[Federal Register Volume 60, Number 228 (Tuesday, November 28, 1995)]
[Notices]
[Pages 58710-58716]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28931]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21522; No. 812-9542]


Warburg, Pincus Trust; Notice of Application

November 20, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

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APPLICANT: Warburg, Pincus Trust (``Trust'') and Warburg, Pincus 
Counsellors, Inc. (``Counsellors'').

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 sub-paragraph (b)(15) of Rules 6e-2 and 6e-3(T) 
thereunder.

SUMMARY OF APPLICATION: Applicants seek an order to the extent 
necessary to permit shares of the Trust and shares of any other 
investment company or series thereof that is designed to fund insurance 
products and for which Counsellors, or any of its affiliates, may serve 
as investment adviser, administrator, manager, principal underwriter or 
sponsor (collectively with the Trust, ``Funds'') to be sold to and held 
by: (1) variable annuity and variable life insurance separate accounts 
of both affiliated and unaffiliated life insurance companies; and (2) 
qualified pension and retirement plans outside the separate account 
content.

FILING DATE: The application was filed on March 17, 1995, and amended 
on July 11, 1995 and November 17, 1995.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Secretary of the 
Commission and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests should be received by the SEC 
by 5:30 p.m. on December 15, 1995, and should be accompanied by proof 
of service on Applicants in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
requester's interest, the reason for the request and the issues 
contested. Persons may request notification of a hearing by writing to 
the Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C. 
20549. Applicants: Warburg, Pincus Trust, 466 Lexington Avenue, New 
York, New York 10017.

FOR FURTHER INFORMATION CONTACT: Yvonne M. Hunold, Assistant Special 
Counsel, or Patrice M. Pitts, Special 

[[Page 58711]]
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 free from the Public 
Reference Branch of the Commission.

Applicants' Representations

    1. The Trust is an open-end, management investment company 
organized as a Massachusetts Business Trust. The Trust currently 
consists of two portfolios, the International Equity Portfolio and the 
Small Company Portfolio (collectively, ``Portfolios''). Additional 
portfolios may be offered in the future (``Future Portfolios''). 
Applicants incorporate by reference into the application the 
registration statement (File No. 33-58125) on Form N-1A of the Trust, 
which was declared effective on June 19, 1995.
    2. Counsellors serves as investment adviser to the Portfolios and 
is a registered investment adviser under the Investment Advisers Act of 
1940. Counsellors' wholly owned subsidiary, Counsellors Securities, 
Inc., serves as distributor for shares of the Portfolios. Counsellors 
is a wholly owned subsidiary of Warburg, Pincus Counsellors G.P., a New 
York general partnership and holding company. E.M. Warburg, Pincus & 
Co., Inc. controls Counsellors through its ownership of a class of 
voting preferred stock of Counsellors.
    3. The Trust currently offers its shares to separate accounts, 
registered with the Commission under the 1940 Act as unit investment 
trusts, of life insurance company affiliates of Nationwide Insurance 
Companies (``Nationwide Companies''). The Trust serves as the 
investment vehicle for life and variable annuity contracts issued by 
Nationwide Companies. Shares of the Trust also are held by a separate 
account of Nationwide Companies, which is exempt from registration as 
an investment company under the 1940 Act pursuant to Section 3(c)(1) of 
the 1940 Act.
    4. Applicants state that, upon the granting of the order requested 
in this application, the Trust intends to offer shares of its 
Portfolios and Future Portfolios to separate accounts \1\ of the 
Nationwide Companies and of other unaffiliated insurance companies 
(collectively, ``Participating Insurance Companies''),\2\ to serve as 
an investment vehicle for various types of insurance products. These 
insurance products may include variable annuity contracts, single 
premium variable life insurance contracts, scheduled premium variable 
life insurance contracts or flexible premium variable life insurance 
contracts (collectively, ``Variable Contracts''). The Trust also 
intends to sell shares of the Portfolios and Future Portfolios directly 
to qualified pension and retirement plans (``Qualified Plans'') outside 
of the separate account context.

