[Federal Register Volume 61, Number 146 (Monday, July 29, 1996)]
[Notices]
[Pages 39484-39490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19118]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22082; File No. 812-10058]


BT Insurance Funds Trust, et al.

July 19, 1996.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

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APPLICANTS: BT Insurance Funds Trust (``Trust''), Bankers Trust Global 
Investment Management, a unit of Bankers Trust Company (``Investment 
Management''), and certain other life insurance companies and their 
separate accounts investing now or in the future in the Trust.

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 Rules 6e-2(b)(15), and 6e-3(T)(b)(15) thereunder.

SUMMARY OF APPLICATION: Applicants seek exemptive relief to the extent 
necessary to permit shares of the Trust and any other investment 
company that is offered to fund variable insurance products and for 
which Investment Management, or any of its affiliates, may serve as 
investment adviser,

[[Page 39485]]

administrator, manager, principal underwriter, or sponsor 
(collectively, ``Investment Companies'') to be sold to and held by the 
separate accounts (``Separate Accounts'') funding variable annuity and 
variable life insurance contracts (``Variable Contracts'') issued by 
affiliated or unaffiliated life insurance companies (``Participating 
Insurance Companies'') or to future qualified pension and retirement 
plans outside of the separate account context (``Qualified Plans'' or 
``Plans'').

FILING DATE: The application was filed on March 25, 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 SEC's Secretary and 
serving Applicants with a copy of the request, personally or by mail. 
Hearing requests should be received by the SEC by 5:30 p.m. on August 
13, 1996, 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: Burton M. Leibert, Esq. or Rosalind A. Fahey, Esq., 
Wilkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New 
York, New York 10022.

FOR FURTHER INFORMATION CONTACT: Pamela K. Ellis, Senior Counsel, or 
Wendy Finck Friedlander, Deputy Chief, both at (202) 942-0670, Office 
of Insurance Products (Division of Investment Management).

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

Applicants' Representations

    1. The Trust is a Massachusetts business trust registered under the 
1940 Act as an open-end management investment company. The Trust 
currently consists of two series, each representing an interest in a 
separate investment portfolio (``Portfolios''). The Trust may establish 
additional series of shares at any time.
    2. Investment Management serves as investment adviser to each 
Portfolio of the Trust. Investment Management is a New York banking 
corporation and a wholly owned subsidiary of Bankers Trust New York 
Corporation (``Bankers Trust'').
    3. 440 Financial Distributors, Inc., a broker-dealer registered 
under the Securities Exchange Act of 1934 and a company not affiliated 
with Bankers Trust, is the distributor of the Portfolios' shares.
    4. Applicants propose that the Investment Companies serve as 
investment vehicles for various types of Variable Contracts. Investment 
Companies' shares will be offered to Separate Accounts of Participating 
Insurance Companies which enter into participation agreements with the 
Trust. These Separate Accounts may be registered with the Commission 
under the 1940 Act or exempt from registration under Section 3(c)(1) of 
the 1940 Act.
    5. Applicants state that each Participating Insurance Company will 
have the legal obligation of satisfying all applicable requirements 
under state law and the federal securities laws in connection with any 
Variable Contract issued by such company. Applicants further state that 
the role of the Trust under this arrangement will consist of offering 
its shares to the Separate Accounts and fulfilling any conditions the 
Commission may impose upon granting the order requested in this 
application.
    6. In addition, Applicants state that the Trust desires to avail 
itself of the opportunity to increase its assets base through the sale 
of its shares to Qualified Plans, consistent with applicable tax law. 
The Qualified Plans may choose any of the Investment Companies as the 
sole investment option under the Qualified Plan or as one of several 
investment options. Qualified Plans' participants may or may not be 
given an investment choice among available alternatives depending on 
the Qualified Plan itself. Shares of any Investment Company sold to 
Qualified Plans would be held by the trustee(s) of such Qualified Plans 
as mandated by Section 403(a) of the Employee Retirement Income 
Security Act (``ERISA''). Investment Management may act as investment 
adviser to any of the Qualified Plans that will purchase shares of the 
Trust. Applicants note that pass-through voting is not required to be 
provided to participants in Qualified Plans under ERISA.

