[Federal Register Volume 62, Number 139 (Monday, July 21, 1997)]
[Notices]
[Pages 39034-39040]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19030]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22749: File No. 812-10648]


Hotchkis and Wiley Variable Trust, et al.

July 14, 1997.
AGENCY: The Securities and Exchange Commission (the ``Commission'').

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

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APPLICANTS: Hotchkis and Wiley Variable Trust (the ``Trust'') and 
Merrill Lynch Asset Management, L.P. (``MLAM'').

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 the extent 
necessary to permit shares of the Trust and shares of any other 
investment company or portfolio that is designed to fund insurance 
products and for which Hotchkis and Wiley (``H&W'') may serve in the 
future, as investment adviser, administrator, manager, principal 
underwriter, or sponsor (``Future Trusts,'' together with Trust, 
``Trusts'') to be sold to and held by variable annuity and variable 
life insurance separate accounts of both affiliated and unaffiliated 
life insurance companies and by qualified pension and retirement plans 
(``Qualified Plans'' or ``Plans'') outside of the separate account 
context.

FILING DATE: This application was filed on May 9, 1997.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request hearing by writing to the Secretary of the 
Commission and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests must be

[[Page 39035]]

received by the Commission by 5:30 p.m. on August 8, 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 writer'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 Lawrence A. 
Rogers, Esq., Merrill Lynch Asset Management, L.P., 800 Scudders Mill 
Road, Plainsboro, New Jersey 08536.

FOR FURTHER INFORMATION CONTACT: Ethan D. Corey, 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 Trust, a Massachusetts business trust, is registered under 
the 1940 Act as an open-end, management investment company. The Trust 
currently consists of three separate portfolios (each, a 
``Portfolio''), each of which has its own investment objective or 
objectives, and policies.
    2. H&W, an operating division of MLAM, serves as the investment 
adviser to the Trust. MLAM is a limited partnership, the general 
partner of which is Princeton Services, Inc. and the limited partner of 
which is Merrill Lynch & Co., Inc. MLAM is registered with the 
Commission as an investment adviser pursuant to the Investment Advisers 
Act of 1940.
    3. Upon effectiveness of the Trust's registration statement, shares 
of each Portfolio will be offered to insurance companies as investment 
options for their separate accounts supporting variable annuity 
contracts (``Current Participating Insurance Companies'').
    4. Applicants state that, upon the granting of the exemptive relief 
requested by the Application, the Trust intends to offer shares 
representing interests in each Portfolio, and any future Portfolios 
(each, a ``Future Portfolio,'' together with Portfolio ``Portfolios''), 
to separate accounts of insurance companies, including both the Current 
Participating Insurance Companies and other insurance companies 
(``Other Insurance Companies'') to serve as the investment vehicle for 
variable annuity contracts and variable life insurance contracts 
(collectively, ``Variable Contracts''). The Current Participating 
Insurance Companies and Other Insurance Companies which elect to 
purchase shares of one or more Portfolios are collectively referred to 
herein as ``Participating Insurance Companies.'' The Participating 
Insurance Companies will establish their own separate accounts 
(``Separate Accounts'') and design their own Variable Contracts. 
Applicants also propose that the Portfolios offer and sell their shares 
directly to Qualified Plans outside of the separate account context.

