[Federal Register Volume 59, Number 69 (Monday, April 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-8513]


[[Page Unknown]]

[Federal Register: April 11, 1994]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20189; File No. 812-8700]

 

Northwestern Mutual Life Insurance Company, et al.

April 4, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for exemptions under the Investment 
Company Act of 1940 (the ``1940 Act'').

-----------------------------------------------------------------------

APPLICANTS: Northwestern Mutual Life Insurance Company 
(``Northwestern''), Northwestern Mutual Index 500 Stock Fund, Inc., 
Northwestern Mutual Select Bond Fund, Inc., Northwestern Mutual Money 
Market Fund, Inc., Northwestern Mutual Balanced Fund, Inc., 
Northwestern Mutual Aggressive Growth Stock Fund, Inc., Northwestern 
Mutual International Equity Fund, Inc. (together, the ``Variable 
Annuity Funds''), Northwestern Mutual Variable Life Series Fund, Inc. 
(the ``Series Fund''), NML Variable Annuity Account B (``Account B''), 
Northwestern Mutual Variable Life Account (the ``Variable Life 
Account'') and Northwestern Mutual Investment Services, Inc. 
(``NMIS'').

RELEVANT 1940 ACT SECTIONS: Exemption requested under section 17(b) 
from the provisions of sections 17(a)(1) and 17(a)(2) of the 1940 Act 
and pursuant to section 6(c) from sections 9(a), 13(a), 15(a), and 
15(b) of the 1940 Act and Rule 6e-2(b)(15) thereunder.

SUMMARY OF APPLICATION: Applicants seek an order that would permit the 
combination of each of the Variable Annuity Funds into the Series Fund. 
Northwestern, the Series Fund and the Variable Life Account also seek 
an order pursuant to Section 6(c) of the 1940 Act granting exemptions 
from Sections 9(a), 13(a), 15(a), and 15(b) of the 1940 Act and Rule 
6e-2(b)(15) thereunder to the extent necessary to permit the shares of 
the Series Fund to be purchased and held after the proposed combination 
by the Variable Life Account as well as by any flexible premium 
variable life insurance separate account that Northwestern may 
establish in the future.

FILING DATES: The application was filed on November 26, 1993 and 
amended on March 28, 1994.

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 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 April 
29, 1994, and should be accompanied by proof of service on the 
Applicants, in the form of an affidavit or, for lawyers, a certificate 
of service. Hearing requests should state the nature of the writer'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 Fifth Street NW., Washington, DC 20549. 
Applicants, The Northwestern Mutual Life Insurance Company, 720 East 
Wisconsin Avenue, Milwaukee, Wisconsin 53202.

FOR FURTHER INFORMATION CONTACT:
Wendy Finck Friedlander, Senior Attorney, or Wendell M. Faria, Deputy 
Chief at (202) 272-2060, Office of Insurance Products (Division of 
Investment Management).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
Application. The complete Application is available for a fee from the 
SEC's Public Reference Branch.

