[Federal Register Volume 61, Number 130 (Friday, July 5, 1996)]
[Notices]
[Pages 35275-35280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17150]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22045; No. 812-9988]


Royce Capital Trust, et al.

June 27, 1996.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

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APPLICANTS: Royce Capital Trust (``Trust'') and Quest Advisory Corp. 
(``Quest'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) granting 
exemptions from Sections 9(a), 13(a), 15(a), and 15(b) of the 1940 Act 
and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder.

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

FILING DATE: The application was filed on February 9, 1996.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Secretary of the 
Commission and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests should be received by the SEC 
by 5:30 p.m. on July 22, 1996 and should be accompanied by proof of 
service on Applicants in the form of an affidavit or, for lawyers, a

[[Page 35276]]

certificate of service. Hearing requests should state the nature of the 
requester's interest, the reason for the request and the issues 
contested. Persons may request notification of a hearing by writing to 
the Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C. 
20549. Applicants: Howard J. Kashner, Esq., Quest Advisory Corp., 1414 
Avenue of the Americas, New York, New York 10019.

FOR FURTHER INFORMATION CONTACT: Edward P. Macdonald, Staff Attorney, 
or Wendy F. Friedlander, Deputy Chief, Office of Insurance Products 
(Division of Investment Management), at (202) 942-0670.

SUPPLEMENTARY INFORMATION: Following is a summary of the application. 
The complete application is available for a fee from the Public 
Reference Branch of the Commission.

Applicants' Representations

    1. The Trust was organized as a Delaware Business Trust in January, 
1996, and has registered with the Commission as an open-end management 
investment company.
    2. Quest serves as investment adviser to the Trust and is a 
registered investment adviser under the Investment Advisers Act of 
1940.
    3. The Funds propose to offer shares of one or more of their series 
to insurance company separate accounts that fund variable annuity and 
variable life insurance contracts (``Contracts'') established by 
Participating Insurance Companies. These separate accounts may be 
registered as investment companies under the 1940 Act or exempt from 
registration pursuant to Section 3(c)(1) of the 1940 Act. Each 
Participating Insurance Company will enter into a fund participation 
agreement with the Funds in which the Participating Insurance company 
invests.
    4. The Funds also intend to offer shares of each series directly to 
Plans outside of the separate account context. The Plans may choose one 
or more series of any of the Funds as the sole investment under the 
Plan or as one of several investments.