Applicants' Legal Analysis

    1. Applicants request an order pursuant to Section 6(c) of the 1940 
Act exempting them from Sections 9(a), 13(a), 15(a), and 15(b) of the 
1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the 
extent necessary to permit shares of the Trusts to be offered and sold 
to, and held by: (1) both variable annuity and variable life insurance 
separate accounts of the same life insurance company or of any 
affiliated life insurance company (''mixed funding''); (2) separate 
accounts of unaffiliated life insurance companies (including both 
variable annuity separate accounts and variable life insurance separate 
accounts) (``shared funding''); and (3) trustees of Qualified Plans.
    2. 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. These exemptions are available only if the separate 
account is organized as a unit investment trust, all the assets of 
which consist of the shares of one or more registered management 
investment companies which offer their shares exclusively to variable 
life insurance separate accounts of the life insurer or of any 
affiliated life insurer. Thus, the exemptions provided by Rule 6e-2 are 
not available if a scheduled premium variable life insurance separate 
account owns shares of an underlying fund that also offers its shares 
to a variable annuity separate account or a flexible premium variable 
life insurance separate account of the same insurance company, or to an 
unaffiliated life insurance company. In addition, the relief granted by 
Rule 6e-2(b)(15) is not available if the scheduled premium variable 
life insurance separate account owns shares of an underlying fund that 
also offers its shares to Qualified Plans.
    3. Rule 6e-3(T)(b)(15) provides similar partial exemptions in 
connection with flexible premium variable life insurance contracts 
issued through a separate account registered under the 1940 Act as a 
unit investment trust. These exemptions, however, are available only if 
all the assets of the separate account consist of the shares of one or 
more registered management investment companies which offer their 
shares ``exclusively to separate accounts of the life insurer, or of 
any affiliated life insurance company, offering either scheduled 
premium variable life insurance contacts 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, the exemptions provided by 
Rule 6e-3(T)(b)(15) are available if the underlying fund is engaged in 
mixed funding, but are not available if the fund is engaged in shared 
funding or if the fund sells its shares to Qualified Plans.
    4. Applicants state that current tax law permits the Trust to 
increase its asset base through the sale of its shares to Qualified 
Plans. Section 817(h) of the Internal Revenue Code of 1986, as amended 
(the ``Code''), imposes certain diversification standards on the assets 
underlying Variable Contracts, such as those in each Portfolio. The 
Code provides that Variable Contracts will not be treated as annuity 
contracts or life insurance contracts, as the case may be, for any 
period (or any subsequent period) for which the underlying assets are 
not, in accordance with regulations issued by the Treasury Department 
(the ``Regulations''), adequately diversified. On March 2, 1989, the 
Treasury Department issued regulations (Treas. Reg. 1.817-5) which 
established specific diversification requirements for investment 
portfolios underlying Variable Contracts. The Regulations generally 
provide that, in order to meet these diversification requirements, all 
of the beneficial interests in the investment company must be held by 
the segregated asset accounts of one or more life insurance companies. 
Notwithstanding this, the Regulations also contain an exception to this 
requirement that permits trustees of a qualified pension or retirement 
plan to hold shares of an investment company, the shares of which are 
also held by insurance company segregated asset accounts, without 
adversely affecting the status of the investment company as an 
adequately diversified underlying investment for Variable Contracts 
issued

[[Page 39036]]