Applicants' Representations

    1. Northwestern is a mutual life insurance company that was 
organized by a special act of the Wisconsin Legislature in 1857. 
Northwestern is licensed to do business as a life insurance company in 
all states and the District of Columbia, and has offered variable 
annuity contracts since 1969 and variable life insurance policies since 
1984.
    2. Northwestern at present operates three variable annuity separate 
accounts, including Account B, and the Variable Life Account for 
variable life insurance. Account B and the Variable Life Account were 
established in 1968 and 1983, respectively, as separate investment 
accounts of Northwestern pursuant to the Wisconsin separate account 
provisions, and are registered under the 1940 Act as unit investment 
trusts. Account B is the separate account used for all variable annuity 
contracts offered by Northwestern, except for contracts offered to tax-
qualified corporate pension and profit sharing plans and HR-10 plans. 
Account B and each of the other variable annuity separate accounts 
consist of six divisions and invest their assets entirely in shares of 
the six corresponding Variable Annuity Funds. The Variable Life Account 
consist of four divisions which invest in corresponding portfolios of 
the Series Fund. The variable life insurance policies are scheduled 
premium and single premium variable life insurance policies, all of 
them ``variable life insurance contracts'' as defined by Rule 6e-
2(c)(1) under the 1940 Act.
    3. The Variable Annuity Funds and the Series Fund are Maryland 
corporations registered under the 1940 Act as open-end management 
investment companies. The Series Fund is presently comprised of four 
investment portfolios: The Index 500 Stock Portfolio, the Select Bond 
Portfolio, the Money Market Portfolio and the Balanced Portfolio. The 
investment objectives, policies and restrictions of each of these 
portfolios are essentially identical to those of the corresponding 
Variable Annuity Fund.
    4. Shares of the Variable Annuity Funds and the Series Fund are 
registered under the Securities Act of 1993 (the ``Securities Act''), 
and are offered only to Northwestern and its separate accounts. As of 
September 30, 1993, Account B owned 57.3% of the outstanding shares of 
the International Equity Fund and more than two-thirds of the 
outstanding shares of each of the other Variable Annuity Funds. The 
remaining shares were held by other variable annuity separate accounts, 
except that Northwestern held 4.5% of the outstanding shares of the 
Aggressive Growth Stock Fund and 32.8% of the outstanding shares of the 
International Equity Fund as general assets. These shares were acquired 
by Northwestern when the Funds were organized. Northwestern has 
redeemed these shares of the Aggressive Growth Stock Fund.
    5. NMIS is a wholly-owned, second tier subsidiary of Northwestern, 
and is the investment adviser to the Variable Annuity Funds and the 
Series Fund. NMIS is registered as an investment adviser under the 
Investment Advisers Act of 1940, and is a registered broker-dealer 
under the Securities Exchange Act of 1934.
    6. On November 4, 1993, the directors of the Variable Annuity Funds 
and the Series Fund unanimously adopted resolutions approving a 
proposal to combine the Variable Annuity Funds into the Series Fund on 
or about May 1, 1994. The proposal contemplates that the Index, Bond, 
Money Market and Balanced Funds will each be combined into the 
corresponding portfolio of the Series Fund, and that two additional 
portfolios will be created within the Series Fund with investment 
objectives, policies and restrictions identical to those of the 
Aggressive Growth Stock Fund and the International Equity Fund in order 
that those two funds may be combined into the respective new 
portfolios. The principal purpose of the proposed combination is to 
achieve economies of scale and administrative efficiency.
    7. The Agreement and Plan of Reorganization (``Agreement'') adopted 
by the directors provides that each Variable Annuity Fund on the 
closing date will transfer all of its assets to the corresponding 
portfolio of the Series Fund in exchange for shares of that portfolio 
having an aggregate net asset value equal to the aggregate value of the 
net assets acquired from each Variable Annuity Fund. For purposes of 
the transaction, the assets and liabilities of each Variable Annuity 
Fund and each Portfolio of the Series Fund will be valued as of the 
close of trading on the New York Stock Exchange on the business day 
next preceding the closing date in accordance with the valuation 
procedures described in the Funds' registration statements. Thereafter, 
each Variable Annuity Fund will distribute the shares of the 
corresponding Series Fund Portfolio to the Variable Annuity Fund 
shareholders in exchange for their Variable Annuity Fund shares, on a 
pro rata basis. The Series Fund shares issued in the transaction were 
registered under the Securities Act on Form N-14.\1\ Northwestern will 
pay all expenses of the Funds attributable to the proposed combination.
---------------------------------------------------------------------------

    \1\A registration statement on Form N-14 (File No. 33-75638) was 
filed for the Series Fund on February 24, 1994. The registration 
statement including all exhibits thereto and financial statements, 
is incorporated into the application.
---------------------------------------------------------------------------