    \1\ These separate accounts may be registered as investment 
companies under the 1940 Act or exempt from registration under the 
1940 Act pursuant to Section 3(c)(1) (collectively, ``Separate 
Accounts'').
    \2\ Each Participating Insurance Company will enter into a fund 
participation agreement (``Participating Agreement'') with the Trust 
on behalf of the Fund in which the Participating Insurance Company 
invests.
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    5. In connection with any Contract issued by a Participating 
Insurance Company, the application states that each such company will 
have the legal obligation of satisfying all applicable requirements 
under both state and federal law. Applicants further state that the 
role of the Funds under this arrangement, insofar as the 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 state that applicable tax law permits the Funds to 
increase their asset base through the sale of Fund shares to Qualified 
Plans without endangering the tax status of Variable Contracts issued 
by Participating Insurance Companies. The Qualified Plans may choose 
any of the Funds as the sole investment option under the Plan or as one 
of several investment options. Participants may be given an investment 
choice depending upon the Plan. Shares of any of the Funds sold to 
Plans will be held by the trustees of the Plans as mandated by Section 
403(a) of the Employee Retirement Income Security Act (``ERISA''). To 
the extent permitted under applicable law, Counsellors may act as 
investment adviser to Qualified Plans that will purchase shares of the 
Funds. Applicants note that, pursuant to ERISA, pass-through voting is 
not required to be provided to participants in the Qualified Plans.

Applicants' Legal Analysis

Mixed and Shared Funding and Sales to Qualified Plans

    1. In connection with the funding of scheduled premium variable 
life insurance contracts issued through a separate account registered 
under the 1940 Act as a unit investment trust (``Separate Account-
UIT''), Rule 6e-2(b)(15) provides partial exemptions from Sections 
9(a), 13(a), 15(a) and 15(b) of the 1940 Act. The relief provided by 
Rule 6e-2(b)(15) extends to a separate account's investment adviser, 
principal underwriter, and sponsor or depositor. The exemptions granted 
by Rule 6e-2(b)(15) are available, however, only where the management 
investment company underlying the UIT offers its shares ``exclusively 
to variable life insurance separate accounts of the life insurer, or of 
any affiliated life insurance company.''
    2. The use of a common management investment company as the 
underlying investment medium for both variable annuity and variable 
life insurance separate accounts of a single insurance company (or of 
two or more affiliated insurance companies) is referred to as ``mixed 
funding.'' The use of a common management investment company as the 
underlying investment medium for variable annuity and/or variable life 
insurance separate accounts of unaffiliated insurance companies is 
referred to as ``shared funding.'' ``Mixed and shared funding'' denotes 
the use of a common management investment company to fund the variable 
annuity and variable life insurance separate accounts of affiliated and 
unaffiliated insurance companies. The relief granted by Rule 6e-
2(b)(15), thus, is not available with respect to a scheduled premium 
variable life insurance separate account that owns shares of an 
underlying fund that also offers its shares to a variable annuity 
separate account of the same company or of any other affiliated or 
unaffiliated life insurance company.\3\ Rule 6e-2(b)(15), therefore, 
precludes mixed and shared funding.

    \3\ Applicants note that amendments to Rule 6e-2 have been 
proposed by the Commission and, if adopted, would permit shares of 
one underlying fund to be sold to separate accounts of the insurer, 
or any affiliated life insurance company offering variable annuity 
contracts or scheduled premium or flexible premium variable life 
insurance. See Release No. IC-14421 (Mar. 15, 1985). The proposed 
amendments, however, would not permit shares of one underlying fund 
to be sold to separate accounts of unaffiliated companies.
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    3. In connection with flexible premium variable life insurance 
contracts issued through a Separate Account-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 exemptive relief extends to a separate account's 
investment adviser, principal underwriter, and sponsor or depositor. 
The exemptions granted to a separate account by Rule 6e-3(T)(b)(15) are 


