[Federal Register Volume 63, Number 69 (Friday, April 10, 1998)]
[Notices]
[Pages 17913-17918]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-9465]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23101; File No. 812-10844]


STI Classic Variable Trust, et al.; Notice of Application

April 3, 1998.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the 
``Commission'').

ACTION: Notice of application for an order under Section 6(c) of the 
Investment Company Act of 1940 (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.

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SUMMARY OF APPLICATION: Applicants seek an order to permit shares of 
STI Classic Variable Trust (the ``Trust'') and shares of any other 
investment company or portfolio that is designed to fund insurance 
products and for which STI Capital Management, N.A. may serve in the 
future, as investment adviser, administrator, manager, principal 
underwriter, or sponsor (together with the Trust, ``Trusts'') to be 
sold to and held by: (1) separate accounts funding variable annuity and 
variable life insurance contracts issued by both affiliated and 
unaffiliated life insurance companies (``Participating Insurance 
Companies''); and (2) qualified pension and retirement plans outside of 
the separate account context (``Qualified Plans'' or ``Plans'').

APPLICANTS: STI Classic Variable Trust and STI Capital Management, N.A. 
(``STI Capital'').

FILING DATE: The application was filed on October 28, 1997, and amended 
and restated on February 9, 1998.

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 April 28, 1998, 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, NW., Washington, DC 20549. 
Applicants, c/o Kevin P. Robins, Esq., SEI Investments Company, Oaks, 
Pennsylvania 19456.

FOR FURTHER INFORMATION CONTACT:
Zandra Y. Bailes, Senior Counsel, or Mark C. Amorosi, Branch Chief, 
Division of Investment Management, Office of Insurance Products, 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, 450 Fifth Street, NW., Washington, DC 
20549 (tel. (202) 942-8090).

Applicants' Representations

    1. The Trust is a Massachusetts business trust and is registered 
under the 1940 Act as an open-end management investment company. The 
Trust currently consists of five separate portfolios (``Funds''), each 
of which has its own investment objective or objectives and policies.
    2. STI Capital, and investment adviser registered under the 
Investment Advisers Act of 1940, serves as the investment adviser to 
the Trust. STI Capital is an indirect wholly owned subsidiary of Sun 
Trust Banks, Inc.
    3. Shares representing interest in each Fund currently offered to 
insurance companies as an investment vehicle for their separate 
accounts that fund variable annuity contracts. The Trust intends to 
offer shares representing interests in each Fund, and any other 
portfolio established by the Trust in the future (``Future Portfolio'') 
(Fund, together with Future Portfolios, ``Portfolios'' or each a 
``Portfolio''), to separate accounts of Participating Insurance 
Companies (``Separate Accounts'') to serve as the investment vehicle 
for variable annuity contracts and variable life insurance contracts 
(collectively, ``Variable Contracts'').
    4. Applicants also propose that the Trusts offer and sell shares 
representing interests in their Portfolios directly to Qualified Plans.

Applicants' 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) 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: (a) both variable annuity 
and variable life insurance separate accounts of the same life 
insurance company or any affiliated life insurance company (``mixed 
funding''); (b) separate accounts of unaffiliated life insurance 
companies (``shared funding''); and (c) trustees of Qualified Plans.
    2. Section 6(c) of the 1940 Act authorizes the Commission, by order 
upon application, to conditionally or unconditionally exempt any 
person, security or transaction, or any class or classes of persons, 
securities or transactions from any provisions 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, 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)(15) are 
available, however, 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 variable 
life insurance separate accounts of the life insurer, or of any 
affiliated life insurance company.'' \1\ Therefore, 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 or a 
flexible