    8. A special meeting of the shareholders of each of the Variable 
Annuity Funds is planned to take place in April 1994. Prior to the 
meeting, Northwestern will solicit voting instructions from the Account 
B variable annuity contractowners and payees, and Northwestern will 
vote the Account B shares of each Variable Annuity Fund in accordance 
with the instructions it receives, as required by the provisions of the 
Account B variable annuity contracts. The Account B shares of each 
Variable Annuity Fund for which no voting instructions are received 
will be voted in the same proportions as those for which instructions 
are received.
    9. The rest of the shares of the Variable Annuity Funds (except for 
the shares held as Northwestern's general assets) are held by variable 
annuity separate accounts funding contracts for tax-qualified corporate 
pension and profit sharing plans and HR-10 plans. These separate 
accounts are not investment companies by reason of Section 3(c)(11) of 
the 1940 Act. The employee plans that hold the contracts funded by the 
separate accounts are subject to requirements of the Employee 
Retirement Income Security Act of 1974 (``ERISA''), which generally 
provide that assets of the plans must be administered solely in the 
interest of plan participants and beneficiaries. According to 
Applicants, ERISA has been interpreted by its administrators and the 
courts to mean that proxies for securities held as plan assets must be 
voted in accordance with ERISA fiduciary concepts. The Variable Annuity 
Fund shares held for the pension separate accounts are not plan assets 
as such because the plan holds contracts issued by the pension separate 
accounts rather than shares of the Variable Annuity Funds. Applicants 
state, however, that the policy of ERISA suggests that the Variable 
Annuity Fund shares should be voted based on the intelligent exercise 
of discretionary authority on behalf of plan participants and 
beneficiaries. Northwestern intends to vote the Variable Annuity Fund 
shares held for these pension separate accounts, and the shares held as 
Northwestern's general assets, in favor of the proposed transaction.
    10. Applicants represent that in accordance with Maryland General 
Corporation Law, the proposed combination will not take place unless it 
has been approved by the affirmative vote of at least two-thirds of the 
outstanding shares of each of the Variable Annuity Funds. In addition, 
Applicants represent that they will not proceed with implementation of 
the proposal unless the proposal also receives the support of at least 
two-thirds of the Account B shares of each Fund.
    11. In addition to the required approval by the shareholders of 
each of the Variable Annuity Funds, the Agreement provides that the 
Funds must receive from the Commission the requested order of 
exemption, and must receive an opinion of tax counsel to the effect 
that the combination of the Funds will qualify as a tax-free 
reorganization under the Internal Revenue Code of 1986.
    12. Implementation of the proposed combination of the funds will 
have no economic impact on values, fees or charges under the variable 
annuity contracts or the rights or interests of owners and payees. The 
proposed transactions also will have no economic impact on owners of 
Northwestern's variable life insurance policies except for the indirect 
effect on the Series Fund's investment performance and expenses which 
may result from an increase in the size of its assets.

