[Federal Register Volume 62, Number 11 (Thursday, January 16, 1997)]
[Notices]
[Pages 2404-2409]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1035]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22456; File No. 812-9096]


The Palladian Trust, et al.

January 9, 1997.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the 
``Commission'').

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

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APPLICANTS: The Palladian Trust (the ``Trust'') and Palladian Advisors, 
Inc. (``PAI'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the 
1940 Act for exemptions 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: Applicants seek an order to the extend 
necessary to permit shares of the Trust to be sold and held by: (1) 
separate accounts (the ``Separate Accounts'') funding variable annuity 
and variable life insurance contracts issued by both affiliated and 
unaffiliated life insurance companies (the ``Participating Insurance 
Companies''); (2) qualified pension and retirement plans; and (3) 
investment advisers to the Trust.

FILING DATE: The application was filed on July 1, 1994, and amended on 
October 26, 1994, June 20, 1996, and December 23, 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, 
in person or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on February 3, 1997, and 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 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 Shea & Gardner, 1800 Massachusetts Avenue, N.W., 
Washington, D.C. 20036, Attention: Christopher E. Palmer, Esq.

FOR FURTHER INFORMATION CONTACT:
Megan L. Dunphy, Attorney, or Patrice M. Pitts, Branch Chief, Office of 
Insurance Products, Division of Investment Management, at (202) 942-
0670.

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

Applicant's Representations

    1. The Trust is an open-end, management investment company 
organized as a Massachusetts business trust. It currently offers shares 
of capital stock (``shares'') in five separate investment portfolios 
(the ``Portfolios''), each of which has its own investment objective: 
The Value Portfolio, The Growth Portfolio, The International Growth 
Portfolio, the Global Strategic Income Portfolio, and the Global 
Interactive/Telecomm Portfolio. Additional portfolios may be added in 
the future.
    2. PAI is a corporation organized under the laws of Delaware, and 
is registered as an investment adviser under the Investment Advisers 
Act of 1940. PAI serves as overall investment manager of the 
Portfolios. The Trust retains other investment advisers (the 
``Portfolio Managers'') to handle the day-to-day investment management 
of the Portfolios.
    3. The Trust currently sells shares of the Portfolio to First ING 
of New York Separate Account A1, a separate account of First ING Life 
Insurance Company of New York, an affiliate of Security Life of Denver 
Insurance Company (collectively, ``Security Life''). The Trust intends 
to offer shares of the Portfolios to Separate Accounts of other 
Participating Insurance Companies, including insurance companies that 
are not affiliated with Security Life, to serve as investment vehicles 
for various types of insurance products, including variable annuity 
contracts, single premium variable life insurance contracts, scheduled 
premium variable life insurance contracts, and flexible premium 
variable life insurance contracts (collectively, the ``Contracts'').
    4. The Trust also intends to offer its shares to qualified pension 
or retirement plans (``Plans'') described in Treasury Regulation 
Sec. 1.817-6(f)(3)(iii).
    5. Each Portfolio Manager has agreed that it or an affiliate 
(either directly or through a qualified pension or retirement plan) 
will invest $1 million in the shares of the Portfolio(s) it manages. 
Each Portfolio Manager purchasing Portfolio shares has agreed that all 
such shares will be automatically redeemed if and when the Portfolio 
Manager's advisory agreement with the Trust terminates.
    6. PAI will not act as an investment adviser to any Plan which 
purchases shares of the Trust. While a Portfolio Manager may serve as 
investment adviser to one or more Plans which invest in the Trust, none 
of the assets of any Plan advisory account actually managed by such 
Portfolio Manager will be invested in the Trust. Nor may such Portfolio 
Manager advise any Plan to invest in the Trust. Plans advised by a 
Portfolio Manager may independently choose to invest in the Trust.

Applicant's Legal Analysis

    1. Applicants request that the Commission issue an order under 
Section 6(c) of the 1940 Act granting exemptions from Sections 9(a), 
13(a), 15(a) and 15(b) thereof, and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) thereunder to the extent necessary to permit ``mixed'' and 
``shared'' funding, as defined below.
    2. Section 6(c) authorizes the Commission, by order upon 
application, to conditionally or unconditionally exempt any person, 
security, or transaction, or class or classes of persons, securities, 
or transactions, from any provision of the 1940 Act, or the rules or 
regulations thereunder, if and to the extent that such 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. 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(2), 13(a), 15(a) 
and 15(b) of the 1940 Act. The exemptions granted to a separate account 
by Rule 6e-2(b)(15) are available only where all of the assets of the 
separate account consist of the shares of one or more registered 
management investment companies which offer shares ``exclusively to 
variable life insurance separate accounts of the life insurer, or of 
any affiliated life insurance company.'' \1\ Therefore, the relief 
grant by Rule 6e-2(b)(15) is