[[Page 58712]]
available only where all the assets of the separate account consist of 
shares of one or more registered management investment companies which 
offer their shares ``exclusively to separate accounts of the life 
insurer, or of any affiliated life insurance company, offering either 
scheduled contacts or flexible contracts, or both; or which also offer 
their shares to variable annuity separate accounts of the life insurer 
or of an affiliated life insurance company. . . . Rule 6e-3(T) thus 
permits mixed funding with respect to a flexible premium variable life 
insurance separate account, subject to certain conditions, but 
precludes shared funding.
    4. Applicants state that various factors have kept certain 
insurance companies from offering variable annuity and variable life 
insurance contracts. According to Applicants, these factor include: the 
cost of organizing and operating an investment funding medium; the lack 
of expertise with respect to investment management; the lack of name 
recognition by the public of certain insurers as investment 
professionals. Applicants argue that use of the Funds as common 
investment media for the Variable Contracts would ease these concerns. 
Participating Insurance Companies would benefit not only from the 
investment and administrative expertise of the Funds' investment 
advisor, but also from the cost efficiencies and investment flexibility 
afforded by a large pool of funds. Applicants state that making the 
Funds available for mixed and shared funding may encourage more 
insurance companies to offer variable contracts such as the Variable 
Contracts which may, in turn, increase competition with respect to both 
the design and pricing of variable contracts. Applicants submit that 
this can be expected to result in greater product variation and lower 
charges. Applicants thus argue that Variable Contract owners would 
benefit because mixed and shared funding will eliminate a significant 
portion of the costs of establishing and administering separate funds. 
Moreover, Applicants assert that sales of shares of the Funds to 
Qualified Plans should increase the amount of assets available for 
investment by the Funds. This should, in turn, promote economies of 
scale, permit increased safety of investments through greater 
diversification, and make the addition of new portfolios more feasible.
    5. Applicants state that, because relief under paragraph (b)(15) of 
Rules 6e-2 and 6e-3(T) is available only where shares are offered 
exclusively to separate accounts of insurance companies, additional 
exemptive relief is necessary if shares of the Funds also are to be 
sold to Qualified Plans. Applicants assert that the relief granted by 
paragraph (b)(15) of Rules 6e-2 and 6e-3(T) should not be affected by 
the proposed sale of Fund shares to Qualified Plans because such sales 
may allow for the development of larger pools of assets resulting in 
the potential for greater investment and diversification opportunities, 
and for decreased expenses at higher asset levels resulting in greater 
cost efficiencies. Applicants further assert that they are not aware of 
any stated rationale for the exclusion of separate accounts and 
investment companies engaged in shared funding from the exemptive 
relief provided under paragraph (b)(15) of Rules 6e-2 and 6e-3(T), or 
for the exclusion of separate accounts and investment companies engaged 
in mixed funding from the exemptive relief provided under (b)(15) of 
Rules 6e-2 and 6e-3(T), or for the exclusion of separate accounts and 
investment companies engaged in mixed funding from the exemptive relief 
provided under Rule 6e-2(b)(15). Similarly, Applicants are not aware of 
any stated rationale for excluding Participating Insurance Companies 
from the exemptive relief requested because the Funds also may sell 
their respective shares only to qualified pension and retirement plans.
    6. Applicants state that current tax law permits Funds to increase 
their asset base through the sale of Fund shares to Qualified Plans. 
Applicants state that Section 817(h) of the Internal Revenue Code of 
1986, as amended (``Code''), imposes certain diversification 
requirements on the underlying assets of Variable Contracts invested in 
the Funds. The Code provides that such Variable Contracts shall not be 
treated as an annuity contract or life insurance contract for any 
period in which the underlying assets are not adequately diversified, 
as prescribed by Treasury Department regulations; to meet the 
diversification requirements, all of the beneficial interests in the 
investment company must be held by the segregated asset accounts of one 
or more insurance companies, subject to certain exceptions. Treas. Reg. 
Sec. 1.817-5 (1989). For example, shares in an investment company may 
be held by the trustee of a qualified pension or retirement plan 
without adversely affecting the ability of shares in the same 
investment company also to be held by the separate accounts of 
insurance companies in connection with the variable contracts. Treas. 
Reg. Sec. 1.817-5(b)(3)(iii).
    7. Applicants state that the promulgation of Rules 6e-2 and 6e-3(T) 
under the 1940 Act preceded the issuance of these Treasury regulations, 
and that the sale of shares of the same investment company to both 
separate accounts and Qualified Plans could not have been envisioned at 
the time of the adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15).
    8. Applicants therefore request relief from Sections 9(a), 13(a), 
15(a) and 15(b) of the 1940 Act, and paragraph (b)(15) of Rules 6e-2 
and 6e-3(T) thereunder to the extent necessary to permit shares of the 
Funds to be offered and sold now and in the future to Separate Accounts 
of Participating Insurance Companies in Connection with both mixed and 
shared funding, and to be sold directly to Qualified Plans. Relief is 
requested for a class or classes of persons and transactions consisting 
of Participating Insurance Companies and their schedule premium 
variable life insurance Separate Accounts and flexible premium variable 
life insurance Separate Accounts (and, to the extent necessary, any 
investment adviser, principal underwriter and depositor of such 
Separate Accounts) investing in any of the Funds.