[[Page 17914]]

premium variable life insurance separate account of the same company or 
of a flexible premium variable life insurance separate account of the 
same company or of any affiliated life insurance company. In addition, 
the relief granted by Rule 6e-2(b)(15) is not available if shares of 
the underlying management investment company are offered to variable 
annuity or variable life insurance separate accounts of unaffiliated 
life insurance companies. Furthermore, 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.
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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 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 
similar partial exemptions from Sections 9(a), 13(a), 15(a) and 15(b) 
of the 1940 Act. These exemptions, however, are available only if the 
assets of the separate account consist of 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 contracts 
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.'' \2\ Therefore, Rule 6e-3(T) 
permits mixed funding with respect to a flexible premium variable life 
insurance separate account but does not permit shared funding. Also, 
the exemptions provided by Rule 6e-3(T) are not available if the 
underlying fund sells its shares to Qualified Plans.
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    \2\ The exemptions provided by Rule 6e-3(T) also are available 
to the investment adviser, principal underwriter, and sponsor or 
depositor of the separate account.
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    5. Applicants state that changes in the federal tax law have 
created the opportunity for the Trust to substantially increase its net 
assets by selling 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. 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 such portfolios 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 Qualified Plans 
to hold shares of an investment company portfolio, the shares of which 
are also held by insurance company segregated asset accounts, without 
adversely affecting the status of the investment company portfolio as 
an adequately diversified underlying investment for variable contracts 
issued through such segregated asset accounts (Treas. Reg. 1.817-
5(f)(3)(iii)).
    6. Applicants maintain that there is no policy reason for the sale 
of the Portfolios' shares to Qualified Plans to prohibit or otherwise 
limit a Participating Insurance Company from relying on the relief 
provided by Rules 6e-2(b)(15) and 6e-3(T)(b)(15). Applicants note that 
if the Portfolios were to sell their shares only to Qualified Plans, 
exemptive relief under Rule 6e-2 and Rule 6e-3(T) would not be 
necessary. The relief provided under Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) does not relate to Qualified Plans or to a registered 
investment company's ability to sell its shares to such plans.
    7. Applicants also note that the promulgation of Rules 6e-2(b)(15) 
and Rule 6e-3(T)(b)(15) preceded the issuance of the Regulations. Thus, 
the sale of shares of the same portfolio to both separate accounts and 
Qualified Plans was not contemplated at the time of the adoption of 
Rules 6e-2(b)(15) and Rule 6e-3(T)(b)(15).
    8. Section 9(a)(3) of the 1940 Act provides 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). Rules 6e-2(b)(15)(i) and (ii) and 6e-3(T)(b)(15)(i) and 
(ii) provide exemptions from Section 9(a) under certain circumstances, 
subject to the limitations on mixed and shared funding. These 
exemptions limit the application of the eligibility restrictions to 
affiliated individuals or companies that directly participate in the 
management of the underlying management company.
    9. 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 limits, 
in effect, 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 Acts 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 individuals in a large 
insurance company complex, most of whom will have no involvement in 
matters pertaining to investment companies in that organization.
    10. Applicants state that neither the Participating Insurance 
Companies nor the Qualified Plans are expected to play any role in the 
management of the Trusts. Those individuals who participate in the 
management of the Trusts will remain the same regardless of which 
Separate Accounts or Qualified Plans use the Trusts. Applicants 
maintain that applying the monitoring requirements of Section 9(a) 
because of investment by separate accounts of other insurers or 
Qualified Plans would be unjustified and would not serve any regulatory 
purpose. Moreover, Qualified Plans, unlike separate accounts, are not 
themselves investment companies, and therefore are not subject to 
Section 9. Furthermore, it is not anticipated that a Qualified Plan 
would be an affiliated person of any of the Trusts by virtue of its 
shareholders.
    11. 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 are observed. More 
specifically, Rules 6e-22(b)(15)(iii)(A) and 6e-3(T)(b)(15)(iii)(A) 
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 
and subject to the provisions of paragraphs (b)(5)(i) and (b)(7)(ii)(A) 
of Rules 6e-2 and 6e-3(T). In addition, Rules 6e-2(b)(15)(iii)(B) and 
6e-3(T)(b)(15)(iii)(A)(2) provide that the insurance company may 
disregard the voting instructions of its contract owners if the 
contract owners initiate any change in such insurance company's 
investment policies, principal underwriter or any investment