[[Page 2405]]

not available with respect to a scheduled premium variable life 
insurance separate account that owns shares of a management company 
that also offers its shares to a variable annuity separate account of 
the same insurance company or any affiliated 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 of the same life insurance company (or of any affiliated life 
insurance company) is referred to as ``mixed funding.'' The use of a 
common management company as the underlying investment medium for 
variable annuity and/or variable life insurance separate accounts of 
more than one unaffiliated insurance company is referred to as ``shared 
funding.'' The relief granted by Rule 6e-2(b)(15) is not available to a 
scheduled premium variable life insurance separate account that owns 
shares of an underlying management investment company (``underlying 
fund'') which offers its shares to Plans or to its investment advisers.
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    \1\ The exemptions provided by Rule 6e-2 also are available to 
the investment adviser, principal underwriter, and sponsor or 
depositor of the separate account
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    4. 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 
Section 9(a), 13(a), 15(a), and 15(b) of the 1940 Act. The exemptions 
granted to a separate account by Rule 6e-3(T)(b)(15) are available only 
to separate accounts owning shares of underlying funds which offer 
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.
    5. Current tax law permits the Trust to increase its asset base 
through the sale of 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 variable 
insurance contracts. Treasury regulations provide that, to meet the 
diversification requirements, all of the beneficial interests in an 
underlying fund must be held by the segregated asset accounts of one or 
more insurance companies. Treas. Reg. Sec. 1.817-5 (1989). The 
regulations do contain certain exceptions to this requirement, however, 
one of which permits the trustee(s) of a qualified pension or 
retirement plan to hold shares of an underlying fund, the shares of 
which are held by the separate accounts of insurance companies, without 
adversely affecting the status of the underlying fund as an adequately 
diversified underlying investment vehicle for variable insurance 
contracts issued through such separate accounts. 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 underlying fund to separate accounts and to 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. 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) and 6e-3(T)(b)(15) provide 
exemptions from section 9(a) under certain circumstances, subject to 
the limitations on mixed and shared funding. These exemptions limit the 
application of the eligibility restrictions to affiliated individuals 
or companies that directly participate in the management of the 
underlying fund.
    8. Applicants state 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 
Section 9. Applicants state that those 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. Applicants 
assert, therefore, that applying the restrictions of Section 9(a) to 
individuals in various unaffiliated insurance companies (or affiliated 
companies of Participating Insurance Companies) serves no regulatory 
purpose.
    9. Applicants state that the relief requested should not be 
affected by the proposed sale of shares of the Trust to the Plans 
because the Plans are not investment companies and will not be deemed 
affiliates by virtue of their shareholdings. Applicants further state 
that no regulatory purpose is served by extending the Section 9(a) 
monitoring requirements in the context of the Trust selling its shares 
to Portfolio Managers. Rules 6e-2 and 6e-3(T) provide relief from the 
eligibility restrictions of Section 9(a) only for officers, directors 
of employees of Participating Insurance Companies or their affiliates. 
Applicants note that Portfolio Managers are not likely to be employees 
of the Participating Insurance Companies or their affiliates, and if 
they were, the Section 9(a) eligibility restrictions would apply to 
those who participate directly in the management of administration of 
the Trust. Applicants also maintain that the monitoring requirements 
should not extend to all officers, directors and employees of the 
Participating Insurance Companies and their affiliates simply because 
the Trust sells certain shares to the Portfolio Managers. This 
monitoring would not benefit Contract owners and Plan participants and 
would only increase costs, thereby reducing net rates of return.
    10. Applicants submit that Rules 6e-2(b)(15)(iii) and 6e-
3(T)(b)(15)(iii) assume the existence of a ``pass-through voting'' 
requirement with respect to management investment company shares held 
by a separate account. Applicants state that Rules 6e-2(b)(15)(iii) and 
6e-3(T)(b)(15)(iii) provide exemptions from the pass-through voting 
requirement with respect to several significant matters, assuming the 
limitations on mixed and shared funding imposed by the 1940 Act and the 
rules thereunder are observed. More specifically, Rules 6e-
2(b)(15)(iii)(A) and 6e-3(T)(b)(15)(iii)(A)(1) provide that an 
insurance company may disregard the 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 and subject to certain 
requirements. In addition, Rules 6e-2(b)(15)(iii)(B) and 6e-
3(T)(b)(15)(iii)(a)(2) provide that an insurance company may disregard 
the 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 complies with the other 
provisions of Rules 6e-2 and 6e-3(T). Applicants note that Rules 6e-2 
and 6e-3(T) both require

