[Federal Register Volume 63, Number 69 (Friday, April 10, 1998)]
[Notices]
[Pages 17907-17913]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-9466]


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SECURITIES AND EXCHANGE COMMISSION

[Docket No. IC-23100; File No. 812-10816]


Salomon Brothers Variable Series Funds Inc, et al; Notice of 
Application

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

ACTION: Notice of application for an order under Section 6(c) of the 
Investment Company Act of 1940 (``1940 Act'') granting relief from 
Sections 9(a), 13(a), 15(a) and 15(b) and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) thereunder.

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Summary of Application

    Appplicants seek an order of exemption to the extent necessary to 
permit shares of the Fund to be sold to and held by: (i) variable 
annuity and variable life insurance separate accounts (``Separate 
Accounts'') of both affiliated and unaffiliated life insurance 
companies (``Participating Insurance Companies''), and (ii) trustees of 
certain qualified pension or retirement plans.

Applicants

    Salomon Brothers Variable Series Funds Inc (the ``Fund'') and 
Salomon Brothers Asset Management Inc (``SBAM'' or the ``Adviser'').

Filing Dates

    The application was filed on October 16, 1997 and an amendment was 
filed 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 
by writing to the Secretary of the SEC and serving Applicants with a 
copy of the request, personally or by mail. Hearing request should be 
received by the Commission by 5:30 p.m. on April 28, 1998, and should 
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 who wish to be notified of a 
hearing may request notification by writing to the Secretary of the 
SEC.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549. Applicants, Gary S. Schpero, 
Esq., Simpson Thacher & Barlett, 425 Lexington Avenue, New York, New 
York 10017.

FOR FURTHER INFORMATION CONTACT:
Elisa Metzger, Senior Counsel, or Mark C. Amorosi, 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 may be obtained for a fee from 
the Public Reference Branch of the SEC, 450 Fifth Street, N.W. 
Washington, D.C. 20549 (tel. (202) 942-8090).

Applicants' Representations

    1. The Fund is a Maryland corporation and is registered under the 
1940 Act as an open-end management investment company. The Fund 
consists of, and offers shares in, seven separate investment portfolios 
(the ``Initial Portfolios''), each of which has its own investment 
objective and policies. The Fund may in the future issue shares of 
additional portfolios (together with the Initial Portfolios, the 
``Portfolios'') and/or multiple classes of shares of each Portfolio.
    2. SBAM serves as the investment adviser to each of the Portfolios. 
SBAM is an investment adviser registered under the Investment Advisers 
Act of 1940, as amended (the ``Advisers Act''). SBAM is a wholly-owned 
subsidiary of Salomon Brothers Holding Company Inc, which is a wholly-
owned subsidiary of Salomon Smith Barney Holdings, Inc. which is, in 
turn, wholly-owned by Travelers Group, Inc. SBAM serves as the overall 
investment manager of the Portfolios, subject to the general direction 
and supervision of the Fund's Board of Directors (the ``Board of 
Directors''). SBAM has entered into a subadvisory agreement with 
Salomon Brothers Asia Pacific Limited (``SBAM AP''), an affiliate of 
SBAM and an investment adviser registered under the Advisers Act. SBAM 
AP serves as the sub-adviser to one of the Portfolios, Salomon Brothers 
Variable Asia Growth Fund. The Adviser also has entered into a 
subadvisory consulting agreement with Salomon Brothers Asset Management 
Limited (``SBAM Limited''), an affiliate of the Adviser and an 
investment adviser registered under the Advisers Act. SBAM Limited 
provides advisory services relating to