Applicants' Legal Analysis Under Section 17

    1. Because Northwestern owns all of the outstanding voting 
securities of each of the Variable Annuity Funds and each of the 
Portfolios of the Series Fund and Section 2(a)(9) of the 1940 Act 
establishes a presumption that a person owning 25% or more of another 
person's outstanding voting securities controls the latter person, each 
of the Variable Annuity Fund and each Portfolio of the Series Fund are 
presumed to be under the common control of Northwestern. The Variable 
Annuity Funds are therefore affiliated persons of the Series Fund and 
its Portfolios.
    2. Section 17(a) of the 1940 Act makes it unlawful for any 
affiliated person of a registered investment company, or any affiliated 
person of such a person, acting as principal (a) knowingly to sell any 
security or other property to such registered company or (b) knowingly 
to purchase from such registered company any security or other 
property. Because the Funds are affiliated persons of each other, the 
sale of the assets of the Variable Annuity Funds to the Series Fund, 
and their purchase by the Series Fund, would violate Section 17(a).
    3. Rule 17a-8 under the 1940 Act permits affiliated registered 
investment companies to merge under certain conditions, notwithstanding 
the prohibitions of section 17(a). One of those conditions stipulates 
that the investment companies be affiliated solely because they share 
common officers, directors, or a common investment adviser. Applicants 
believe that the exemption provided by Rule 17a-8 may not be available 
to them, in that the Variable Annuity Funds and the Series Fund may be 
deemed to be affiliated in ways not contemplated by the rule. 
Nonetheless, Applicants have complied with Rule 17a-8's other 
conditions. Specifically, the directors of the Variable Annuity Funds 
and the Series Fund, including a majority of the disinterested 
directors, have determined that the proposed combination is in the best 
interest of the shareholders of the Variable Annuity Funds and the 
Series Fund, and have approved the form of the Agreement.
    4. Section 17(b) of the 1940 Act provides that the Commission, upon 
application, shall grant an order exempting a proposed transaction 
otherwise barred by section 17(a) if evidence establishes that (a) the 
terms of the proposed transaction, including the consideration to be 
paid or received, are reasonable and fair and do not involve 
overreaching on the part of any person concerned; (b) the proposed 
transaction is consistent with the policy of each registered investment 
company concerned, as recited in its registration statement and reports 
filed under the 1940 Act; and (c) the proposed transaction is 
consistent with the general purposes of the 1940 Act. The Applicants 
contend that the proposed transaction meets these tests.
    5. In considering and evaluating the proposed combination from the 
perspective of both the Variable Annuity Funds and the Series Fund and 
its Portfolios, and their respective shareholders, the directors 
recognized that the investment objectives, policies and restrictions of 
each of the existing Portfolios of the Series Fund are identical in all 
relevant respects to the investment objectives, policies and 
restrictions of the corresponding Variable Annuity Funds. The directors 
recognized, further, that the two Portfolios to be created and added to 
the Series Fund will have investment objectives, policies and 
restrictions identical to the other two Variable Annuity Funds, i.e., 
the Aggressive Growth Stock Fund and the International Equity Fund.
    6. Applicants state that the directors have given particular 
attention to the management fees and other expenses paid and incurred 
by the respective Funds currently and in the context of the proposed 
combination. For the Series Fund the present management agreement 
provides for compensation at the annual rate of \3/10\ of 1% of the 
Fund's net assets. The manager pays all expenses of the Series Fund 
except interest, taxes and brokerage commissions, and any extraordinary 
or non-recurring expenses incurred in connection with the operation of 
the Fund. The Series Fund accordingly has never incurred any expenses 
except for brokerage commissions and the management fee of 30 basis 
points. The present advisory agreement for the Index Fund provides for 
a management fee at the annual rate of \2/10\ of 1% of the Fund's net 
