[Federal Register Volume 61, Number 172 (Wednesday, September 4, 1996)]
[Notices]
[Pages 46669-46674]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22454]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22180; File No. 812-10052]


Schwab Annuity Portfolios, et al.

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

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

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APPLICANT: Schwab Annuity Portfolios (the ``Trust'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the 
1940 Act from the provisions of 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: Applicant seeks an order to the extent 
necessary to permit shares of the Trust and shares of any other 
investment company (the ``Future Funds,'' collectively, with the Trust, 
the ``Funds'') that is designed to fund variable insurance products, 
and for which Charles Schwab Investment Management, Inc. (the 
``Investment Manager'') or an affiliate may serve as investment 
adviser, manager, principal underwriter or sponsor, to be sold to and 
held by: (a) variable annuity and variable life insurance separate 
accounts (the ``Separate Accounts'') of both affiliated and 
unaffiliated life insurance companies (the ``Participating Insurance 
Companies''); and (b) qualified pension and retirement plans outside of 
the separate account context (the ``Plans'').

FILING DATE: The application was filed on March 21, 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 23, 1996, and accompanied by proof 
of service on the Applicant in the form of an affidavit or, for 
lawyers, a certificate of service. Hearing requests should state the 
nature of the 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. Applicant, Frances Cole, Esq., Charles Schwab Investment 
Management, Inc., 101 Montgomery Street, San Francisco, CA 94104.

FOR FURTHER INFORMATION CONTACT: Mark Amorosi, Attorney, 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 Trust, an open-end management investment company organized 
as a Massachusetts business trust on January 21, 1994, currently 
consists of one series: the Schwab Money Market Portfolio (the 
``Series'').
    2. The Investment Manager, registered investment adviser under the 
Investment Advisers Act of 1940, serves as the investment adviser and 
administrator to each Fund. The Investment Manager is a wholly-owned 
subsidiary of the Charles Schwab Corporation, a parent of investment 
services companies incorporated in California.

[[Page 46670]]

    3. The Trust currently offers shares of the Series only to 
Transamerica Separate Account VA-5, a separate account of Transamerica 
Occidental Life Insurance Company and to Separate Account VA-5 NLNY, a 
separate account of First Transamerica Life Insurance Company 
(collectively referred to as ``Transamerica''), to fund the benefits of 
Schwab Investment AdvantageTM, a variable annuity contract issued 
by Transamerica. It is intended, however, that shares of the Funds will 
be offered to separate accounts of other insurance companies, including 
insurance companies that are not affiliated with Transamerica. The 
Funds also may be used as investment vehicles for qualified pension and 
retirement plans outside of the separate account context.
    4. Upon the granting of the order requested in the application, the 
Funds intend to offer to Separate Accounts of Participating Insurance 
Companies shares of the Series and of future investment series to serve 
as the investment vehicle for various types of variable insurance 
products, including, but not limited to, variable annuity contracts, 
single premium variable life insurance policies, and flexible premium 
variable life insurance contracts (collectively, the ``Contracts''). 
The Funds also may offer shares of the Series and of future investment 
series directly to Plans outside of the separate account context.
    5. Participating Insurance Companies will establish their own 
Separate Accounts and design their own variable contracts. The role of 
the Funds under this arrangement, insofar as the federal securities 
laws are applicable, will consist of offering shares to the Separate 
Accounts and fulfilling any conditions that the Commission may impose 
upon granting the order requested in the application.
    6. Tax law permits the Funds to increase their asset base through 
the sale of shares of the Funds to Plans. Plans may choose the Funds as 
the sole investment option under the Plan or as one of several 
investment options. Which investment choices are available to a Plan 
participant will depend upon the Plan. Shares of the Funds sold to 
Plans will be held by the trustees of the Plans, as mandated by Section 
403(a) of the Employee Retirement Income Security Act (``ERISA'').

Applicant's 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 the investment adviser, principal underwriter, and sponsor 
or depositor of the Separate Account. The exemptions granted by 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 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 variable life 
insurance separate accounts of unaffiliated insurance companies is 
referred to as ``shared funding.'' The relief granted by Rule 6e-
2(b)(15) is not available with respect to a scheduled premium variable 
life insurance separate account that owns shares of an underlying fund 
that 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) precludes mixed funding as well as 
shared funding.
    2. Applicant states 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.
    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 relief 
provided by Rule 6e-3(T) also is available to the investment adviser, 
principal underwriter, and sponsor or depositor of the Separate 
Account. The exemptions granted to a separate account by Rule 6e-
3(T)(b)(15) are available only where the UIT's underlying fund offers 
its 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.'' Thus, Rule 6e-3(T) permits mixed 
funding, but does not permit shared funding.
    4. Applicant states that because the relief under Rule 6e-3(T) is 
available only where shares are offered exclusively to separate 
accounts, additional exemptive relief is necessary if shares of the 
Funds also are to be sold to Plans.
    5. Applicant states 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 Plans. 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 the Funds. 
The Code provides that such Contracts shall not be treated as an 
annuity contract 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 assets 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 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. Applicant states that the promulgation of Rules 6e-2 and 6e-3(T) 
under the 1940 Act preceded the issuance of these Treasury Regulations. 
Applicant asserts that, given the then current tax law, 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).
    7. Applicant therefore requests 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 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