Applicants' Legal Analysis

    1. In connection with the funding of scheduled premium variable 
life insurance contracts issued through a separate account registered 
under the 1940 Act as a unit investment trust (``UIT''), Rule 63-
2(b)(15) provides partial exemptions from Sections 9(a), 13(a), 15(a) 
and 15(b) of the 1940 Act. The relief provided by Rule 6e-2(b)(15) is 
available to a separate account's investment adviser, principal 
underwriter, and sponsor or depositor. The exemptions granted by Rule 
6e-2(b)(15) are available, however, only where the management 
investment company underlying the UIT offers its shares ``exclusively 
to variable life insurance separate accounts of the life insurer, or of 
any affiliated life insurance company.''
    2. The use of a common management investment company as the 
underlying investment medium for both variable annuity and variable 
life insurance separate accounts of a single insurance company (or of 
two or more affiliated insurance companies) is referred to as ``mixed 
funding.'' The use of a common management investment company as the 
underlying investment medium for variable annuity and/or variable life 
insurance separate accounts of unaffiliated insurance companies is 
referred to as ``shared funding.'' ``Mixed and shared funding'' denotes 
the use of a common management investment company to fund the variable 
annuity and variable life insurance separate accounts of affiliated and 
unaffiliated insurance companies. The relief granted by Rule 6e-
2(b)(15), thus, is not available with respect to a scheduled premium 
variable life insurance separate account that owns shares of an 
underlying fund that also offers its shares to a variable annuity 
separate account of the same company or of any other affiliated or 
unaffiliated life insurance company. Rule 6e-2(b)(15), therefore, 
precludes mixed and shared funding.
    3. Applicants state that because the relief under rule 6e-2(b)(15) 
is available only where shares are offered exclusively to separate 
accounts of insurance companies, additional exemptive relief is 
necessary if shares of the Funds are also to be sold to Plans.
    4. In connection with flexible premium variable life insurance 
contracts issued through a UIT, rule 6e-3(T)(b)(15) provides partial 
exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act. 
The exemptions granted to a separate account by Rule 6e-3(T)(b)(15) are 
available only where all of the assets of the separate account consist 
of the shares of one or more registered management investment companies 
which offer their shares ``exclusively to separate accounts of the life 
insurer, or of any affiliated life insurance company, offering either 
scheduled contracts or flexible contracts, or both; or which also offer 
their shares to variable annuity separate accounts of the life insurer 
or of an affiliated life insurance company.'' Rule 6e-3(T) thus permits 
mixed funding but does not permit shared funding.
    5. Applicants state that because the relief under Rule 6e-3(T) is 
available only where shares are offered exclusively to separate 
accounts, additional relief is necessary if shares of the Funds also 
are to be sold to Plans. Applicants assert that the relief granted by 
paragraphs (b)(15) of Rules 6e-2 and 6e-3(T) should not be affected by 
the proposed sale of Fund shares to Plans because such sales may allow 
for the development of larger pools of assets, resulting in the 
potential for greater investment and diversification opportunities and 
for decreased expenses at higher asset levels resulting in greater cost 
efficiencies.
    6. Applicants state that changes in the tax law have created the 
opportunity for the Funds to increase their asset base through the sale 
of Fund shares to the Plans. Applicants state that Section 817(h) of 
the Internal Revenue code, as amended, (``Code'') imposes certain 
diversification requirements on the underlying assets of the Contracts 
held in the Funds. The Code provides that such Contracts shall not be 
treated as an annuity contract or a life insurance contract for any 
period in which the underlying assets are not, in accordance with 
regulations prescribed by the Treasury Department, adequately 
diversified. On March 2, 1989, the Treasury Department issued 
regulations which established diversification requirements for the 
investment portfolios underlying variable contracts. Treas. Reg. 1.817-
5 (1989). The regulations provide that, to meet the diversification 
requirements, all of the beneficial interests in the investment company 
must be held by the segregated asset accounts of one or more insurance 
companies. The regulations do, however contain certain exceptions to 
this requirement, one of which allows shares in an investment company 
to be held by a qualified pension or retirement plan without adversely 
effecting the ability of shares in the same investment company to also 
be held by the separate accounts of insurance companies in connection 
with their variable contracts. Treas. Reg. 1.817-5(f)(3)(iii).
    7. Applicants state that the promulgation of Rules 6e-2 and 6e-3(T) 
under the 1940 Act preceded the issuance of these Treasury regulations, 
and that the sale of shares of the same investment company to both 
separate accounts and Plans could not have been envisioned at the time 
of the adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15).
    8. Applicants therefore request relief from Section 9(a), 13(a), 
15(a) and 15(b) of the 1940 Act, and Rules 6e-2(b)(15)

[[Page 35277]]

and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares 
of the Fund to be offered and sold in connection with both mixed and 
shared funding, and to be sold directly to Plans. Relief is requested 
for a class or classes of persons and transactions consisting of 
Participating Insurance Companies and their scheduled premium variable 
life insurance separate accounts and flexible premium variable life 
insurance separate accounts (and, to the extent necessary, any 
investment adviser, principal underwriter, and depositor of such 
separate accounts) investing in any of the Funds.