[[Page 17908]]

currency transactions and investments in non-dollar-denominated debt 
securities for the benefit of one of the Portfolios, Salomon Brothers 
Variable Strategic Bond Fund. SBAM AP and SBAM Limited are hereinafter 
referred to as the ``Sub-Advisers.''
    3. The Fund currently offers shares of certain of its Initial 
Portfolios to Separate Accounts of Sun Life of Canada U.S. (``Sun 
Life'') in order to serve as the investment vehicle for certain 
variable annuity contracts. In the future, the Fund wishes to offer 
shares of its Portfolios, to Separate Accounts of Sun Life and other 
insurance companies in order to serve as the investment vehicle for 
various types of insurance products, which may include variable annuity 
contracts, single premium variable life insurance contracts, scheduled 
premium variable life insurance contracts, and flexible premium 
variable life insurance contracts (collectively referred to herein as 
``Contracts''). Applicants represent that the Participating Insurance 
Companies will establish their own Separate Accounts and design their 
own Contracts.
    4. The Fund also may offer shares of the Fund to the trustees (or 
custodians) of certain qualified pension or retirement plans (the 
``Plans'') as permitted by Treasury Regulation Sec. 1.817-5(f)(3)(iii) 
adopted pursuant to Sec. 817(h) of the Internal Revenue Code of 1986, 
as amended (the ``Code'') and described in Revenue Ruling 94-62.

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) under 
the 1940 Act 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 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.'' Therefore, the relief granted by 
Rule 6e-2(b)(15) is not available if the scheduled premium variable 
life insurance separate account owns shares of a management company 
that also offers its shares to a variable annuity separate account of 
the same insurance company or any other insurance company or to 
trustees of a Plan. The use of a common management investment company 
as the underlying investment medium for both variable annuity and 
variable life insurance separate accounts of the same life insurance 
company or of any affiliated life insurance company is referred to 
herein as ``mixed funding.''
    2. 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 management company that also 
offers its shares to separate accounts funding variable contracts of 
one or more unaffiliated life insurance companies. The use of a common 
management company as the underlying investment medium for variable 
annuity and/or variable life insurance separate accounts of one 
insurance company and separate accounts funding variable contracts of 
one or more unaffiliated life insurance companies is referred to herein 
as ``shared funding.''
    3. 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 management company that also offers its shares to 
Plans.
    4. In connection with 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) under the 1940 Act 
provides partial exemptions from Sections 9(a), 13(a), 15(a) and 15(b) 
of the 1940 Act similar to those provided by Rule 6e-2. The exemptions 
granted 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 of 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.'' Therefore, Rule 6e-3(T)(b)(15) 
grants the exemptions if the underlying fund engages in mixed funding, 
but not if it engages in shared funding or sells its shares to Plans.
    5. Applicants state that the current tax law permits the Fund to 
increase its asset base through the sale of shares to Plans. Section 
817(h) of the Code imposes certain diversification requirements on the 
underlying assets of the Contracts invested in the Fund. The Code 
provides that such Contracts shall not be treated as an annuity 
contract or life insurance contract for any period in which the 
underlying assets are not adequately diversified as prescribed by 
Treasury regulations. 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. 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 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 contracts. Treas. Reg. Sec. 1-817-
5(f)(3)(iii).
    6. The promulgation of Rules 6e-2 and 6e-3(T) preceding the 
issuance of these Treasury regulations. Applicants state that given the 
then-current tax law, the sale of shares of the same investment company 
to both separate accounts and Plans could not have been envisioned at 
the time of the adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15).
    7. Accordingly, Applicants hereby request an order of the 
Commission exempting the variable life insurance Separate Accounts of 
Participating Insurance Companies (and, to the extent necessary, any 
principal underwriter and depositor of such a Separate Account) and the 
Applicants 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) thereunder (and any permanent rule 
comparable to Rule 6e-3(T)), to the extent necessary to permit shares 
of the Fund to be offered and sold to, and held by: (1) both variable 
annuity Separate Accounts and variable life insurance Separate Accounts 
of the same life insurance company or of affiliated life insurance 
companies (i.e., mixed funding); (2) Separate Accounts of unaffiliated 
life insurance companies (including both variable annuity Separate 
Accounts and variable life insurance Separate Accounts) (i.e., shared 
funding); and (3) trustees of Plans.