Applicants' Legal Analysis

    1. Applicants request that the Commission issue an order under 
Section 6(c) of the 1940 Act exempting them 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) to the extent necessary to permit mixed and shared funding, 
as defined below in Paragraphs 4 and 5.
    2. Section 6(c) authorizes the Commission to grant exemptions from 
the provisions of the 1940 Act, and rules thereunder, if and to the 
extent that an exemption is necessary or appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the 1940 Act.
    3. Rules 6e-2(b)(15) provides partial exemptive relief from 
Sections 9(a), 13(a), 15(a), and 15(b) of the 1940 Act to separate 
accounts registered under the 1940 Act as unit investment trusts to the 
extent necessary to offer and sell scheduled premium variable life 
insurance contracts. The relief provided by the ruled also extends to a 
separate account's investment adviser, principal underwriter, and 
sponsor or depositor.
    4. The exemptions granted by Rule 6e-2(b)(15) are available only to 
a management investment company underlying a separate account 
(``Underlying Fund'') that offers its shares exclusively to variable 
life insurance separate accounts of a life insurer, or of any other 
affiliated life insurance company, issuing scheduled premium variable 
life insurance contracts. The relief granted by Rule 6e-2(b)(15) is not 
available to a separate account issuing scheduled premium variable life 
insurance contracts if the Underlying Fund also offers its shares to a 
separate account issuing variable annuity or flexible premium variable 
life insurance contracts. The use of a common Underlying Fund as an 
investment vehicle for both variable annuity contracts and scheduled or 
flexible premium variable life insurance contracts is referred to 
herein as ``mixed funding.''
    5. Additionally, the relief granted by Rule 6e-2(b)(15) is not 
available to separate accounts issuing scheduled premium variable life 
insurance contracts if the Underlying Fund also offers its shares to 
unaffiliated life insurance company separate accounts funding variable 
contracts. The use of a common fund as an underlying investment vehicle 
for separate accounts of unaffiliated insurance companies is referred 
to herein as ``shared funding.'' Moreover, because the relief granted 
by Rule 6e-2(b)(15) is available only where shares of the Underlying 
Fund are offered exclusively to separate accounts of insurance 
companies, additional exemptive relief is necessary if the shares of 
the Trust also are to be sold to Qualified Plans.
    6. Applicants, therefore, request an order of the Commission 
exempting scheduled premium variable life

[[Page 39486]]