Disqualification

    9. Section 9(a) of the 1940 Act provides that it is unlawful for 
any company to serve as an investment adviser to or principal 
underwriter for any registered open-end investment company if an 
affiliated person of that company is subject to a disqualification 
enumerated in Section 9(a)(1) or (2). Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) provide exemption from Section 9(a) under certain 
circumstances, subject to the limitations on mixed and shared funding. 
The relief provided by Rules 6e-2(b)(15)(i) and 6e-3(T)(b)(15)(i) 
permit a person disqualified under Section 9(a) to serve as an officer, 
director or employee of the life insurer, or any of its affiliates, so 
long as that person does not participate directly in the management or 
administration of the underlying fund. The relief provided by Rules 6e-
2(b)(15)(ii) and 6e-3(T)(b)(15)(ii) permit the life insurer to serve as 
the underlying fund's investment adviser or principal underwriter, 
provided that none of the insurer's personnel who are ineligible 
pursuant to Section 9(a) participate in the management or 
administration of the Fund.
    10. Applicants state that the partial relief from Section 9(a) of 
the 1940 Act found in Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, 
in effect, limits the amount of monitoring necessary to ensure 
compliance with Section 9 to that which is appropriate in light of the 
policy and purposes of that section. Applicants state that those rules 
recognize that it is not necessary for the protection of investors or 
the purposes fairly intended by the policy or provisions of the 1940 
Act to apply the provisions of Section 9(a) to the many individuals 
employed by the Participating Insurance Companies, most of whom will 
have no involvement in matters pertaining to investment companies 
within that organization. Applicants note that the Participating 
Insurance Companies are not expected to play any role in the management 
or administration of the Funds. Therefore, Applicants assert, applying 
the restrictions of Section 9(a) serves no regulatory purpose. 
Applicants state that the relief requested should not be affected by 
the proposed sale of shares of the Funds to the Plans because the Plans 
are not investment companies and are not, therefore, subject to Section 
9(a).

Pass-Through Voting

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

Conflicts of Interest

    15. Applicants state that no increased conflicts of interest would 
be present by the granting of the requested relief. Applicants assert 
that shared funding does not present any issues that do not already 
exist where a single insurance company is licensed to do business in 
several states. Applicants note that where Participating Insurance 
Companies are domiciled in different states, it is possible that the 
state insurance regulatory body in a state in which one Participating 
Insurance Company is domiciled could require action that is 
inconsistent with the requirements of insurance regulators in one or 
more other states in which other Participating Insurance Companies are 
domiciled. Applicants submit that this possibility is no different and 
no greater than exists where a single insurer and

[[Page 35278]]

