[Federal Register Volume 61, Number 170 (Friday, August 30, 1996)]
[Notices]
[Pages 46000-46004]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22228]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22170; File No. 812-10118]


Morgan Stanley Universal Funds, Inc. et al.

August 23, 1996.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the 
``Commission'').

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

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APPLICANTS: Morgan Stanley Universal Funds, Inc. (``MS Fund''), Morgan 
Stanley Asset Management Inc. (``MSAM'') and Miller Anderson & 
Sherrerd, LLP (``MAS'').

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 an order to the extent 
necessary to permit shares of the MS Fund and shares of any other 
investment company that is designed to fund insurance products and for 
which MSAM and MAS, or any of their affiliates, may serve as investment 
adviser, administrator, manager, principal underwriter or sponsor 
(collectively, the ``Funds'') to be sold to and held by: (a) variable 
annuity and variable life insurance separate accounts of both 
affiliated and unaffiliated life insurance companies (``Participating 
Insurance Companies''); and (b) qualified pension and retirement plans 
outside the separate account context (``Qualified Plans'').

FILING DATE: The application was filed on May 1, 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 on this application by writing to the 
Secretary of the SEC and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on September 17, 1996, and should be 
accompanied by proof of service on the Applicants in the form of an 
affidavit or, for lawyers, a certificate of service. Hearing requests 
should state the nature of the writers interest, the reason for the 
request and the issues contested. Persons may request notification of 
the date of a hearing by writing to the Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, c/o Morgan, Lewis & Bockius LLP, Attention: Richard 
W. Grant, Esq. and James B. Kimmel, Esq., 2000 One Logan Square, 
Philadelphia, Pennsylvania 19103-1993.

FOR FURTHER INFORMATION CONTACT: Joyce Merrick Pickholz, Senior 
Counsel, or Patrice M. Pitts, Special Counsel, Office of Insurance 
Products, Division of Investment Management, at (202) 942-0670.

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

Applicant's Representations

    1. The MS Fund, an open-end, management investment company 
organized as a Maryland corporation, currently consists of 17 separate 
investment portfolios. The MS Fund may create additional portfolios in 
the future.
    2. MSAM and MAS serve as the investment advisers to the MS Fund. 
They are wholly owned subsidiaries of Morgan Stanley Group, Inc. and 
are registered as investment advisers under the Investment Advisers Act 
of 1940.
    3. The MS Fund intends to offer its shares to variable annuity 
separate accounts and variable life insurance separate accounts 
established by insurance companies that may or may not be affiliated 
with one another and to Qualified Plans.
    4. The Participating Insurance Companies will establish their own 
separate accounts and design their own variable annuity and variable 
life insurance contracts (``Contracts''). The Funds will offer shares 
to the separate accounts and fulfill any conditions that the Commission 
may impose upon granting the order requested in the application.
    5. The Funds can increase their respective asset bases by selling 
shares to Qualified Plans. The Qualified Plans may choose a Fund as the 
sole investment option, or as one of several investment options, under 
a Plan. Participants in the Qualified Plans may or may not be given an 
investment choice, depending upon the Qualified Plan. Shares of a Fund 
sold to a Qualified Plan will be held by the trustee(s) of the 
Qualified Plan as mandated by Section 403(a) of the Employee Retirement 
Income Security Act (``ERISA''). ERISA does not require pass-through 
voting to be provided to participants in Qualified Plans.

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 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 is 
available to a separate account's investment adviser, principal 
underwriter, and depositor. The exemptions provided under Rule 6e-
2(b)(15) are available 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.'' The use of a common management investment 
company as the underlying investment medium for both variable annuity 
and variable life insurance separate accounts is referred to as ``mixed 
funding.'' The use of a common investment company as the underlying 
investment medium for separate accounts of unaffiliated insurance 
companies is referred to as ``shared funding.'' The relief provided 
under Rule 6e-2(b)(15) is not applicable to a scheduled premium 
variable life insurance separate account that owns shares of an 
underlying fund where the underlying fund offers its shares to a 
variable annuity separate account of the same company or of any other 
affiliated or unaffiliated life insurance company. Therefore, Rule 6e-
2(b)(15) does not provide exemptive relief for either mixed funding or 
shared funding.
    2. Applicants state that with respect to Rule 6e-2, exemptive 
relief is also necessary if shares of the Funds are also to be sold to 
Qualified Plans since the relief under Rule 6e-2 is available only 
where shares are offered exclusively to

