[Federal Register Volume 63, Number 152 (Friday, August 7, 1998)]
[Notices]
[Pages 42465-42471]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-21172]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23372; File No. 812-11090]


Barr Rosenberg Variable Insurance Trust, et al.

July 31, 1998.
AGENCY: The Securities and Exchange Commission (the ``Commission'').

ACTION: Notice of application for an order under Section 6(c) of the 
Investment Company Act of 1940 (``Act'') granting exemptive relief from 
Sections 9(a), 13(a), 15(a) and 15(b) of the 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 
Barr Rosenberg Variable Insurance Trust (the ``Trust'') and any other 
investment company that is designed to fund insurance products and for 
which Rosenberg Institutional Equity Management or its affiliates may 
serve as investment manager, investment adviser, investment sub-
adviser, administration, manager, principal underwriter or sponsor 
(together with the Trust, ``Trusts'') to be sold to and held by: (i) 
Variable annuity and variable life insurance separate accounts of both 
affiliated and unaffiliated life insurance companies; (ii) qualified 
pension and retirement plants (``Qualified Plans'' or ``Plans'') 
outside of the separate account context; and (iii) the Trusts' 
investment adviser (representing seed money investments in the Trusts).
    Applicants: Barr-Rosenberg Variable Trust (the ``Trust'') and 
Rosenberg Institutional Equity Management (``RIEM'').
    Filing Date: The application was originally filed on March 24, 
1998, and amended and restated on June 23, 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 Commission and serving Applicants with a copy 
of the request, personally or by mail. Hearing requests must be 
received by the Commission by 5:30 p.m. on August 25, 1998, and should 
be accompanied by proof of services 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 Commission.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC 
20549. Applicants, c/o Edward H. Lyman, Esq., Rosenberg Institutional 
Equity Management, 4 Orinda Way, Building E, Orinda, California 94563.

FOR FURTHER INFORMATION CONTACT: Ethan D. Corey, Senior Counsel, 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, 450 Fifth Street, NW., 
Washington, DC (tel. (202) 942-8090).

Applicants' Representations

    1. The Trust, a Massachusetts business trust, is registered under 
the Act as an open-end, management investment company. The Trust 
currently consists of one investment portfolio (the ``Fund'').
    2. RIEM serves as the investment manager to the Trust. RIEM is 
registered with the Commission as an investment adviser pursuant to the 
Investment Advisers Act of 1940.
    3. The Trust may offer each series of its shares to separate 
accounts (``Participating Separate Accounts'') registered under the Act 
as unit investment trusts (``UITs'') of various life insurance 
companies (``Participating Insurance Company'') and to Plans qualified 
under Section 401(a) of the Internal Revenue Code of 1986, as amended 
(the ``Code''). Certain Participating Separate Accounts (``VLI 
Accounts'') support variable life insurance contracts (``VLI 
Contracts''). Other Participating Separate Accounts (``VA Accounts'') 
support variable annuity contracts (``VA Contracts,'' together with VLI 
Contracts, ``Variable Contracts'').

Applicants' Legal Analysis

    1. Applicants request an order pursuant to Section 6(c) of the Act 
exempting them from Section 9(a), 13(a), 15(a), and 15(b) of the 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) VA Accounts and VLI Accounts of the same life insurance 
company or of any affiliated life insurance company (``mixed 
funding''); (b) VA Accounts and VLI Accounts of unaffiliated life 
insurance companies (``shared funding''); (c) trustees of Qualified 
Plans; and (d) the Trusts' investment adviser (representing seed money 
investments in the Trust or Future Trust).
    2. Rule 6e-2(b)(15) under the Act provides partial exemptions from: 
(a) Section 9(a), which makes it unlawful for certain individuals and 
companies to act in certain capacities with respect to registered 
investment companies; and (b) Sections 13(a), 15(a), and 15(b) of the 
Act to the extent that those sections might be deemed to require 
``pass-through'' voting with respect to the

