[Federal Register Volume 62, Number 138 (Friday, July 18, 1997)]
[Notices]
[Pages 38591-38596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-18920]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22746; No. 812-10644]


The Lazard Retirement Series, Inc., et al.

July 11, 1997.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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APPLICANTS: Lazard Retirement Series, Inc. (the ``Company'') and Lazard 
Asset Management (``LAM'').

RELEVANT 1940 ACT SECTIONS: Order requested pursuant to Section 6(c) 
granting 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 exemptive relief to permit 
shares of the Company and any other investment company that is designed 
to fund variable insurance products and for which LAM, or any of its 
affiliates, may serve as investment adviser, administrator, manager, 
principal underwriter or sponsor (collectively, the ``Funds'') to be 
sold to and held by separate accounts funding variable annuity and 
variable life insurance contracts issued by affiliated or unaffiliated 
life insurance companies (``Participating Insurance Companies'') or 
qualified pension and retirement plans (``Plans'') outside of the 
separate account context.

FILING DATE: The application was filed on May 7, 1997.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request

[[Page 38592]]

a hearing by writing to the Secretary of the Commission and serving 
Applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the Commission by 5:30 p.m. on August 5, 
1997, and must be accompanied by proof of service on Applicants in the 
form of an affidavit or, for lawyers, a certificate of service. Hearing 
requests should state the nature of the requester's interest, the 
reason for the request and the issues contested. Persons may request 
notification of a hearing by writing to the Secretary of the 
Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549. Applicants, c/o Lazard Freres 
Asset Management, 30 Rockefeller Plaza, New York, New York 10020.

FOR FURTHER INFORMATION CONTACT: Laura A. Novack, Senior Attorney, or 
Kevin M. Kirchoff, Branch Chief, Office of Insurance Products (Division 
of Investment Management) at (202) 942-0670.

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

Applicants' Representations

    1. The Company is a Maryland corporation registered pursuant to the 
1940 Act as an open-end management investment company. The Company, 
which was organized in February 1997, consists of nine separate series 
which operate as distinct investment vehicles, all of which desire to 
sell their shares to fund variable insurance products.
    2. LAM, a division of Lazard Freres & Co. LLC, is registered under 
the Investment Advisers Act of 1940, and serves as the Company's 
investment manager.
    3. Applicants desire that the Funds have the flexibility to offer 
their shares to insurance company separate accounts that fund variable 
annuity and variable life insurance contracts (including single 
premium, scheduled premium, modified single premium and flexible 
premium) (collectively, ``Variable Contracts''), which separate 
accounts are established by affiliated or unaffiliated insurance 
companies. These separate accounts may be registered as investment 
companies under the 1940 Act or may be exempt from registration under 
the 1940 Act pursuant to Section 3(c)(1) thereunder.
    4. The participating Insurance Companies will establish their own 
separate accounts and design their own Variable Contracts. Each 
Participating Insurance Company will have the legal obligation of 
satisfying all requirements applicable to such insurance company under 
the federal securities laws. The role of the Funds, so far as the 
federal securities laws are applicable, will be limited to that of 
offering their shares to separate accounts of Participating Insurance 
Companies and to Plans, and fulfilling any conditions the Commission 
may impose upon granting the requested relief. Each Participating 
Insurance Company will enter into a fund participation agreement with 
the Fund in which the Participating Insurance Company invests.
    5. Applicants state that Fund shares also may be offered directly 
to Plans outside the separate account context. The Plans may choose one 
or more of the Funds as the sole investment under the Plan or as one of 
several investments. Plan participants may or may not be given the 
right to select among Funds, depending on the Plans. ``Plan 
Participants'' include not only those participants of qualified pension 
or retirement plans as set forth in Treasury Regulation Sec. 1.817-
5(f)(3)(iii) and Revenue Ruling 94-62, but also include any other 
trust, account, contract or annuity that is determined to be within the 
scope of Treasury Regulation Sec. 1.817-5(f)(3)(iii). Fund shares sold 
to Plans will be held, where applicable, by the trustees of such Plans 
as required by Section 403(a) of the Employee Retirement Income 
Security Act (``ERISA'').