[[Page 17915]]

adviser (provided that disregarding such voting instructions is 
reasonable and subject to the other provisions of paragraphs (b)(5)(ii) 
and (b)(7)(ii)(B) and (C) of Rules 6e-2 and 6e-3(T)).
    12. Applicants assert that Qualified Plans, which are not 
registered as investment companies under the 1940 Act, have 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 the Employee Retirement Income Security Act (``ERISA''), 
shares of a portfolio 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 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. Unless one of the 
above two exceptions stated in Section 403(a) applies, Plan trustees 
have the exclusive authority and responsibility for voting proxies.
    13. 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.
    14. 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 holders 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 respect to such Qualified Plans since the Qualified Plans are not 
required to pass-through voting privileges.
    15. Even if a Qualified Plan were to hold a controlling interest in 
a Portfolio, Applicants do not believe that such control would 
disadvantage other investors in such Portfolio to any greater extent 
than is the case when any institutional shareholder holds a majority of 
the voting securities of any open-end management investment company. In 
this regard, Applicants submit that investment in a Portfolio by a Plan 
will not create any of the voting complications occasioned by mixed 
funding or shared funding. Unlike mixed or shared funding, Plan 
investor voting rights cannot be frustrated by veto rights of insurers 
or state regulators.
    16. Where a Plan provides participants with the right to give 
voting instructions, Applicants see 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 holders. The purchase of shares of Portfolios by 
Qualified Plans that provide voting rights does not present any 
complications not otherwise occasioned by mixed or shared funding.
    17. Applicants submit that the prohibitions on mixed and shared 
funding might reflect concern regarding possible different investment 
motivations among investors. Applicants assert that shared funding does 
not present any issues that do not already exist where a single 
insurance company is licensed to do business in several or all states. 
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.
    18. Applicants submit that shared funding is, in this respect, no 
different than the use of the same investment company as the funding 
vehicle for affiliated insurers, which Rules 6e-2(b)(15) and 6e-
(T)(b)(15) permit. Affiliated insurers may be domiciled in different 
states and be subject to differing state law requirements. Affiliation 
does not reduce the potential, if any exists, for differences in state 
regulatory requirements. In any event, Applicants submit that the 
conditions set forth in the application and included in this notice are 
designed to safeguard against and provide procedures for resolving any 
adverse effects that differences among state regulatory requirements 
may produce.
    19. Applicants assert that the right of an insurance company under 
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) to disregard the voting 
instructions of the contract owners 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) that an insurance company's disregard of voting 
instructions be reasonable and based on specific good faith 
determinations.
    20. A particular insurer's disregard of voting instructions, 
nevertheless, could conflict with the majority of contract owners' 
voting instructions. The insurer's action possibly could be different 
from the determination of all or some of the other insurers (including 
affiliated insurers) that the voting instructions of contract owners 
should prevail, and could either 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 election of the relevant Trust, to 
withdraw its Separate Account's investment in such Portfolio, and no 
charge or penalty would be imposed as a result of such withdrawal.
    21. Applicants submit that there is no reason why the investment 
policies of the Portfolios would or should be materially different from 
what those 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. In this regard, 
Applicants note that each type of insurance product is designed as a 
long-term investment program. In addition, Applicants represent that 
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.
    22. Furthermore, Applicants submit that no one investment strategy 
can be identified as appropriate to a particular insurance product. 
Each pool of variable

[[Page 17916]]