[[Page 42466]]

shares of a registered management investment company underlying a UIT 
(an ``underlying fund'') to VLI Accounts supporting scheduled premium 
VLI Contracts and to their life insurance company depositors, 
investment advisers, and principal underwriters. The exemptions granted 
by the Rule are available, however, only if an underlying fund offers 
its shares exclusively to VLI Accounts of a single Participating 
Insurance Company or an affiliated insurance company, and then, only if 
scheduled premium VLI Contracts are issued through such VLI Accounts. 
Therefore, the relief granted by Rule 6e-2(b)(15) is not available with 
respect to a scheduled premium VLI Account that owns shares of an 
underlying fund that engages in mixed funding by also offering its 
shares to a VA Account or to a flexible premium VLI 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 the underlying 
fund engages in shared funding by offering its shares to VA Accounts 
and VLI Accounts of unaffiliated life insurance companies. Furthermore, 
Rule 6e-2(b)(15) does not contemplate that shares of the underlying 
fund might also be sold to Qualified Plans.
    3. Rule 6e-3(T)(b)(15) under the Act provides partial exemptions 
from Sections 9(a), 13(a), 15(a), and 15(b) of the Act to VLI Accounts 
supporting flexible premium variable life insurance contracts and their 
life insurance company depositors, investment advisers and principal 
underwriters. The exemptions granted by the Rule are available, 
however, only where the Trust offers its shares exclusively to separate 
accounts of the Participating Insurance Company, or of any affiliated 
insurance company, offering either scheduled premium contracts or 
flexible premium contracts, or both, or which also offer their shares 
to VA Accounts of the Participating Insurance Company or of an 
affiliated life insurance company. Therefore, Rule 6e-3(T)(b)(15) 
permits mixed funding with respect to a flexible premium VLI Account, 
subject to certain conditions. However, Rule 6e-3(T)(b)(15) does not 
permit shared funding because the relief granted is not available with 
respect to a VLI Account that owns shares of an underlying fund that 
also offers its shares to separate accounts (including VA Accounts and 
flexible premium and scheduled premium VLI Accounts) of unaffiliated 
Participating Insurance Companies. Also, Rule 6e-3(T)(b)(15) does not 
contemplate that shares of the underlying fund might also be sold to 
Qualified Plans.
    4. Applicants state that current tax law permits the Trust to sell 
its shares directly to Qualified Plans. Section 817(h) of the Code 
imposes certain diversification standards on the assets underlying 
Variable Contracts, such as those in the Trust. 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 adequately 
diversified in accordance with regulations issued by the Treasury 
Department. On March 1, 1989, the Treasury Department adopted 
regulations (Treas. Reg. 1.817-5) (the ``Regulations'') 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 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 through such 
segregated asset accounts (Treas. Reg. 1.817-5(f)(3)(iii)).
    5. Applicants also note that the promulgation of Rules 6e-2(b)(15) 
and 6e-3(T)(b)(15) preceded the issuance of the Regulations. Thus, the 
sale of shares of the same investment company to both Participating 
Separate Accounts and Qualified Plans was not contemplated at the time 
of the adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15), and, 
therefore, Applicants assert that the restrictions of such Rules do not 
evidence an intent of the Commission to prevent extended mixed funding.
    6. Section 9(a)(3) of the Act provides that it is unlawful for any 
company to serve as investment adviser or principal underwriter for 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). Rule 6e-2(b)(15) and Rule 6e-3(T)(b)(15) limit the 
application of the eligibility restrictions of Section 9(a) to 
affiliated persons of a life insurance company that directly 
participate in the management of the underlying registered management 
investment company under certain circumstances, subject to limitations 
on mixed and shared funding. The relief provided by Rule 6e-2(b)(15)(i) 
and Rule 6e-3(T)(b)(15)(i) permits persons who are affiliated persons 
of a life insurance company or its affiliates who otherwise would be 
disqualified under Section 9(a) to serve as an officer, director, or 
employee of an underlying fund, so long as any such person does not 
participate directly in the management or administration of such 
underlying fund. In addition, Rule 6e-2(b)(15)(ii) and Rule 6e-
3(T)(b)(15)(ii) permit a Participating Insurance Company to serve as 
the underling fund's investment adviser or principal underwriter, 
provided that none of the insurance company's personnel who are 
ineligible pursuant to Section 9(a) of the Act participate in the 
management or administration of the underlying fund.
    7. Applicants assert that the partial relief provided by Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) from the requirements of Section 9 limits 
the amount of monitoring of a Participating Insurance Company's 
personnel that is 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 Rules 6e-2(b)(15) and 6e-3(T)(b)(15) recognize 
that applying the provisions of Section 9 to the many individuals in a 
large insurance company complex, most of whom typically will have no 
involvement in matters pertaining to investment companies funding the 
Participating Separate Accounts, is not necessary or appropriate in the 
public interest nor is it necessary for the protection of investors or 
the purposes fairly intended by the policy and provisions of the Act. 
Moreover, applicants assert that disallowing the relief permitted by 
Rule 6e-2(b)(15) and Rule 6e-3(T)(b)(15) because the Trusts will sell 
their shares to Qualified Plans would serve no regulatory purpose. 
Applicants assert that the sale of shares of an underlying fund to 
Qualified Plans does not change the fact that the purposes of the Act 
are not advanced by applying the prohibitions of Section 9(a) to 
individuals who may be involved in a life insurance complex but have no 
involvement in the underlying fund.
    8. Rule 6e-2(b)(15)(iii) and Rule 6e-3(T)(b)(15)(iii) provide 
partial exemptions from Sections 13(a), 15(a), and 15(b) of the Act to 
the extent that those sections might be deemed to require ``pass-
through'' voting with respect to the shares of an underlying fund, by 
allowing an issuance company to disregard the voting instructions of 
contract owners with respect to several