Disqualification

    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 Section 
9(a)(1) or (2). Rule 6e-2(b)(15)(i) and (ii) and Rule 6e-3(T)(b)(15)(i) 
and (ii) provide partial exemptions from Section 9(a), subject to the 
limitations on mixed and shared funding. These rules provide: (i) that 
the eligibility restrictions of Section 9(a) shall not apply to persons 
who are

[[Page 17909]]

officers, directors or employees of the life insurer or its affiliates 
who do not participate directly in the management or administration of 
the underlying fund; and (ii) that an insurer shall be ineligible to 
serve as an investment advisor or principal underwriter of the 
underlying fund only if an affiliated person of the life insurer who is 
disqualified by Section 9(a) participates in the management or 
administration of the fund.
    9. Applicants state that the partial relief granted in Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) from requirements of section 9, 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 when the life insurer serves as investment 
adviser to or principal underwriter for the underlying fund. Applicants 
state 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 many individuals in a 
typical insurance company complex, most of whom will have no 
involvement in matters pertaining to underlying investment companies.
    10. Applicants submit that there is no regulatory purpose in 
denying the partial exemptions because of mixed and shared funding and 
sales to Plans. Applicants further assert that sales to those entities 
does not change the fact that the purposes of the 1940 Act are not 
advanced by applying the prohibitions of Section 9(a) to persons in a 
life insurance complex who have no involvement in the underlying fund.

Pass-Through Voting

    11. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) assume the 
existence of a pass-through voting requirement with respect to 
management investment company shares held by a separate account. 
Applicants state that pass-through voting privileges will be provided 
with respect to all Contract owners so long as the Commission 
interprets the 1940 Act to require pass-through voting privileges for 
Contract owners.
    12. 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. Rules 6e-2(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 certain requirements. Rules 6e-
2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(B) provide that the insurance 
company may disregard voting instructions of contract owners if the 
contract owners initiate any change in such insurance company's 
investment policies, principal underwriter, or any investment adviser 
(provided that disregarding such voting instructions is reasonable and 
complies with the other provisions of Rules 6e-2 and 6e-3(T)).
    13. Applicants state that Rule 6e-2 recognizes that a variable life 
insurance contract has important elements unique to insurance 
contracts, and is subject to extensive state regulation of insurance. 
Applicants assert that in adopting Rules 6e-2(b)(15)(iii), the 
Commission expressly recognized that state insurance regulators have 
authority, pursuant to state insurance laws or regulations, to 
disapprove or require changes in investment policies, investment 
advisers, or principal underwriters. The Commission also expressly 
recognized that state insurance regulators have authority to require an 
insurer to draw from its general account to cover costs imposed upon 
the insurer by a change approved by contract owners over the insurer's 
objection. The Commission, therefore, deemed such exemptions necessary 
to ``assure the solvency of the life insurer and performance of its 
contractual obligations by enabling an insurance regulatory authority 
or the life insurer to act when certain proposals reasonably could be 
expected to increase the risks undertaken by the life insurer.'' 
Applicants state that in this respect, flexible premium variable life 
insurance contracts are identical to scheduled premium variable life 
insurance contracts; therefore, Applicants assert that the 
corresponding provisions of Rule 6e-3(T) undoubtedly were adopted in 
recognition of the same factors.
    14. Applicants further represent that the offer and sale of shares 
of the Fund to Plans will not have any impact on the relief requested 
in this regard. Shares of the Fund sold to Plans would be held by the 
trustees of the Plans as required by Section 403(a) of the Employee 
Retirement Income Security Act of 1974, as amended (``ERISA''), or 
applicable provisions of the Code. Section 403(a) of ERISA also 
provides that trustee(s) must have exclusive authority and discretion 
to manage and control the Plan investments with two exceptions: (a) 
when the Plan expressly provides that the trustee(s) is (are) subject 
to the direction of a named fiduciary who is not a trustee, in which 
case the trustee(s) is (are) subject to proper directions of such 
fiduciary which are made in accordance with the terms of the Plan and 
not contrary to ERISA; and (b) when the authority to manage, acquire or 
dispose of assets of the Plan is delegated to one or more investment 
managers pursuant to Section 402(c)(3) of ERISA. Unless one of the two 
exceptions stated in Section 403(a) applies, Plan trustees have the 
exclusive authority and responsibility for voting proxies. Where a 
named fiduciary appoints an investment manager, the investment manager 
has the responsibility to vote the shares held unless the right to vote 
such shares is reserved to the trustees or to the named fiduciary. In 
any event, ERISA permits but does not require pass-through voting to 
the participants in Plans. 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 Plans because they are not entitled to pass-through voting 
privileges.
    15. Applicants explain that some Plans, however, may provide 
participants with the right to give voting instructions. Applicants 
note, however, that there is no reason to believe that participants in 
Plans generally, or those in a particular Plan, either as a single 
group or in combination with other Plans, would vote in a manner that 
would disadvantage Contract owners. Applicants submit that, therefore, 
the purchase of the shares of the Fund by Plans that provide voting 
rights to participants does not present any complications not otherwise 
occasioned by mixed and shared funding.