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 factors in order to attract and retain purchasers.
    23. Applicants do not believe that the sale of shares of the 
Portfolios to Qualified Plan 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. Applicants note 
that Section 817(h) of the Code imposes certain diversification 
standards on the underlying assets of variable contracts held in an 
underlying mutual fund. The 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. However, the Regulations specifically permit ``qualified 
pension or retirement plans'' and separate accounts to invest in the 
same underlying fund. For this reason, Applicants have concluded that 
neither the Code, nor the Regulations, nor 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 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. A Participating 
Insurance Company then will make distributions in accordance with the 
terms of its Variable Contract, and a Qualified Plan will make 
distributions in accordance with the terms of the Plan.
    25. With respect to voting rights, Applicants determined that it is 
possible to provide an equitable means of giving voting rights to 
contract owners in the Separate Account and to Qualified Plans. 
Applicants represent that the Trusts will inform each shareholder, 
including each Separate Account and Qualified Plan, of information 
necessary for the shareholder 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 agreement with a Trust 
concerning participation in the relevant Portfolio. 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 
Portfolios 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 contend that the ability of the Trusts to sell 
shares of Portfolios directly to Qualified Plans does not create a 
``senior security'' as such term is defined under Section 18(g) of the 
1940 Act. 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 Portfolios. They only can redeem such 
shares at net asset value. No shareholder of a Portfolio has any 
preference over any other shareholder with respect to distribution of 
assets or payment of dividends.
    27. Applicants considered whether there are any conflicts between 
the contract owners of the Separate Accounts and Qualified Plan 
participants with respect to the state insurance commissioners' veto 
powers over investment objectives. Applicants note that 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. 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. Based on 
the foregoing, Applicants have concluded that even if there should 
arise issues where the interests of contract owners and the interests 
of Qualified Plans are in conflict, the issues can be almost 
immediately resolved since the trustees of (or participants in) the 
Qualified Plans can, on their own, redeem the shares out of the 
Portfolios.
    28. Applicants state that they do not see any greater potential for 
material irreconcilable conflicts arising between the interests of 
participants in Qualified Plans and contract owners of 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.
    29. Applicants assert that various factors have limited the number 
of insurance companies that offer variable annuities and variable life 
insurance 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 investment), and the lack of name recognition by the public of 
certain insurers as investment experts. In particular, some smaller 
life insurance companies may not find it economically feasible, or 
within their investment or administrative expertise, to enter the 
variable contract business on their own.
    30. Applicants contend that the use of Portfolios as common 
investment media for variable contracts would reduce or alleviate these 
concerns. Participating Insurance Companies will benefit not only from 
the investment and administrative expertise of STI Capital, but also 
from the cost efficiencies and investment flexibility afforded by a 
large pool of funds. Therefore, 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 investment 
through greater diversification, and by making the addition of new 
portfolios more feasible.

Applicants' Conditions

    Applicants have consented to the following conditions:
    1. A majority of the Board of each Trust shall 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

[[Page 17917]]

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 shall be suspended: (a) for a period of 45 days if the 
vacancy or vacancies may be filed 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 among the interests of the 
contract holders of all Separate Accounts and of participants of 
Qualified Plans investing in such Trust 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 such Trust are being managed; (e) a difference in voting 
instructions given by variable annuity contract owners and 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, STI Capital, and any 
Qualified Plan that executes a participation agreement upon becoming an 
owner of 10% 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 conflicts and 
information, and to assist the Board will be contractual obligations 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 segregation 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 instruction, 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 Trust, and these responsibilities will 
be carried out with a view only to the interest of contract owners and 
Plan participants.
    For the 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 STI Capital 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 an offer to 
do so has been declined by the 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 each 
decision without a Plan participant vote.
    5. A Board's determination of the existence of a material 
irreconcilable 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, such Participants, 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 the Trust governing 
participation in a Portfolio. Each Participating Insurance Company will 
vote shares for which it has not received timely voting

[[Page 17918]]

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 (although the 
Trusts are not one of the trusts described in 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 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 such conflict.
    9. If and to the extent Rule 6e-2 and 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, 
or terms and conditions materially different from any exemptions 
granted in the order requested in the application, then the Trusts and/
or the Participating Insurance Companies, as appropriate, shall take 
such steps as may be necessary to comply with Rule 6e-2 or 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 will 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 
is such Portfolio that includes the conditions set forth herein to the 
extent applicable. A Plan will execute an application containing an 
acknowledgment 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 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. 98-9465 Filed 4-9-98; 8:45 am]
BILLING CODE 8010-01-M