[[Page 46671]]

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 exemptions 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) 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 Rules 6e-2(b)(15)(ii) and 6e-3(T)(b)(15)(ii) 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) participate in the 
management or administration of the fund.
    9. Applicant states that the partial relief from Section 9(a) 
provided by 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. Applicant states that those 1940 Act rules recognize that it 
is not necessary for the protection of investors or the purposes fairly 
intended by the policy and provisions of the 1940 Act to apply the 
provisions of Section 9(a) to the many individuals in a large insurance 
company complex, most of whom will have no involvement in matters 
pertaining to investment companies within that organization. Applicant 
notes that the Participating Insurance Companies are not expected to 
play any role in the management or administration of the Funds. 
Therefore, Applicant asserts, applying the restrictions of Section 9(a) 
serves no regulatory purpose. The application states that the relief 
requested should not be affected by the proposed sale of shares of the 
Funds to the Plans because the Plans are not investment companies and 
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) 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. More specifically, Rules 6e-2(b)(15)(iii)(A) and 6e-
3(T)(b)(15)(iii)(A) provide that an insurance company may disregard 
voting instructions of its contract owners with respect to the 
investments of an underlying fund, or any contract between an 
underlying fund and its investment adviser, when required to do so by 
an insurance regulatory authority. In addition, Rules 6e-
2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(B) provide that an 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. Applicant states that Rule 6e-2 recognizes that variable life 
insurance contracts have important elements unique to insurance 
contracts, and are subject to extensive state regulation. Applicant 
maintains, therefore, that in adopting Rule 6e-2, the Commission 
expressly recognized that exemptions from pass-through voting 
requirements are necessary ``to assure the solvency of the life insurer 
and performance of its contractual obligations by enabling an insurance 
regulatory authority or the life insurer to act when certain proposals 
reasonably could be expected to increase the risks undertaken by the 
life insurer.'' Applicant notes that, in this respect, flexible premium 
variable life insurance contracts are identical to scheduled premium 
variable life insurance contracts, and submits that the corresponding 
provisions of Rule 6e-3(T) (which apply to flexible premium insurance 
contracts and which permit mixed funding) undoubtedly were adopted in 
recognition of the same considerations as the Commission applied in 
adopting Rule 6e-2. Applicant further submits that these considerations 
are no less important or necessary when an insurance company funds its 
separate accounts in connection with mixed and shared funding, and that 
such mixed and shared funding does not compromise the goals of the 
insurance regulatory authorities or of the Commission.
    13. Applicant further represents that the Funds' sale of shares to 
the Plans does not affect the relief requested in this regard. As noted 
previously, shares of the Funds sold to Plans would be held by the 
trustees of such Plans as required 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 Plan, with two exceptions: (a) 
When the 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 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, 
Applicant notes that, unlike the case with Separate Accounts of 
Participating Insurance Companies, the issue of the resolution of 
material irreconcilable conflicts with respect to voting is not present 
with Plans.
    14. Applicant states that no increased conflicts of interest would 
be presented if the requested relief were granted. Applicant asserts 
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. Applicant notes 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. Applicant submits that this 
possibility is no different from and no greater than what exists where 
a single insurer and its affiliates offer their insurance products in 
several states.
    15. Applicant further submits that affiliation does not reduce the 
potential, if any exists, for differences in state regulatory 
requirements. In any event, the conditions (adapted from the conditions 
included in Rule 6e-3(T)(b)(15)) discussed below are