Conflicts of Interest

    16. Applicants submit that no increased conflicts of interest would 
be presented by the granting of the requested relief. 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. Applicants note that a particular state 
insurance regulatory body could require action that is inconsistent 
with the requirements of other states in which the insurance company 
offers its policies. The fact that different insurers may be domiciled 
in different states does not create a significantly different or 
enlarged problem.
    17. Applicants submit that shared funding, in this respect, is no 
different than the use of the same investment company as the funding 
vehicle for

[[Page 17910]]

affiliated insurers, which Rules 6e-2(b)(15) and 6e-3(T)(b)(15) permit. 
Affiliated insurers may be domiciled in different states and be subject 
to differing state law requirements. Applicants state that affiliation 
does not reduce the potential, if any exists, for differences in state 
regulatory requirements. In any event, the conditions proposed in the 
application, which are adapted from the conditions included in Rule 6e-
3(T)(b)(15), 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 
regulatory 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 Fund.
    18. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) give the insurance company 
the right to disregard the voting instructions of the contract owners 
under certain circumstances. Applicants assert that this right does not 
raise any issues different from those raised by the authority of state 
insurance administrators over separate accounts. Applicants submit that 
affiliation does not eliminate the potential, if any exists, for 
divergent judgments as to the advisability or legality of a change in 
investment policies, principal underwriter, or investment adviser 
initiated by contract owners. The potential for disagreement is limited 
by the requirements in Rule 6e-2 and 6e-3(T) that the insurance 
company's disregard of voting instructions be reasonable and based on 
specific good-faith determinations.
    19. A particular insurer's disregard of voting instructions, 
nevertheless, could conflict with the majority of contract owner 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 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 Fund's election, to withdraw its 
Separate Account's investment in the Fund, with the result that no 
charge or penalty would be imposed as a result of such withdrawal.
    20. Applicants submit that investment by the Plans in any of the 
Portfolios will similarly present no conflict. The likelihood that 
voting instructions of insurance company Separate Account holders will 
ever be disregarded or the possible withdrawal referred to immediately 
above is extremely remote and this possibility will be known, through 
prospectus disclosure, to any Plan choosing to invest in the Fund. 
Moreover, Applicants state that even if a material irreconcilable 
conflict involving Plans were to arise, the Plans may simply redeem 
their shares and make alternative investments.
    21. Applicants also 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 
contracts, whether flexible premium or scheduled premium contracts. 
Each type of insurance product is designed as a long-term investment 
program. Similarly, the investment objectives of Plans--as long-term 
investments--coincides with that of the Contracts and should not 
increase the potential for conflicts. Applicants represent that each 
Portfolio will be managed to attempt to achieve the investment 
objective of the Portfolio and not to favor or disfavor any particular 
Participating Insurance Company or type of insurance product.
    22. Applicants note that no one investment strategy can be 
identified as appropriate to a particular insurance product or to a 
Plan. 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 fund supporting even one type of 
insurance product must accommodate these diverse factors in order to 
attract and retain purchasers. Applicants submit that permitting mixed 
and shared funding will provide economic support for the continuation 
of the Fund. In addition, permitting mixed and shared funding also will 
facilitate the establishment of additional Portfolios serving diverse 
goals.
    23. 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. Treasury Regulation 1.817-
5(f)(3)(iii), which established diversification requirements for such 
portfolios, specifically permits ``qualified pension or retirement 
plans'' and insurance company separate accounts to share the same 
underlying investment company. Therefore, neither the Code, nor the 
Treasury regulations, nor the revenue rulings thereunder, recognize or 
proscribe any inherent conflicts of interests if Plans, variable 
annuity separate accounts, and variable life insurance separate 
accounts all invest in the same management investment company.
    24. While there may be differences in the manner in which 
distributions are taxed for variable annuity contracts, variable life 
insurance contracts and Plans, Applicants assert that the tax 
consequences do not raise any conflicts of interest. When distributions 
are to be made, and the Separate Account or the Plan cannot net 
purchase payments to make the distributions, the Separate Account or 
the Plan will redeem Shares of the Fund at their net asset value. The 
Plan will then make distributions in accordance with the terms of the 
Plan and the Participating Insurance Company will make distributions in 
accordance with the terms of the Contract.
    25. Applicants state that it is possible to provide an equitable 
means of giving voting rights to Contract owners and to Plans. 
Applicants represent that the Portfolios will inform each shareholder, 
including each Separate Account and each Plan, of its respective share 
of ownership in the respective Portfolio. Applicants further represent 
that, at that time, each Participating Insurance Company will then 
solicit voting instructions in accordance with the ``pass-through'' 
voting requirement.
    26. Applicants assert that the ability of the Portfolios to sell 
their respective shares directly to Plans does not create a ``senior 
security,'' as that term is defined in Section 18(g) of the 1940 Act, 
with respect to any Contract owner as opposed to a participant under a 
Plan. As noted above, regardless of the rights and benefits of 
participants under the Plans or Contract owners under the Contracts, 
the Plans and the Separate Accounts have rights only with respect to 
their respective shares of the Fund. They can only redeem such shares 
at their net asset value. No shareholder of any 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 the participants under the 
Plans with respect to state insurance Commissioners' veto powers over 
investment objectives. A basic premise of shareholder voting is that 
not all shareholders may agree with a particular proposal. The state 
insurance commissioners have been given the veto power in recognition 
of the fact that insurance companies cannot simply redeem their 
separate accounts out of one fund and invest in another. Time-