insurance separate accounts of Participating Insurance Companies (and, 
to the extent necessary, any principal underwriter and depositor of 
such account) and the Applicants from Sections 9(a), 13(a), 15(a), and 
15(b) of the 1940 Act, and Rule 6e-2(b) thereunder, to the extent 
necessary to permit shares of the Investment Companies to be offered 
and sold to, and held by: (1) Variable annuity separate accounts and 
variable life insurance separate accounts of the same life insurance 
company or of affiliated life insurance companies (i.e., mixed 
funding); (2) variable life insurance separate accounts of one life 
insurance company and separate accounts funding variable contracts of 
unaffiliated life insurance companies (i.e., shared funding); (3) 
Qualified Plans.
    7. Regarding the funding of flexible premium variable life 
insurance contracts issued through a separate account, Rule 6e-
3(T)(b)(15) provides partial exemptions from Sections 9(a), 13(a), 
15(a), and 15(b) of the 1940 Act. This exemptive relief extends to a 
separate account's investment adviser, principal underwriter, and 
sponsor or depositor. These exemptions are available only where the 
Underlying Fund of the separate account offers its 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), therefore, permits mixed 
funding with respect to a flexible premium variable life insurance 
separate account, subject to certain conditions. However, Rule 6e-3(T) 
does not permit shared funding because the relief granted by Rule 6e-
3(T)(b)(15) is not available to a flexible premium variable life 
insurance separate account that owns shares of a management company 
that also offers its shares to separate accounts of unaffiliated life 
insurance companies. Moreover, because the relief afforded by Rule 6e-
3(T) is available only where shares of the Underlying Fund are offered 
exclusively to separate accounts of insurance companies, additional 
relief is necessary if shares of the Trust also are to be sold to 
Qualified Plans.
    8. Accordingly, Applicants request an order of the Commission 
exempting flexible premium life insurance separate accounts of 
Participating Insurance Companies (and, to the extent necessary, any 
principal underwriter and depositor of such accounts) and the 
Applicants from Sections 9(a), 13(a), 15(a), and 15(b) thereunder, to 
permit shares of the Investment Companies to be offered and sold to, 
and held by: (1) Separate accounts funding variable contracts of 
affiliated and unaffiliated life insurance companies; and (2) Qualified 
Plans.
    9. Applicants state that changes in the tax law have created the 
opportunity for the Portfolios to increase their asset base through the 
sale of Portfolio shares to Qualified Plans. Applicants state that 
Section 817(h) of the Internal Revenue Code of 1986, as amended 
(``Code''), imposes certain diversification standards on the assets 
underlying variable contracts, such as those in each Portfolio of the 
Trust. The Code provides that a variable contract shall not be treated 
as an annuity contract or life insurance contract for any period for 
which the underlying assets are not, in accordance with regulations 
prescribed by the Treasury Department, adequately diversified. These 
diversification requirements are applied by taking into account the 
assets of the Underlying Fund if all the beneficial interests in the 
Underlying Fund are held by certain designated persons. On March 2, 
1989, the Treasury Department issued regulations that adopted 
diversification requirements for Underlying Funds. Treas. Reg. 
Sec. 1.817-5 (1989). These regulations provide that, in order 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 permits trustee(s) 
of a qualified pension or retirement plan to hold shares of an 
investment company, the shares of which also are held by separate 
accounts of insurance companies, without adversely affecting the status 
of the investment company as an adequately diversified underlying 
investment vehicle for variable contracts issued through such 
segregated asset accounts. Treas. Reg. Sec. 1.817-5(f)(3)(iii).
    10. Applicants state that the promulgation of Rules 6e-2(b)(15) and 
6e-3(T)(b)(15) preceded the issuance of the Treasury Department's 
regulations which made it possible for shares of an investment company 
to be held by the trustee(s) of qualified plans without adversely 
affecting the ability of shares in the same investment company also to 
be held by separate accounts of insurance companies in connection with 
their variable contracts. Thus, the sale of shares of the same 
investment company to 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) given the then current tax law.
    11. Moreover, Applicants assert that if the Trust were to sell its 
shares only to Qualified Plans, no exemptive relief would be necessary. 
Applicants state that none of the relief provided for in Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) relates to qualified pension or retirement 
plans or to an Underlying Fund's ability to sell its shares to such 
plans. It is only because the Separate Accounts investing in the Trust 
are themselves investment companies which are relying upon Rules 6e-2 
and 6e-3(T) and which propose to have the relief continue in place that 
Applicants are applying for the requested relief.
    12. Section 9(a) of the 1940 Act makes it unlawful for any company 
to serve as an investment adviser to, or principal underwriter of, any 
registered open-ended investment company if an affiliated person of 
that company is subject to any disqualification specified in Sections 
9(a)(1) or 9(a)(2). Subparagraphs (b)(15) (i) and (ii) of Rules 6e-2 
and 6e-3(T) provide exemptions from Section 9(a) under certain 
circumstances, subject to 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.
    13. Applicants state that the partial relief granted under 
subparagraphs (b)(15) of Rules 6e-2 and 6e-3(T) from the requirements 
of Section 9(a), in effect, limits the monitoring of an insurer's 
personnel that would otherwise be necessary to ensure compliance with 
Section 9 to that which is appropriate in light of the policy and 
purposes of Section 9. Applicants submit that Rules 6e-2 and 6e-3(T) 
recognize that it is not necessary for the protection of investors or 
for the purposes of the 1940 Act to apply the provisions of Section 
9(a) to the many individuals in an insurance company complex, most of 
whom typically will have no involvement in matters pertaining to an 
investment company in