through such segregated asset accounts (Treas. Reg. 1.817-
5(f)(3)(iii)).
    5. The promulgation of Rules 6e-2 and 6e-3(T) preceded the issuance 
of these Regulations. Applicants state that, given the then-current tax 
law, the sale of shares of the same investment company to both the 
separate accounts of insurers and to Qualified Plans could not have 
been envisioned at the time of the adoption of Rules 6e-2(b)(5) and 6e-
3(T)(b)(15).
    6. Section 9(a)(3) of the 1940 Act provides, among other things, 
that it is unlawful for any company to serve as investment adviser or 
principal underwriter of any registered open-end investment company if 
an affiliated person of that company is subject to a disqualification 
enumerated in Sections 9(a) (1) or (2) of the 1940 Act. Rules 6e-
2(b)(15) (i) and (ii) and Rule 6e-3(T)(b)(15) (i) and (ii) under the 
1940 Act provide exemptions from Section 9(a) under certain 
circumstances, subject to the limitations on mixed and shared funding 
imposed by the 1940 Act and the rules thereunder. These exemptions 
limit the application of the eligibility restrictions to affiliated 
individuals or companies that directly participate in the management of 
the underlying management company.
    7. Applicants state that the partial relief granted in Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) from the requirements of Section 9 of the 
1940 Act, 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 
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 in 
that organization. Applicants state that it is unnecessary to apply 
Section 9(a) to individuals in various unaffiliated Participating 
Insurance Companies (or affiliated companies of Participating Insurance 
Companies) that may utilize the Trusts as the funding medium for 
Variable Contracts. According to Applicants, there is no regulatory 
purpose in extending the Section 9(a) monitoring requirements because 
of mixed or shared funding. The Participating Insurance Companies and 
Qualified Plans are not expected to play any role in the management or 
administration of the Trusts. Moreover, those individuals who 
participate in the management or administration of the Trusts will 
remain the same regardless of which Separate Accounts or Qualified 
Plans use the Trusts. Applicants argue that applying the monitoring 
requirements of Section 9(a) because of investment by other insurers' 
separate accounts would be unjustified and would not serve any 
regulatory purpose.
    8. Applicants also state that in the case of Qualified Plans, the 
Plans, unlike the Separate Accounts, are not themselves investment 
companies, and therefore are not subject to Section 9 of the 1940 Act. 
Furthermore, it is not anticipated that a Qualified Plan would be an 
affiliated person of any of the Trusts by virtue of its shareholders.

Pass-Through Voting

    9. Rule 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 that the limitations 
on mixed and shared funding imposed by the 1940 Act and the rules 
promulgated thereunder are observed.
    10. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act give 
the Participating Insurance Companies the right to disregard voting 
instructions of contract owners. Rules 6e-2(b)(15)(iii)(A) and 6e-
3(T)(b)(15)(iii)(A) each provide that the 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 (subject to the provisions of paragraphs (b)(5)(i) 
and (b)(7)(ii)(A) of Rules 6e-2 and 6e-3(T) under the 1940 Act). Rules 
6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2) each provide that the 
insurance company may disregard voting instructions of contract owners 
if the contract owners initiate any change in the underlying investment 
company's investment policies, principal underwriter, or any investment 
adviser (subject to the provisions of paragraphs (b)(5)(ii), 
(b)(7)(ii)(B), and (b)(7)(ii)(C) of Rules 6e-2 and 6e-3(T) under the 
1940 Act). Applicants represent that these rights do not raise any 
issues different from those raised by the authority of state insurance 
administrators over separate accounts. Under Rules 6e-2(b)(15) and 6e-
3(T)(b)(15), an insurer can disregard voting instructions of contract 
owners only with respect to certain specified items. Applicants also 
note that the potential for disagreement among Separate Accounts is 
limited by the requirements in Rules 6e-2 and 6e-3(T) that a 
Participating Insurance Company's disregard of voting instructions be 
reasonable and based on specific good faith determinations.
    11. Applicants further represent that the offer and sale of 
Portfolio shares to Qualified Plans will not have any impact on the 
relief requested in this regard. With respect to the Qualified Plans, 
which are not registered as investment companies under the 1940 Act, 
there is no requirement to pass through voting rights to Plan 
participants. Indeed, to the contrary, applicable law expressly 
reserves voting rights associated with Plan assets to certain specified 
persons. Under Section 403(a) of ERISA, shares of a fund sold to a 
Qualified Plan must be held by the trustees of the Plan. 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) 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. 
Unless one of the above two exceptions stated in Section 403(a) 
applies, Plan trustees have the exclusive authority and responsibility 
for voting proxies.
    12. Where a named fiduciary to a Qualified Plan 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 the named fiduciary. The Qualified Plans may have 
their trustee(s) or other fiduciaries exercise voting rights 
attributable to investment securities held by the Qualified Plans in 
their discretion. Some of the Qualified Plans, however, may provide for 
the trustee(s), an investment adviser (or advisers) or another named 
fiduciary to exercise voting rights in accordance with instructions 
from participants.
    13. Where a Qualified Plan does not provide participants with the 
right to give voting instructions, Applicants do not see any potential 
for material irreconcilable conflicts of interest between or among 
variable contract owners and Plan investors with respect to voting of 
the respective Portfolio's shares. Accordingly, 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