[[Page 46001]]

separate accounts of insurance companies.
    3. In connection with flexible premium variable life insurance 
contracts issued through a separate account registered under the 1940 
Act as 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 
provided under Rule 6e-3(T)(b)(15) are available only where all 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 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.'' Therefore, Rule 6e-3(T) permits 
mixed funding, but does not permit shared funding.
    4. Applicants state that with respect to Rule 6e-3(T), exemptive 
relief is also necessary if shares of the Funds are also to be sold to 
Qualified Plans since the relief under Rule 6e-3(T) is available only 
where shares are offered exclusively to separate accounts of insurance 
companies.
    5. Applicants state that changes in the tax law have created the 
opportunity for a Fund to increase its asset base through the sale of 
its shares to Qualified Plans. Applicants state that Section 817(h) of 
the Internal Revenue Code of 1986, as amended (the ``Code''), imposes 
certain diversification standards on the underlying assets of the 
Contracts held in a Fund. Specifically, the Code provides that such 
Contracts shall not be treated as annuity contracts or life insurance 
contracts 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. 
Sec. 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, however, contain certain 
exceptions to this requirement, one of which allows shares in an 
investment company to 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 their variable contracts. Treas. 
Reg. Sec. 1.817-5(f)(3)(iii).
    6. Applicants state that the promulgation of Rules 6e-2 and 6e-3(T) 
under the 1940 Act preceded the issuance of these Treasury regulations. 
Applicants assert that, given the then current tax law, 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).
    7. Applicants therefore request relief 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 to the extent necessary to permit shares of the 
Funds to be offered and sold to Qualified Plans and to variable annuity 
and variable life separate accounts in connection with both mixed and 
shared funding.
    8. Section 9(a) of the 1940 Act provides that it is unlawful for 
any company to serve as 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) (i) and (ii) and 6e-3(T)(b)(15) (i) 
and (ii) provide exemptions from Section 9(a) under certain 
circumstances, subject to the limitations on mixed and shared funding. 
These exemptions limit the disqualification to affiliated individuals 
or companies that participate directly in the management or 
administration of the underlying investment company.
    9. Applicants state that the partial relief from Section 9(a) found 
in Rules 6e-2(b)(15) and 6e-3(T)(b)(15), 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 the 
Section. Applicants state that those 1940 Act rules recognize that it 
is not necessary to apply the provisions of Section 9(a) to the many 
individuals in a large 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 Qualified Plans because the 
Plans are not investment companies are not, therefore, subject to 
Section 9(a).
    10. 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 shares 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.
    11. Rules 6e-2(b)(15)(iii)(A) and 6e-3(T)(b)(15)(iii)(A) provide 
that the insurance company may disregard voting instructions of its 
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. Also, 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 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.
    12. Applicants represent that the sale of Fund shares to Qualified 
Plans does not affect the relief requested in this regard. As noted 
previously by Applicants, shares of the Funds sold to Qualified Plans 
would be held by the trustees of such Qualified 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 Qualified Plan with two exceptions: (a) when the Qualified 
Plan expressly provides that the trustee(s) is (are) subject to the 
direction of a 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. 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

[[Page 46002]]