[[Page 17911]]

consuming, complex transactions must be undertaken to accomplish such 
redemptions and transfers. Applicants submit that, on the other hand, 
trustees of Plans can make the decision quickly and implement the 
redemption of their shares from a Portfolio and reinvest in another 
funding vehicle without the same regulatory impediments or, as is the 
case with most Plans, even hold cash pending suitable reinvestment. 
Based on the foregoing, Applicants maintain that even if there should 
arise issues where the interests of Contract owners and the interests 
of participants in Plans are in conflict, the issues can be resolved 
almost immediately because the trustees of the Plans can, on their own, 
redeem the shares out of the Portfolio.
    28. Applicants state that various factors have kept more insurance 
companies from offering variable annuity and variable life insurance 
contracts than currently offer such contracts. According to the 
Applicants, these factors include the costs of organizing and operating 
a fund 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. Applicants submit that the use of 
the Fund as a common investment medium for variable contracts would 
reduce or eliminate these concerns. Applicants argue, in addition, that 
mixed and shared funding should provide several benefits to 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 the Adviser and the Sub-Advisers, but also from the cost 
efficiencies and investment flexibility afforded by a larger pool of 
asserts. Mixed and shared funding also would permit a greater amount of 
assets available for investment by the Fund, thereby promoting 
economies of scale, by permitting increased safety through greater 
diversification, and by making the addition of new Portfolios more 
feasible. Applicants assert that, therefore, making the Fund 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 
changes to investors. Applicants further note that the sale of shares 
of the Fund to Plans can also be expected to increase the amount of 
assets available for investment by the Fund and thus promote economies 
of scale and greater diversification.
    29. Applicants assert that there is 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. Applicants do not believe 
that mixed and shared funding, and sales to Plans, will have any 
adverse federal income tax consequences.