its affiliates offer their insurance products in several states.
    16. Applicants further submit that affiliation does not reduce the 
potential for differences among state regulatory requirements. In any 
event, the conditions (adapted from the conditions included in Rule 6e-
3(T)(b)(15) discussed below) are designed to safeguard against any 
adverse effects that these differences may produce. If a particular 
state insurance regulator's decision conflicts with the decisions of a 
majority of other state regulators, the affected insurer may be 
required to withdraw its separate account's investment in the relevant 
Funds.
    17. Applicants also argue that affiliation does not eliminate the 
potential, if any exists, for divergent judgments as to when a 
Participating insurance Company could disregard Contract owner voting 
instructions. Potential disagreement is limited by the requirement that 
the Participating Insurance Company's disregard of voting instructions 
be both reasonable and based on specific good faith determinations. 
However, if a Participating Insurance Company's decision to disregard 
Contract owner instructions represents a minority position or would 
preclude a majority vote approving a particular change, such 
Participating Insurance Company may be required, at the election of the 
relevant Fund, to withdraw its investment in that Fund. No charge or 
penalty will be imposed as a result of such withdrawal.
    18. Applicants submit that there is no reason why the investment 
policies of a Fund with mixed funding would or should be materially 
different from what those policies would or should be if such 
investment company or series thereof funded only variable annuity or 
variable life insurance contracts. Applicants therefore argue that 
there is no reason to believe that conflicts of interest would result 
from mixed funding. Moreover, Applicants represent that the Funds will 
not be managed to favor or disfavor any particular insurance company or 
type of Contract.
    19. Applicants note that Section 817(h) of the Code imposes certain 
diversification standards on the underlying assets of variable annuity 
contracts and variable life insurance contracts held in the portfolios 
of management investment companies. Treasury regulation 1.817-
5(f)(3)(iii), which established diversification requirements for such 
portfolios, specifically permits ``qualified pension or retirement 
plans'' and separate accounts to share the same underlying investment 
company. Therefore, Applicants have concluded that neither the Code, 
nor the Treasury regulations, nor the revenue rulings thereunder, 
present any inherent conflicts of interests if Plans, variable annuity 
separate accounts and variable life insurance separate accounts all 
invest in the same management investment company.
    20. Applicants note that while there are differences in the manner 
in which distributions are taxed for variable annuity contracts, 
variable life insurance contracts and Plans these tax consequences do 
not raise any conflicts of interest. When distributions are to be made, 
and the separate account or the Plan is unable to net purchase payments 
to make the distributions, the separate account or the Plan will redeem 
shares of the Funds at their respective net asset values. The Plan will 
then make distributions in accordance with the terms of the Plan. A 
Participating Insurance Company will make distributions in accordance 
with the terms of the variable contract.
    21. Applicants state that they do not see any greater potential for 
material irreconcilable conflicts arising between the interests of Plan 
participants and owners of the Contracts issued by the separate 
accounts of Participating Insurance Companies from possible future 
changes in the federal tax laws than that which already exists between 
variable annuity contract owners and variable life insurance contract 
owners.
    22. With respect to voting rights, Applicants state that it is 
possible to provide an equitable means of giving such voting rights to 
Contract owners and to Plans. Applicants represent that a Fund will 
inform each shareholder, including each separate account and Plan, of 
information necessary for the shareholder meeting, including their 
respective share ownership in the Fund. A Participating Insurance 
Company will then solicit voting instructions in accordance with the 
``pass-through'' voting requirements of Rules 6e-2 and 6e-3(T).
    23. Applicants argue that the ability of the Funds to sell their 
respective shares directly to Plans does not create a ``senior 
security'', as such term is defined under Section 18(g) of the 1940 
Act, with respect to any Contract owner as opposed to a participant 
under a Plan. Regardless of the rights and benefits of Plan 
participants and Contract owners under their respective Plans and 
Contracts, the Plans and separate accounts have rights only with 
respect to their shares of the Funds. Such share may be redeemed only 
at net asset value. No shareholder of any of the Funds has any 
preference over any other shareholder with respect to distribution of 
assets or payment of dividends.
    24. Applicants state that there are no conflicts of interest 
between Contract owners and Plan participants with respect to the state 
insurance commissioners' veto powers over investment objectives. The 
state insurance commissioners have been given the veto power to prevent 
insurance companies indiscriminately redeeming their separate accounts 
out of one Fund and investing those assets in another Fund. Generally, 
to accomplish such redemptions and transfers, complex and time 
consuming transactions must be undertaken. Conversely, trustees of 
Plans or the participants in participant-direct Plans can make the 
decision quickly and implement redemption of shares from a Fund and 
reinvest the monies in another funding vehicle without the same 
regulatory impediments or, as in the case with most Plans, even hold 
cash pending a suitable investment. Based on the foregoing, Applicants 
represent that even should there arise issues where the interests of 
Contract owners and the interests of the Plans and Plan participants 
conflict, the issues can be almost immediately resolved in that 
trustees of the Plans can, independently, redeem shares out of the 
Funds.
    25. Applicants state that various factors have kept certain 
insurance companies from offering Contracts. According to Applicants, 
these factors include: the cost of organizing and operating an 
investment funding medium; the lack of expertise with respect to 
investment managers; and the lack of public name recognition as 
investment experts. Specifically, Applicants state that smaller life 
insurance companies may not find it economically feasible, or within 
their investment or administrative expertise, to enter the Contract 
business on their own. Applicants argue the use of the Funds as common 
investment media for the Contracts would ease these concerns. 
Participating Insurance Companies would benefit not only from the 
investment and administrative expertise of Quest and its affiliates, 
but also from the cost efficiencies and investment flexibility afforded 
by a large pool of funds. Applicants state that making the Funds 
available for mixed and shared funding may encourage more insurance 
companies to offer variable contract such as the Contracts, which may 
then increase competition with respect to both the design and the 
pricing of variable contracts. Applicants submit that this can be 
expected to

