[Federal Register Volume 59, Number 96 (Thursday, May 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12175]


[[Page Unknown]]

[Federal Register: May 19, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-20293; 812-8524]

 

The Life Insurance Company of Virginia

May 12, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or the 
``Commission'').

ACTION: Notice of Application for an order under the Investment Company 
Act of 1940 (the ``1940 Act'').

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APPLICANTS: The Life Insurance Company of Virginia (``Life of 
Virginia''), Life of Virginia Separate Account I, Life of Virginia 
Separate Account II, Life of Virginia Separate Account III, Aon 
Advisors, Inc. (``AAI''), and Aon Savings Plan (the ``Plan''). (The 
three separate accounts shall be referred to collectively as the 
``Accounts.'' The Accounts, Life of Virginia, AAI, and the Plan shall 
be referred to collectively as the ``Applicants.'')

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the 
1940 Act for exemptions from sections 9(a), 13(a), 15(a) and 15(b) of 
the 1940 Act, and Rule 6e-3(T)(b)(15) thereunder; and an order 
requested under section 17(b) of the 1940 Act for exemptions from 
section 17(a) of the 1940 Act.

SUMMARY OF APPLICATION: The Accounts and Life of Virginia seek an order 
exempting them and certain other separate accounts (the ``future 
accounts'') established in the future by Life of Virginia, or any life 
insurance company affiliate of Life of Virginia, from the provisions of 
sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and Rule 6e-
3(T)(b)(15) thereunder, to permit the Accounts and the future accounts 
to hold shares of Life of Virginia Series Fund, Inc. (the ``Fund'') at 
the same time that the Fund offers its shares to the Plan or other 
qualified pension or retirement plans. In addition, AAI and the Plan 
seek an order exempting them from section 17(a) of the 1940 Act to the 
extent necessary to permit the Plan to purchase certain classes of 
shares of the Fund with investment securities of the Plan.

FILING DATES: The application was filed initially on August 5, 1993. An 
amended and restated application was filed on March 17, 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 the Secretary of the 
Commission, and serving the Applicants with copies of the request, 
personally or by mail. Hearing requests should be received by the 
Commission by 5:30 p.m. on June 6, 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 Commission.

ADDRESSES: Secretary, SEC, 450 5th Street NW., Washington, DC 20549. 
Applicants, c/o William E. Daner, Jr., Esq., Counsel, The Life 
Insurance Company of Virginia, 6610 West Broad Street, Richmond, 
Virginia 23230, and c/o Maxine G. Bonn, Esq., Counsel, Aon Corporation, 
123 N. Wacker Drive, Chicago, IL 60606-1770.

FOR FURTHER INFORMATION CONTACT:
Patrice M. Pitts, Attorney, or Michael V. Wible, Special Counsel, 
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 Commission's 
Public Reference Branch.

