with voting responsibilities, an Adviser or 
its affiliates would have a fiduciary duty to vote relevant Shares in 
the best interest of the Qualified Plan participants.
    14. Further, Applicants assert that even if a Qualified Plan were 
to hold a controlling interest in an Insurance Fund, Applicants do not 
believe such control would disadvantage other investors in such 
Insurance Fund to any greater extent than is the case when any 
institutional shareholder holds a majority of the voting securities of 
any open-end management investment company. In this regard, Applicants 
submit that investment in an Insurance Fund by a Qualified Plan will 
not create any of the voting complications occasioned by mixed funding 
or shared funding. Unlike mixed funding or shared funding, Applicants 
argue that Qualified Plan investor voting rights cannot be frustrated 
by veto rights of insurers or state regulators.
    15. Where a Qualified Plan provides participants with the right to 
give voting instructions, Applicants see no reason to believe that 
participants in Qualified Plans generally or those in a particular 
Qualified Plan, either as a single group or in combination with 
participants in other Qualified Plans, would vote in a manner that 
would disadvantage Variable Contract holders. Applicants assert that 
the purchase of Shares by Qualified Plans that provide voting rights 
does not present any complications not otherwise occasioned by mixed or 
shared funding.
    16. Applicants do not believe that the sale of the Shares to 
Qualified Plans will increase the potential for material irreconcilable 
conflicts of interest between or among different types of investors. In 
particular, Applicants see very little potential for such conflicts 
beyond those that would otherwise exist between Variable Contract 
owners.
    17. Applicants assert that permitting an Insurance Fund to sell its 
shares to an Adviser or to the General Account of a Participating 
Insurance Company will enhance management of each Insurance Fund 
without raising significant concerns regarding material irreconcilable 
conflicts. Unlike the circumstances of many investment companies that 
serve as underlying investment media for variable insurance products, 
an Insurance Fund may be deemed to lack an insurance company 
``promoter'' for purposes of Rule 14a-2 under the 1940 Act. 
Accordingly, any Insurance Funds that are established as new 
registrants may be subject to the requirements of Section 14(a) of the 
1940 Act, which generally requires that an investment company have a 
net worth of $100,000 upon making a public offering of its shares. 
Insurance Funds also will require more limited amounts of initial 
capital in connection with the creation of any new series of Shares and 
the voting of initial Shares of such series on matters requiring the 
approval of Shareholders. A potential source of the requisite initial 
capital is an Insurance Fund's investment adviser or a Participating 
Insurance Company. Either of these parties may have an interest in 
making the requisite capital investment and in participating with an 
Insurance Fund in its organization. Applicants note, however, that 
provision of seed capital or the purchase of shares in connection with 
the management of an Insurance Fund by its investment adviser or by a 
Participating Insurance Company may be deemed to violate the 
exclusivity requirement of Rule 6e-2(b)(15) and/or Rule 6e-3(T)(b)(15).
    18. Given the conditions of Treas. Reg. Section 1.817-5(f)(3) and 
the harmony of interest between an Insurance Fund, on the one hand, and 
an Adviser or a Participating Insurance Company, on the other, 
Applicants assert that little incentive for overreaching exists. 
Applicants further assert that such investment should not implicate the 
concerns discussed above regarding the creation of material 
irreconcilable conflicts. Instead, Applicants argue that permitting 
investments by an Adviser, or by General Accounts, will permit the 
orderly and efficient creation of an Insurance Fund, and reduce the 
expense and uncertainty of using outside parties at the early stages of 
the Insurance Fund's operations.

Applicants' Conditions

    Applicants consent to the following conditions with respect to each 
Insurance Fund:
    1. A majority of the Board of Trustees (the ``Board'') of each 
Insurance Fund will consist of persons who are not ``interested 
persons'' of the Insurance Fund, as defined by Section 2(a)(19) of the 
1940 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 death, disqualification or bona fide resignation of any 
trustee or trustees, then the operation of this condition will be 
suspended: (a) For a period of 90 days if the vacancy or vacancies may 
be filled by the Board; (b) for a period of 150 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 or by future rule.
    2. The Board of each Insurance Fund will monitor the Insurance Fund 
for the existence of any material irreconcilable conflict between the 
interests of the contract owners of all Separate Accounts and 
participants of all Qualified Plans investing in the Insurance Fund, 
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 
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 Insurance Fund are being 
managed; (e) a difference in voting instructions given by variable 
annuity contract owners,