[[Page 42467]]

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) permit a Participating Insurance Company to 
disregard the voting instructions of its contract owners if such 
instructions would require an underlying fund's shares to be voted to 
cause such underlying fund to make (or to refrain from making) certain 
investments which would result in changes in the subclassification or 
investment objectives of such underlying fund or to approve or 
disapprove any contract between such underlying fund and an 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 
the Rules). Rules 6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2) 
permit a Participating Insurance Company to disregard contract owners' 
voting instructions if the contract owners initiate any change in the 
underlying fund's investment objectives, principal underwriter or any 
investment adviser (provided that disregarding such voting instructions 
is reasonable and subject to the other provisions of paragraph 
(b)(5)(ii)and (b)(7)(ii) (B) and (C) of the Rules). Applicants assert 
that these rights do not raise any issues different from those raised 
by the authority of state insurance administrators over separate 
accounts.
    9. Applicants assert that the reason the Commission did not grant 
more extensive relief in the area of mixed and shared funding when it 
adopted Rule 6e-3(T) is because of the Commission's uncertainty in this 
area with respect to such issues as conflicts of interest. Applicants 
believe that Commission concern is not warranted in the context of 
permitting shared funding or permitting Qualified Plans to invest in 
the Trust and that the addition of owners of Variable Contracts 
supported by separate accounts of unaffiliated life insurance companies 
and Qualified Plans as eligible shareholders will not increase the risk 
of material irreconcilable conflicts among shareholders.
    10. Voting rights of shares sold to Qualified Plans are expressly 
reserved to certain specified persons and are not required to be passed 
through to Qualified Plan participants. Under Section 403(a) of the 
Employee Retirement Income Security Act (``ERISA''), shares of an 
underlying fund sold to a Qualified Plan must be held by the trustee(s) 
of the Qualified Plan, and such trustee(s) must have exclusive 
authority and discretion to manage and control the Qualified Plan with 
two exceptions: (a) When the Qualified 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 trustee(s) are subject to proper 
directions made in accordance with the terms of the Qualified Plan and 
not contrary to ERISA, and (b) when the authority to manage, acquire or 
dispose of assets of the Qualified 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, the 
exclusive authority and responsibility for voting shares of an 
underlying fund is vested in the plan trustees. 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.
    11. If 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.
    12. If a Qualified Plan does not provide participants with the 
right to give voting instructions, the Applicants submit that there is 
no potential for material irreconcilable conflicts of interest between 
or among owners of Variable Contracts and participants in Qualified 
Plans with respect to voting of an underlying fund's shares. 
Accordingly, unlike the case with Participating Separate Accounts, the 
issue of the resolution of material irreconcilable conflicts with 
respect to voting is not present with respect to such Qualified Plans 
because the Qualified Plans are not entitled to pass-through voting 
privileges.
    13. Applicants further note that there is no reason to believe that 
participants in Qualified Plans which provide participants with the 
right to give voting instructions 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 Trusts by Qualified Plans that provide voting 
rights does not present any complications not otherwise occasioned by 
mixed or shared funding.
    14. Applicants state that the presence of both VLI Accounts and VA 
Accounts as shareowners of an underlying fund will not lead to a 
greater probability of material irreconcilable conflicts than if the 
underlying fund did not engage in mixed funding. Similarly, shared 
funding does not present any issues that do not already exist where an 
underlying fund sells its shares to a single insurance company which 
sells contracts in several states. A state insurance regulatory body in 
one state could require action that is inconsistent with the 
requirements of other states in which the insurance company offers its 
policies. The fact that unaffiliated insurers may be domiciled in 
different states does not create a significantly different or enlarged 
problem.
    15. Applicants assert that shared funding by unaffiliated insurers, 
in this respect, is 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-3(T)(b)(15) under the Act permit under various 
circumstances. 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 summarized below are 
designed to safeguard against, and provide procedures for resolving, 
any adverse effects that differences among state regulatory 
requirements may produce. For instance, if a particular state insurance 
regulator's decision conflicts with the majority of other state 
regulators, then the affected insurer may be required to withdraw its 
Participating Separate Account's investment in the Trusts. 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 Trust.
    16. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the 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 and under 
certain specified conditions. Requiring that only affiliated insurance

[[Page 42468]]