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 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.
    13. 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.
    14. 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 majority of 
other state regulators, the affected insurer may be required to 
withdraw its separate account's investment in the relevant portfolio or 
underlying fund.
    15. Applicants also state that affiliation does not eliminate the 
potential, if any exists, for divergent judgments as to the 
advisability or legality of a change in investment policies, principal 
underwriter, or investment adviser initiated by owners of the 
Contracts. Potential disagreement is limited by the requirement that 
the Participating Insurance Company's disregard of voting instructions 
be both reasonable and based on specified 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 a 
Fund, to withdraw its investment in that Fund. No charge or penalty 
will be imposed as a result of such withdrawal.
    16. Applicants state that there is no reason why the investment 
policies of a Fund would or should be materially different from what 
those policies would or should be if that Fund served as a funding 
medium for only variable annuity or only variable life insurance 
contracts. Moreover, Applicants represent that the Funds will not be 
managed to favor or disfavor any particular insurance company or type 
of Contract.
    17. 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 Sec. 1.187-5(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 management investment 
company. Therefore, Applicants have concluded that neither the Code, 
nor the Treasury Regulations or 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.
    18. 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 a Fund at their net 
asset value. The Qualified Plan will then make distributions in 
accordance with the terms of the Qualified Plan and the Participating 
Insurance Company will make distributions in accordance with the terms 
of the Contract.
    19. 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 the trustees of Qualified Plans. Applicants 
represent that the transfer agent for a Fund will inform each 
Participating Insurance Company of its share ownership in each separate 
account, and will inform the trustees of Qualified Plans of their 
holdings. Each Participating Insurance Company will then solicit voting 
instructions in accordance with Rules 6e-2 and 6e-3(T).
    20. Applicants contend that the ability of a Fund to sell its 
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 Contract owner as opposed to a participant 
under a Qualified Plan. Regardless of the rights and benefits of 
participants and Contract owners under the respective Qualified Plans 
and Contracts, the Qualified Plans and the separate accounts have 
rights only with respect to their shares of a Fund. Such shares may be 
redeemed only at net asset value. No shareholder of a Fund has any 
preference over any other shareholder with respect to distribution of 
assets or payment of dividends.
    21. Finally, Applicants state that there are no conflicts between 
Contract owners and participants under the 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 basic premise of shareholder 
voting is that not all shareholders may agree with a particular 
proposal. This does not mean that there are inherent conflicts of 
interest between shareholders. The state insurance commissioners have 
been given the veto power in recognition of the fact that an insurance 
company cannot simply request redemption of shares held in its separate 
account and have those shares redeemed out of one Fund and the proceeds 
invested in another Fund. Generally, to accomplish such redemptions and 
transfers, complex and time consuming transactions must be undertaken. 
In contrast, trustees of Qualified Plans can make the decision quickly 
and implement the redemption of shares from a Fund and reinvest the 
monies in another funding vehicle without the same regulatory 
impediments or, as is the case with most Qualified Plans, even hold 
cash pending suitable investment. Based on the foregoing, Applicants 
represent that even should there arise issues where the interests of 
Contract owners and the interests of Qualified Plans conflict, the 
issues can be almost immediately resolved because the trustees of the 
Qualified Plans can, independently, redeem shares out of the Funds.
    22. Applicants state that various factors have kept certain 
insurance companies from offering variable annuity and variable life 
insurance contracts. According to Applicants, these factors include: 
the cost of

[[Page 46003]]

organizing and operating an investment 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 
professionals. Applicants contend that use of the Fund 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 MSAM and MAS, 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 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 result in 
greater product variation and lower charges. Thus, Applicants represent 
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 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.

Applicants' Conditions

    Applicants have consented to the following conditions if an order 
is granted:
    1. A majority of the Board of Directors of a Fund (``Board'') shall 
consist of persons who are not ``interested persons'' of the Fund, as 
defined by Section 2(a)(19) of the 1940 Act and the rules thereunder 
and as modified by any applicable orders of the Commission, except 
that, if this condition is not met by reason of the death, 
disqualificaction, or bona fide resignation of any trustee or director, 
then the operation of this condition shall be suspended: (a) for a 
period of 45 days if the vacancy or vacancies may be filled by the 
Board; (b) for a period of 60 days if a vote of shareholders is 
required to fill the vacancy or vacancies; or (c) for such longer 
period as the Commission may prescribe by order upon application.
    2. Each Board will monitor its respective Fund for the existence of 
any material irreconcilable conflict among the interests of the 
Contract owners investing in the separate accounts and in the Fund. 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 interpretative 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 Fund are managed; (e) a 
difference in voting instructions given by owners of variable annuity 
contracts and owners of variable life insurance contracts; or (f) a 
decision by a Participating Insurance Company to disregard the voting 
instructions of Contract owners.
    3. If a Qualified Plan becomes an owner of 10% or more of the 
assets of a Fund, such Plan will execute a fund participation agreement 
with that Fund. At the time of its initial purchase of the shares of 
the Fund, the Qualified Plan will acknowledge this condition in its 
application to purchase the shares.
    4. The Participating Insurance Companies, MSAM and MAS (or any 
other investment adviser of a Fund), and any Qualified Plan that 
executes a Fund participation agreement upon becoming an owner of 10% 
or more of the assets of a Fund (the ``Participating Entities''), will 
report any potential or existing conflicts to the Board. Participating 
Entities will be responsible for assisting the Board in carrying out 
its responsibilities under these conditions by providing the Board with 
an information reasonably necessary for the Board to consider any 
issues raised. This responsibility includes, but is not limited to, an 
obligation by each Participating Insurance Company to inform the Board 
whenever Contract owner voting instructions are disregarded. The 
responsibility to report such information and conflicts and to assist 
the Board will be contractual obligations of the Participating 
Insurance Companies and Qualified Plans investing in the Fund, and 
these responsibilities will be carried out with a view only to the 
interests of Contract owners and Qualified Plan participants.
    5. If it is determined by a majority of the Board, or by a majority 
of its disinterested directors, that a material irreconcilable conflict 
exists, the relevant Participating Entities shall, at their expense and 
to the extent reasonably practicable (as determined by a majority of 
the disinterested directors), take whatever steps are necessary to 
remedy or eliminate the irreconcilable material conflict, up to and 
including: (a) Withdrawing the assets allocable to some or all of the 
separate accounts from a Fund and reinvesting such assets in a 
different investment medium including another portfolio of that Fund, 
or 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 Contract owners 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; (b) withdrawing the assets 
allocable to some or all of the Qualified Plans from a Fund or 
individual portfolio thereof and reinvesting those assets in a 
different investment medium, including another portfolio of that Fund; 
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 disregard 
voting instructions of the owners of the Contracts, and that decision 
represents a minority position or would preclude a majority vote, the 
Participating Insurance Company may be required, at the election of a 
Fund, to withdraw its separate account's investment in that Funds, and 
no charge or penalty will be imposed as a result of such withdrawal.
    6. The responsibility to take remedial action in the event of a 
Board determination of an irreconcilable material conflict and to bear 
the cost of such remedial action shall be a contractual obligation of 
all Participating Entities under the agreements governing their 
participation in the Funds. The responsibility to take such remedial 
action shall be carried out with a view only to the interests of 
Contract owners and participants in Qualified Plans.
    7. For purposes of condition 5, a majority of the disinterested 
members of the Board shall determine whether any proposed action 
adequately remedies any material irreconcilable conflict, but, in no 
event will a Fund, or any of its advisers, be required to establish a 
new funding medium for any Contract. Further, no Participating 
Insurance Company shall be required by condition 5 to establish a new 
funding medium for any Contract if an offer to do so had been declined 
by a vote of a majority of Contract owners materially affected by the 
irreconcilable material conflict.
    8. A Board's determination of the existence of an irreconcilable 
material conflict and its implications will be