Disqualification

    9. Section 9(a) of the 1940 Act makes it unlawful for any company 
to serve as an investment adviser to, or principal underwriter for, any 
registered open-end investment company if an affiliated person of that 
company is subject to a disqualification specified in Sections 9(a)(1) 
or 9(a)(2).
    10. Rules 6e-2(b) and 6e-3(T)(b)(15) provide exemptions from 
Section 9(a) under certain circumstances, subject to the limitations on 
mixed and shared funding. The relief provided by subparagraphs 
(b)(15)(i) of Rules 6e-2 and 6e-3(T) permits a person disqualified 
under Section 9(a) to serve as an officer, director, or employee of the 
life insurer, or any of its affiliates, so long as that person does not 
participate directly in the management or administration of the 
underlying fund. The relief provided by subparagraph (b)(15)(ii) of 
Rules 6e-2 and 6e-3(T) permits the life insurer to serve as the 
underlying fund's investment adviser or principal underwriter, provided 
that none of the insurer's personnel who are ineligible pursuant to 
Section 9(a) are participating in the management or administration of 
the fund.
    11. Applicants state that the partial relief from Section 9(a) 
found in subparagraph (b)(15) of Rules 6e-2 and 6e-3(T), in effect, 
limits the monitoring 

[[Page 58713]]
necessary to ensure compliance with Section 9 to that which is 
appropriate in light of the policy and purposes of the Section. 
Applicants state that those 1940 Act rules recognize that it is not 
necessary for the protection of investors or for the purposes fairly 
intended by the policy and provisions of the 1940 Act to apply the 
provisions of Section 9(a) to the many individuals in an insurance 
company complex, most of whom will have no involvement in matters 
pertaining to investment companies within that organization. Applicants 
note that the Participating Insurance Companies are not expected to 
play any role in the management or administration of the Funds. 
Therefore, Applicants assert, applying the restrictions of Section 9(a) 
serves no regulatory purpose. The application states that the relief 
requested should not be affected by the proposed sale of shares of the 
Funds to the Qualified Plans. Qualified Plans are not investment 
companies and are not, therefore, subject to Section 9(a).

Pass-Through Voting

    12. Subparagraph (b)(15)(iii) of Rules 6e-2 and 6e-3(T) assumes the 
existence of a pass-through voting requirement with respect to 
management investment company shares held by a separate account. 
Applicants represent that the Participating Insurance Companies will 
provide pass-through voting privileges to all Variable Contract owners 
so long as the Commission interprets the 1940 Act to require such 
privileges, and that Participating Insurance Companies will vote all 
shares as to which no response from Variable Contract owners is timely 
received, as well as shares owned by them, in the same proportion as 
shares for which voting instructions are received.
    13. Subparagraph (b)(15)(iii) of Rules 6e-2 and 6e-3(T) provides 
partial exemptions from the pass-through voting requirement with 
respect to several significant matters, assuming observance of the 
limitations on mixed and shared funding. Subparagraph (b)(15)(iii)(A) 
of Rules 6e-2 and 6e-3(T) provides that the insurance company may 
disregard voting instructions of its contract owners with respect to 
the subclassification or investment objectives of a fund or any 
contract between a fund and its investment advisor, when required to do 
so by an insurance regulatory authority.
    14. Subparagraph (b)(15)(iii)(B) of Rule 6e-2 and subparagraph 
(b)(15)(iii)(A)(2) of Rule 6e-3(T) provides that the insurance company 
may disregard voting instructions of its contract owners if the 
contract owners initiate any change in the company's investment 
objectives, principal underwriter or investment advisor, provided that 
disregarding such voting instructions is reasonable and subject to the 
other provisions of paragraph (b)(5)(ii) and (b)(7)(ii)(B) and (C) of 
each rule.
    15. Applicants represent that the Funds' sale of shares to 
Qualified Plans does not affect the relief requested in this regard. As 
previously noted, shares of the Funds sold to Qualified Plans would be 
held by the trustees of such Plans as required by Section 403(a) of 
ERISA. Section 403(a) also provides that the trustee(s) must have 
exclusive authority and discretion to manage and control the Plan with 
two exceptions: (a) when the Qualified Plan expressly provides that the 
trustee(s) are subject to the direction of the named fiduciary who is 
not a trustee, in which case the trustee(s) is (are) subject to proper 
directions made in accordance with the terms of the Qualified Plan and 
not contrary to ERISA; and (b) when the authority to manage, acquire or 
dispose of assets of the Qualified Plan is delegated to one or more 
investment managers pursuant to Section 402(c)(3) of ERISA.
    16. Unless one of the two exceptions stated in Section 403(a) 
applies, Qualified Plan trustees have the exclusive authority and 
responsibility for voting proxies. Where a named fiduciary appoints an 
investment manager, the investment manager has the responsibility to 
vote the shares held unless the right to vote such shares is reserved 
to the trustees or to the named fiduciary. In any event, there is no 
pass-through voting to the participants in such Qualified Plans. 
Accordingly, Applicants assert that, unlike the case with insurance 
company separate accounts, the issue of the resolution of material 
irreconcilable conflicts with respect to voting is not present with 
Qualified Plans because the Plans are not entitled to pass-through 
voting privileges. Applicants further assert that investment in the 
Funds by Qualified Plans will not create any of the voting 
complications occasioned by mixed and shared funding because Qualified 
Plan investor voting rights cannot be frustrated by veto rights of 
insurers or state regulators.
    17. Applicants state that some Qualified Plans may provide 
participants with the right to give voting instructions. Applicants 
submit that there is no reason to believe that participants in 
Qualified Plans generally, or those in a particular Plan, either as a 
single group or in combination with other Qualified Plans, would vote 
in a manner that would disadvantage Variable Contract owners. 
Accordingly, Applicants assert that the purchase of Fund shares by 
Qualified Plans that provide voting rights to participants does not 
present any complications not otherwise occasioned by mixed and shared 
funding.