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, Rule 6e-2(b)(15) 
provides partial exemptions from Sections 9(a), 13(a), 15(a) and 15(b) 
of the 1940 Act. The exemptions granted by Rule 6e-2(b) are available 
only where the management investment company underlying the separate 
account offers its shares ``exclusively to variable life insurance 
separate accounts of the life insurer or any affiliated life insurance 
company.''
    2. The use of a common management investment company as the 
underlying investment medium for both variable annuity and variable 
life insurance separate accounts of a single insurance company (or of 
two or more affiliated insurance companies) is referred to as ``mixed 
funding.'' The use of a common management investment company as the 
underlying investment medium for variable annuity and/or variable life 
insurance separate accounts of unaffiliated insurance companies is 
referred to as ``shared funding.'' ``Mixed and shared funding'' denotes 
the use of a common management investment company to fund the variable 
annuity and variable life insurance separate accounts of affiliated and 
unaffiliated insurance companies. The relief granted by Rule 6e-
2(b)(15) is not available with respect to a scheduled premium variable 
life insurance separate account that owns shares of an underlying fund 
that also offers its shares to a variable annuity separate account of 
the same company or of any other affiliated or unaffiliated life 
insurance company. Therefore, Rule 6e-2(b)(15) precludes mixed and 
shared funding.
    3. In connection with the funding of flexible premium variable life 
insurance contracts issued through a separate account registered under 
the 1940 Act as a unit investment trust, Rule 6e-3(T)(b)(15) provides 
partial exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the 
1940 Act. The exemptions granted to a separate account by Rule 6e-
3(T)(b)(15) are available only where all of the assets of the separate 
account consist of the shares of one or more registered management 
investment companies which offer their shares ``exclusively'' to 
separate accounts of the life insurer, or any affiliated life insurance 
company, offering either scheduled premium variable life insurance 
contracts or flexible premium variable life insurance 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 with respect to a 
flexible premium variable life insurance separate account, but 
precludes shared funding.
    4. Applicants assert that the use of the Funds as common investment 
media for the Variable Contracts would allow Participating Insurance 
Companies to benefit not only from the investment and administrative 
expertise of LAM, but also from the cost efficiencies and investment 
flexibility afforded by a large pool of funds. Applicants submit that 
mixed and shared funding would benefit Variable Contract owners by: (a) 
eliminating a significant portion of the costs of establishing and 
administering separate funds; (b) permitting a greater number of assets 
to be available for investment by the Funds, thereby promoting 
economies of scale, permitting greater diversification, and making the 
addition of new portfolios more feasible; and (c) encouraging more 
insurance companies to offer Variable Contracts, resulting in increased 
competition with respect to both the design and pricing of Variable

[[Page 38593]]