[[Page 46004]]

made known promptly and in writing to all Participating Entities.
    9. Participating Insurance Company 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. Each 
Participating Insurance Company will vote shares of a Fund held in the 
Participating Insurance Company's separate accounts for which no voting 
instructions from Contract owners are timely received, as well as 
shares of that Fund which the Participating Insurance Company itself 
owns, in the same proportion as those shares of the Fund for which 
voting instructions from Contract owners are timely received. 
Participating Insurance Companies will be responsible for assuring that 
each of their separate accounts participating in a Fund calculates 
voting privileges in a manner consistent with other Participating 
Insurance Companies. The obligation to calculate voting privileges in a 
manner consistent with all other separate accounts will be a 
contractual obligation of all Participating Insurance Companies under 
the agreements governing their participation in the Funds.
    10. 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 a 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 not within 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 and 
with whatever rules the Commission may promulgate with respect thereto.
    11. Each Fund will notify all Participating Insurance Companies 
that separate account prospectus disclosure regarding potential risks 
of mixed and shared funding may be appropriate. Further, each Fund will 
disclose in its prospectus that (a) the Fund is intended to be a 
funding vehicle for all types of variable annuity and variable life 
insurance contracts offered by various insurance companies and for 
certain qualified pension and retirement plans, (b) material 
irreconcilable conflicts possibly may arise, and (c) the Fund's Board 
will monitor events in order to identify the existence of any material 
irreconcilable conflicts and to determine what action, if any, should 
be taken in response to any such conflict.
    12. If and to the extent that Rules 6e-2 and 6e-3(T) under the 1040 
Act are amended (or if 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 by 
Applicants, then the Funds and/or the Participating Entities, as 
appropriate, shall take such steps as may be necessary to comply with 
Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the 
extent such rules are applicable.
    13. No less frequently than annually, the Participating Entities 
shall submit to the relevant Board such reports, materials, or data as 
that Board may reasonably request so the Board may carry out fully the 
conditions contained in these express conditions. Such reports, 
materials, and data shall be submitted more frequently if deemed 
appropriate by a Board. The obligations of the Participating Entities 
to provide these reports, materials, and data to a Board shall be a 
contractual obligation under the agreements governing their 
participation in the Fund.
    14. All reports received by a Board of potential or existing 
conflicts, and all Board action with regard to (a) determining the 
existence of a conflict, (b) notifying Participating Entities 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.

Conclusion

    For the reasons and upon the facts stated above, Applicants asserts 
that the requested exemptions are appropriate in the public interest 
and consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-22228 Filed 8-29-96; 8:45 am]
BILLING CODE 8010-01-M