assets. The Index Fund bears certain internal expenses not borne by the 
Series Fund Portfolios, but these are falling as a percentage of the 
Index Fund's assets as the Index Fund's size increases. Total expenses 
for the Index Fund in 1992 were 26 basis points. The proposed 
combination of the Index Fund into the Index 500 Stock portfolio of the 
Series Fund requires that the management agreement for the Series Fund 
be revised to conform the expense structure to that of the present 
Index Fund arrangement. For the Bond Fund and the Balanced Fund the 
present investment advisory agreements provide for management 
compensation at the annual rate of \5/10\ of 1% of assets on assets in 
excess of $50 million and further reduced to \3/10\ of 1% on assets in 
excess of $100 million. This was also the schedule for the Money Market 
Fund until May 1, 1993, when the management fee was reduced to 30 basis 
points. Each of these three funds bears certain internal expenses. For 
the Balanced Fund, with assets in excess of $1.5 billion, total 
expenses came to about 31 basis points in 1992, including the 
management fee. For the Bond Fund and the Money Market Fund the 
corresponding expenses were about 47 and 48 basis points, respectively, 
reflecting the fact that these Funds are much smaller. The proposed 
combination of the funds will retain the present cost and fee structure 
for the Select Bond Portfolio, Money Market Portfolio and the Balanced 
Portfolio of the Series Fund, with expenses of 30 basis points. The 
directors recognized that this proposal should substantially benefit 
the present shareholders of the Bond Fund and also result in a slightly 
lower expense level for the present shareholders of the Balanced Fund 
and the Money Market Fund. For the Aggressive Growth Stock Fund and the 
International Equity Fund, the management fees and other expenses are 
higher, and the existing structure of costs and fees for these Funds 
will be retained for the two corresponding Series Fund Portfolios 
proposed to be created. Applicants acknowledge that the proposed 
combination of these two Funds into the Series Fund will not have an 
immediate effect on costs, but they note that the availability of these 
investment options will be advantageous for the present owners of 
variable life insurance policies and the participation of the Variable 
Life Account in these Portfolios should tend to increase the rate of 
growth for these Portfolios, with corresponding efficiencies which 
should be consistent with enhanced performance for the present 
shareholders as well.
    7. The Applicants note that the combination of the Funds as 
proposed will reduce revenues received from the present shareholders of 
the Bond and Balanced Funds and the Index Portfolio of the Series Fund, 
and the Funds' adviser will bear increased expenses. Based on 1992 
asset sizes, Applicants have calculated that the cost impact of the 
proposed changes would amount to $356,000. With the proposed 
combination of the Funds, these costs would be at least partly offset 
by anticipated savings, primarily for accounting staff and audit fees. 
In addition, Northwestern expects to add three new investment options 
for both variable life insurance and variable annuities by May 1994, 
and may develop additional options in the future. The Applicants state 
that these plans can be accommodated most efficiently by combining all 
of the present operations into the Series Fund and adding more series 
as management and the directors of the Fund may determine.
    8. Applicants believe that the proposed combination of the Funds 
will have no adverse tax consequences for the Funds or their 
shareholders. Northwestern will pay the costs of the transaction, 
including the cost of soliciting voting instructions from 
contractowners and any costs incurred by the Series Fund in liquidating 
any securities received from the Variable Annuity Funds that are 
inconsistent with the investment objectives and policies of the 
respective Portfolios of the Series Fund. There will be no dilution of 
any investor's interest as a result of the transaction.
    9. Applicants assert that, as a mutual life insurance company, 
Northwestern has no reason to prefer one group of its contractowners 
over another group. From Northwestern's perspective, the sole purpose 
of the Funds is to serve as investment funding vehicles for 
Northwestern's variable contracts.