[[Page 34493]]

variable life insurance contract owners, and trustees of the Qualified 
Plans; (f) a decision by a Participating Insurance Company to disregard 
the voting instructions of contract owners; or (g) if applicable, a 
decision by a Qualified Plan to disregard the voting instructions of 
Qualified Plan participants.
    3. Participating Insurance Companies (on their own behalf, as well 
as by virtue of any investment of General Account assets in a Portfolio 
of an Insurance Fund), an Adviser, and any Trustee on behalf of any 
Qualified Plan that executes a Participation Agreement upon becoming an 
owner of 10 percent or more of the assets of a Portfolio (collectively, 
``Participants'') will report any potential or existing conflicts to 
the Board of the relevant Insurance Fund. Participants will be 
responsible for assisting the Board in carrying out the Board's 
responsibilities under these conditions by providing the Board with all 
information reasonably necessary for the Board to consider any issues 
raised. This responsibility includes, but is not limited to, an 
obligation by each Participating Insurance Company to inform the Board 
whenever contract owner voting instructions are disregarded, and, if 
pass-through voting is applicable, an obligation by each Trustee for a 
Qualified Plan to inform the Board whenever it has determined to 
disregard Qualified Plan participant voting instructions. The 
responsibility to report such information and conflicts, and to assist 
the Board, will be a contractual obligation of all Participating 
Insurance Companies under their Participation Agreements with the 
relevant Insurance Fund, and these responsibilities will be carried out 
with a view only to the interests of the contract owners. The 
responsibility to report such information and conflicts, and to assist 
the Board, also will be contractual obligations of all Qualified Plans 
under their Participation Agreements with the relevant Insurance Fund, 
and such agreements will provide that these responsibilities will be 
carried out with a view only to the interests of Qualified Plan 
participants.
    4. If it is determined by a majority of the Board of an Insurance 
Fund, or a majority of the disinterested directors/trustees of such 
Board, that a material irreconcilable conflict exists, then the 
relevant Participant will, at its expense and to the extent reasonably 
practicable (as determined by a majority of the disinterested 
directors/trustees), take whatever steps are necessary to remedy or 
eliminate the material irreconcilable conflict, up to and including: 
(a) Withdrawing the assets allocable to some or all of their Separate 
Accounts from the relevant Portfolio of the Insurance Fund and 
reinvesting such assets in a different investment vehicle including 
another Portfolio, or in the case of Participating Insurance Company 
Participants submitting the question as to whether such segregation 
should be implemented to a vote of all affected contract or policy 
owners and, as appropriate, segregating the assets of any appropriate 
group (i.e., variable annuity contract owners or variable life 
insurance policy owners of one or more Participating Insurance 
Companies) that votes in favor of such segregation, or offering to the 
affected contract or policy owners the option of making such a change; 
(b) establishing a new registered management investment company or 
managed separate account; and (c) withdrawing the assets allocable to 
some or all of the Qualified Plans or Participating Insurance Company 
from the affected Portfolio and reinvesting those assets in a different 
medium. If a material irreconcilable conflict arises because of a 
decision by a Participating Insurance Company to disregard contract or 
policy owner voting instructions, and that decision represents a 
minority position or would preclude a majority vote, then the 
Participating Insurance Company may be required, at the election of the 
relevant Insurance Fund, to withdraw such Participating Insurance 
Company's Separate Account investments in the Insurance Fund, and no 
charge or penalty will be imposed as a result of such withdrawal. If a 
material irreconcilable conflict arises because of a Qualified Plan's 
decision to disregard Qualified Plan participant voting instructions, 
if applicable, and that decision represents a minority position or 
would preclude a majority vote, the Qualified Plan may be required, at 
the election of the Insurance Fund, to withdraw its investment in the 
Insurance Fund, 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 Board determination of a material irreconcilable conflict 
and to bear the cost of such remedial action will be a contractual 
obligation of all Participants under their Participation Agreements 
with the relevant Insurance Fund, and these responsibilities will be 
carried out with a view only to the interests of contract or policy 
owners and Qualified Plan participants.
    For purposes of this Condition 4, a majority of the disinterested 
directors/trustees of the Board of each Insurance Fund will determine 
whether or not any proposed action adequately remedies any material 
irreconcilable conflict, but, in no event, will the Insurance Fund or 
an Adviser, as relevant, be required to establish a new funding vehicle 
for any Variable Contract. No Participating Insurance Company will be 
required by this Condition 4 to establish a new funding vehicle for any 
Variable Contract if any offer to do so has been declined by vote of a 
majority of the contract or policy owners materially and adversely 
affected by the material irreconcilable conflict. Further, no Qualified 
Plan will be required by this Condition 4 to establish a new funding 
vehicle for the Qualified Plan if: (a) A majority of the Qualified Plan 
participants materially and adversely affected by the irreconcilable 
material conflict vote to decline such offer, or (b) pursuant to 
documents governing the Qualified Plan, the Qualified Plan makes such 
decision without a Qualified Plan participant vote.
    5. The Board of each Insurance Fund's determination of the 
existence of a material irreconcilable conflict and its implications 
will be made known in writing promptly to all Participants.
    6. As to Variable Contracts issued by Separate Accounts registered 
under the 1940 Act, Participating Insurance Companies will provide 
pass-through voting privileges to all Variable Contract owners as 
required by the 1940 Act as interpreted by the Commission. However, as 
to Variable Contracts issued by unregistered Separate Accounts, pass-
through voting privileges will be extended to contract owners to the 
extent granted by the issuing insurance company. Accordingly, such 
Participants, where applicable, will vote Shares of the applicable 
Portfolio held in their Separate Accounts in a manner consistent with 
voting instructions timely received from Variable Contract owners. 
Participating Insurance Companies will be responsible for assuring that 
each Separate Account investing in a Portfolio calculates voting 
privileges in a manner consistent with other Participants.
    The obligation to calculate voting privileges as provided in the 
Application will be a contractual obligation of all Participating 
Insurance Companies under their Participation Agreements with the 
relevant Insurance Fund. Each Participating Insurance Company will vote 
Shares for which it has not received timely voting instructions, as 
well as Shares held in its General Account or otherwise attributed to 
it, in the same proportion as it votes those Shares for which it has 
received voting instructions. Each Qualified Plan will vote as required 
by