[[Page 35279]]

result in greater product variation and lower charges. Thus, Applicants 
argue that Contract owners would benefit because mixed and shared 
funding will eliminate a significant portion of the costs of 
establishing and administering separate funds. Moreover, Applicants 
assert that sales of shares of the Funds to Plans should increase the 
amount of assets available for investment by such Funds. This should, 
in turn, promote economies of scale, permit increased safety of 
investments through greater diversification, and make the addition of 
new portfolios more feasible.
    26. Applicants state that, regardless of the types of Fund 
shareholders, Quest is legally obligated to manage the Funds in 
accordance with each Fund's investment objectives, policies and 
restrictions as well as any guidelines established by the relevant 
Board of Directors or Trustees of the Funds. Applicants assert that 
Quest work with a pool of money without consideration for the identity 
of shareholders, and, thus, manage the Funds in the same manner as any 
other mutual fund.
    27. Applicants believe that there is no significant legal 
impediment to permitting mixed and shared funding. Additionally, 
Applicants note the previous issuance of orders permitting mixed and 
share funding where shares of a fund were sold directly to qualified 
plans, such as the Plans. Applicants note further that there is ample 
precedent for extending exemptive relief to members of a class or 
classes or persons, not currently identified, that may be similarly 
situated in the future. Such class relief has been granted in various 
contexts and from a wide variety of the 1940 Act's provisions including 
class exemption in the context of mixed and shared funding.

Applicants' Conditions

    The Applicants have consented to the following conditions if the 
order requested in the application is granted:
    1. A majority of the Board of Trustees or Board of Directors (each 
a ``Board'') of each Fund shall consist of persons who are not 
``interested persons'' of the Funds, as defined by Section 2(a)(19) of 
the 1940 Act and Rules thereunder, and as modified by any applicable 
orders of the Commission, except that, if this condition is not met by 
reason of death, disqualification, or bona fide resignation of any 
Director or Trustee, then the operation of this condition shall be 
suspended: (i) for a period of 45 days, if the vacancy or vacancies may 
be filled by the appropriate Board, (ii) for a period of 60 days, if a 
vote of shareholders is required to fill the vacancy or vacancies; or 
(ii) for such longer period as the Commission may prescribe by order 
upon application.
    2. The Boards will monitor their respective Funds for the existence 
of any irreconcilable material conflict between the interests of 
Contract owners of all separate accounts and of Plan participants and 
Plans investing in the Funds, and determine what action if any, should 
be taken in response to such conflicts. A material irreconcilable 
conflict may arise for a variety of reasons, including: (a) An action 
by any state insurance regulatory authority; (b) a change in applicable 
federal or state insurance, tax, or securities laws or regulations, or 
a public ruling, private letter billing, no-action or interpretive 
letter, or any similar action by insurance, tax, or securities 
regulatory authorities; (c) an administrative or judicial decision in 
any relevant proceeding; (d) the manner in which the investments of the 
Funds are managed; (e) a difference in voting instructions given by 
owners of variable annuity and variable life insurance contracts; or 
(f) a decision by a Participating Insurance Company to disregard voting 
instructions of Contract owners; and, (g) if applicable, a decision by 
a Plan to disregard the voting instructions of Plan participants.