[[Page 2406]]

that disregard of voting instructions by an insurance company be 
reasonable and based on specific good faith determinations. If a 
decision of a Participating Insurance Company to disregard the 
instructions of Contract owners 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 
Trust, to withdraw the investment of its Separate Account in the Trust. 
No charge or penalty will be imposed as a result of such withdrawal.
    11. Applicants further represent that the sale of Trust shares to 
Plans would not affect the circumstances and conditions under which any 
veto right would be exercised by a Participating Insurance Company. 
Shares of the Trust sold to Plans would be held by the trustees of such 
Plans as required by Section 403(a) of the Employee Retirement Income 
Security Act of 1974 (``ERISA''). Section 403(a) also provides that the 
trustee(s) must have exclusive authority and discretion to manage and 
control the Plan with two exceptions: (a) when the 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, ERISA does not require pass-through 
voting to the participants in Plans. Accordingly, Applicants note that, 
unlike the case with insurance company separate accounts, the issue of 
the resolution of material irreconcilable conflicts with respect to 
voting is not present with Plans.
    12. Applicants note, however, that some Plans do provide 
participants with the right to give voting instructions. Applicants 
submit that there is no reason to believe that Plan participants 
generally, or participants of a particular Plan, either as a single 
group or in combination with other Plans, would vote in a manner that 
would disadvantage Contract owners. Therefore, the purchase of Trust 
shares by Plans that provide voting rights to their participants does 
not present any complications not otherwise occasioned by mixed and 
shared funding.
    13. Applicants state that no increased conflicts of interest would 
be presented by the granting of the requested relief. Applicants submit 
that shared funding does not present any issues that do not already 
exist where a single insurance company is licensed to do business in 
several states. In this regard, Applicants not 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 policies. Accordingly, Applicants submit that the fact that 
different insurers may be domiciled in different states does not create 
a significantly different or enlarged problem.
    14. Applicants state that there is no reason why the investment 
policies of the Trust providing mixed funding would or should be 
materially different from what those policies would or should be if the 
Trust funded only variable annuity or variable life insurance contracts 
whether flexible premium or scheduled premium contracts. In this 
regard, Applicants note that each type of variable insurance product is 
designed as a long-term investment program, and that Plans also have 
long-term investment horizons. Moreover, Applicants submit that each 
Portfolio of the Trust will be managed to attempt to achieve the 
investment objective of the Portfolio, and not to favor or disfavor any 
particular Participating Insurance Company or type of variable 
insurance product.
    15. Applicants note that no single investment strategy can be 
identified as appropriate to a particular variable 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 underlying fund supporting even one 
type of variable insurance product must accommodate these diverse 
factors in order to attract and retain purchasers.
    16. Applicants further note that Section 817(h) imposes certain 
diversification standards on the underlying assets of variable annuity 
contracts and variable life insurance contracts held in the portfolios 
of management investment companies. Treasury Regulation 1.817-
5(f)(3)(iii), which established diversification requirements for such 
portfolios, specifically permits ``qualified pension or retirement 
plans'' and investment separate accounts to share the same underlying 
investment company. Therefore, Applicants have concluded that neither 
the Code, nor the Treasury Regulations, nor the revenue rulings 
thereunder present any inherent conflicts of interest if Plans, 
variable annuity separate account and variable life insurance Separate 
Accounts all invest in the same management investment company.
    17. Applicants note that while there are differences in the manner 
in which distributions are taxed for variable annuity contracts, 
variable life insurance contracts and Plans, these tax consequences do 
not raise any conflicts of interest. When distributions are to be made, 
and the Separate Account or the Plan is unable to net purchase payments 
to make the distributions, the Separate Account or the Plan will redeem 
shares of the Trust at their respective net asset value. The Plan will 
then make distributions in accordance with the terms of the Plan, and a 
Participating Insurance Company will make distributions in accordance 
with the terms of the Contract.
    18. With respect to voting rights, Applicants state that it is 
possible to provide an equitable means of giving such voting rights to 
Contract owners and to Plans. Applicants represent that the Portfolios 
will inform each shareholder, including each Separate Account and Plan, 
of its respective share of ownership in the respective Portfolio. Each 
Participating Insurance Company will then solicit voting instructions 
in accordance with the ``pass-through'' voting requirement.
    19. Applicants argue that the ability of the Portfolios to sell 
their respective shares directly to Plans does not create a ``senior 
security'', as that term is defined under Section 18(g) of the 1940 
Act, with respect to any contract owner as opposed to a participant 
under a Plan. Regardless of the rights and benefits of 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 Trust. Such shares may be redeemed only at net asset value. No 
shareholders of any of the Portfolios has any preference over any other 
shareholder with respect to distribution of assets or payment of 
dividends.
    20. Finally, Applicants state 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 basis premise of shareholder voting is that not all shareholders 
may agree with a particular proposal. The state insurance