[[Page 39037]]

respect to such Qualified Plans since the Qualified Plans are not 
entitled to pass-through voting privileges.
    14. Some Qualified Plans, however, may provide participants with 
the right to give voting instructions. Applicants note that there is no 
reason to believe that participants in Qualified Plans generally or 
those in a particular Plan, either as a single group or in combination 
with participants in other Qualified Plans, would vote in a manner that 
would disadvantage variable contract owners. Applicants, therefore, 
submit that the purchase of shares of the Portfolios by Qualified Plans 
that provide voting rights does not present any complications not 
otherwise occasioned by mixed or shared funding.
    15. Applicants state that no increased conflicts of interest would 
be presented by the granting of the requested relief. Shared funding by 
unaffiliated insurance companies does not present any issues that do 
not already exist where a single insurance company is licensed to do 
business in several or all states. 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. The fact that different insurers may be domiciled in 
different states does not create a significantly different or enlarged 
problem.
    16. Applicants submit that shared funding by unaffiliated insurers, 
in this respect, is no different that the use of the same investment 
company as the funding vehicle for affiliated insurers, which Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act permit. Affiliated 
insurers may be domiciled in different states and be subject to 
differing state law requirements. Affiliation does not reduce the 
potential for differences in state regulatory requirements. Applicants 
state that the conditions set forth below are designed to safeguard 
against, and provide procedures for resolving, any adverse effects that 
differences among state regulatory requirements may produce. If a 
particular state insurance regulator's decision conflicts with the 
majority of other state regulators, then the affected insurer will be 
required to withdraw its Separate Account's investment in the 
Portfolios. This requirement will be provided for in agreements that 
will be entered into by Participating Insurance Companies with respect 
to their participation in the relevant Portfolio.
    17. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act give 
the insurance company the right to disregard the voting instructions of 
the contract owners. Applicants assert that this right does not raise 
any issues different from those raised by the authority of state 
insurance administrators over separate accounts. Under Rules 6e-
2(b)(15) and 6e-3(T)(b)(15), an insurer can disregard contract owner 
voting instructions only with respect to certain specified items. 
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. The potential for disagreement is limited 
by the requirements in Rules 6e-2 and 6e-3(T) under the 1940 Act that 
the insurance company's disregard of voting instructions be reasonable 
and based on specific good-faith determinations.
    18. A particular insurer's disregard of voting instructions, 
nevertheless, could conflict with the majority of contract owner's 
voting instructions. The insurer's action possibly could be different 
than the determination of all or some of the other insurers (including 
affiliated insurers) that the voting instructions of contract owners 
should prevail, and either could preclude a majority vote approving the 
change or could represent a minority view. If the insurer's judgment 
represents a minority position or would preclude a majority vote, then 
the insurer may be required, at the relevant Portfolio's election, to 
withdraw its Separate Account's investment in such Trust, and no charge 
or penalty will be imposed as a result of such withdrawal. This 
requirement will be provided for in the agreements entered into with 
respect to participation by the Participating Insurance Companies in 
the Portfolios.
    19. Applicants submit that there is no reason why the investment 
policies of the Portfolios would or should be materially different from 
what these policies would or should be if the Portfolios funded only 
variable annuity contracts or variable life insurance policies, whether 
flexible premium or scheduled premium policies. Each type of insurance 
product is designed as a long-term investment program. Each Portfolio 
will be managed to attempt to achieve the investment objective or 
objectives of such Portfolio, and not to favor or disfavor any 
particular Participating Insurance Company or type of insurance 
product.
    20. Furthermore, Applicants assert 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. A Portfolio supporting even one type 
of insurance product must accommodate these diverse factors in order to 
attract and retain purchasers. Permitting mixed and shared funding will 
provide economic justification for the continuation of the relevant 
Portfolio. Mixed and shared funding will broaden the base of contract 
owners which will facilitate the establishment of additional portfolios 
serving diverse goals.
    21. Applicants do not believe that the sale of the shares of the 
Portfolios to Qualified Plans will increase the potential for material 
irreconcilable conflicts of interest between or among different types 
of investors. In particular, Applicants see very little potential for 
such conflicts beyond that which would otherwise exist between variable 
annuity and variable life insurance contract owners.
    22. As noted above, 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. The Code provides that a variable 
contract shall not be treated as an annuity contract or life insurance, 
as applicable, for any period (and any subsequent period) for which the 
investments are not, in accordance with Regulations, adequately 
diversified.
    23. Regulations issued under Section 817(h) provide that, in order 
to meet the statutory diversification requirements, all of the 
beneficial interests in the investment company must be held by the 
segregated asset accounts of one or more insurance companies. The 
Regulations, however, contain certain exceptions to this requirement, 
one of which allows shares in an underlying mutual fund to be held by 
the trustees of a qualified pension or retirement plan without 
adversely affecting the ability of shares in the underlying fund also 
to be held by separate accounts of insurance companies in connection 
with their variable contracts. (Treas. Reg. 1.817-5(f)(3)(iii)). Thus, 
the Regulations specifically permit ``qualified pension or retirement 
plans'' and separate accounts to invest in the same portfolio of an 
underlying fund. For this reason, Applicants assert that neither the 
Code, nor the Regulations, nor the Revenue Rulings thereunder, present 
any inherent conflicts of interest.
    24. Applicants note that while there are differences in the manner 
in which distributions from Variable Contracts and Qualified Plans are 
taxed, these differences will have no impact on the Trusts. When 
distributions are to be made, and a Separate Account or a