Contracts, which can be expected to result in greater product variation 
and lower charges.
    5. Applicants assert that the relief granted by sub-paragraph 
(b)(15) of Rules 6e-2 and 6e-3(T) should not be affected by the 
proposed sale of Fund shares to Plans. Applicants note, however, that 
because the relief under sub-paragraph (b)(15) of Rules 6e-2 and 6e-
3(T) is available only where shares are offered exclusively to separate 
accounts of life insurance companies, additional exemptive relief is 
necessary if shares of the Funds also are to be sold to Plans.
    6. Applicants state that current tax law permits the Funds to 
increase their asset base through the sale of Fund shares to the Plans. 
Applicants state that Section 817(h) of the Internal Revenue Code of 
1986, as amended (the ``Code''), imposes certain diversification 
requirements on the underlying assets of variable annuity contracts and 
variable life contracts held by the portfolios of the Funds. The Code 
provides that such contracts shall not be treated as an annuity 
contract or life insurance contract for any period (and any subsequent 
period) during which the investments are not adequately diversified in 
accordance with regulations prescribed by the Treasury Department. 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. 
Treas. Reg. Sec. 1.817-5 (1989). 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 annuity and 
variable life contracts. Treas. Reg. Sec. 1.817-5(f)(3)(iii).
    7. Applicants state that the promulgation of Rules 6e-2 and 6e-3(T) 
under the 1940 Act preceded the issuance of these Treasury Regulations, 
and that the sale of shares of the same investment company to both 
separate accounts and Plans could not have been envisioned at the time 
of the adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15).
    8. Applicants therefore request an Order of the Commission 
exempting variable life insurance variable annuity separate accounts of 
Participating Insurance Companies (and, to the extent necessary, any 
investment adviser, principal underwriter and depositor of such an 
account) and Applicants from Sections 9(a), 13(a), 15(a) and 15(b) of 
the 1940 Act, and sub-paragraph (b)(15) of Rules 6e-2 and 63-3(T) 
thereunder, when shares of the Funds are offered and sold to, and held 
by, such separate accounts in the mixed and shared funding context, 
regardless of whether shares of the Funds also are offered and sold 
directly to Plans.
    9. Section 9(a) of the 1940 Act provides that it is unlawful for 
any company to serve as an investment adviser to, or principal 
underwriter for, any registered open-end investment company if an 
affiliated person of that company is subject to a disqualification 
enumerated in Section 9(a) (1) or (2).
    10. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) provide partial exemptions 
from Section 9(a) under certain circumstances, subject to the 
limitations on mixed and shared funding. The relief provided by sub-
paragraph (b)(15)(i) of Rules 6e-2 and 6e-3(T) permits a person 
disqualified under Section 9(a) to serve as an officer, director, or 
employee of an insurance company or any of its affiliates, so long as 
that person does not participate directly in the management or 
administration of the underlying investment company. The relief 
provided by sub-paragraph (b)(15)(ii) of Rules 6e-2 and 6e-3(T) permits 
the life insurer to serve as the underlying fund's investment adviser 