Applicants' Legal Analysis Under Section 6(c)

    1. After the Substitution, the Series Fund will be used as the 
underlying investment vehicle for both Account B and the Variable Life 
Account, and may be used by any flexible premium variable life 
insurance separate account that Northwestern may establish in the 
future. The use of a single management company as the underlying 
investment vehicle for both variable annuities and variable life 
insurance is referred to as ``mixed funding.'' Rule 6e-2(b)(15) under 
the 1940 Act precludes mixed funding. However, Northwestern and the 
Variable Life Account rely on Rule 6e-2 for certain exemptions from the 
1940 Act as they offer scheduled premium variable life insurance 
policies. Applicants therefore request an exemption under section 6(c) 
of the 1940 Act from sections 9(a), 13(a), 15(a) and 15(b) of the 1940 
Act, and Rule 6e-2(b)(15) thereunder, to the extent necessary to permit 
the Variable Life Account to purchase and hold shares of the Series 
Fund after the proposed combination of the Variable Annuity Funds into 
the Series Fund.
    2. Sections 9(a)(1) and 9(a)(2) of the 1940 Act generally 
disqualify any person convicted of certain offenses, and any affiliate 
of such person, from functioning in various capacities with respect to 
a registered investment company. Section 9(a)(3), among other things, 
makes it unlawful for any company to serve as depositor for a 
registered investment company if an affiliated person of that company 
is subject to a disqualification set forth in section 9(a)(1) or 
section 9(a)(2). Rule 6e-2(b)(15) provides exemptions from section 9(a) 
under certain circumstances and limitations to, in effect, permit a 
life insurance company to serve as depositor for a variable life 
insurance separate account even if one or more of its employees or 
other affiliates may be ineligible under section 9(a). These exemptions 
limit the application of the disability restrictions to employees and 
other affiliates who directly participate in the management of the 
underlying management company. The partial relief in Rule 6e-2(b)(15) 
from the requirements of section 9 limits, in effect, the monitoring of 
an insurer's personnel that would otherwise be necessary to ensure 
compliance with section 9 to that which is appropriate in light of the 
policy and purposes of section 9. Applicants contend that those rules 
recognize that it is not necessary for the protection of investors or 
the purposes fairly intended by the policies and provisions of the 1940 
Act to apply the provisions of section 9(a) to all of the individuals 
involved in the insurance organization where most of them have no 
involvement with investment companies.
    3. Rule 6e-2 permits an insurance company to disregard the voting 
instructions of its contractowners in certain limited circumstances. 
Rule 6e-2(b)(15)(iii) provides partial exemptions from section 13(a), 
15(a), and 15(b) of the 1940 Act to the extent that those securities 
have been deemed by the Commission to require ``pass through'' voting 
with respect to underlying fund shares held by a separate account. 
Applicants contend that the limits on ``pass through'' voting 
privileges contained in Rule 6e-2(b)(15)(iii) also should apply under 
mixed funding.
    4. The Applicants maintain that Rule 6e-2 recognizes that a 
variable life insurance contract is subject to extensive state 
regulation of insurance. In adopting rule 6e-2(b)(15)(iii), the 
Commission expressly recognized that state insurance regulators have 
authority: (1) Pursuant to state insurance laws or regulations, to 
disapprove or require changes in investment policies, investment 
advisers, or principal underwriters; and (2) to require an insurer to 
draw from its general account to cover costs imposed upon the insurer 
by a change approved by contractowners over the insurer's objection.
    5. Applicants maintain that the right, under Rule 6e-2(b)(15), of 
the company to disregard policyowners' voting instructions does not 
raise any issues different from those raised by the authority of state 
insurance administrators over separate accounts. Under Rule 6e-
2(b)(15), an insurer can disregard contractowner voting instructions 
only with respect to certain specified items and under certain 
specified conditions. The potential for disagreement is limited by the 
requirement in Rule 6e-2 that the insurance company override of voting 
instructions be reasonable and based on specified good faith 
determinations.
    6. Applicants submit that these rights of the state insurance 
authorities and the insurance company to override contractowners' 
voting instructions in certain limited circumstances are not 
inconsistent with mixed funding. Applicants note that the NAIC Model 
Regulation permits the use of a single underlying fund for different 
separate accounts, and suggests that it is not likely that insurance 
regulators would find an investment policy, principal underwriter, or 
investment adviser in-appropriate for one insurance product but not for 
another. Applicants observe that the provisions of the separate account 
statutes and regulation of Wisconsin, Northwestern's domiciliary state, 
are consistent with the NAIC Model Regulation on these points. They 
observe that Northwestern has already been operating separate funds 
with identical investment objectives, policies, and limitations for 
variable annuities and for variable life insurance for almost ten 
years, and that no basis for distinguishing the investment program for 
variable annuities from the parallel program for variable life 
insurance has been identified.
    7. The Applicants submit that mixed funding would be of benefit to 
shareholders of both the Series fund and the Variable Annuity Funds, as 
well as variable life insurance policyowners and variable annuity 
contractowners. Mixed funding should benefit owners of all of 
Northwestern's variable contracts by eliminating some portion of the 
costs of operating and administering separate funds for variable 
annuities and variable life insurance. Furthermore, granting the 
requested relief should result in an increased amount of assets 
available for investment by the Series Fund. This may benefit all 
variable contractowners by promoting economies of scale, by permitting 
increased safety through greater diversification, or by making the 
addition of new Series Fund Portfolios more feasible.