    3. Participating Insurance Companies, Quest (or any other 
investment manager of a Fund), and any Plan that executes a 
participation agreement upon becoming an owner of 10% or more of the 
issued and outstanding shares of a Fund (``Participating Plans'') will 
report any potential or existing conflicts to the Board of any relevant 
Fund. Quest (or any other investment adviser of a Fund), Participating 
Insurance Companies and Participating Plans will be responsible for 
assisting the appropriate Board in carrying out its responsibilities 
under these conditions by providing the Board with all information 
reasonably necessary for it to consider any issues raised. This 
responsibility includes, but is not limited to, an obligation by a 
Participating Insurance Company to inform the Board whenever it has 
determined to disregard Contract holders' voting instructions and, if 
pass-through voting is applicable, an obligation by a Participating 
Plan to inform the Board whenever it has determined to disregard Plan 
participant voting instructions. The responsibility to report such 
information and conflicts and to assist the Board will be contractual 
obligations of all Participating Insurance Companies and Participating 
Plans investing in the Funds under their agreements governing 
participating in the Funds, and such agreements shall provide that 
these responsibilities will be carried out with a view only to the 
interests of the Contract owners and, if applicable, Plan participants.
    4. If it is determined by a majority of the Board of a Fund, or by 
a majority of its disinterested trustees or directors, that a material 
irreconcilable conflict exists, the relevant Participating Insurance 
Companies and Participating Plans will, at their expense and to the 
extent reasonably practicable (as determined by a majority of 
disinterested trustees or members of the Board), take whatever steps 
are necessary to remedy or eliminate the material irreconcilable 
conflict, including: (a) Withdrawing the assets allocable to some or 
all of the separate accounts from the Fund or any series and 
reinvesting such assets in a different investment medium, which may 
include another series of a Fund or another Fund; (b) submitting the 
question of whether such segregation should be implemented to a vote of 
all affected Contract owners and, as appropriate, segregating the 
assets of any appropriate group (i.e., variable annuity or variable 
life insurance contract owners of one or more Participating Insurance 
Companies) that votes in favor of such segregation, or offering to the 
affected Contract owners the option of making such a change; and (c) 
establishing a new registered management investment company or managed 
separate account. If a material irreconcilable conflict arises because 
of a Participating Insurance Company's decision to Contract owner 
voting instructions and that decision represents a minority position or 
would preclude a majority vote, the Participating Insurance Company may 
be required, at the election of the Fund, to withdraw its separate 
account's investment in the Fund, and no charge or penalty will be 
imposed as a result of such withdrawal. If a material irreconcilable 
conflict arises because of a Participating Plan's decision to disregard 
Plan participant voting instructions, if applicable, and that decision 
represents a minority position or would preclude a majority vote, the 
Participating Plan may be required, at the election of the Fund, to 
withdraw its investment in the Fund, and no charge or penalty will be 
imposed as a result of such withdrawal. To the extent permitted by 
applicable law, the responsibility of taking remedial action in the 
event of a Board determination of the existence of an irreconcilable 
material conflict and bearing the cost of such remedial action, shall 
be a contractual obligation of all