companies invest in the Trust 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. Moreover, 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.
    17. A particular Participating Insurance Company'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 
Participating Insurance Companies (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 election of the relevant Fund, to withdraw its 
Participating Separate Account's investment in such Fund, 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 Trust.
    18. Applicants assert 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 VA 
Contracts or VLI Contracts. Each type of insurance product is designed 
as a long-term investment program. The Fund will be managed in the same 
manner as any other mutual fund and there is no incentive for the 
Fund's investment manager to invest to benefit a particular class of 
shareholders. In addition, the Board of Trustees has a fiduciary duty 
to oversee the Trusts' investment adviser and ensure that the Trusts 
are managed in a way that does not discriminate against any Trust 
shareholders.
    19. Furthermore, Applicants assert that no one investment strategy 
can be identified as appropriate to particular insurance product. Each 
pool of VA and VLI 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 as well as permitting 
sales of Qualified Plans will provide benefits to the Trusts' 
shareholders. Among other things, Participating Insurance Companies and 
Variable Contract owners will benefit from a greater variety of 
investment options with lower costs.
    20. Applicants do not believe that the sale of the shares of the 
Trusts to Qualified Plans will increase the potential for material 
irreconcilable conflicts of interest between or among different types 
of investors. Applicants assert that there are either no conflicts of 
interest or that there exists the ability by the affected parties to 
resolve the issues without harm to the contract owners in the 
Participating Separate Accounts or to the participants under the 
Qualified Plans.
    21. 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 the Regulations, adequately 
diversified.
    22. The Regulations 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 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 
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.
    23. Applicants note that while there are differences in the manner 
in which distributions from Variable Contracts and Qualified Plans are 
taxed, the differing tax consequences do not raise any conflicts of 
interest. If the Participating Separate Account or the Qualified Plan 
cannot net purchase payments to make the distributions, the 
Participating Separate Account or the Qualified Plan will redeem shares 
of the Fund at their net asset value. The Qualified Plan then will make 
distributions in accordance with the terms of the Qualified Plan and 
the Participating Insurance Company will make distributions in 
accordance with the terms of the Variable Contract. Therefore, 
distributions and dividends will be declared and paid by the Fund 
without regard to the character of the shareholder.
    24. Applicants that state it is possible to provide an equitable 
means of giving voting rights to Variable Contract owners and to the 
trustees of Qualified Plans. The transfer agent for the Fund will 
inform each Participating Insurance Company of its share ownership in 
each Participating Separate Account, as well as inform the trustees of 
Qualified Plans of their holdings. 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 Fund. 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 will be no different from 
the voting rights that are provided to Qualified Plans with respect to 
shares of funds sold to the general public.
    25. Applicants submit that the ability of the Trusts 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 Act, 
with respect to any contract owner as opposed to a participant under a 
Qualified Plan. Regardless of the rights and benefits of Variable 
Contract owners or participants under the Qualified Plans, the 
Qualified Plans and the Participating Separate Accounts have rights 
only with respect to their respective shares of the Trusts. They can 
only redeem such shares at their net asset value. No shareholder of the 
Trusts will have any preference over any other shareholder with respect 
to distribution of assets or payment of dividends.
    26. Applicants assert that the veto power of state insurance 
commissioners over an underlying fund's investment objectives does not 
create any inherent conflicts of interest between the contract owners 
of the Participating Separate Accounts and Qualified Plan participants. 
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

[[Page 42469]]

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.
    27. In contrast, the trustees of Qualified Plans or the 
participants in participant-directed Qualified Plans can make the 
decision quickly and redeem their interest in the Funds 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.
    28. Applicants also assert that the investment of seed capital in 
the Trust presents no potential for irreconcilable conflicts of 
interest. Seed capital for the trust will be provided by the Trust's 
investment adviser or by Participating Insurance Companies.
    29. 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 Trust as a common investment medium 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 the Trusts' investment adviser, 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 the sale of shares of the Trusts to 
Qualified Plans in addition to the Separate Accounts will result in an 
increased amount of assets available for investment by such Trusts. 
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.
    30. Applicants assert that granting the exemptions requested by 
Applicants will not compromise the regulatory purposes of Sections 
9(a), 13(a), 15(a) and 15(b) of the Act or Rules 6e-2(b)(15) or 6e-
3(T)(b)(15) thereunder.