[[Page 34494]]

applicable law and governing Qualified Plan documents.
    7. As long as the 1940 Act requires pass-through voting privileges 
to be provided to Variable Contract owners, an Adviser and any General 
Account will vote their respective Shares in the same proportion as all 
variable contract owners having voting rights with respect to that 
Insurance Fund or Portfolio; provided, however, that an Adviser or any 
General Account shall vote its Shares in such other manner as may be 
required by the Commission or its staff.
    8. Each Insurance 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 respective 
Portfolio, and, in particular, the Insurance 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 each Insurance Fund 
is not, or will not be, one of those trusts of the type described in 
Section 16(c) of the 1940 Act), as well as with Section 16(a) of the 
1940 Act and, if and when applicable, Section 16(b) of the 1940 Act. 
Further, each Insurance Fund will act in accordance with the 
Commission's interpretations of the requirements of Section 16(a) with 
respect to periodic elections of directors/trustees and with whatever 
rules the Commission may promulgate thereto.
    9. An Insurance Fund will make its Shares available to a Separate 
Account to fund a Variable Contract offering interests based on those 
Shares and/or to a Qualified Plan at or about the same time it accepts 
any seed capital from an Adviser or General Account of a Participating 
Insurance Company.
    10. Each Insurance Fund has notified, or will notify, all 
Participants that Separate Account prospectus disclosure or Qualified 
Plan prospectuses or other Qualified Plan disclosure documents 
regarding potential risks of mixed and shared funding may be 
appropriate. Each Insurance Fund will disclose in its prospectus that: 
(a) Shares of the Insurance Fund may be offered to Separate Accounts 
funding both variable annuity contracts and variable life insurance 
policies and, if applicable, to Qualified Plans; (b) due to differences 
in tax treatment and other considerations, the interests of various 
contract owners participating in the Insurance Fund and the interests 
of Qualified Plans investing in the Insurance Fund, if applicable, may 
conflict; and (c) the Insurance Fund's Board will monitor events in 
order to identify the existence of any material irreconcilable 
conflicts and to determine what action, if any, should be taken in 
response to any such conflict.
    11. If and to the extent that Rule 6e-2 and Rule 6e-3(T) under the 
1940 Act are amended, or proposed Rule 6e-3 under the 1940 Act is 
adopted, to provide exemptive relief from any provision of the 1940 
Act, or the rules promulgated thereunder, with respect to mixed or 
shared funding, on terms and conditions materially different from any 
exemptions granted in the order requested in the Application, then each 
Insurance Fund and/or Participating Insurance Companies, as 
appropriate, shall take such steps as may be necessary to comply with 
Rules 6e-2 or 6e-3(T), or Rule 6e-3, as such rules are applicable.
    12. Each Participant, at least annually, will submit to the Board 
such reports, materials or data as the Board reasonably may request so 
that the directors/trustees of the Board may fully carry out the 
obligations imposed upon the Board by the conditions contained in the 
Application. Such reports, materials and data will be submitted more 
frequently if deemed appropriate by the Board. The obligations of the 
Participants to provide these reports, materials and data to the Board, 
when it so reasonably requests, will be a contractual obligation of all 
Participants under their Participation Agreements with the relevant 
Insurance Fund.
    13. All reports of potential or existing conflicts received by the 
Board, and all Board action with regard to determining the existence of 
a conflict, notifying Participants of a conflict and determining 
whether any proposed action adequately remedies a conflict, will be 
properly recorded in the minutes of the Board or other appropriate 
records, and such minutes or other records shall be made available to 
the Commission upon request.
    14. Each Insurance Fund will not accept a purchase order from a 
Qualified Plan if such purchase would make the Qualified Plan an owner 
of 10 percent or more of the assets of any Portfolio of an Insurance 
Fund unless the Trustee for such Qualified Plan executes an agreement 
with the Insurance Fund governing participation in the Insurance Fund 
that includes the conditions set forth herein to the extent applicable. 
A Trustee for a Qualified Plan will execute an application containing 
an acknowledgement of this condition at the time of its initial 
purchase of Shares.

Conclusions

    Applicants submit that, for the reasons summarized above and to the 
extent necessary or appropriate to provide for the transactions 
described herein, 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, in accordance with the standards of Section 
6(c) of the 1940 Act, are 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.
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-12077 Filed 6-21-07; 8:45 am]

BILLING CODE 8010-01-P