or principal underwriter, provided that none of the insurer's personnel 
who are ineligible pursuant to Section 9(a) participate in the 
management or administration of the fund.
    11. Applicants state that the partial relief from Section 9(a) 
found in sub-paragraph (b)(15) of Rules 6e-2 and 6e-3(T), in effect, 
limits the amount of monitoring necessary to ensure compliance with 
Section 9 to that which is appropriate in light of the policy and 
purposes of that section. Applicants state that those rules recognize 
that it is not necessary for the protection of investors or the 
purposes fairly intended by the policy and provisions of the 1940 Act 
to apply the provisions of Section 9(a) to the many individuals in an 
insurance company complex, who will have no involvement in matters 
pertaining to the investment company funding the separate accounts. 
Applicants note that the Participating Insurance Companies are not 
expected to play any role in the management or administration of the 
Funds. Therefore, Applicants assert, applying the restrictions of 
Section 9(a) serves no regulatory purpose. Applicants state that the 
relief requested should not be affected by the proposed sale of Fund 
shares to the Plans, because the insulation of the Funds from those 
individuals who are disqualified under the 1940 Act remains in place. 
Moreover, since the Plans are not investment companies and will not be 
deemed to be affiliated solely by virtue of their shareholdings, no 
additional relief is necessary.
    12. Sections 13(a), 15(a) and 15(b) of the 1940 Act require ``pass-
through'' voting with respect to underlying investment company shares 
held by a separate account. Subparagraph (b)(15)(iii) of Rules 6e-2 and 
6e-3(T) under the 1940 Act provides partial exemptions from the pass-
through voting requirements in limited situations.
    13. For example, sub-paragraph (b)(15)(iii)(B) of Rule 6e-2 and 
sub-paragraph (b)(iii)(B) of Rule 6e-3(T) provide that the insurance 
company may disregard the voting instructions of its contract owners if 
the contract owners initiate any change in the investment company's 
investment policies, principal underwriter, or investment adviser. 
Under the Rules, voting instructions with respect to a change in 
investment management may be disregarded only if the insurance company 
makes a good faith determination that such changes would: (a) Violate 
state law; (b) result in investment that were not consistent with the 
investment objectives of the separate account; or (c) result in 
investments that would vary from the general quality and nature of 
investments and investment techniques used by other separate accounts 
of the company or of an affiliated life insurance company with similar 
investment objectives.
    14. Applicants state that Rule 6e-2 recognizes that variable life 
insurance contracts have important elements unique to insurance 
contracts and are subject to extensive state regulation of insurance. 
Applicants maintain, therefore, that in adopting Rule 6e-2, the 
Commission expressly recognized that exemptions from pass-through 
voting requirements were necessary to assure the solvency of the life 
insurer and the 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. Flexible premium variable life 
insurance contracts and variable annuity contracts are subject to 
substantially the same state insurance regulatory authority, and 
therefore, corresponding provisions of Rule 6e-3(T) presumably were 
adopted in recognition of the same