Applicants' Representations

    1. Life of Virginia, a stock life insurance company organized under 
the laws of the Commonwealth of Virginia on March 21, 1871, is a wholly 
owned subsidiary of Combined Insurance Company of America, which is a 
wholly owned subsidiary of Aon Corportion. Life of Virginia is the 
depositor and sponsor of the Accounts.
    2. Each of the Accounts is a separate account registered under the 
1940 Act as a unit investment trust. The Accounts act as funding media 
for variable life insurance policies issued by Life of Virginia. Life 
of Virginia Separate Account I has four subdivisions; Life of Virginia 
Account II and Life of Virginia Separate Account III each have nineteen 
subdivisions. Four of the subdivisions of each of the Accounts invest 
in one of the four investment portfolios of the Fund.
    3. Life of Virginia and other life insurance companies directly or 
indirectly owned by Aon Corporation may establish variable life 
insurance separate accounts in the future that also would need to rely 
on the exemptions requested herein by the Accounts and Life of 
Virginia. Any such future separate accounts would be registered under 
the 1940 Act as unit investment trusts.
    4. AAI, a wholly owned subsidiary of Aon Corporation, in engaged 
primarily in the business of providing investment management and advice 
to pension plans, corporations, investment companies and other 
organizations. AAI is registered under the Investment Advisers Act of 
1940, is the investment adviser to the Fund, and manages certain Plan 
assets.
    5. The Plan was authorized by the board of directors of Aon 
Corporation. Interests in the Plan are registered under the Securities 
Act of 1933 (File No. 33-27984). The Plan currently offers participants 
four investment options: Aon Corporation common stock, interest in a 
pool of guaranteed investment contracts, interests in a money market 
investment portfolio, and interest in a balanced investment portfolio.
    6. Participation in the Plan is open to all eligible employees of 
Aon Corporation and its subsidiaries--including Life of Virginia and 
AAI--which have adopted the Plan. The Plan is intended to qualify under 
section 401(a) and 501(a) of the Internal Revenue Code of 1986, as 
amended (the ``Code''), and includes a cash or deferred arrangement 
intended to quality under section 401(k) of the Code. The Plan is also 
subject to the provisions of the Employee Retirement Income Security 
Act of 1974 (``ERISA''), applicable to defined contribution profit 
sharing plans.
    7. The Plan trustees are appointed by Aon Corporation, and 
currently are all employers of Aon Corporation subsidiaries. Under the 
terms of the Plan, Aon Corporation retains the right to appoint other 
individuals or corporations as trustees, including persons not 
affiliated with Aon Corporation. The Plan is administered by a plan 
committee consisting of various employees of Aon Corporation and its 
subsidiaries.
    8. The Fund was incorporated under the laws of the Commonwealth of 
Virginia on May 14, 1984, and is registered under the 1940 Act as an 
open-end diversified management investment company. The Fund consists 
of four series: Common Stock Index Portfolio, Government Securities, 
Money Market Portfolio and Total Return Portfolio.
    9. To date, the Fund has offered its shares only to Life of 
Virginia (as seed money investments), the Accounts, and Life of 
Virginia Separate Account 4 (``Account 4''), a variable annuity 
separate account. The Fund offers each series of shares to 
corresponding subdivisions of each of the Accounts to support variable 
life insurance contracts (``VLI contracts'') and to Account 4 to 
support variable annuity contracts (``VA contracts''). (The VLI 
contracts and the VA contracts shall be referred to collectively as the 
``variable contracts.'')
    10. In light of recent changes in the federal tax law which have 
created the opportunity for the Fund to substantially increase its net 
assets by selling shares to the Plan and to other qualified pension or 
retirement plans, the Accounts and Life of Virginia propose that the 
Fund be permitted to sell its shares directly to the Plan and to 
unaffiliated pension or retirement plans subject to ERISA and Sections 
401(a) and 501(a) of the Code (the ``unaffiliated plans''). For 
purposes of the 1940 Act, the unaffiliated plans will not be affiliated 
persons of the Fund or of the Applicants or affiliated persons of such 
persons. Nor will the trustees and the other fiduciaries of the 
unaffiliated plans be affiliated persons of the Fund or of the 
Applicants or affiliated persons of such persons.
    11. Applicants state that Section 817(h) of the Code imposes 
certain diversification standards on the assets underlying variable 
contracts held in the portfolios of the Fund. The Code provides that 
variable contracts will not be treated as annuity contracts or life 
insurance contracts, as the case may be, for any period for which the 
underlying assets are not diversified in accordance with Treasury 
Department regulations.
    12. Treasury Regulation 1.817-5 establishes specific 
diversification requirements for the investment portfolios underlying 
variable contracts. The regulation generally provides that, in order to 
meet these diversification requirements, all of the beneficial 
interests in the investment company must be held by the segregated 
assets account of one or more life insurance companies. However, the 
regulation also contains an exception to this requirement that permits 
trustees of a qualified pension or retirement plan to hold shares of an 
investment company--the shares of which are also held by insurance 
company segregated asset accounts--without adversely affecting the 
status of the investment company as an adequately diversified 
underlying investment for variable contracts issued through such 
segregated asset accounts.
    13. As a result of this exception to the general diversification 
requirement, qualified pension and retirement plans (such as the Plan 
or the unaffiliated plans) may select the Fund as an investment option 
without endangering the tax status of Life of Virginia VLI contracts 
issued through the Accounts or VA contracts issued through Account 4. 
Fund shares sold to the Plan or to the unaffiliated plans would be held 
by their respective trustees, as required by section 403(a) of ERISA. 
The Plan trustees would generally vote Fund shares that they hold for 
the Plan in accordance with instructions solicited from Plan 
participants. The trustees or other fiduciaries of the unaffiliated 
plans may vote Fund shares held by their plans in their own discretion 
or, if the applicable plan so provides, in accordance with instructions 
from participants in such plans.
    14. Applicants also propose that, in one or more discrete 
instances, the Plan be permitted to purchase Funds shares using 
investment securities held in one of the investment portfolios 
currently offered to Plan participants.
    15. Applicants represent that the investment objectives of the 
money market and balanced investment portfolios offered by the Plan are 
very similar to the investment objective of the Fund's Money Market 
Portfolio and Total Return Portfolio, respectively. Accordingly, 
Applicants propose that, subject to the approval of the Fund's board of 
directors and the judgment of the Plan trustees that the proposed 
transactions do not violate the prohibited transaction and fiduciary 
duty requirements of ERISA, the Plan be permitted to use the assets of 
its money market portfolio to purchase shares of the Fund's Money 
Market Portfolio and the assets of its balanced portfolio to purchase 
shares of the Fund's Total Return Portfolio. If the proposed 
consolidations were to occur, the Plan would initially acquire a 
substantial majority of the outstanding shares of these two Fund 
portfolios.