Applicants' Conditions for Section 6(c) Relief

    If the requested order is granted, the Applicants consent to the 
following conditions:
    1. The directors of the Series Fund, a majority of whom shall be 
disinterested directors, will monitor the Series Fund for the existence 
of any material irreconcilable conflict between interests of the 
variable life insurance policyowners and the variable annuity contract 
owners and any future owners in the Series Fund. An irreconcilable 
material conflict may arise from a variety of reasons, including:
    (i) An action by any state insurance regulatory authority;
    (ii) A change in applicable federal or state insurance, tax, or 
securities laws or regulations, or a public ruling, private letter 
ruling, no-action or interpretative letter, or any similar action by 
insurance, tax, or securities regulatory authorities;
    (iii) An administrative or judicial decision in any relevant 
proceeding;
    (iv) The manner in which the investments of any Portfolio are being 
managed;
    (v) A difference in voting instructions given by variable life 
insurance policyowners, variable annuity contract owners or any future 
owners; or
    (vi) A decision by Northwestern to disregard the voting 
instructions of variable life insurance policyowners.
    2. Northwestern will report any potential or existing conflicts to 
the directors of the Series Fund. Northwestern will be responsible for 
assisting the directors in carrying out their responsibilities under 
these conditions, by providing the directors with all information 
reasonably necessary for the directors to consider any issues raised. 
This includes, but is not limited to, an obligation of Northwestern to 
inform the directors whenever voting instructions are disregarded.
    3. If it is determined by a majority of the directors of the Series 
Fund, or a majority of its disinterested directors, that a material 
irreconcilable conflict exists, then Northwestern shall, at 
Northwestern's expense and to the extent reasonably practicable (as 
determined by a majority of the disinterested directors), take whatever 
steps are necessary to remedy or eliminate the irreconcilable material 
conflict, up to and including:
    (i) Withdrawing the assets allocable to some or all of the separate 
accounts from the Series Fund or any Portfolio therein and reinvesting 
such assets in a different investment medium (including another 
Portfolio, if any, of the Series Fund) or submitting the question 
whether such segregation should be implemented to a vote of all 
affected variable life insurance policyowners, variable annuity 
contract owners or future owners and, as appropriate, segregating the 
assets of any appropriate group or class (i.e., variable annuity 
contract owners, variable life insurance policyowners, or future 
owners) that votes in favor of such segregation, or offering to the 
members of the affected group the option of making such a change; and
    (ii) Establishing a new registered management investment company or 
managed separate account.
    If a material irreconcilable conflict arises because of 
Northwestern's decision to disregard voting instructions and that 
decision represents a minority position or would preclude a majority 
vote, Northwestern may be required by the Series Fund to withdraw the 
investment of any of its separate accounts from the Series Fund, and no 
charge or penalty will be imposed as a result of such withdrawal. For 
the purposes of the conditions set forth in this paragraph, a majority 
of the disinterested directors shall determine whether or not any 
proposed action adequately remedies any irreconcilable material 
conflict, but in no event shall the Series Fund be required to 
establish a new funding medium for any variable contract. Northwestern 
shall not be required by this condition to establish a new funding 
medium for any variable contract if an offer to do so has been declined 
by vote of a majority of the group materially adversely affected by the 
irreconcilable material conflict.
    4. The determination by the directors of the existence of any 
irreconcilable material conflict and its implications shall be made 
known promptly in writing to Northwestern.
    5. Northwestern will provide pass-through voting privileges to all 
variable life insurance policyowners, variable annuity contract owners 
or future owners so long as the Commission continues to interpret the 
1940 Act as requiring pass-through voting privileges for variable 
contract owners. Northwestern shall be responsible for assuring that 
each of its separate accounts participating in the Series Fund 
calculates voting privileges in a manner consistent with the other 
separate accounts and in accordance with the provisions of the 
respective variable contracts.
    6. The Series Fund shall disclose in its prospectus that (1) shares 
of the Series Fund are offered to separate accounts of Northwestern 
which fund both variable life insurance policies and variable annuity 
contracts, (2) due to differences of tax treatment or other 
considerations, the interests of variable life insurance policyowners, 
variable annuity contract owners or future owners participating in the 
Series Fund might at some time be in conflict, and (3) the directors of 
the Series Fund will monitor for any material conflicts and determine 
what action, if any, should be taken. The Series Fund shall also notify 
Northwestern that disclosure regarding potential risks of mixed funding 
may be appropriate in prospectuses for the variable life insurance 
policies and the variable annuity contracts.
    7. All reports received by the directors of potential or existing 
conflicts, and all actions of the directors with regard to determining 
the existence of a conflict, and determining whether any proposed 
action adequately remedies a conflict, will be properly recorded in the 
minutes of the meeting of the directors or other appropriate records, 
and such minutes or other records shall be made available to the 
Commission upon request.
    8. If and to the extent that Rule 6e-2 is amended to provide 
exemptive relief from any provision of the 1940 Act or the rules 
thereunder with respect to mixed funding on terms and conditions 
materially different from any exemptions granted in the order requested 
in this Application, then the Series Fund and/or Northwestern, as 
appropriate, shall take such steps as may be necessary to comply with 
Rule 6e-2, as amended, to the extent such rules are applicable.

Conclusion

    1. Applicants request an order of the Commission pursuant to 
section 17(b) of the 1940 Act exempting the proposed combination of the 
Funds from the provisions of section 17(a)(1) and 17(a)(2) of the 1940 
Act. Applicants submit that, for reasons stated above, the terms of the 
proposed transaction, including the consideration to be paid and 
received, are reasonable and fair to each Variable Annuity Fund and the 
Series Fund, to each portfolio of the Series Fund and to shareholders 
and owners of variable annuity contracts and variable life insurance 
policies invested in each and do not involve overreaching on the part 
of any person concerned. Furthermore, the proposed transaction will be 
consistent with the policies of each Fund and each Portfolio of the 
Series Fund and with the general purposes of the 1940 Act.
    2. In addition, Northwestern, the Series Fund and the Variable Life 
Account request an order of the Commission pursuant to section 6(c) of 
the 1940 Act for exemptions from sections 9(a), 13(a), 15(a), 15(b) of 
the 1940 Act and Rule 6e-2(b)(15) thereunder to the extent necessary to 
permit the Variable Life Account, and any flexible premium variable 
life insurance separate account that Northwestern may establish in the 
future, to purchase and hold shares of the Series Fund after the 
proposed combination of the Variable Annuity Funds into the Series 
Fund.
    3. Northwestern, the Series Fund and the Variable Life Account 
submit that, for the reasons stated above, the exemptions are necessary 
or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-8513 Filed 4-8-94; 8:45 am]
BILLING CODE 8010-01-M