[[Page 39487]]

that organization. The Participating Insurance Companies are not 
expected to play any role in the management or administration of the 
Investment Companies. Applicants, therefore, submit that there is no 
regulatory reason to apply the provisions of Section 9(a) to the many 
individuals in various Participating Insurance Companies.
    14. Subparagraphs (b)(15)(iii) of Rules 6e-2 and 6e-3(T) provide 
partial exemptions from Sections 13(a), 15(a), and 15(b) of the 1940 
Act to the extent that those sections have been deemed by the 
Commission to require ``pass-through'' voting with respect to 
management investment company shares held by a separate account, to 
permit the insurance company to disregard the voting instructions of 
its variable contract owners in certain limited circumstances.
    15. Voting instructions may be disregarded under subparagraphs 
(b)(15)(iii)(A) of Rules 6e-2 and 6e-3(T) if they would cause the 
Underlying Fund to make, or refrain from making, certain investments 
which would result in changes to the subclassification or investment 
objectives of the Underlying Fund, or to approve or disapprove any 
contract between a fund and its investment advisers, when required to 
do so by an insurance regulatory authority, subject to the provisions 
of paragraphs (b)(5)(i) and (b)(7)(ii)(A) of each Rule.
    16. Under subparagraph (b)(15)(iii)(B) of Rule 6e-2 and 
subparagraph (b)(15)(iii)(A)(2) of Rule 6e-3(T), an insurance company 
may disregard variable contract owners' voting instructions if the 
variable contract owners initiate any change in the Underlying Fund's 
investment objectives, principal underwriter, or investment adviser, 
provided that disregarding such voting instructions is reasonable and 
subject to the other provisions of paragraphs (b)(5)(ii) and (b)(7)(ii) 
(B) and (C) of each Rule.
    17. Applicants assert that the proposed sale of shares of the Trust 
to Qualified Plans does not impact of the relief requested. As 
previously noted, Rules 6e-2(b)(15)(iii) and 6e-3(T)(15)(iii) permit an 
insurer to disregard variable contract owner voting instructions in 
certain circumstances. Offering shares of the Trust to Qualified Plans 
would not affect the circumstances and conditions under which any veto 
right would be exercised by a Participating Insurance Company. 
Furthermore, as stated above, shares of the Trust would be sold only to 
Qualified Plans for which such shares would be held by the trustee(s) 
of such plans as mandated by Section 403(a) of ERISA. Section 403(a) 
provides that the trustee(s) must have exclusive authority and 
discretion to manage and control the qualified plan with two 
exceptions: (1) When the qualified plan expressly provides that the 
trustee(s) are subject to the direction of an named fiduciary who is 
not a trustee, in which case the trustee(s) are subject to proper 
directions of such fiduciary made in accordance with the terms of the 
qualified plan and not contrary to ERISA; and (2) when the authority to 
manage, acquire, a dispose of assets of the Qualified Plans is 
delegated to one or more investment managers under Section 402(c)(3) of 
ERISA. Unless one of the two exceptions stated in Section 403(a) 
applies, the Qualified Plans' trustee(s) have the exclusive authority 
and responsibility for voting proxies. When 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 trustee(s) or the named fiduciary. In any event, Applicants 
assert that pass-through voting to the participants in such Qualified 
Plans is not required. 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 Qualified Plans.
    18. Applicants state that no increased conflicts of interest would 
be present by the granting of the requested relief. Applicants submit 
that shared funding by unaffiliated insurance companies 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. In this 
regard, Applicants assert that a particular state insurance regulatory 
body could require action that is inconsistent with the requirements of 
other states in which the insurance company offers its variable 
contracts. Accordingly, Applicants submit that the fact that different 
insurers may be domiciled in different states does not create a 
significantly different or enlarged problem.
    19. Applicants state further that, under paragraph (b)(15) of Rules 
6e-2 and 6e-3(T), the right of an insurance company to disregard 
Variable Contract owners' voting instructions does not raise any issues 
different from those raised by the authority of state insurance 
administrators over separate accounts, and that affiliation does not 
eliminate the potential, if any, for divergent judgments as to the 
advisability or legality of a change in investment policies, principal 
underwriter, or investment adviser. Applicants state that the potential 
for disagreement is limited by the requirements in Rules 6e-2 and 6e-
3(T) that the insurance company's disregard of voting instructions be 
reasonable and based on specific good faith determinations. If a 
participating Insurance Company's decision to disregard Variable 
Contract owners' instructions represents a minority position or would 
preclude a majority vote approving a particular change, however, such 
Participating Insurance Company may be required, at the election of the 
relevant Investment Company, to withdraw its Separate Account's 
investment in such Investment Company. No charge or penalty will be 
imposed as result of such withdrawal.
    20. Applicants state that there is no reason why the investment 
policies of the Investment Companies with mixed funding would or should 
be materially different from what they would or should be if the 
Investment Companies funded only variable annuity contracts or variable 
life insurance policies. Each type of insurance product is designed as 
a long-term investment program. Moreover, Applicants assert that the 
Investment Companies will continue to be managed in an attempt to 
achieve their investment objectives, and not to favor any particular 
Participating Insurance Company or type of insurance product. 
Applicants, therefore, argue that there is no reason to believe that 
conflicts of interest would result from mixed funding.
    21. In addition, Applicants assert that the sale of shares of the 
Trust to Qualified Plans will not increase the potential for material 
irreconcilable conflicts of interest between or among different types 
of investors. Section 817 is the only section in the Code where 
separate accounts are discussed. Section 817(h) imposes certain 
diversification standards on Underlying Funds of variable contracts. 
Treasury Regulation 1.817-5(f)(3)(iii) specifically permits ``qualified 
pension or retirement plans'' and separate accounts to share the same 
underlying management investment company. Applicants, therefore, have 
concluded that neither the Code, nor the Treasury regulations or 
revenue rulings thereunder, present any inherent conflicts of interest 
between or among qualified pension or retirement plan participants and 
variable contract owners if qualified pension and retirement plans and 
variable annuity and variable life separate accounts invest in the same 
management investment company.