Applicants' Conditions

    1. Applicants have consented to the following conditions:
    a. 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 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: (i) For a period of 45 days if the vacancy 
or vacancies may be filled by the Board; (ii) for a period of 60 days 
if a vote of shareholders is required to fill the vacancy or vacancies; 
or (iii) for such longer period as the Commission may prescribe by 
order upon application.
    b. 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, should be taken in response to such conflicts. A material 
irreconcilable conflict may arise for a variety of reasons, including: 
(i) An action by any state insurance regulatory authority; (ii) 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; (iii) an administrative or judicial 
decision in any relevant proceeding; (iv) the manner in which the 
investments of such Trust are being managed; (v) a difference in voting 
instructions given by VA contract owners, VLI contract owners, and Plan 
investors or the trustees of a Qualified Plan that does not provide 
voting rights to its investors; (vi) Participating Insurance Company to 
disregard the voting instructions of contract owners; or (vii) if 
applicable, a decision by a Qualified Plan to disregard the voting 
instructions of Plan participants.
    c. Each Trust will disclose in its prospectus that: (i) 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; (ii) 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 (iii) 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. Each Trust shall also notify 
the Qualified Plan trustees and Participating Insurance Companies that 
similar prospectus disclosure may be appropriate in Participating 
Separate Account prospectuses or any Plan prospectuses or other Plan 
disclosure documents.
    d. Each Trust will comply with all provisions of the Act requiring 
voting by shareholders, including Sections 16(a), 16(b) (when 
applicable) and 16(c) (even though the Trust is not a trust of the type 
described therein).
    e. RIEM will report any material irreconcilable conflicts or any 
potential material irreconcilable conflicts between or among the 
interests of VLI Contract owners, VA Contract owners and Plan 
participants to the Trust's Board of Trustees and will assist the Board 
in carrying out the Board's responsibilities under these conditions. 
Such assistance will include, but not be limited to, providing the 
Board, at least annually, with all information reasonably necessary for 
the Board to consider any issues raised by such existing or potential 
conflicts.
    f. All reports sent by Participating Insurance Companies or 
Qualified Plans to the Board of Trustees of a Trust or notices sent by 
the Board of Trustees to Participating Insurance Companies or Qualified 
Plans notifying the recipient of the existence of or potential for a 
material irreconcilable conflict between the interests of VA Contract 
owners, VLI Contract owners and Plan participants as well as Board 
deliberations regarding such conflicts or such potential conflicts 
shall be recorded in the board meeting minutes of the Trust or other 
appropriate records, and such minutes or other records shall be made 
available to the Commission upon request.
    2. In addition to the foregoing conditions, Applicants consent to 
the following conditions and represent and agree that if the exemptions 
requested are granted, a Trust will not sell shares to any VLI Account 
unless such

[[Page 42470]]