Conflicts of Interest

    18. Applicants state that no increased conflicts of interest would 
be present by the granting of the requested relief. Applicants assert 
that shared funding does not present any issues that do not already 
exist where a single insurance company is licensed to do business in 
several, or all, states. Applicants note that where insurers are 
domiciled in different states, it is possible that the state insurance 
regulatory body in a state in which one insurance company is domiciled 
could require action that is inconsistent with the requirements of 
insurance regulators in one or more other states in which other 
insurance companies are domiciled. Applicants submit that this 
possibility is no different and no greater than exists where a single 
insurer and its affiliates offer their insurance products in several 
states.
    19. Applicants further submit that affiliation does not reduce the 
potential, if any exists, for differences among state regulatory 
requirements. In any event, the conditions (adapted from the conditions 
included in Rule 6e-3(T)(b)(15)) discussed below are designed to 
safeguard against any adverse effects that these differences may 
produce. If a particular state insurance regulator's decision conflicts 
with the decisions of a majority of other state regulators, the 
affected insurer may be required to withdraw its separate account's 
investment in the relevant Funds.
    20. Applicants also argue that affiliation does not eliminate the 
potential, if any, for divergent judgments as to when a Participating 
Insurance Company could disregard Variable Contract owner voting 
instructions. Potential disagreement is limited by the requirement that 
the Participating Insurance Company's disregard of voting instructions 
be both reasonable and based on specific good faith determinations. 
However, if a Participating Insurance Company's decision to disregard 
Variable Contract owner instructions represents a minority position or 
would preclude a majority vote approving a particular change, such 
Participating Insurance Company may be required, at the election of the 
relevant Fund, to withdraw its investment in that Fund. 