[[Page 39038]]

Qualified Plan is unable to net purchase payments to make the 
distributions, the Separate Account and Qualified Plan will redeem 
shares of the relevant Portfolio at their respective net asset value in 
conformity with Rule 22c-1 under the 1940 Act (without the imposition 
of any sales charge) to provide proceeds to meet distribution needs. A 
Participating Insurance Company then will make distributions in 
accordance with the terms of its Variable Contract, and a Qualified 
Plan then will make distributions in accordance with the terms of the 
Plan.
    25. Applicants state that it is possible to provide an equitable 
means of giving voting rights to contract owners in the Separate 
Accounts and to Qualified Plans. In connection with any meeting of 
shareholders, the Trusts will inform each shareholder, including each 
Separate Account and Qualified Plan, of information necessary for the 
meeting, including their respective share of ownership in the relevant 
Portfolio. Each Participating Insurance Company then will solicit 
voting instructions in accordance with Rules 6e-2 and 6e-3(T), as 
applicable, and its participation agreement with the relevant Trust. 
Shares held by Qualified Plans will be voted in accordance with 
applicable law. The voting rights provided to Qualified Plans with 
respect to shares of the Trusts would be no different from the voting 
rights that are provided to Qualified Plans with respect to shares of 
funds sold to the general public.
    26. Applicants submit that the ability of the Portfolios to sell 
their shares directly to Qualified Plans does not create a ``senior 
security'' as such term is defined under Section 18(g) of the 1940 Act 
``Senior security'' is defined under Section 18(g) of the 1940 Act to 
include ``any stock of a class having priority over any other class as 
to distribution of assets or payment of dividends.'' As noted above, 
regardless of the rights and benefits of participants under Qualified 
Plans, or contract owners under Variable Contracts, the Qualified Plans 
and the Separate Accounts only have rights with respect to their 
respective shares of the Portfolio and any Future Portfolio. They only 
can redeem such shares at net asset value. No shareholder of the 
Portfolios has any preference over any other shareholder with respect 
to distribution of assets or payment of dividends.
    27. Applicants assert that there are no conflicts between the 
contract owners of the Separate Accounts and participants under the 
Qualified Plans with respect to the state insurance commissioners' veto 
powers over investment objectives. Applicants note that the basic 
premise of corporate democracy and shareholder voting is that not all 
shareholders may agree with a particular proposal. Although the 
interests and opinions of shareholders may differ, this does not mean 
that inherent conflicts of interest exist between or among such 
shareholders. State insurance commissioners have been given the veto 
power in recognition of the fact that insurance companies usually 
cannot simply redeem their separate accounts out of one fund and invest 
in another. Generally, time-consuming, complex transactions must be 
undertaken to accomplish such redemptions and transfers.
    28. Conversely, the trustees of Qualified Plans or the participants 
in participant-directed Qualified Plans can make the decision quickly 
and redeem their interest in the Portfolios and reinvest in another 
funding vehicle without the same regulatory impediments faced by 
separate accounts or, as is the case with most Qualified Plans, even 
hold cash pending suitable investment.
    29. Applicants also assert that there is no greater potential for 
material irreconcilable conflicts arising between the interest of 
participants in the Qualified Plans and contract owners of the Separate 
Accounts from future changes in the federal tax laws than that which 
already exist between variable annuity contract owners and variable 
life insurance contract owners.
    30. Applicants state that various factors have kept more insurance 
companies from offering variable annuity and variable life insurance 
contracts than currently offer such contracts. These factors include 
the costs of organizing and operating a funding medium, the lack of 
expertise with respect to investment management (principally with 
respect to stock and money market investments), and the lack of name 
recognition by the public of certain insurers as investment experts 
with whom the public feels comfortable entrusting their investment 
dollars. Use of a Portfolio as a common investment media for variable 
contracts would reduce or eliminate these concerns. Mixed and shared 
funding also should provide several benefits to variable contract 
owners by eliminating a significant portion of the costs of 
establishing and administering separate funds. Participating Insurance 
Companies will benefit not only from the investment and administrative 
expertise of MLAM and its operating division H&W, but also from the 
cost efficiencies and investment flexibility afforded by a large pool 
of funds. Mixed and shared funding also would permit a greater amount 
of assets available for investment by a Portfolio, thereby promoting 
economics of scale, by permitting increased safety through greater 
diversification, or by making the addition of new Portfolios more 
feasible. Applicants assert that making the Portfolios available for 
mixed and shared funding will encourage more insurance companies to 
offer variable contracts, and this should result in increased 
competition with respect to both variable contract design and pricing, 
which can be expected to result in more product variation and lower 
charges. Applicants also assert that the sale of shares of the 
Portfolios to Qualified Plans in addition to the Separate Accounts will 
result in an increased amount of assets available for investment by 
such Portfolios. This may benefit variable contract owners by promoting 
economies of scale, by permitting increased safety of investments 
through greater diversification, and by making the addition of new 
Portfolios more feasible.
    31. Applicants see no significant legal impediment to permitting 
mixed and shared funding. Separate accounts organized as unit 
investment trusts historically have been employed to accumulate shares 
of mutual funds which have not been affiliated with the depositor or 
sponsor of the separate account. As noted above, Applicants assert that 
mixed and shared funding will have any adverse Federal income tax 
consequences.