[[Page 46672]]

designed to safeguard against any adverse effects these differences may 
produce. If a particular state insurance regulator's decision conflicts 
with that of a majority of other state regulators, the affected insurer 
may be required to withdraw its Separate Account's investment in the 
relevant Fund.
    16. Applicant also argues 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 Contract owners. 
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 the 
relevant Fund, to withdraw its investment in that Fund. No charge or 
penalty will be imposed as a result of such withdrawal.
    17. Applicant states 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. Applicant therefore argues that 
there is no reason to believe that conflicts of interest would result 
from mixed funding. Moreover, Applicant represents that the Funds will 
not be managed to favor or disfavor any particular insurance company or 
type of Contract.
    18. Applicant notes that no one investment strategy can be 
identified as appropriate to a particular insurance product. Each pool 
of variable annuity and variable life insurance contract owners is 
composed of individuals of diverse financial status, age, insurance, 
and investment goals. An investment company supporting even one type of 
insurance product must accommodate these diverse factors in order to 
attract and retain purchasers.
    19. Applicant also notes 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 management 
investment company. Therefore, Applicant has concluded that neither the 
Code, the Treasury regulations nor the revenue rulings thereunder 
present any inherent conflicts of interest if Plans, variable annuity 
Separate Accounts and variable life insurance Separate Accounts all 
invest in the same management investment company.
    20. Applicant states 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 value. The Plan then 
will make distributions in accordance with the terms of the Plan. A 
Participating Insurance Company will surrender values from the Separate 
Account into the general account to make distributions in accordance 
with the terms of the variable contract.
    21. Applicant also states that it is possible to provide an 
equitable means of giving voting rights to Contract owners and to 
Plans. Applicant represents that the Funds will inform each 
shareholder, including each Separate Account and Plan, of its 
respective share of ownership in the respective Funds. Each 
Participating Insurance Company will then solicit voting instructions 
in accordance with Rules 6e-2 and 6e-3(T).
    22. Applicant submits 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 compared to a participant 
under a Plan. Regardless of the rights and benefits of participants and 
Contract owners under the respective Plans and Contracts, the Plans and 
the Separate Accounts have rights only with respect to their shares of 
the Funds. Such shares 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.
    23. Applicant states that there are no conflicts between Contract 
owners and participants under the Plans with respect to the state 
insurance commissioners' veto powers over investment objectives. The 
basic premise of shareholder voting is that not all shareholders may 
agree with a particular proposal. The state insurance commissioners 
have been given the veto power in recognition of the fact that 
insurance companies usually are unable to simply redeem their Separate 
Accounts out of one fund and invest those monies in another fund. 
Complex and time consuming transactions must be undertaken to 
accomplish such redemptions and transfers. By contrast, trustees of 
Plans or the participants in participant-directed 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 is the case with most Plans, even hold 
cash pending suitable investment. Based on the foregoing, Applicant 
represents that even should there arise issues where the interest of 
Contract owners and the interests of Plans conflict, the issues can be 
resolved almost immediately in that trustees of the Plans can, 
independently, redeem shares out of the Funds.
    24. Applicant states that various factors have kept certain 
insurance companies from offering variable annuity and variable life 
insurance contracts. According to Applicant, these factors include: the 
cost of organizing and operating an investment funding medium; the lack 
of expertise with respect to investment management (particularly with 
respect to stock and money market investments); and the lack of name 
recognition by the public of certain insurers as investment 
professionals. Applicant argues that 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 the Funds' investment 
adviser, but also from the cost efficiencies and investment flexibility 
afforded by a large pool of funds. Applicant states that making the 
Funds available as common investment media for variable insurance 
contracts would benefit contract owners by: (a) Eliminating a 
significant portion of the costs of establishing and administering 
separate funds; (b) increasing the amount of assets available for 
investment by the Funds, thereby promoting economies of scale, 
permitting increased safety of investments through greater 
diversification, and making the addition of new portfolios more 
feasible; and (c) encouraging more insurance companies to offer 
variable contracts, resulting in

[[Page 46673]]

increased competition with respect to both the design and the pricing 
of variable contracts, which can be expected to result in greater 
product variation and lower charges. Applicant believes that there is 
no significant legal impediment to permitting mixed and shared funding.