[[Page 58714]]
No charge or penalty will be imposed as a result of such withdrawal.
    21. Applicants state that there is no reason why the investment 
policies of a Fund with mixed funding would or should be materially 
different from what those policies would or should be if such 
investment company or series thereof funded only variable annuity or 
variable life insurance contracts. Applicants therefore argue that 
there is no reason to believe that conflicts or interest would result 
from mixed funding. Moreover, Applicants represent that the Funds will 
not be managed to favor or disfavor any particular insurance company or 
type of Variable Contract.
    22. Applicants note that Section 817(h) imposes certain 
diversification standards on the underlying assets of variable annuity 
contracts and variable life insurance contracts held in the portfolios 
of management investment companies. Treasury Regulation 1.817-
5(f)(3)(iii), which established diversification requirements for such 
portfolios, specifically permits ``qualified pension or retirement 
plans'' and insurance company separate accounts to share the same 
underlying investment company. Therefore, Applicants have concluded 
that neither the Code, nor the Treasury regulations, nor the revenue 
rulings thereunder, present any inherent conflicts of interest if 
Qualified Plans, variable annuity separate accounts and variable life 
insurance separate accounts all invest in the same management 
investment company.
    23. Applicants state that while there are differences in the manner 
in which distributions are taxed for variable annuity contracts, 
variable life insurance contracts and Qualified Plans, these tax 
consequences do not raise any conflicts of interest. When distributions 
are to be made, and the Separate Account or the Qualified Plan is 
unable to net purchase payments to make the distributions, the Separate 
Account or the Qualified Plan will redeem shares of the Funds at their 
respective net asset value. The Qualified Plan will then make 
distributions in accordance with the terms of the Plan. A Participating 
Insurance Company will surrender values from the separate account into 
the general account to make distributions in accordance with the terms 
of the Variable Contract.
    24. Applicants state that they do not see any greater potential for 
material irreconcilable conflicts arising between the interests of 
participants under the Qualified Plans and owners of the Variable 
Contracts issued by the Separate Accounts from possible future changes 
in the federal tax laws than that which already exists between variable 
annuity contract owners and variable life insurance contract owners.
    25. With respect to voting rights, Applicants state that it is 
possible to provide an equitable means of giving such voting rights to 
Variable Contract owners and to Qualified Plans. Applicants represent 
that a Fund will inform each shareholder, including each Separate 
Account and Qualified Plan, of information necessary for the meeting, 
including their respective share ownership in the respective Funds. A 
Participating Insurance Company will then solicit voting instruction in 
accordance with the ``pass-through'' voting requirements of Rules 6e-2 
and 6e-e(T).
    26. Applicants argue that the ability of the Funds to sell their 
respective shares directly to Qualified Plans does not create a 
``senior security,'' as such term is defined under Section 18(g) of the 
1940 Act, with respect to any Variable Contract owner as opposed to a 
participant under a Qualified Plan. Regardless of the rights and 
benefits of participants and Variable Contract owners under their 
respective Qualified Plans and Variable Contracts, Qualified Plans and 
Separate Account have rights only with respect to their respective 
shares of the Funds. Such shares may be redeemed only at net asset 
value. No shareholder of the Funds has any preference over any other 
shareholder with respect to distribution of assets or payment of 
dividends.
    27. Applicants state that there are no conflicts between Variable 
Contract owners and participants under Qualified Plans with respect to 
the state insurance commissioners' veto powers (direct with respect to 
variable life insurance and indirect with respect to variable 
annuities) over investment objectives. The basis premise of corporate 
democracy and shareholder voting is that not all shareholders may agree 
with a particular proposal. The state insurance commissioners have been 
given the veto power in recognition of the fact that insurance 
companies can not simply redeem their separate accounts out of one fund 
and invest those assets in another fund. Generally, to accomplish such 
redemptions and transfers, complex and time consuming transactions must 
be undertaken. Conversely, trustees of (or participants in) Qualified 
Plans can redeem shares of the Funds held by them and reinvest in 
another Fund without the same regulatory impediments or, as is the case 
with most Qualified Plans, even hold cash or other liquid assets 
pending suitable alternative investment. Based on the foregoing, 
Applicants represent that even should there arise issues where the 
interests of Variable Contract owners and the interest of the Qualified 
Plans conflict, the issues can be almost immediately resolved in that 
trustees of the Qualified Plans can, independently, redeem shares out 
of the Funds.
    28. Applicants have concluded that the addition of Qualified Plans 
as eligible shareholders should not increase the risk of material 
irreconcilable conflicts among shareholders. However, Applicants assert 
further that, even if a material irreconcilable conflict involving 
Qualified Plans arose, the trustees of (or participants in) the 
Qualified Plans, unlike the Separate Accounts, can redeem their shares 
and make alternative investments. Applicants thus submit that allowing 
Qualified Plans to invest directly in shares of the Funds should not 
increase the opportunity for conflicts of interest.
    29. Further, Applicants state that, regardless of the types of Fund 
shareholders, Counsellors is legally obligated to manage the Funds in 
accordance with each Fund's investment objectives, policies and 
restrictions as well as any guidelines established by the relevant 
Board of Directors or Trustees of the Funds. Applicants assert that 
Counsellors works with a pool of money without consideration for the 
identity of shareholders, and, thus, manage the Funds in the same 
manner as any other mutual fund.
    30. Applicants believe that there is no significant legal 
impediment to permitting mixed and shared funding. Additionally, 
Applicants note the previous issuance of orders permitting mixed and 
shared funding where shares of a fund were sold directly to qualified 
plans, such as the Qualified Plans. Applicants note further that there 
is ample precedent for extending exemptive relief to members of a class 
or classes or persons, not currently identified, that may be similarly 
situated in the future. Such class relief has been granted in various 
contexts and from a wide variety of the 1940 Act's provisions including 
class exemption in the context of mixed and shared funding.