Applicants' Conditions

    Applicants have consented to the following conditions:
    1. A majority of the Board of each Trust will consist of persons 
who are not ``interested persons'' of such 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 trustees, then the operation of this 
condition will 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 Trust for the existence 
of any material irreconcilable conflict between the interests of the 
contract owners of all Separate Accounts and participants of all 
Qualified Plans investing in such Trust, and determine what action, if 
any

[[Page 39039]]

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 
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 such Trust are being managed; (e) a difference in voting 
instructions given by variable annuity contract owners, variable life 
insurance contract owners, and trustees of the Plans; (f) a decision by 
a Participating Insurance Company to disregard the voting instructions 
of contract owners; or (g) if applicable, a decision by a Qualified 
Plan to disregard the voting instructions of Plan participants.
    3. Participating Insurance Companies, H&W, and any Qualified Plan 
that executes a participation agreement upon becoming an owner of 10 
percent or more of the assets of any Portfolio (collectively, the 
``Participants'') will report any potential or existing conflicts to 
the relevant Board. Participants will be responsible for assisting the 
relevant Board in carrying out the Board's responsibilities under these 
conditions by providing the Board with all information reasonably 
necessary for the Board to consider any issues raised. This includes, 
but is not limited to, an obligation by each Participating Insurance 
Company to inform the relevant Board whenever contract owner voting 
instructions are disregarded, and, if pass-through voting is 
applicable, an obligation by each Qualified Plan to inform the Board 
whenever it has determined to disregard Plan participant voting 
instructions. The responsibility to report such information and 
conflicts, and to assist the Board, will be a contractual obligation of 
all Participating Insurance Companies under their participation 
agreements with the Trusts, and these responsibilities will be carried 
out with a view only to the interests of the contract owners. The 
responsibility to report such information and conflicts, and to assist 
the Board, also will be contractual obligations of all Qualified Plans 
with participation agreements, and such agreements will provide that 
these responsibilities will be carried out with a view only to the 
interests of Plan participants.
    4. If it is determined by a majority of a Board, or a majority of 
the disinterested trustees of such Board, that a material 
irreconcilable conflict exists, then the relevant Participant will, at 
its expense and to the extent reasonably practicable (as determined by 
a majority of the disinterested trustees), take whatever steps are 
necessary to remedy or eliminate the material irreconcilable conflict, 
up to and including: (a) Withdrawing the assets allocable to some or 
all of the Separate Accounts from the relevant Portfolio and 
reinvesting such assets in a different investment medium, including 
another Portfolio, or in the case of insurance company participants 
submitting the question as to whether such separation should be 
implemented to a vote of all affected contract owners and, as 
appropriate, segregating the assets of any appropriate group (i.e., 
annuity contract owners or life insurance contract owners of one or 
more Participating Insurance Company) that votes in favor of such 
segregation, or offering to the affected contract owners the option of 