Applicants' Legal Analysis and Conclusions

A. Request for Exemptions Under Sections 6(c)

(i) General Grounds for Relief
    1. Life of Virginia and the accounts request that the Commission 
issue an order pursuant to section 6(c) of the 1940 Act, exempting them 
as well as any future accounts from the provisions of sections 9(a), 
13(a), 15(a) and 15(b) of the 1940 Act and Rule 6e-3(T)(b)(15) 
thereunder to the extent necessary for the Accounts and any future 
accounts to hold shares of the Fund at the same time that the Plan and 
the unaffiliated plans hold shares of the Fund. Life of Virginia and 
the Accounts submit that the requested exemptions are appropriate in 
the public interest and consistent with the protection of investors and 
the purposes fairly intended by the policy and provisions of the 1940 
Act.
    2. Life of Virginia and the Accounts currently rely on the 
exemptions provided by Rule 6e-3(T)(b)(15) under the 1940 Act, which 
provides partial exemptions from sections 9(a), 13(a), and 15(b) of the 
1940 Act for certain VLI contracts. However, the exemptions granted by 
the Rule are available only where: (i) The Fund offers its shares 
exclusively to separate accounts of Life of Virginia or any life 
insurance company affiliate of Life of Virginia offering either 
scheduled premium variable life insurance contracts or flexible premium 
variable life insurance contracts, or both; or (ii) the Fund offers its 
shares to variable annuity separate accounts of Life of Virginia or of 
any life insurance company affiliate of Life of Virginia. The Rule 6e-
(T)(b)(15) exemptions would not be available to Life of Virginia, the 
Accounts, or any future accounts if the Fund were to sell its shares to 
the Plan or to unaffiliated plans.
    3. In general, section 9(a) of the 1940 Act disqualifies any person 
convicted of certain offenses, and any company affiliated with that 
person, from acting or serving in various capacities with respect to a 
registered investment company. Section 9(a)(3) provides that it is 
unlawful for any company to serve as investment adviser or principal 
underwriter for any registered open-end investment company if an 
affiliated person of that company is subject to a disqualification 
enumerated in sections 9(a) (1) or (2). However, Rule 6e-3(T)(b)(15) 
(i) and (ii) provides exemptions from section 9(a), under certain 
circumstances and subject to certain conditions that limit the 
application of the eligibility restrictions of section 9(a) to 
affiliated individuals or companies that directly participate in the 
management of the Fund.
    4. Life of Virginia and the Accounts assert that the partial relief 
provided by Rule 6e-3(T)(b)(15) effectively limits the amount of 
monitoring of personnel that Life of Virginia and its affiliates would 
have to conduct to ensure compliance with section 9 to that which is 
appropriate in light of the policy and purposes of section 9. Life of 
Virginia and the Accounts further assert that the Rule recognizes 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 the many hundreds of individuals in a 
large insurance company complex, most of whom typically have no 
involvement in matters pertaining to investment companies affiliated 
with that organization.
    5. Rule 6e-3(T)(b)(15)(iii) also provides partial exemptions from 
sections 13(a), 15(a) and 15(b) of the 1940 Act to the extent that, 
under certain limited circumstances, the Rule permits Life of Virginia 
and any life insurance company affiliates thereof that establish future 
accounts: (i) to disregard the voting instructions of VLI contract 
owners if following such instructions would cause Life of Virginia to 
make (or refrain from making) certain investments that would result in 
changes in the subclassification or investment objectives of the Fund; 
or (ii) (subject to the provisions of paragraphs (b)(5)(i) and 
(b)(7)(ii)(A) of Rule 6e-3(T)) to approve or disapprove any contract 
between the Fund and AAI, when such action is mandated by insurance 
regulatory authority.
    6. Life of Virginia and the Accounts assert that historically, the 
exclusivity provision in Rule 6e-3(T)(b)(15) evolved from the 
Commission's concern about possible divergent interests between or 
among different classes of investors (e.g., variable contract owners) 
in mutual funds supporting variable life insurance separate accounts. 
The unit investment trust structure for supporting VLI contracts 
created the opportunity for a mutual fund underlying a trust also to 
offer its shares to a variable annuity separate account (hereinafter, 
``mixed funding''). Rule 6e-3(T)(b)(15) was designed to permit a 
separate account supporting both flexible and scheduled premium VLI 
contracts to share the same underlying fund and engage in mixed 
funding.
    7. Life of Virginia and the Accounts maintain that the proposed 
Plan and unaffiliated plan investments in the Fund should not increase 
the likelihood of material irreconcilable conflicts, and should benefit 
VA and VLI contracts owners.
    8. Life of Virginia and the Accounts maintain that qualified 
retirement plan investors in the Fund would have substantially the same 
interests as current variable contract owners. Like variable contract 
owners, qualified retirement plan investors are long-term investors. 
Therefore, most can be expected not to withdraw their assets from the 
Plan or the unaffiliated plans. In addition, since neither variable 
contract owners nor Plan and unaffiliated plan investors would be taxed 
on the investment return of their respective investments in the Fund, 
they would be taxed on the investment return of their respective 
investments in the Fund, they would share a strong interest in the Fund 
operating in a manner that preserves its tax status. For these reasons, 
Life of Virginia and the Accounts represent that material conflicts 
between these two groups of investors regarding capital transactions 
are unlikely. Life of Virginia and the Accounts also note that ERISA 
imposes general diversification requirements on qualified pension and 
retirement plan investments that are consistent with the 
diversification requirements applicable to the Fund under section 
817(h) of the Code.
    9. Life of Virginia and the Accounts represent that the Accounts 
and the Plan are governed in similar ways. Plan trustees have a 
fiduciary duty to participants that is similar to the obligations that 
Life of Virginia (or any life insurance company affiliate thereof) has 
to look after the interests of variable contract owners.
    10. Life of Virginia and the Accounts assert that, because Plan and 
unaffiliated plan investors would have beneficial interests similar to 
those of current investors, the addition of the Plan and unaffiliated 
plans as shareholders of the Fund, and the addition of Plan and 
unaffiliated Plan participants as persons having beneficial interests 
in the Fund, should not increase the risk of material irreconcilable 
conflicts among investors. Life of Virginia and the Accounts further 
assert that even if a material irreconcilable conflict involving the 
Plan or the unaffiliated plans or their respective participants arose, 
the trustees of the Plan and the unaffiliated plans, may, if their 
fidiciary duty to the participants requires it, redeem the shares of 
the Fund held by the Plan or the unaffiliated plans and make 
alternative investments without obtaining prior regulatory approval. 
Similarly, the Plan and most if not all of the unaffiliated plans, may 