[[Page 38594]]

considerations as the Commission applied in adopting Rule 6e-2. 
Applicants submit 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 funding does 
not compromise the goals of the insurance regulatory authorities or of 
the Commission.
    15. Applicants further state that the sale of Fund shares to Plans 
does not affect the relief requested in this regard. As previously 
noted, Fund shares sold to Plans will be held by the trustees of such 
Plans as required by Section 403(a) of ERISA. Section 403(a) also 
provides that the trustees must have exclusive authority and discretion 
to manage and control the assets of the Plans with two exceptions: (a) 
When the Plan expressly provides that the trustees are subject to the 
direction of a named fiduciary who is not a trustee, in which case the 
trustees are subject to proper directions made in accordance with the 
terms of the Plan and not contrary to ERISA; and (b) when the authority 
to manage, acquire or dispose of assets of the Plan is delegated to one 
or more investment managers pursuant to Section 402(c)(3) of ERISA.
    16. 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 
share held unless the right to vote such shares is reserved to the 
trustees or to the named fiduciary. In any event, there is no pass-
through voting to the participants in such Plans. Accordingly, 
Applicants not 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 where the Plans do not 
provide participants with the right to give voting instructions.
    17. Applicants submit that there is no contractual or other 
relationship between the Participant Insurance Companies and any Plans 
which would affect the solvency of the life insurer, would affect the 
performance of the life insurer's contractual obligations, or would be 
expected to increase the risks undertaken by the life insurer. 
Accordingly, Applicants submit that where Plans provide participants 
with the right to give voting instructions, the purchase of shares by 
Plans does not present any complications not otherwise occasioned by 
mixed or shared funding.
    18. Applicants state that no increased conflicts of interest would 
be presented by the granting of the requested relief. Applicants assert 
that share funding does not present any issues that do not already 
exist where a single insurance company is licensed to do business in 
several states. Applicants note that where different Participating 
Insurance Companies are domiciled in different states, it is possible 
that the state insurance regulatory body in a state in which one 
Participating Insurance Company is domiciled could require action that 
is inconsistent with the requirements of other insurance regulators in 
one or more other states in which other Participating Insurance 
Companies are domiciled. Applicants submit that this possibility is no 
different or greater than exists where a single insurer an its 
affiliates offer their insurance products in several states.
    19. Applicants further submit that affiliation does not reduce the 
potential for differences in state regulatory requirements. In any 
event, the conditions (adapted from the conditions included in Rule 6e-
3(T)(b)(15)) discusses 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 Funds.
    20. Applicants also argue that affiliation does not eliminate the 
potential, if any exists, for divergent judgments as to when a 
Participating Insurance Company could disregard Variable Contract owner 
voting instructions. Potential disagreement is limited by the 
requirements 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 Variable 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 
separate account's investment in that Fund. No charge or penalty will 
be imposed as a result of such a withdrawal.
    21. Applicants submit that there is no reason why the investment 
policies of a Fund with mixed funding would, or should, be materially 
different from what those policies would, or should, be if such Fund or 
series thereof funded only variable annuity or variable life insurance 
contracts. Moreover, Applicants represent that the Funds will not be 
managed to favor or disfavor any particular insurer or type of 
insurance product.
    22. Applicants note that Section 817(h) of the Code imposes certain 
diversification requirements on the underlying assets of variable 
annuity and variable life insurance contracts held in the portfolios of 
management investment companies. Treasury Regulation Sec. 1.817-
5(f)(3)(iii), which established diversification requirements for such 
portfolios, specifically permits, among other things, ``qualified 
pension or retirement plans'' and separate accounts to share the same 
underlying management investment company. Therefore, Applicants have 
concluded that neither the code, the Treasury Regulations, nor the 
Revenue Rulings thereunder present any inherent conflicts of interest 
if the Plans, variable annuity separate accounts and variable life 
insurance separate accounts all invest in the same management 
investment company.
    23. Applicants note that while there are differences in the manner 
in which distributions are taxed for variable annuity contracts, 
variable life insurance contracts and Plans, these tax consequences do 
not raise any conflicts of interest. When distributions are to be made, 
and the separate account or the Plan is unable to net purchase payments 
to make the distributions, the separate account or the Plan will redeem 
shares of the Funds at their respective net asset value. The Plan will 
then make distributions in accordance with the terms of the Plan. The 
life insurance company will make distributions in accordance with the 
terms of the Variable Contract.
    24. Applicants state that they do not see any greater potential for 
material irreconcilable conflicts arising between the interests of 
participants under the Plans and owners of the Variable Contracts 
issued by the separate accounts of Participating Insurance Companies 
from possible future changes in the federal tax laws than that which 
already exists between variable annuity contract owners and variable 
life insurance contract owners.
    25. Applicants argue that the ability of the Funds to sell their 
respective shares directly to Plans does not create a ``senior 
security,'' as such term is defined under Section 18(g) of the 1940 
Act, with respect to any Variable Contract owner as opposed to a 
participant under a Plan. Regardless of the rights and benefits of 
participants and Variable Contract owners under their respective Plans 
and Variable