making such a change; and (b) establishing a new registered management 
investment company or managed separate account. If a material 
irreconcilable conflict arises because of a decision by a Participating 
Insurance Company to disregard contract owner voting instructions, and 
that decision represents a minority position or would preclude a 
majority vote, then the insurer may be required, at the election of the 
relevant Trust, to withdraw such insurer's Separate Account's 
investment in such Trust, and no charge or penalty will be imposed as a 
result of such withdrawal. If a material irreconcilable conflict arises 
because of a Qualified 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 relevant Trust, to withdraw its 
investment in such 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 will be a 
contractual obligation of all Participants under their agreements 
governing participation in the Trusts, and these responsibilities will 
be carried out with a view only to the interests of contract owners and 
Plan participants.
    For purposes of this Condition 4, a majority of the disinterested 
members of a Board will determine whether or not any proposed action 
adequately remedies any material irreconcilable conflict, but, in no 
event, will any Trust or H&W be required to establish a new funding 
medium for any variable contract. No Participating Insurance Company 
will be required by this Condition 4 to establish a new funding medium 
for any variable contract if any offer to do so has been declined by 
vote of a majority of the contract owners materially and adversely 
affected by the material irreconcilable conflict. Further, no Qualified 
Plan will be required by this Condition 4 to establish a new funding 
medium for the Plan if: (a) A majority of the Plan participants 
materially and adversely affected by the irreconcilable material 
conflict vote to decline such offer, or (b) pursuant to documents 
governing the Qualified Plan, the Plan makes such decision without a 
Plan participant vote.
    5. A Board's determination of the existence of a material 
irreconciliable conflict and its implications will be made known in 
writing promptly to all Participants.
    6. Participating Insurance Companies will provide pass-through 
voting privileges to all contract owners as required by the 1940 
Act.Accordingly, each such Participant, where applicable, will vote 
shares of the applicable Portfolio held in its Separate Accounts in a 
manner consistent with voting instructions timely received from 
contract owners. Participating Insurance Companies will be responsible 
for assuring that each Separate Account investing in a Portfolio 
calculates voting privileges in a manner consistent with other 
Participants. The obligation to calculate voting privileges as provided 
in the application will be a contractual obligation of all 
Participating Insurance Companies under their agreement with Trust 
governing participation in a Portfolio. Each Participating Insurance 
Company will vote shares for which it has no received timely voting 
instructions as well as shares it owns in the same proportion as it 
votes those shares for which it has received voting instructions. Each 
Qualified Plan will vote as required by applicable law and governing 
Plan documents.
    7. Each Trust will comply with all provisions of the 1940 Act 
requiring voting by shareholders, and, in particular, each 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, as well as with 
Section 16(a) of the 1940 Act and, if and when applicable, Section 
16(b) of the 1940 Act. Further, each Trust will act in accordance with 
the Commission's interpretation of the