Applicants' Conditions

    Applicants have consented to the following conditions if the order 
requested in the application is granted.
    1. A majority of the Board of Directors shall consist of persons 
who are not ``interested persons'' of the Fund, 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 Director or Directors, then the operation of this 
condition shall be suspended: (a) for a period of 45 days if the 
vacancy or vacancies may be filled by the remaining Directors: (b) for 
a period of 60 days if a vote of shareholders is required to fill the 
vacancy of vacancies; or (c) for such longer period as the Commission 
may prescribe by order upon application.
    2. The Board of Directors will monitor the Fund for the existence 
of any material irreconcilable conflict between the interests of the 
Contract owners of all Separate Accounts investing in the Fund and of 
the Plan participants investing in the Fund. A material irreconcilable 
conflict may arise for a variety of reasons, including: (a) an action 
by any state insurance regulatory authority; (b) a change in applicable 
federal or state insurance, tax, or securities laws or regulations, or 
a public ruling, private letter ruling, no-action or interpretative 
letter, or any similar action by insurance, tax, or securities 
regulatory authorities; (c) an administrative or judicial decision in 
any relevant proceeding; (d) the manner in which the investments of any 
Portfolio are being managed; (e) a difference in voting instructions 
given by variable annuity Contract owners, variable life insurance 
Contract owners and trustees of Plans; (f) a decision by an insurer to 
disregard the voting instructions of Contract owners; or (g) if 
applicable, a decision by a Plan to disregard voting instructions of 
Plan participants.
    3. Participating Insurance Companies, the Adviser or any other 
investment adviser who may serve as the adviser to any Portfolio in the 
future, and any Plan that executes a fund participation agreement upon 
becoming an owner of 10 percent or more of the assets of the Fund 
(collectively, the ``Participants'') will report any potential or 
existing conflicts of interest to the Board of Directors. Participants 
will be responsible for assisting the Board of Directors in carrying 
out its responsibilities under these conditions by providing the Board 
of Directors with all information reasonably necessary for the Board of 
Directors to consider any issues raised. This responsibility includes, 
but is not limited to, an obligation by each Participating Insurance 
Company to inform the Board of Directors whenever voting instructions 
of Contract owners are disregarded and, if pass-through voting is 
applicable, an obligation by each Plan to inform the Board of Directors 
whenever it has determined to disregard Plan participant voting 
instructions. The responsibility to report such information and 
conflicts and to assist the Board of Directors will be contractual 
obligations of all Participating Insurance Companies and Plans with 
participation agreements, and such agreements shall provide that these 
responsibilities will be carried out with a view only to the interests 
of the Plan participants or Contract owners, as appropriate.
    4. If it is determined by a majority of the Board of Directors, or 
by a majority of the disinterested Directors, that a material 
irreconcilable conflict exists, the relevant Participating Insurance 
Companies and Plans will, at their own expense and to the extent 
reasonably practicable (as determined by a majority of the 
disinterested Directors), take whatever steps are necessary to remedy 
or eliminate the material irreconcilable conflict, which steps could 
include: (a) withdrawing the assets allocable to some or all of the 
Separate Accounts from the Fund or any Portfolio and reinvesting such 
assets in a different investment medium, including another Portfolio of 
the Fund, or submitting the question as to whether such segregation 
should be implemented to a vote of all affected Contract owners and, as 
appropriate, segregating the assets of any appropriate group (i.e., 
variable annuity Contract owners or variable life insurance Contract 
owners of one or

[[Page 17912]]