[[Page 38595]]

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 distributions of 
assets or payment of dividends.
    26. Applicants state that there are no conflict of interest between 
Variable Contract owners and Plan Participants with respect to the 
state insurance commissioners' veto powers over investment objectives. 
The state insurance commissioners have been given the veto power to 
prevent, among other things, insurance companies from indiscriminately 
redeeming their separate accounts out of one Fund and investing in 
another. To accomplish such redemptions and transfers, complex and time 
consuming transactions must be undertaken. conversely, 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 a suitable investment. Based on the foregoing, Applicants 
represent that even should the interests of Variable Contract owners 
and the interests of Plans and Plan participants conflict, the 
conflicts can be resolved almost immediately in that trustees of the 
Plans can, independently, redeem shares out of the Funds.
    27. Applicants state that, regardless of the types of Fund 
shareholders, a Fund's adviser is legally obligated to manage the Funds 
in accordance with each Fund's investment objectives, policies and 
restrictions as well as any guidelines established by the Fund's Board. 
Applicants assert that LAM does so, and, thus, would manage the Funds 
in the same manner as any other mutual fund.

Applicants' Conditions

    Applicants have consented to the following conditions:
    1. A majority of each Fund's Board shall consist of persons who are 
not ``interested persons'' thereof, 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 death, disqualification, or bona fide resignation of any 
Board member, 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 Fund's Board will monitor the Fund for the existence of any 
material irreconcilable conflict between and among the interests of 
Variable Contract owners of all separate accounts and of Plan 
participants and Plans investing in the Fund, and determine what 
action, if any, should be taken in response to such conflicts. A 
material irreconcilable conflict may arise for a variety of reasons, 
including: (a) An action by any state insurance regulatory authority; 
(b) a change in applicable federal or state insurance, tax, or 
securities laws or regulations, or a public ruling, private letter 
ruling, no-action or interpretive letter, or any similar action by 
insurance, tax, or securities regulatory authorities; (c) an 
administrative or judicial decision in any relevant proceeding; (d) the 
manner in which the investments of the Funds are being managed; (e) a 
difference in voting instructions given by owners of variable annuity 
and variable life insurance contracts; (f) a decision by a 
Participating Insurance Company to disregard the voting instructions of 
Variable Contract owners; or (g) if applicable, a decision by a Plan to 
disregard the voting instructions of Plan participants.
    3. LAM (or any other investment adviser of a Fund), any 
Participating Insurance Company and any Eligible Plan that executes a 
fund participation agreement upon becoming an owner of 10% or more of 
the assets of a Fund (collectively, ``Participants'') will report any 
potential or existing conflicts to the relevant Board. Participants 
will be obligated to assist the relevant Board in carrying out its 
responsibilities under these conditions by providing the Board will all 
information reasonably necessary for the Board to consider any issues 
raised. This responsibility includes, but it not limited to, an 
obligation by each Participating Insurance Company to inform the Board 
whenever Variable Contract owner voting instructions are disregarded 
and, if pass-through voting is applicable, an obligation by each Plan 
to inform the Board whenever Plan participant voting instructions are 
disregarded. The responsibility to report such information and 
conflicts and to assist the Boards will be contractual obligations 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 Variable Contract owners and, 
if applicable, Plan participants.
    4. If a majority of a Fund's Board members, or a majority of its 
disinterested Board members, determine that a material irreconcilable 
conflict exists, the relevant Participating Insurance Companies and 
Plans, at their expense and to the extent reasonably practical (as 
determined by a majority of the disinterested Board members), shall 
take whatever steps are necessary to remedy or eliminate the material 
irreconcilable conflict. Such steps could include: (a) Withdrawing the 
assets allocable to some or all of the separate accounts from the Fund 
or any of its series and reinvesting such assets in a different 
investment medium, which may include another series of the Fund or 
another Fund; (b) in the case of a Participating Insurance Company, 
submitting the question as to whether such segregation should be 
implemented to a vote of all affected Variable Contract owners and, as 
appropriate, segregating the assets of any appropriate group (i.e., 
variable annuity or variable life insurance contract owners of one or 
more Participating Insurance Companies) that votes in favor of such 
segregation, or offering to the affected 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 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 Participating Insurance Company may be 
required, at the election of the Fund, to withdraw its separate 
account's investment in such Fund, 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 
participant voting instructions, if applicable, and that decision 
represents a minority position or would preclude a majority vote, the 
Plan may be required, at the election of the Fund, to withdraw its 
investment in such Fund, 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 will be a contractual obligation of all

[[Page 38596]]