hold cash or other liquid assets pending their reinvestment in a 
suitable alternative investment.
    11. Life of Virginia and the Accounts maintain that variable 
contract owners would benefit from the expected increase in net assets 
of the Fund's portfolios resulting from additional investments by Plan 
and unaffiliated plan participants. Such additional investments also 
should lower the costs of investing for variable contract owners, 
promote economies of scale, permit increased safety through greater 
portfolio diversification, provide the Fund's investment adviser with 
greater flexibility because of a larger portfolio, and make more 
feasible the addition of new portfolios in the future.
    12. The Applicants note that when the Commission last revised Rule 
6e-3(T) in 1987, the Treasury Department had not issued Treasury 
Regulation 1.817-5 which permits the Fund to sell shares to qualified 
pension or retirement plans without adversely affecting the tax status 
of Life of Virginia's variable contracts. Life of Virginia and the 
Accounts submit that, although proposed regulations had been published, 
the Commission did not envision this possibility when it last examined 
Rule 6e-3(T)(b)(15), and might well have broadened the exclusivity 
provision of the Rule at that time to include plans such as the Plan 
(or the unaffiliated plans) had this possibility been apparent. 
Applicants further note that the Commission recently issued an order 
under Section 6(c) granting the exemptions requested herein to 
applicants in very similar circumstances.
(ii) Voting Rights
    13. Life of Virginia and the Accounts do not see any inherent 
conflicts arising between or among the interests of variable contract 
owners, or Plan participants because of the potential for the Plan to 
hold a controlling interest in a portfolio of the Fund. If the 
exemptions requested herein are granted to Life of Virginia and the 
Accounts, the Plan trustees generally would vote shares of the Fund 
held by them on behalf of the Plan pursuant to instructions from Plan 
participants. Thus, Plan participants' interests will be represented in 
the Fund in substantially the same manner as are those of Life of 
Virginia's variable contract owners.
    14. Life of Virginia and the Accounts assert that it is unlikely 
that Plan participants as a group vote in a manner that would 
disadvantage variable contract owners. Moreover, the trustees and other 
affiliated persons of the Plan will not be in a position to exercise 
undue influence over the Fund or any of its portfolios.
    15. Also, with regard to resolving or remedying possible conflicts 
of interest related to voting, the Plan's investment in the Fund does 
not present any complications not otherwise occasioned by traditional 
mixed funding as permitted by Rule 6e-3(T)(b)(15). Life of Virginia and 
the Accounts submit that just because the interests and opinions of 
Fund investors may differ does not mean that inherent conflicts of 
interest exist between or among such investors.
    16. Section 403(a) of ERISA provides that, with few exceptions, 
trustees of the unaffiliated plans would have the exclusive authority 
and responsibility for exercising voting rights attributable to their 
respective plan's investment securities. Where a named fiduciary 
appoints an investment adviser, the adviser has the authority and 
responsibility to exercise such voting rights unless the authority and 
responsibility is reserved to the trustee(s) or a non-trustee 
fiduciary.
    17. Life of Virginia and the Accounts generally expect many of the 
unaffiliated plans to have their trustees or other fiduciaries 
exercise, in their discretion, voting rights attributable to investment 
securities held by the unaffiliated plans. Some of the unaffiliated 
plans, however, 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.
    18. Where unaffiliated plans do not provide participants with the 
right to give voting instructions, Life of Virginia and the Accounts do 
not see any potential for material irreconcilable conflicts of 
interests between variable contract owners and unaffiliated plan 
investors with respect to voting of Fund shares. Life of Virginia and 
the Accounts note that there is very little likelihood that any 
particular unaffiliated plan will hold a controlling interest in a 
portfolio of the Fund. However, even if an unaffiliated plan were to 
hold such a controlling interest, Life of Virginia and the Accounts do 
not believe that such control would disadvantage other investors in the 
Fund to any greater extent than would be the case were an institutional 
shareholder to hold a controlling interest. Life of Virginia and the 
Accounts submit that investment in the Fund by the unaffiliated plans 
will not create any of the voting complications occasioned by 
traditional mixed and shared funding, or by the Plan's proposed 
investment in the Fund.
    19. Where unaffiliated plans provide participants with the right to 
give voting instructions, Life of Virginia and the Accounts do not 
believe that participants in unaffiliated plans--acting as a single 
group or in combination with participants in other unaffiliated plans--
would vote in a manner that would disadvantage variable contract 
owners. As is the case with the Plan's proposed investment in the Fund, 
the purchase of Fund shares by the unaffiliated plans that provide 
voting rights does not present any complications not otherwise 
occasioned by traditional mixed and shared\1\ funding.
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    \1\As used herein, the term ``shared funding'' shall refer to 
the use of a common management investment company as the underlying 
investment medium for separate accounts of unaffiliated life 
insurance companies.
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    20. In light of Treasury Regulation 1.817-5(f)(3)(iii) which 
specifically permits ``qualified pension or retirement plans'' and 
separate accounts to share the same underlying management investment 
company, Life of Virginia and the Accounts have concluded that neither 
the Code, nor other Treasury Regulations or revenue rulings thereunder, 
would create any inherent conflicts of interest between or among 
participants, VLI and variable contract owners.
(iii) Tax Treatment of Distributions
    21. Although there are differences in the manner in which 
distribution from the Plan or the unaffiliated plans and distributions 
from variable contracts are taxed, Life of Virginia and the Accounts 
maintain that these differences will have no impact on the Fund. The 
Accounts, Account 4, the future accounts, the Plan, and the 
Unaffiliated plans each will purchase and redeem such shares at net 
asset value in conformity with Rule 22c-1 under the 1940 Act without 
the imposition of any sales charges.
(iv) Potential Future Conflicts Arising From Tax Law Changes
    22. Life of Virginia and the Accounts do not see any greater 
potential for material irreconcilable conflicts arising between the 
interests of plan investors and other Fund investors from possible 
future changes in the federal tax laws than that which already exists 
with regard to such conflicts arising between variable contract owners.
(v) Conditions for Relief
    23. Life of Virginia and the Accounts represent and agree that if 
the exemptions requested herein pursuant to Section 6(c) of the 1940 
Act are granted, they will rely on such exemptions to purchase and hold 
Fund shares only if the following conditions are met:

    (a) The board of directors of the Fund, including a majority of 
those directors who are not interested persons of the Fund or 
interested persons of such persons, shall: (i) adopt a resolution 
approving the sale of Fund shares to the Plan and the unaffiliated 
plans; and (ii) monitor the Fund for the existence of any material 
irreconcilable conflicts between or among the interests of variable 
contract owners, and qualified pension and retirement plan 
investors.
    (b) Life of Virginia will monitor its operations and those of 
the Fund for the purpose of identifying any material conflicts or 
potential material conflicts between or among the interests of 
qualified retirement and pension plan investors and variable 
contract owners.
    (c) Life of Virginia will report any such conflicts or potential 
conflicts to the Fund's board of directors and will provide the 
board with all information reasonably necessary for the board to 
consider any issues raised by such existing or potential conflicts. 
Life of Virginia will also assist the board in carrying out this 
obligation by, among other things, informing the board whenever it 
disregards voting instructions from variable contract owners.
    (d) Life of Virginia will provide ``pass-through'' voting 
privileges to variable contract owners as long as the Commission 
interprets the 1940 Act to require such privileges. Life of Virginia 
will vote Fund shares held by it that are not attributable to 
variable contract reserves in the same proportion as instructions 
received in a timely fashion from variable contract owners, and 
shall be responsible for ensuring that the Accounts and Account 4 
each calculate ``pass-through'' votes in a consistent manner.
    (e) In the event that a conflict of interest arises between 
variable contract owners, and/or qualified retirement or pension 
plan investors, Life of Virginia will, at its own expense, take 
whatever action is necessary to remedy such conflict (as it 
adversely affects variable contract owners), up to and including: 
(1) establishing a new-registered management investment company; and 
(2) withdrawing assets attributable to reserves for the variable 
contracts subject to the conflict from the Fund and (A) reinvesting 
such assets in a different investment medium (including another 
portfolio of the Fund), or (B) submitting the question of whether 
such segregation should be implemented to a vote of all affected 
variable contract owners, and, as appropriate, segregating the 
assets supporting the contracts of any group of such owners that 
votes in favor of such segregation, or offering to such owners the 
option of making such a change. Notwithstanding the foregoing, Life 
of Virginia will not be obligated to establish a new funding medium 
for any group of variable contracts if an offer to do so has been 
declined by a vote of a majority of the variable contract owners 
adversely affected by the conflict.
    (f) The board meeting minutes of the Fund or other appropriate 
records shall record: (1) all reports sent by Life of Virginia, 
depositors of the future accounts, the Plan, or the unaffiliated 
plans to be the board of directors of the Fund; (2) notices sent by 
the Fund's board of directors to Life of Virginia, the depositors of 
the future accounts, the Plan, or the unaffiliated plans, notifying 
the recipient of the existence of or potential for a material 
conflict between the interests of variable contract owners and 
qualified retirement and pension plan investors; and (3) board 
deliberations regarding conflicts or potential conflicts. Such board 
meeting minutes or other records shall be made available to the 
Commission upon request.
    (g) The Fund's prospectus shall disclose that: (1) Fund shares 
are offered in connection with mixed funding and to 401(a) plans; 
(2) both mixed funding and investment by 401(a) plans in the Fund 
may present certain conflicts of interest between variable contract 
owners and qualified retirement and pension plan investors; and (3) 
the Fund's board of directors will monitor for the existence of any 
material conflict of interest. The Fund also shall notify the Plan 
and Life of Virginia that similar prospectus disclosure may be 
appropriate in separate account prospectuses or the Plan prospectus.
    (h) Life of Virginia and the Accounts will continue to rely on 
Rule 6e-3(T)(b)(15) and to comply with all of its conditions.
    (i) To the extent permitted or required by ERISA, the Plan is 
amended to provide ``pass-through'' voting privileges to Plan 
participants.