[[Page 2407]]

commissioners have been given the veto power in recognition of the fact 
that insurance companies cannot simply redeem shares of one underlying 
fund held by their Separate Accounts and invest the proceeds in another 
underlying fund. Complex and time-consuming transactions must be 
undertaken to accomplish such redemptions and transfers. Conversely, 
trustees of Plans can decide to and actually redeem shares of an 
investment vehicle, and reinvest the proceeds in another investment 
vehicle without the same regulatory impediments; most Plans may even 
hold cash pending suitable investment. Based on the foregoing, 
Applicants represent that should issues arise where the interests of 
Contract owners and the interests of Plans conflict, the issues can be 
resolved almost immediately because trustees of the Plans can redeem 
shares out of the Trust independently.
    21. Applicants assert that the requested relief is appropriate and 
in the public interest because the relief will promote competitiveness 
in the variable insurance product market. Applicants submit that 
various factors have kept more insurance companies from offering 
variable annuity and variable life insurance contracts that currently 
offers such contracts. 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. Applicants 
argue that use of the Trust as a common investment medium for the 
Contracts would alleviate these concerns because Participating 
Insurance Companies would benefit not only from the investment and 
administrative expertise of PAI and the Portfolio Managers, but also 
from the cost efficiencies and investment flexibility afforded by a 
large pool of assets. Applicants state that making the Trust available 
for mixed and shared funding may encourage more insurance companies to 
offer variable contracts such as the Contracts and, accordingly, may 
increase competition with respect to both the design and the pricing of 
variable contracts; this can be expected to result in greater product 
variation and lower charges. Applicants submit that mixed and shared 
funding will benefit Contract owners by eliminating a significant 
portion of the costs of establishing and administering separate funds. 
Moreover, Applicants assert that sales of shares of the Trust to Plans 
should increase the amount of assets available for investment by the 
Trust. This should, in turn, promote economies of scale, permit 
increased safety of investments through greater diversification, and 
make the addition of new portfolios more feasible.

Applicant's Conditions

    Applicants have consented to the following conditions:
    1. A majority of the Board of Trustees or Directors of the Trust 
(the ``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 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, 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 remaining trustees; (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. The Board will monitor the Trust for the existence of any 
material irreconcilable conflict among the interests of the Contract 
owners of all of the Separate Accounts investing in the Trust and of 
the Plan participant investing in the Trust. 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 insurances, 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 
Portfolio are being managed; (e) a difference in voting instructions 
given by owners of variable annuity contracts and those given by owners 
of variable life insurance contracts; (f) a decision by a Participating 
Insurance Company to disregard the voting instructions of Contract 
owners; or (g) if applicable, a decision by a Plan to disregard voting 
instructions of Plan participants.
    3. The Participating Insurance Companies, PAI (or any other 
investment adviser of the Portfolios), and any Plan that executes a 
fund participation agreement upon becoming an owner of 10% or more of 
the assets of a Trust (collectively, ``Participants'') will report any 
potential or existing conflicts to the Board. Participants will be 
responsible for assisting the Board in carrying out its 
responsibilities under these conditions by providing the Board with all 
information reasonable 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 and, if 
pass-through voting is applicable, an obligation by PAI and each Plan 
to inform the Board whenever it is determined to disregard Plan 
participant voting instructions. 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 Trust under their agreements governing 
participating in the Trust, and such agreements shall provide that 
these responsibilities will be carried out with a view only to the 
interests of Contract owners or, as appropriate, Plan participants.
    4. If the Board or a majority of its disinterested members 
determines that a material irreconcilable conflict exists, the relevant 
Participating Insurance Companies and Plans shall, at their expense and 
to the extent reasonably practicable (as determined by a majority of 
the disinterested members), take any steps necessary to remedy or 
eliminate the material irreconcilable conflict, including: (a) 
withdrawing the assets allocate to some or all of the Separate Accounts 
from the Trust or any Portfolio and reinvesting such assets in a 
different investment medium including another Portfolio of the Trust; 
(b) submitting the question of whether such segregation should be 
implemented to a vote of all affected variable insurance 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 change; 
and (c) establishing a new registered management investment company or 
managed separate account. If a material irreconcilable conflict arise 
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 Trust's election, to withdraw its