Participating Insurance Companies and Plans under their agreements 
governing participating in the Funds. These responsibilities shall be 
carried out with a view only to the interests of Contract owners and, 
as applicable, Plan participants.
    5. For purposes of Condition 4, a majority of the disinterested 
members of the applicable Board shall determine whether any proposed 
action adequately remedies any material irreconcilable conflict. In no 
event will a Fund or LAM (or any other investment adviser of the Funds) 
be required to establish a new funding medium for any Variable 
Contract. No Participating Insurance Company shall be required by 
Condition 4 to establish a new funding medium for any Variable Contract 
if a majority of Variable Contract owners materially and adversely 
affected by the material irreconcilable conflict, vote to decline such 
offer. 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 an applicable law, the Plan makes such decision without a 
vote by Plan Participants.
    6. Participants will be informed promptly in writing of a Board's 
determination of the existence of a material irreconcilable conflict 
and its implications.
    7. Participating Insurance Companies will provide pass-through 
voting privileges to all Variable Contract owners so long as the 
Commission continues to interpret the 1940 Act as requiring pass-
through voting privileges for Variable Contract owners. Accordingly, 
such Participating Insurance Companies, where applicable, will vote 
shares of the Fund held in its separate accounts in a manner consistent 
with voting instructions timely received from Variable Contract owners. 
In addition, each Participating Insurance Company will vote shares of a 
Fund held in its separate accounts for which it has not received timely 
voting instructions, as well as shares it owns, in the same proportion 
as those shares for which it has received voting instructions. 
Participating Insurance Companies will be responsible for assuring that 
each of their separate accounts investing in a Fund calculates voting 
privileges in a manner consistent with all other Participating 
Insurance Companies. The obligation to vote a Fund's shares and 
calculate voting privileges in a manner consistent with all other 
separate accounts investing in the Fund will be a contractual 
obligation of all Participating Insurance Companies under the 
agreements governing their participation in the Fund. Each Plan will 
vote as required by applicable law and governing Plan documents.
    8. All reports of potential or existing conflicts of interest 
received by a Board, and all Board action with regard to: (a) 
Determining the existence of a conflict; (b) notifying Participants of 
a conflict; and (c) determining whether any proposed action adequately 
remedies a conflict, will be properly recorded in the minutes of the 
relevant Board or other appropriate records. Such minutes or other 
records shall be made available to the Commission upon request.
    9. Each Fund will notify all Participating Insurance Companies that 
separate account prospectus disclosure regarding potential risks of 
mixed and shared funding may be appropriate. Each Fund shall disclose 
in its prospectus that: (a) Its shares may be offered to insurance 
company separate accounts that fund both variable annuity and variable 
life insurance contracts, and to Plans; (b) differences in tax 
treatment or other considerations may cause the interests of various 
Variable Contract owners participating in the Fund and the interests of 
Plans investing in the Fund to conflict; and (c) the Board will monitor 
the Fund for any material conflicts and determine what action, if any, 
should be taken.
    10. Each Fund will comply with all the provisions of the 1940 Act 
requiring voting by shareholders (for these purposes, the persons 
having a voting interest in the shares of the Funds). In particular, 
each such Fund either will 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 none of the Funds shall be one of the trusts described in 
Section 16(c) of the 1940 Act) as well as 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 Board members 
and with whatever rules the Commission may promulgate with respect 
thereto.
    11. If and to the extent Rule 6e-2 or Rule 6e-3(T) is amended, of 
if Rule 6e-3 under the 1940 Act is adopted, to provide exemptive relief 
from any provisions of the 1940 Actor 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 Participants, as appropriate, 
shall take such steps as may be necessary to comply with Rule 6e-2 or 
Rule 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such 
rules are applicable.
    12. No less than annually, the Participants shall submit to each 
Board such reports, materials or data as each Board may reasonably 
request so that such Boards may carry out fully the obligations imposed 
upon them by the conditions stated in this application. Such reports, 
materials and data shall be submitted more frequently if deemed 
appropriate by the Boards. The obligations of Participating Insurance 
Companies and Plans to provide these reports, materials and data upon 
reasonable request of a Board shall be a contractual obligation of all 
Participating Insurance Companies and Plans under the agreements 
governing their participation in the Funds.
    13. If a Plan or Plan participant should become an owner of 10% or 
more of the assets of a Fund, such Plan or Plan participant will 
execute a participation agreement with such Fund which includes the 
conditions set forth herein to the extent applicable. A Plan or Plan 
participant will execute an application containing an acknowledgement 
of this condition upon such Plan's initial purchase of the shares of 
any Fund.

Conclusion

    For the reasons summarized above, Applicants represent that the 
exemptions requested are necessary and appropriate in the public 
interest and consistent with the protection of investors and 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. 97-18920 Filed 7-17-97; 8:45 am]
BILLING CODE 8010-01-M