    24. Life of Virginia and the Accounts represent that the future 
accounts and their life insurance company depositors will rely on the 
exemptions from section 6(c) of the 1940 Act requested herein to 
purchase and hold Fund shares only if such life insurance company 
depositors comply with conditions (b), (c), (d), (e) and (h) above as 
those conditions relate to such life insurance company depositors and 
to the owners of variable annuity contracts and variable life insurance 
contracts issued by those life insurance company depositors.

B. Request for Exemptions Under Section 17(b)

    25. AAI and the Plan request that the Commission issue an order 
pursuant to section 17(b) of the 1940 Act, exempting them from the 
provisions of section 17(a) of the 1940 Act to the extent necessary to 
permit the Plan to purchase shares of the Fund with investment 
securities of the Plan. AAI and the Plan represent that the terms of 
the proposed transactions as set forth herein, including the 
consideration to be paid and received: (i) Are reasonable and fair to 
the Fund, to its Money Market Portfolio and its Total Return Portfolio, 
to shareholders, and to variable contract owners invested in each of 
the Money Market Portfolio and the Total Return Portfolio; and (ii) do 
not involve overreaching on the part of any person concerned. 
Furthermore, AAI and the Plan represent that the proposed transactions 
will be consistent with the general purposes of the 1940 Act and, more 
specifically, the policies of the Fund, its Money Market Portfolio, and 
its Total Return Portfolio.
    26. AAI and the Plan also assert that the proposed transactions, in 
addition to meeting the standards of section 17(b) vis-a-vis the Fund, 
are fair and reasonable to the Plan and are in the best interests of 
the Plan participants as determined by the Plan trustees. In 
particular, AAI and the Plan submit that the proposed transactions are 
consistent with the policy and purpose of the Plan as recited in its 
current registration statement, and are consistent with the provisions 
of ERISA (applicable to defined contribution plans) regarding reporting 
and disclosure, participation and vesting, funding, fiduciary 
responsibility, administration and enforcement.
    27. Section 17(a)(1) of the 1940 Act, in relevant part, prohibits 
any affiliated person of a registered investment company, or any 
affiliated person of such person, acting as principal, from knowingly 
selling any security or other property to that company. Section 
17(a)(2) of the 1940 Act generally prohibits the persons described 
above, acting as principals, from knowingly purchasing any security or 
other property from the registered investment company.
    28. Section 2(a)(3) of the 1940 Act defines the term ``affiliated 
person of another person'' in relevant part as: ``(A) any person 
directly or indirectly owning, controlling, or holding with power to 
vote, 5 per centum or more of the outstanding voting securities of such 
other person; (B) any person 5 per centum or more of whose outstanding 
voting securities are directly or indirectly owned, controlled, or held 
with power to vote, by such person; (C) any person directly or 
indirectly controlling, controlled by, or under common control with, 
such other person. * * *''
    29. AAI and the Plan assert that because Life of Virginia's general 
account owns directly more than 25% of the outstanding voting 
securities of the Common Stock Index Portfolio and the Government 
Securities Portfolio of the Fund, and because 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, the Common Stock Index Portfolio and the Government Securities 
Portfolio are controlled by Life of Virginia and, consequently, by Aon 
Corporation. Although the variable contract owners are considered the 
beneficial owners of many Fund shares, AAI and the Plan submit that the 
Fund and each of its portfolios (arguably) is under the control of Life 
of Virginia (and Aon Corporation), since Life of Virginia owns of 
record all of the shares of the Fund. AAI and the Plan further submit 
that, because they, too, are controlled by Aon Corporation, AAI, the 
Plan, the Fund, and the Fund's portfolios can be deemed under the 
common control of Aon Corporation.
    30. AAI and the Plan asset that since a person under common control 
with a registered investment company is an affiliated person of that 
investment company, AAI and the Plan are affiliated persons of the Fund 
and its Money Market Portfolio and Total Return Portfolio. The Plan's 
proposal to purchase Fund shares with investment securities would 
entail the sale of such securities by the Plan (or by AAI and the 
Plan), acting as principal, to the Fund and therefore would contravene 
section 17(a).
    31. Section 17(b) of the 1940 Act provides that the Commission may, 
upon application, grant an order exempting any transaction from the 
prohibitions of Section 17(a) if the 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.
    32. Subject to certain enumerated conditions, Rule 17a-7 under the 
1940 Act exempts from the prohibitions of section 17(a) a purchase or 
sale transaction between: (i) Registered investment companies or 
separate series of registered investment companies, which are 
affiliated persons, or affiliated persons of affiliated persons, of 
each other; (ii) between separate series of a registered investment 
company; or (iii) between a registered investment company or a separate 
series of a registered investment company and a person which is an 
affiliated person of such registered investment company (or affiliated 
person of such person) solely by reason of having a common investment 
adviser or investment advisers which are affiliated persons of each 
other, common directors, and/or common officers.
    33. AAI and the Plan submit that they cannot rely on Rule 17a-7 
because they are not affiliated persons of the Fund or the Money Market 
Portfolio or the Total Return Portfolio solely by reason of having a 