more Participating Insurance Companies) 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 that insurer may be required, at the Fund's 
election, to withdraw the insurer's Separate Account investment in the 
Fund or relevant Portfolio(s) 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 Fund's election, to withdraw its investment in the 
Fund or relevant Portfolio(s) 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 determination by the Board of Directors of a 
material irreconcilable conflict and to bear the cost of such remedial 
action will be a contractual obligation of all Participating Insurance 
Companies and Plans under their agreements governing participation in 
the Fund, and these responsibilities will be carried out with a view 
only to the interests of Contract owners and Plan participants.
    5. For purposes of Condition 4, a majority of the disinterested 
Directors will determine whether or not any proposed action adequately 
remedies any material irreconcilable conflict, but in no event will the 
Fund or the Adviser be required to establish a new funding medium for 
any Contract. No Participating Insurance Company shall be required by 
Condition 4 to establish a new funding medium for any Contract if any 
offer to do so has been declined by vote of a majority of the Contract 
owners materially and adversely affected by the material irreconcilable 
conflict. Further, no Plan shall be required by Condition 4 to 
establish a new funding medium for such Plan if (a) a majority of Plan 
participants materially and adversely affected by the irreconcilable 
material conflict vote to decline such offer, or (b) pursuant to 
governing Plan documents and applicable law, the Plan makes such 
decision without Plan participant vote.
    6. The determination of the Board of Directors of the existence of 
a material irreconcilable conflict and its implications will be made 
known in writing promptly to all Participants.
    7. Participating Insurance Companies will provide pass-through 
voting privileges to all Contract owners so long as the Commission 
continues to interpret the 1940 Act as requiring pass-through voting 
privileges for Contract owners. Accordingly, Participating Insurance 
Companies will vote shares of the Fund held in their Separate Accounts 
in a manner consistent with voting instructions timely-received from 
Contract owners. Each Participating Insurance Company will also vote 
shares of the Fund held in its Separate Accounts for which no voting 
instructions from Contract owners are timely-received, as well as 
shares of the Fund which the Participating Insurance Company itself 
owns, in the same proportion as those shares of the Fund for which 
voting instructions from Contract owners are timely-received. 
Participating Insurance Companies will be responsible for assuring that 
each of their Separate Accounts participating in the Fund calculates 
voting privileges in a manner consistent with other Participating 
Companies. The obligation to 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 their 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 received by the 
Board of Directors, and all action by the Board of Directors 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 meetings of the Board of Directors or other appropriate 
records, and such minutes or other records shall be made available to 
the Commission upon request.
    9. The Fund will notify all Participating Insurance Companies that 
separate account disclosure in their respective Separate Account 
prospectuses may be appropriate to advise accounts regarding the 
potential risk of mixed and shared funding. The Fund shall disclose in 
its prospectus that (a) the Fund is intended to be a funding vehicle 
for variable annuity and variable life insurance contracts offered by 
various insurance companies and for Plans; (b) due to differences of 
tax treatment and other considerations, the interests of various 
Contract owners participating in the Fund and the interests of Plans 
investing in the Fund may conflict; and (c) the Board of Directors 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.
    10. The Fund will comply with all provisions of the 1940 Act that 
require voting by shareholders (which, for these purposes, will be the 
persons having a voting interest in the shares of the Fund), and, in 
particular, the Fund will provide for annual shareholder meetings 
(except insofar as the Commission may interpret Section 16 of the 1940 
Act not to require such meetings) and comply with Section 16(a) of the 
1940 Act and, if and when applicable, Section 16(b) of the 1940 Act. 
Further, the Fund will act in accordance with the Commission's 
interpretation of the requirements of Section 16(a) with respect to 
periodic election of Directors and with whatever rules the Commission 
may promulgate with respect thereto.
    11. If and to the extent that Rule 6e-2 or 6e-3(T) under the 1940 
Act is 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 any exemptions 
granted in the order requested in the application, then the Fund and/or 
Participating Insurance Companies, as appropriate, shall take such 
steps as may be necessary to comply with such Rules 6e-2 and 6e-3(T), 
as amended, or proposed Rule 6e-3 as adopted, to the extent that such 
rules are applicable.
    12. The Participants, at least annually, will submit to the Board 
of Directors such reports, materials, or data as the Board of Directors 
may reasonably request so that the Board of Directors may fully carry 
out the obligations imposed upon it by the conditions contained in the 
application. Such reports, materials, and data will be submitted more 
frequently if deemed appropriate by the Board of Directors. The 
obligations of the Participants to provide these reports, materials, 
and data to the Board of Directors, when the Board of Directors so 
reasonably requests, shall be a contractual obligation of all 
Participants under their agreements governing participation in the 
Fund.
    13. If a plan should ever become a holder of ten percent or more of 
the assets of the Fund, such Plan will execute a participation 
agreement with the Fund that includes conditions set

[[Page 17913]]

forth herein to the extent applicable. A Plan will execute an 
application containing an acknowledgment of this condition upon such 
Plan's initial purchase of the shares of the Fund.

Conclusion

    For the reasons set forth above, Applicants assert that the 
requested exemptions are 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. 98-9466 Filed 4-9-98; 8:45 am]
BILLING CODE 8010-01-M