[[Page 39488]]

    22. Applicants assert that while there are differences in the 
manner in which distributions are taxed for variable annuity and 
variable life insurance contracts and Qualified Plans, these tax 
consequences do not raise any conflicts of interest. When distributions 
are 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 Investment Companies at 
their respective net asset value. The Qualified Plan then will make 
distributions in accordance with the terms of the Plan, and 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.
    23. With respect to voting rights, Applicants state that it is 
possible to provide an equitable means of giving rights to Variable 
Contract owners and participants in the Qualified Plans. In connection 
with any meeting of shareholders, the Trust will inform each 
shareholder, including each Separate Account and Qualified Plan, of the 
information necessary for the meeting, including their respective share 
of ownership in the Investment Companies. A Participating Insurance 
Company will solicit voting instructions in accordance with the ``pass-
through'' voting requirement. Qualified Plans and Separate Accounts 
each will have the opportunity to exercise voting rights with respect 
to their shares in the investment Companies, although only the Separate 
Accounts are required to pass through their vote to Contract owners. 
The voting rights provided to Qualified Plans with respect to shares of 
the Trust would be no different from the voting rights that are 
provided to Qualified Plans with respect to shares of mutual funds sold 
to the general public.
    24. Applicants argue that the ability of the Investment Companies 
to sell their shares directly to Qualified Plans does not create a 
``senior security'' as defined by Section 18(g) of the 1940 Act. As 
noted above, regardless of the rights and benefits of participants 
under Qualified Plans, or variable Contract owners under Variable 
Contracts, the Qualified Plans and the Separate Accounts have rights 
only with respect to their respective shares of the Investment 
Companies. They only can redeem such shares at their net asset value. 
No shareholder of the Investment Companies has any preference over any 
other shareholder with respect to distribution of assets of payment of 
dividends.
    25. Applicants have determined that of conflicts of interest exist 
between the Variable Contract owners of the Separate Accounts and 
Qualified Plans participants with respect to the state insurance 
commissioners' veto powers over investment objectives. The basic 
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 
the insurance companies usually cannot simply redeem their separate 
accounts out of one fund and invest in another fund. Generally, time-
consuming complex transactions must be undertaken to accomplish such 
redemptions and transfers. Conversely, the trustee(s) of Qualified 
Plans or the participants in participant directed Qualified Plans could 
make the decision quickly and could implement the redemption of their 
shares from the Investment Companies and reinvest in another funding 
vehicle without the same regulatory impediments or, as is the case with 
most Qualified Plans, even hold cash pending suitable investment.
    26. 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 Variable Contract owners of 
the Separate Accounts from possible future changes in the federal tax 
laws than that which already exists between Variable Contract owners.
    27. Applicants assert that the requested relief is appropriate and 
in the public interest because the relief will promote competitiveness 
in the variable life insurance market. Various factors have limited the 
number of insurance companies that offer variable contracts. These 
factors include the costs of organizing and operating a funding medium, 
the lack of expertise with respect to investment management, and the 
lack of name recognition by the public of certain insurers as 
investment experts to whom the public feels comfortable entrusting 
their investment dollars. Applicants argue that use of Investment 
Companies as common investment vehicles of Variable Contracts helps to 
alleviate these concerns because Participating Insurance Companies 
benefit not only from the investment and administrative expertise of 
the Trust's investment adviser, but also from the cost efficiencies and 
investment flexibility afforded by a large pool of funds. Making the 
Portfolios available for mixed and shared funding may encourage more 
insurance companies to offer variable contracts and, accordingly, could 
result in increased competition with respect to both variable contract 
design and pricing, which can be expected to result in more product 
variation and lower charges. Mixed and shared funding also would 
benefit variable contract owners by eliminating a significant portion 
of the costs of establishing and administering separate mutual funds. 
Furthermore, Applicants assert that the sale of shares of the 
Investment Companies to Qualified Plans, in addition to Separate 
Accounts of Participating Insurance Companies, would result in an 
increased amount of assets available for investment by the Investment 
Companies. This may benefit Variable Contract owners by promoting 
economies of scale, by permitting increased safety of investments 
through greater diversification, and by making the addition of new 
portfolios more feasible.
    28. Applicants assert that there is no significant legal impediment 
to permitting mixed and shared funding. Separate accounts organized as 
unit investment trusts historically have been employed to accumulated 
shares of mutual funds which have not been affiliated with the 
depositor or sponsor of the separate account, and Applicants believe 
that mixed and shared funding will have no adverse federal income tax 
consequences.