Account's Participating Insurance Company enters into a participation 
agreement with the Trust containing provisions that require the 
following:
    a. A majority vote of the disinterested trustees of a Trust shall 
represent a conclusive determination as to the existence of a material 
irreconcilable conflict between or among the interests of VLI Contract 
owners, VA Contract owners and Qualified Plan investors. For the 
purpose of subparagraph (e) below, a majority vote of the disinterested 
trustees of that Trust shall represent a conclusive determination as to 
whether any proposed action adequately remedies any material 
irreconcilable conflict between or among the interests of VLI Contract 
owners, VA Contract owners and Qualified Plan investors. The Trust 
shall notify each Participating Insurance Company and Qualified Plan in 
writing of any determination of the foregoing type.
    b. Each Participating Insurance Company will monitor its operations 
and those of the Trusts for the purpose of identifying any material 
irreconcilable conflicts or potential material irreconcilable conflicts 
between or among the interests of Qualified Plan investors, VA Contract 
owners and VLI Contract owners.
    c. Each Participating Insurance Company will report any such 
conflicts or potential conflicts to a Trust's Board of Trustees and 
will provide the Board, at least annually, with all information 
reasonably necessary for the Board to consider any issues raised by 
such existing or potential conflicts or by these conditions. Each 
Participating Insurance Company will also assist the Board in carrying 
out its responsibilities under these conditions including, but not 
limited to: (i) Informing the Board whenever it disregards VLI Contract 
owner or VA Contract owner voting instructions; and (ii) providing, at 
least annually, such other information and reports as the Board may 
reasonably request. Each Participating Insurance Company will carry out 
these obligations with a view only to the interests of owners of its 
VLI Contracts and VA Contracts.
    d. Each Participating Insurance Company will provide ``pass-
through'' voting privileges to owners of registered VA Contracts and 
registered VLI Contracts as long as the Act requires such privileges in 
such cases. Accordingly, such Participating Insurance Companies, where 
applicable, will vote Trust shares held in their Participating Separate 
Accounts in a manner consistent with voting instructions timely 
received from owners of such VLI and VA Contracts. Each Participating 
Insurance Company will vote Trust shares owned by itself (i.e., that 
are not attributable to VLI Contract or VLI Contract reserves) in the 
same proportion as instructions received in a timely fashion from VA 
Contract owners and VLI Contract owners and shall be responsible for 
ensuring that it and other Participating Insurance Companies calculate 
``pass-through'' votes for VLI Accounts and VA Accounts in a consistent 
manner. Each Participating Insurance Company also will vote Trust 
shares held in any registered VLI Account or registered VA Account for 
which it has not received timely voting instructions in the same 
proportion as instructions received in a timely fashion from VA 
Contract owners and VLI Contract owners.
    e. In the event that a material irreconcilable conflict of interest 
arises between VA Contract owners or VLI Contract owners and Qualified 
Plan participants, each Participating Insurance Company will, at its 