[[Page 35280]]

Participating Insurance Companies and Participating Plans under their 
agreements governing participation in the Funds, and these 
responsibilities will be carried out with a view only to the interests 
of the Contract owners and, as applicable, Plan participants.
    For purposes of this Condition Four, a majority of the 
disinterested members of the applicable Board will determine whether or 
not any proposed action adequately remedies any material irreconcilable 
conflict, but in no event will the relevant Fund or Quest (or any other 
investment advisor to a Fund) be required to establish a new funding 
medium for any Contract. No Participating Insurance Company shall be 
required by this Condition Four to establish a new funding medium for 
any Contract if an offer to do so has been declined by a vote of a 
majority of Contract owners materially affected by the material 
irreconcilable conflict. No Participating Plan shall be required by 
this Condition Four to establish a new funding medium for such Plan if 
(a) a majority of Plan participants materially and adversely affected 
by the material irreconcilable conflict vote to decline such offer, or 
(b) pursuant to governing plan documents and applicable law, the 
Participating Plan makes such decision without Plan participant vote.
    5. Quest, all Participating Insurance Companies, and Participating 
Plans will be promptly informed in writing of any Board's determination 
that a material irreconcilable conflict exists, and its implications.
    6. Participating Insurance Companies will provide pass-through 
voting privileges to all Contract owners so long as the Commission 
continues to interpret the 1940 Act as requiring pass-through voting 
privileges for Contract owners. Accordingly, the Participating 
Insurance Companies will vote shares of a Fund held in their separate 
accounts in a manner consistent with voting instructions timely 
received from Contract owners. Participating Insurance Companies will 
be responsible for assuring that each of their separate accounts 
calculates voting privileges in a manner consistent with all other 
Participating Insurance Companies. The obligation to calculate voting 
privileges in a manner consistent with all other separate accounts 
investing in the Fund will be a contractual obligation of all 
Participating Insurance Companies under the agreements governing 
participation in the Fund. Each Participating Insurance Company will 
vote shares for which it has not received voting instructions as well 
as shares attributable to it in the same proportion as it votes shares 
for which it has received instructions. Each Participating Plan will 
vote as required by applicable law and governing plan documents.
    7. All reports of potential or existing conflicts of interest 
received by a Board, and all Board action with regard to determining 
the existence of a conflict, notifying Quest, Participating Insurance 
Companies and Participating Plans of a conflict, and determining 
whether any proposed action adequately remedies a conflict, will be 
properly recorded in the minutes of the appropriate Board or other 
appropriate records, and such minutes or other records shall be made 
available to the Commission upon request.
    8. Each Fund will notify all Participating Companies that separate 
account prospectus disclosure regarding potential risks of mixed and 
shared funding may be appropriate. Each Fund shall disclose in its 
prospectus that: (a) Its shares may be offered to insurance company 
separate accounts that fund both variable annuity and variable life 
insurance contracts, and to Plans; (b) due to differences of tax 
treatment and other considerations, the interests of various Contracts 
owners participating in the Fund and the interests of Plans investing 
in the Fund may conflict; and, (c) the Board will monitor the Fund for 
any material conflicts of interest and determine what action, if any, 
should be taken.
    9. Each Fund will comply with all provisions of the 1940 Act 
requiring voting by shareholders (which for these purposes, shall be 
the persons having a voting interest in the shares of the Fund) and in 
particular, each Fund will either provide for annual meetings (except 
to the extent that the Commission may interpret Section 16 of the 1940 
Act not to require such meetings) or comply with Section 16(c) of the 
1940 Act (although the Fund is one of the trusts described in Section 
16(c) of the 1940 Act), as well as with Section 16(a) and, if 
applicable, Section 16(b) of the 1940 Act. Further, the Fund will act 
in accordance with the Commission's interpretation of the requirements 
of Section 16(a) with respect to periodic elections of directors (or 
trustees) and with whatever rules the Commission may promulgate with 
respect thereto.
    10. If and to the extent Rule 6e-2 or Rule 6e-3(T) is amended, or 
Rule 6e-3(T) is adopted, to provide exemptive relief from any provision 
of the 1940 Act or the rules thereunder with respect to mixed and 
shared funding on terms and conditions materially different from any 
exemptions granted in the order requested by Applicants, then the Fund 
and the Participating Insurance Companies, as appropriate, shall take 
such steps as may be necessary to comply with Rule 6e-2 or Rule 6e-
3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules 
are applicable.
    11. No less than annually, Quest (or any other investment adviser 
of a Fund), the Participating Insurance Companies and Participating 
Plans shall submit to the Boards such reports, materials, or data as 
the Boards may reasonably request so that the Boards may carry out 
fully the obligations imposed upon them by the conditions stated in the 
application. Such reports, materials, and data shall be submitted more 
frequently if deemed appropriate by the Boards. The obligations of 
Quest, Participating Insurance Companies and Participating Plans to 
provide these reports, materials, and data to the Boards shall be a 
contractual obligation of Quest, all Participating Insurance Companies 
and Participating Plans under the agreements governing their 
participation in the Fund.
    12. If a Plan should become an owner of 10% or more of the issued 
and outstanding shares of a Fund, such Plan will execute a 
participation agreement with the applicable Fund including the 
conditions set forth herein to the extent applicable. A Plan will 
execute an application containing an acknowledgment of this condition 
at the time of its initial purchase of shares of the Fund.

Conclusion

    For the reasons stated above, Applicants assert that the requested 
exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act 
and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, are appropriate in 
the public interest consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-17150 Filed 7-3-96; 8:45 am]
BILLING CODE 8010-01-M