Applicants' Conditions

    The Applicants have consented to the following conditions:
    1. A majority of the board of the Trust (``Board'') shall consist 
of persons who are not ``interested persons'' of the Trust 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 trustee or director, 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 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 
prescribed by order upon application.
    2. The Board will monitor the Investment Companies for the 
existence of any material irreconcilable conflict between the contract 
holders of all Separate Accounts and of participants of Qualified Plans 
investing in the respective Investment Companies, and determined what 
action, if any, should be taken in response to such conflicts. A 
material irreconcilable conflict may

[[Page 39489]]

arise for a variety of reasons, including: (a) State insurance 
regulatory authority action; (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 Investment Companies are 
being managed; (e) a difference among voting instructions given by 
Variable Contract owners; or (f) a decision by a Participating 
Insurance Company to disregard Variable Contract owners' voting 
instructions.
    3. Participating Insurance Companies and Investment Management (or 
any other investment manager of the Trust) and any Qualified Plan that 
executes a fund participation agreement upon becoming an owner of 10% 
or more of the assets of the Investment Company (``Participants'') will 
report any potential or existing conflicts, of which they become aware, 
to the Board. Participants will be obligated to assist the Board in 
carrying out is 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 Variable Contract owners' voting instructions are disregarded. 
The responsibility to report such information and conflicts and to 
assist the Board will be a contractual obligation of all Participants 
investing in an Investment Company under their participation 
agreements, and those participation agreements shall provide that, in 
the case of insurance company Participants, such responsibilities will 
be carried out with a view only to the interests of the Variable 
Contract owners.
    4. If a majority of the Board, or a majority of its disinterested 
members (``Independent Trustees''), determines 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 Independent Trustees), take whatever steps are necessary to 
remedy or eliminate the irreconcilable material conflict, including: 
(a) Withdrawing the assets allocable to some or all of the Separate 
Accounts from the Portfolios and reinvesting those assets in a 
different investment medium, which may include another portfolio of the 
relevant Investment Company, or, in the case of insurance company 
Participants, submitting the question 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., 
annuity contract owners, life insurance contract owners, or variable 
contract owners of one or more Participant) 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 owners' voting 
instructions, and that decision represents a minority position or would 
preclude a majority vote, the Participant may be required, at the 
election of the relevant Investment Company, to withdraw its separate 
account's investment therein. No charge or penalty will be imposed as a 
result of such withdrawal.
    The responsibility to take remedial action in the event of a 
determination by the Board 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 governing participation in the Investment Companies and 
these responsibilities, in the case of insurance company Participants, 
will be carried out with a view only to the interests of the contract 
owners. A majority of Independent Trustees shall determine whether or 
not any proposed action adequately remedies any irreconcilable material 
conflict, but in no event will the relevant Investment Company or 
Investment Management (or any other investment adviser of the 
Investment Companies) be required to establish a new funding medium for 
any variable contract. No insurance company Participant shall be 
required by this condition to establish a new funding medium for any 
Variable Contract if an offer to do so has been declined by a vote of 
majority of variable contract owners materially affected by the 
irreconcilable material conflict.
    5. The determination by the Board 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 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 