Applicant's Conditions

    Applicant has consented to the following conditions if the order 
requested in the application is granted:
    1. A majority of the Board of Trustees or Directors of each Fund 
(each, a ``Board'') shall consist of persons who are not ``interested 
persons'' of the Funds, 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, disqualification, of 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 of all of the Separate Accounts investing in the 
respective Funds. 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 any series of the Funds 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. The Participating Insurance Companies, the Investment Manager 
(or any affiliated adviser), and any Plan that executes a fund 
participation agreement upon becoming an owner of 10% or more of the 
assets of a Fund (the ``Participants'') will report any potential or 
existing conflicts to the respective responsible Board. Participants 
will be responsible for assisting the appropriate Board in carrying out 
its responsibilities under these conditions by providing the Board with 
all information reasonably necessary for 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 to and to 
assist the Board will be a contractual obligation of all Participating 
Insurance Companies and Plans investing in the Funds under their 
agreements governing participation in the Funds and such agreements 
shall provide that these responsibilities will be carried out with a 
view only to the interests of Contract owners, and, if applicable, Plan 
participants.
    4. If it is determined by a majority of the Board, or by a majority 
of its disinterested trustees or directors, that an irreconcilable 
material conflicts exists, the relevant Participating Insurance Company 
and Plan shall, at its expense and to the extent reasonably practicable 
(as determined by a majority of the disinterested trustees or 
directors), take any steps 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 affected 
Funds and reinvesting such assets in a different investment medium 
including another series of the relevant Fund, or submitting the 
question as to whether such segregation should be implemented to a vote 
of all affected contract owners and, as appropriate, segregating the 
assets of any appropriate group (i.e., variable annuity contract owners 
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 variable contract owners the option of making 
such a charge; (b) withdrawing the assets allocable to some or all of 
the Plans from the affected Fund or any series of the Fund and 
reinvesting such assets in a different investment medium, including 
another series of the 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 Contract owner voting 
instructions, and that decision represents a minority position or would 
preclude a majority vote, the insurer may be required, at the election 
of the relevant Fund, to withdraw its Separate Account's investment in 
the Fund, and no charge or penalty will be imposed as a result of such 
withdrawal.
    5. The responsibility to take remedial action in the event of a 
Board determination of a material irreconcilable conflict and to bear 
the cost of such remedial action shall be a contractual obligation of 
all Participating Insurance Companies and Plans 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 
intents of Contract owners and Participants in the Plan.
    6. For purposes of Condition Four, a majority of the disinterested 
members of the applicable Board shall determine whether any proposed 
action adequately remedies any material irreconcilable conflict, but in 
no event will the relevant Fund or the Investment Manager (or any 
affiliated adviser) be required to establish a new funding medium for 
any Contract. Further, no Participating Insurance Company shall be 
required by Condition Four to establish a new funding medium for any 
Contract if any offer to do so has been declined by a vote of a 
majority of the Contract owners materially affected by the material 
irreconcilable conflict.
    7. A Board's determination of the existence of an irreconcilable 
material conflict and its implications shall be made known promptly and 
in writing to all Participants.
    8. 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 the Funds 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 Account(s) for which no voting instructions from the 
Contract owners are timely received, as well as shares of the 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 that participates in the Funds calculates voting privileges in 
a manner consistent with other Participating Insurance Companies. The 
obligation to calculate

[[Page 46674]]

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.
    9. All reports received by the Board of potential or existing 
conflicts, and all Board action with regard 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 appropriate Board or 
other appropriate records. Such minutes or other records shall be made 
available to the Commission upon request.
    10. Each Fund shall 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 certain qualified pension and retirement plans; (b) 
material irreconcilable conflicts 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. Each Fund will notify all 
Participating Insurance Companies that Separate Account prospectus 
disclosure regarding potential risks of mixed and shared funding may be 
appropriate.
    11. Each Fund will comply with all provisions of the 1940 Act 
requiring voting by shareholders, 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 one of the trusts described in Section 16(c) of the 1940 
Act), as well as with Section 16(a), and, if applicable, Section 16(b) 
of the 1940 Act. Further, each Fund will act in accordance with the 
Commission's interpretation of the requirements of Section 16(a) with 
respect to periodic elections of directors (or trustees) and with 
whatever rules the Commission may promulgate with respect thereto.
    12. If, and to the extent that, Rules 6e-2 and 6e-3(T) are amended 
(or if Rule 6e-3 under the 1940 Act 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 
Applicant, then the Funds and/or the Participants, 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 than annually, the Participants shall submit to each 
Fund's Board such reports, materials, or data as the Board reasonably 
may request so that the directors or trustees, as appropriate, of the 
Fund may carry out fully the obligations imposed upon them by the 
conditions contained in the application. Such reports, materials, and 
data shall be submitted more frequently if deemed appropriate by the 
Board. The obligations of the Participating Insurance Companies and 
Plans to provide these reports, materials, and data to a Fund's Board, 
when the appropriate Board so reasonably requests, shall be a 
contractual obligation of all Participating Insurance Companies and 
Plans under the agreements governing their participation in the Funds.
    14. If a Plan becomes an owner of 10% or more of the assets of a 
Fund, such Plan will execute a fund participation agreement with the 
applicable Fund including the conditions set forth herein to the extent 
applicable. A Plan will execute an application with each of the Funds 
containing an acknowledgment of this condition upon such Plan's initial 
purchase of the shares of any Fund.

Conclusion

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

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-22454 Filed 9-3-96; 8:45 am]
BILLING CODE 8010-01-M