Applicants' Conditions

    The Applicants have consented to the following conditions if the 
order requested in the application is granted:
    1. A majority of the Board of Trustees or Board of Directors (each 
a ``Board'') of each Fund shall consist of persons who are not 
``interested persons'' of the 

[[Page 58715]]
Funds, as defined by Section 2(a)(19) of the 1940 Act and Rules 
thereunder and as modified by any applicable orders of the Commission, 
except that, if this condition is not met by reason of death, 
disqualification, or bona fide resignation of any Director or Trustee, 
then the operation of this condition shall be suspended: (i) for a 
period of 45 days, if the vacancy or vacancies may be filled by the 
appropriate Board; (ii) for a period of 60 days, if a vote of 
shareholders is required to fill the vacancy or vacancies; or (iii) for 
such longer period as the Commission may prescribe by order upon 
application.
    2. Each Board will monitor its respective Funds for the existence 
of any material irreconcilable conflict among the interests of the 
Variable Contract owners of all the Separate Accounts and of 
participants of Qualified Plans investing in the respective Funds, and 
determine what action, if any, should be taken in response to such 
conflicts. A material irreconcilable conflict may arise for a variety 
of reasons, including: (a) an action by any state insurance regulatory 
authority; (b) a change in applicable federal or state insurance, tax, 
or securities laws or regulations, or a public ruling, private letter 
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 Funds are managed; (e) a 
difference in voting instructions given by the owners of variable 
annuity and variable life insurance contracts; or (f) a decision by a 
Participating Insurance Company to disregard voting instructions of 
Variable Contract owners.
    3. Participating Insurance Companies, Counsellors (or any other 
investment manager of a Fund), and any Qualified Plan that executes a 
Participation Agreement upon becoming an owner of 10% or more of the 
assets of a Fund (collectively, ``Participants'') shall report any 
potential or existing conflicts to the relevant Board. Participants 
will be responsible for assisting the appropriate Board in carrying out 
its responsibilities under these conditions by providing the Board with 
all information reasonably necessary for it to consider any issues 
raised. This responsibility includes, but is not limited to, an 
obligation by each insurance company Participant to inform the Board 
whenever it has determined to disregard contract holders' voting 
instructions. The responsibility to report such information and 
conflicts and to assist the Board will be a contractual obligation of 
all Participants under their Participation Agreements and such 
Agreements, in the case of insurance company Participants, shall 
provide that these responsibilities will be carried out with a view 
only to the interests of the Variable Contract owners.
    4. If it is determined by a majority of the Board of a Fund, or by 
a majority of its disinterested members, that a material irreconcilable 
conflict exists, the relevant Participant shall, at its expense and to 
the extent reasonably practicable (as determined by a majority of 
disinterested members of the Board), take whatever steps are necessary 
to remedy or eliminate the irreconcilable material conflict, up to and 
including: (a) withdrawing the assets allocable to some or all of the 
Separate Accounts from a Fund or its portfolio and reinvesting such 
assets in a different investment medium (including another portfolio of 
the relevant Fund, if any), or, in the case of insurance company 
participants, submitting the question as to whether such segregation 
should be implemented to a vote of all affected contract owners and, as 
appropriate, segregating the assets of any appropriate group (i.e., 
variable annuity contract owners, life insurance contract owners, or 
variable contract owners of one or more Participants) that votes in 
favor of such segregation, or offering to the affected contract owners 
the option of making such a change; and (b) establishing a new 
registered management investment company or managed separate account. 
If a material irreconcilable conflict arises because of an insurance 
company Participant's decision to disregard contract owner voting 
instructions, and that decision represents a minority position or would 
preclude a majority vote, such Participant may be required, at the 
election of the relevant Fund, to withdraw its Separate Account's 
investment in the Fund, and no charge or penalty will be imposed as a 
result of such withdrawal.
    The responsibility to take remedial action in the event of a Board 
determination that an irreconcilable material conflict exists, and to 
bear the cost of such remedial action, shall be a contractual 
obligation of all Participants under their Participation Agreements, 
and this responsibility, in the case of insurance company Participants 
shall be carried out with a view only to the interests of the Variable 
Contract owners.
    For the purposes of this Condition ``4.,'' a majority of 
disinterested members of the applicable Board shall determine whether 
any proposed action adequately remedies any irreconcilable material 
conflict, but in no event will the relevant Fund or Counselors (or any 
other investment advisor to the Funds) be required to establish a new 
funding medium for any Variable Contract. Further, no insurance company 
President shall be required by this Condition ``4.'' to establish a new 
funding medium for any Variable Contract if an offer to do so has been 
declined by a vote of a majority of Variable Contract owners materially 
affected by the irreconcilable material conflict.
    5. The Board's determination of the existence of an irreconcilable 
material conflict and its implications shall be made known promptly in 
writing to all Participants.
    6. Insurance company Participants will provide pass-through voting 
privileges to all Variable Contract owners so long as the Commission 
continues to interpret the 1940 Act as requiring pass-through voting 
privileges for Variable Contract owners. Accordingly, such 
Participants, where applicable, will vote shares of the Fund held in 
its Separate Accounts in a manner consistent with voting instructions 
timely received from Variable Contract owners. Also, each insurance 
company Participant will vote shares of a Fund held in its Separate 
Accounts for which no timely voting instructions from contractowners 
are received, as well as shares it owns, in the same proportion as 
those shares for which voting instructions are received. Insurance 
company Participants will be responsible for assuring that each of 
their Separate Accounts investing in a Fund calculates voting 
privileges in a manner consistent with other Participants. The 
obligation to vote a Fund's shares and calculate voting privileges in a 
manner consistent with all other Separate Accounts will be a 
contractual obligation on all Participants under their Participation 
Agreements.
    7. All reports received by the Board of potential or existing 
conflicts, and all Board action with regard to (a) determining the 
existence of a conflict, (b) notifying Participants of a conflict, and 
(c) determining whether any proposed action adequately remedies a 
conflict, will be properly recorded in the minutes of the appropriate 
Board or other appropriate records. Such minutes or other records shall 
be made available to the Commission upon request.
    8. Each Fund will notify all Participants that Separate Account 
prospectus disclosure regarding potential risks of mixed and shared 
funding may be appropriate. Each Fund 