appropriate, will vote shares of a Portfolio held in their Separate 
Accounts in a manner consistent with timely voting instructions 
received from contract owners. Insurance company Participants also will 
vote shares of a Portfolio held in its Separate Accounts for which no 
timely voting instructions from Variable Contract owners are received, 
as well as shares it owns, in the same proportion as those shares for 
which voting instructions are received. Insurance company Participants 
shall be responsible for assuring that each of their Separate Accounts 
investing in an Investment Company calculates voting privileges in a 
manner consistent with other Participants. The obligation to calculate 
voting privileges in a manner consistent with all other Separate 
Accounts investing in an Investment Company shall be a contractual 
obligation of all insurance company Participants under their 
participation agreements.
    7. Each Investment Company will notify all Participants that 
prospectus disclosure regarding potential risks of mixed and shared 
funding may be appropriate. Each Investment Company shall disclose in 
its Prospectus that: (a) Its shares of the Investment Company may be 
offered to insurance company separate accounts of both annuity and life 
insurance variable contracts and to qualified plans; (b) because of 
differences of tax treatment or other considerations, the interests of 
various contract owners participating in the Investment Company and the 
interests of Qualified Plan investing in the Investment Companies may 
conflict; and (c) the Board will monitor for any material conflicts and 
determine what action, if any, should be taken.
    8. All reports received by the Board regarding potential or 
existing conflicts, and all action of the Board with respect to 
determining the existence of a conflict notifying Participants of a 
conflict, and determining whether any proposed action adequately 
remedies a conflict, will be properly recorded in the minutes of the 
meetings of the Board or other appropriate records and such minutes or 
other records shall be made available to the Commission upon request.
    9. If and to the extent Rule 6e-2 or Rule 6e-3(T) is amended, or 
Rule 6e-3 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 Investment 
Companies and/or the Participants, as appropriate, shall take such 
steps as

[[Page 39490]]

may be necessary to comply with Rule 6e-2 and Rule 6e-3(T), as amended, 
and Rule 6e-3, as adopted, to the extent such rules are applicable.
    10. Each Investment Company 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 
Investment Companies), and, in particular, each Investment Company will 
provide for meetings as required by applicable State law or the 1940 
Act, including Section 16(c) of the 1940 Act (although the Investment 
Companies are not one of the trusts described in that section) as will 
as with Section 16(a) and, if and when applicable, Section 16(b). 
Further, each Portfolio will act in accordance with the Commission's 
interpretation of the requirements of Section 16(a) with respect to 
periodic elections of directors and with whatever rules the Commission 
may adopt with respect thereto.
    11. The Participants shall, at least annually, submit to the Board 
such reports, materials or data as the Board may reasonably request so 
that the Board may fully carry out the obligations imposed upon it by 
these stated conditions, and said reports, materials, and data shall be 
submitted more frequently if deemed appropriate by the Board. The 
obligations of the Participants to provide these reports, materials, 
and data upon reasonable request of the Board shall be a contractual 
obligation of all Participants under their participation agreements 
with the Investment Companies.
    12. None of the Investment Companies will accept a purchase order 
from a Plan if such purchase would make the Plan shareholder an owner 
of 10% or more of the assets of an Investment Company unless such 
Qualified Plan executes fund participation agreement with such 
Investment Company. A plan shareholder will execute an application 
containing an acknowledgement of this condition upon its initial 
purchase of the shares of an Investment Company.

Conclusion

    For the reasons stated above, Applicants assert that the requested 
exemptions, in accordance with the standards of Section 6(c), 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. 96-19118 Filed 7-26-96; 8:45 am]
BILLING CODE 8010-01-M