[[Page 2408]]

Separate Account's investment in the Trust, and no charge or penalty 
will be imposed as a result of such withdrawal. If a material 
irreconcilable conflict arises because of a Plan's decision to 
disregard Plan voting instructions, if applicable, and that decision 
represents a minority position or would preclude a majority vote, the 
Plan may be required, at the Trust's election, to withdraw its 
investment in the Trust and no charge or penalty will be imposed as a 
result of such withdrawal. The responsibility to take remedial action 
in the event of a Board determination 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 their agreements governing their participation in the 
Trust. The responsibility to take such remedial action shall be carried 
out with a view only to the interests of Contract owners and 
Participants in the Plan.
    5. For purposes of condition 4, a majority of the disinterested 
trustees will determine whether any proposed action adequately remedies 
any material irreconcilable conflict, but in no event will the Trust or 
PAI (or any other investment adviser of the Portfolios) be required to 
establish a new funding medium for any Contract. Further, no 
Participating Insurance Company shall be required by condition 4 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. Further, 
no Plan shall be required by condition 4 to establish a new funding 
medium for such Plan if (a) a majority of Plan participants materially 
and adversely affected by the material irreconcilable conflict vote to 
decline such offer, or (b) pursuant to governing Plan documents and 
applicable law, the Plan makes such decision without a vote by Plan 
participants.
    6. The Board's determination of the existence of an irreconcilable 
material conflict and its implications shall be made known in writing 
promptly to all Participants.
    7. 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 variable contract owners. Accordingly, the Participating 
Insurance Companies will vote shares of the Trust held in their 
Separate Accounts in a manner consistent with voting instructions 
timely received from Contract owners. Each Participating Insurance 
Company also will vote shares of the Trust 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 it owns, in the same proportion as those shares for which voting 
instructions are received. Participating Insurance Companies will be 
responsible for assuring that each of their Separate Accounts investing 
in the Trust 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 Trust. Each Plan will vote as required by applicable law and 
governing Plan documents.
    8. As long as the Commission continues to interpret the 1940 Act as 
requiring pass-through voting privileges for variable contract owners, 
each Portfolio Manager will vote its shares of the Portfolio in the 
same proportion as all contract owners having voting rights with 
respect to that Portfolio; provided, however, that the Portfolio 
Manager shall vote its shares in such other manner as may be required 
by the Commission or its staff.
    9. All reports received by the Board regarding 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 Board or other 
appropriate records. Such minutes or other records shall be made 
available to the Commission upon request.
    10. The Trust will notify all Participating Insurance Companies 
that Separate Account prospectus disclosure regarding potential risks 
of mixed and shared funding may be appropriate. The Trust will disclose 
in its prospectus that: (a) the Trust is intended to be a funding 
vehicle for variable annuity and variable life insurance contracts 
offered by various insurance companies and certain qualified pension 
and retirement plans; (b) because of differences in tax treatment and 
other considerations, the interests of Contract owners investing in the 
Trust and the interests of Plans investing in the Trust may conflict; 
and (c) the Board will monitor events 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.
    11. The Trust will comply with all provisions of the 1940 Act 
requiring voting by shareholders (which, for these purposes, will be 
the persons having a voting interest in the shares of the Trust) and, 
in particular, the Trust 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 Trust is not one of the trust described 
in Section 16(c) of the 1940 Act), as well as with Section 16(a) and, 
if applicable, Section 16(b) of the 1940 Act. Further, the Trust 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.
    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 
Applicants, then the Trust and/or the Participating Insurance 
Companies, as appropriate, will 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 the 
Board such reports, materials, or data as the Board reasonably may 
request so that the Board may carry out fully the obligations imposed 
upon it 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 Participants to 
provide these reports, materials, and data to the Board, when the Board 
so reasonably requests, shall be a contractual obligation of all 
Participants under the agreements governing their participation in the 
Trust.
    14. If a Plan becomes an owner of 10% or more of the assets of a 
Trust, such Plan will execute a participation agreement with the Trust. 
A Plan will execute an application containing an acknowledgement of 
this condition upon such Plan's initial purchase of the shares of any 
Portfolio.

Conclusion

    For the reasons stated above, Applicants assert that the requested 
exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act 
and

[[Page 2409]]

Rules 6e-2(b)(15) and 6e-3(T)(b)(15) 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. 97-1035 Filed 1-15-97; 8:45 am]
BILLING CODE 8010-01-M