[[Page 58716]]
shall disclose in its prospectus that: (a) its shares may be offered to 
insurance company separate accounts that fund both variable annuity and 
variable life insurance contracts, as well as to Qualified Plans; (b) 
differences in tax treatment or other considerations may cause the 
interests of various Variable Contract owners participating in the 
Funds and the interests of Qualified Plans investing in the Funds to 
conflict; and (c) each Fund's Board will monitor the Funds for any 
material conflicts and determine what action, if any, should be taken.
    9. Each Fund will comply with all provisions of the 1940 Act 
requiring voting by shareholders (for these purposes, the persons 
having a voting interest in the shares of the Funds). In particular, 
each Fund will either provide for annual meetings (except to the extent 
that the Commission may interpret Section 16 of the 1940 Act not to 
require such meetings) or comply with Section 16(c) of the 1940 Act 
(although none of the Funds shall be one of the trusts described in 
Section 16(c) of the 1940 Act, as well as with Section 16(a) and, if 
applicable, Section 16(b) of the 1940 Act. Further, each Fund will act 
in accordance with the Commission's interpretation of the requirements 
of Section 16(a) with respect to periodic elections of directors (or 
trustees) and with whatever rules the Commission may promulgate with 
respect thereto.
    10. If and to the extent Rule 6e-2 or Rule 6e-3(T) is amended, or 
Rule 6e-3(T) is adopted, to provide exemptive relief from any provision 
of the 1940 Act or the rules thereunder with respect to mixed and 
shared funding on terms and conditions materially different from any 
exemptions granted in the order requested, then the Funds and/or the 
Participants, as appropriate, shall take such steps as may be necessary 
to comply with Rule 6e-2 or Rule 6e-3(T), as amended, and Rule 6e-3, as 
adopted, to the extent such rules are applicable.
    11. No less than annually, the Participants shall submit to each 
Board such reports, materials or data as each Board may reasonably 
request so that such Boards may fully carry out the obligations imposed 
upon them by the conditions stated in the application. Such reports, 
materials, and data shall be submitted more frequently if deemed 
appropriate by the Boards. The obligations of the Participants to 
provide these reports, materials, and data upon reasonable request of a 
Board shall be a contractual obligation of all Participants under their 
Participation Agreement.
    12. None of the Funds will accept a purchase order from a Qualified 
Plan shareholder if such purchase would make the Qualified Plan 
shareholder an owner of 10% or more of the assets of a Fund unless such 
Qualified Plan executes a fund participation agreement with the 
applicable Fund. A Qualified Plan shareholder will execute an 
application containing an acknowledgment of this condition upon such 
Plan's initial purchase of the shares of any Fund.

Conclusion

    For the reasons stated above, Applicants assert that the requested 
exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act 
and Rules 6e-2 and 6e-3(T) thereunder 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, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-28931 Filed 11-27-95; 8:45 am]
BILLING CODE 8010-01-M