common investment adviser or affiliated investment advisers, common 
directors, and/or common officers. AAI and the Plan also note that 
since the proposed purchase of Fund shares by the Plan involves the 
purchase and sale of securities for securities, the proposed 
transaction does not meet the condition of Rule 17a-7 that the 
transaction be a purchase or a sale for no consideration other than 
cash payment against prompt delivery of a security for which market 
quotations are readily available.
    34. AAI and the Plan assert that where, as here, an investment 
company would comply in substance with, but cannot literally meet all 
of the conditions of, Rule 17a-7, the Commission should consider the 
extent to which the investment company meets the Rule 17a-7 or other 
similar conditions, and issue an order if the protections of Rule 17a-7 
would be provided in substance. AAI and the Plan maintain that although 
the transactions will conform in all material respects with the 
substance of all but one of the conditions enumerated in Rule 17a-7, 
the terms of the proposed transactions--including the consideration to 
be received by the Fund--are reasonable, fair, and do not involve 
overreaching by investment company affiliates.
    35. AAI and the Plan submit that the proposed transactions would 
offer to the Fund the same degree of protection from overreaching that 
Rule 17a-7 offers to investment companies involved in purchase or sale 
transactions with their affiliates. For example, the Plan could not 
``dump'' undesirable securities on the Fund, transfer investment 
securities from the Fund, or effect the proposed transactions at a 
price that is disadvantageous to the Fund. In addition, although the 
transactions will not be for cash, each will be effected based upon (i) 
the independent market price of the Plan's investment securities valued 
as specified in Rule 17a-7(b), and (ii) the net asset value per share 
of the Money Market Portfolio or the Total Return Portfolio, valued in 
accordance with the procedures disclosed in the Fund's registration 
statement and as required by Rule 22c-1 under the 1940 Act. AAI and the 
Plan represent that no brokerage commission, fee, or other remuneration 
will be paid to any party in connection with the proposed transactions. 
In addition, although the board of directors of the Fund will not adopt 
specific procedures to govern the proposed transactions, it will 
scrutinize and specifically approve by resolution each such 
transaction, including the price to be paid for the Fund's shares and 
the nature and quality of the securities offered in payment for such 
shares.
    36. AAI and the Plan represent that the proposed sale of additional 
shares is consistent with the investment policy of both the Money 
Market Portfolio and the Total Return Portfolio of the Fund, as recited 
in the Fund's registration statement, and the sale of shares for 
investment securities, as contemplated by the proposed transactions, is 
also consistent with these investment policies provided that (i) the 
shares are sold at net asset value, and (ii) the securities are of the 
type and quality that each portfolio would have acquired with the sale 
proceeds had the shares been sold for cash. As recited in the 
conditions listed below, the Fund's board of directors will examine the 
portfolios of the Plan's money market and balanced portfolios and only 
approve the proposed transactions if they, including a majority of 
those directors who are not interested persons of the Fund, or 
interested persons of such persons, determine that (i) and (ii) would 
be met.
    37. The proposed transactions, as described herein, are consistent 
with the general purposes of the 1940 Act as stated in the Findings and 
Declaration of Policy in Section 1 of the 1940 Act. The proposed 
transactions do not present any of the conditions or abuses that the 
1940 Act was designed to prevent.
    38. AAI and the Plan maintain that the terms of the proposed 
transactions are fair and reasonable to the Plan as well as to the 
Fund, and protect the Plan and the Fund from overreaching by their 
respective affiliates.
    39. AAI and the Plan represent that the Plan trustees have 
determined that the proposed transactions are in the best interests of 
Plan participants, and are consistent with the policies and purpose of 
the Plan as recited in various Plan documents, including its 
registration statement. In this regard, AAI and the Plan represent that 
the Plan trustees have determined that the Fund's Money Market 
Portfolio has substantially the same investment objectives as the 
Plan's money market investment portfolio and, likewise, that the Fund's 
Total Return Portfolio has substantially the same investment objectives 
as the Plan's balanced portfolio.
    40. AAI and the Plan represent that Plan participants will benefit 
from the fact that the expense of liquidating Plan assets, purchasing 
Fund shares with cash, and reinvesting the cash in substantially the 
same assets, would be avoided. AAI and the Plan further represent that, 
to the extent that the Plan trustees have determined that the Fund's 
Money Market Portfolio and Total Return Portfolio should replace the 
Plan's current money market portfolio and balanced portfolio, 
respectively, the proposed transactions would greatly diminish the 
expense of this replacement to Plan participants.
    41. AAI and the Plan represent that the proposed transactions are 
consistent with the provisions of ERISA regarding reporting and 
disclosure, participation and vesting, funding, fiduciary 
responsibility, administration and enforcement that are applicable to 
defined contribution plans.
    42. AAI and the Plan represent and agree that if the exemptions 
requested herein pursuant to section 17(b) of the 1940 Act are granted, 
the Plan will purchase shares of the Fund with investment securities 
only if the following conditions are met:

    (a) Shares of the Money Market Portfolio or the Total Return 
Portfolio of the Fund will be purchased with investment securities 
of the Plan's money market portfolio or balanced portfolio.
    (b) The transactions will be effected at the ``independent 
current market price'' of the investment securities (as that term is 
defined in Rule 17a-7 under the 1940 Act), and at the net asset 
value of appropriate Fund share next computed after the closing of 
the transaction.
    (c) No brokerage commission, fee (except for customary transfer 
fees), or other remuneration will be paid in connection with the 
transactions.
    (d) The Fund's board of directors, including a majority of those 
directors who are not interested persons of the Fund, or interested 
persons of such persons shall: (i) review the terms of the 
transactions, the composition of the investment portfolios of the 
Plan to be used as the purchase price in the transactions, and the 
value (and the valuation method) of the investment securities 
comprising the purchase price in the transactions; and (ii) adopt a 
resolution determining separately for each transaction, that the 
transaction is reasonable and fair to the existing investors in the 
appropriate Fund portfolio, that the transaction would not subject 
the Fund to overreaching, and that the investment securities offered 
by the Trustees on behalf of the Plan in that transaction are 
consistent with the investment objective, policies and restrictions 
of the related Fund portfolio.
    (e) The Fund agrees in writing that it will maintain and 
preserve for a period of not less than six years from the end of the 
fiscal year in which the transaction occurs--and for the first two 
years in a readily accessible place--a written record of each such 
transaction setting forth: (i) a description of the investment 
securities used as the purchase price for Fund shares; (ii) the 
terms of such transaction; and (iii) the information and materials 
upon which the determinations described in condition (d) above were 
made.

Conclusion

    1. AAI and the Plan request an order of the Commission pursuant to 
section 17(b) of the 1940 Act exempting them from section 17(a) of the 
1940 Act to the extent necessary to permit the Plan to purchase certain 
classes of shares of the Fund with investment securities of the Plan. 
AAI and the Plan submit that, for the reasons stated above, the terms 
of the proposed transactions--including the consideration to be paid 
and received: (i) Are reasonable and fair to the Fund, its Money Market 
Portfolio, its Total Return Portfolio, its shareholders, and the 
variable contract owners invested in the Money Market Portfolio and the 
Total Return Portfolio; and (ii) do not involve overreaching on the 
part of any person concerned. Furthermore, the proposed transactions 
will be consistent with the general purposes of the 1940 Act and the 
policies of the Fund, its Money Market Portfolio, and its Total Return 
Portfolio.
    2. In addition, Life of Virginia and the Accounts request an order 
pursuant to section 6(c) of the 1940 Act, exempting them as well as any 
future accounts from the provisions of sections 9(a), 13(a), 15(a), and 
15(b) of the 1940 Act, and Rule 6e-3(T)(b)(15) thereunder, to the 
extent necessary to permit the Accounts and any future accounts to hold 
shares of the Fund at the same time that the Plan and other qualified 
retirement and pension plans hold shares of the Fund.
    3. For the reasons stated above, Applicants submit that the 
proposed transactions do not present any of the conditions or abuses 
that the 1940 Act was designed to prevent, and that the requested 
exemptions are appropriate in the public interest and consistent with 
the protection of investors and the purposes fairly intended by the 
policy and provisions of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-12175 Filed 5-18-94; 8:45 am]
BILLING CODE 8010-01-M