[[Page 39040]]

requirements of Section 16(a) with respect to periodic elections of 
trustees and with whatever rules the Commission may promulgate with 
respect thereto.
    8. The Trusts will notify all Participants that separate account 
prospectus disclosure regarding potential risks of mixed and shared 
funding may be appropriate. Each Trust will disclose in its prospectus 
that: (a) Shares of such Trust may be offered to insurance company 
separate accounts of both variable annuity and variable life insurance 
contracts and to Qualified Plans; (b) due to differences in tax 
treatment and other considerations, the interests of various contract 
owners participating in such Trust and the interests of Qualified Plans 
investing in such Trust may conflict; and (c) the Trust's Board of 
Trustees 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.
    9. If and to the extent that Rule 6e-2 and Rule 6e-3(T) under the 
1940 Act are amended, or proposed Rule 6e-3 under the 1940 Act is 
adopted, to provide exemptive relief from any provision of the 1940 
Act, or the rules promulgated thereunder, with respect to mixed or 
shared funding, on terms and conditions materially different from those 
terms and conditions associated with the exemptive relief requested in 
the application, then the Trusts and/or Participating Insurance 
Companies, as appropriate, shall take such steps as may be necessary to 
comply with Rules 6e-2 and 6e-3(T), or Rule 6e-3, as such rules are 
applicable.
    10. The Participants, at least annually, will submit to the Board 
of each Trust such reports, materials, or data as a Board reasonably 
may request so that the trustees of the Board may fully carry out the 
obligations imposed upon a Board by the conditions contained in the 
application, and said reports, materials, and data will be submitted 
more frequently if deemed appropriate by a Board. The obligations of 
the Participants to provide these reports, materials, and data to a 
Board, when it so reasonably requests, will be a contractual obligation 
of all Participants under their agreements governing participation in 
the Portfolios.
    11. All reports of potential or existing conflicts received by a 
Board, 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 relevant Board or other 
appropriate records, and such minutes or other records shall be made 
available to the Commission upon request.
    12. The Trusts will not accept a purchase order from a Qualified 
Plan if such purchase would make the Plan shareholder an owner of 10 
percent or more of the assets of such Portfolio unless such Plan 
executes an agreement with the relevant Trust governing participation 
in such Portfolio. A Plan will execute an application containing an 
acknowledgement of this condition at the time of its initial purchase 
of shares of any Portfolio.

Conclusion

    For the reasons summarized above, Applicants assert that the 
requested exemptions are appropriate in the pubic 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. 97-19030 Filed 7-18-97; 8:45 am]
BILLING CODE 8010-01-M