own expense, take whatever action is necessary to remedy such conflict 
as it adversely affects owners of its VA Contracts or VLI Contracts up 
to and including: (i) Establishing a new registered management 
investment company, and (ii) withdrawing assets attributable to 
reserves for the VA Contracts or VLI Contracts subject to the conflict 
from the Trust and reinvesting such assets in a different investment 
medium (including another Fund of the Trust) or submitting the question 
of whether such withdrawal should be implemented to a vote of all 
affected VA Contract owners or VLI Contract owners, and, as 
appropriate, segregating the assets supporting the contracts of any 
group of such owners that votes in favor of such withdrawal, or 
offering to such owners the option of making such a change. Each 
Participating Insurance Company will carry out the responsibility to 
take the foregoing action with a view only to the interests of owners 
of its VA Contracts and VLI Contracts. Notwithstanding the foregoing, 
each Participating Insurance Company will not be obligated to establish 
a new funding medium for any group of VA Contracts or VLI Contracts if 
an offer to do so has been declined by a vote of a majority of the VA 
Contract owners or VLI Contract owners adversely affected by the 
conflict.
    f. If a material irreconcilable conflict arises because of a 
Participating Insurance Company's decision to disregard the voting 
instructions of VLI Contract owners or VA Contract owners and that 
decision represents a minority position or would preclude a majority 
vote at any Fund shareholder meeting, then, at the request of the 
Trust's Board of Trustees, the Participating Insurance Company will 
redeem the shares of the Trust to which the disregarded voting 
instructions relate. No charge or penalty, however, will be imposed in 
connection with such a redemption.
    g. Each Participating Insurance Company and VLI Account will 
continue to rely on Rule 6e-2(b)(15) and/or Rule 6e-3(T)(b)(15), as 
appropriate, and to comply with all of the appropriate Rule's 
conditions. In the event that rule 6e-2 and/or Rule 6e-3(T) is amended, 
or any successor rule is adopted, each Participating Insurance Company 
and VLI Account will instead comply with such amended or successor 
rule.
    h. Each Participating Insurance Company will maintain at its home 
office available to the Commission a list of its officers, directors 
and employees who participate directly in the management and 
administration of any separate account organized at a UIT or of any 
Fund. These individuals will continue to be subject to the automatic 
disqualification provisions of Section 9(a).
    3. In addition to the foregoing conditions, Applicants consent to 
the following conditions and represent and agree that if the exemptions 
requested are granted, the Trust will not sell shares of any Fund to a 
Qualified Plan if such sale would result in the Qualified Plan owning 
10% or more of that Fund's outstanding shares unless the Qualified Plan 
first enters into a participation agreement with the Trust containing 
provisions that require the following:
    a. The trustees or plan committees of the Qualified Plan will: (i) 
Monitor the Qualified Plan's operations and those of the Trusts for the 
purpose of identifying any material irreconcilable conflicts or 
potential material irreconcilable conflicts between or among the 
interests of Qualified Plan participants, VA Contract owners and VLI 
Contract owners; (ii) report any such conflicts or potential conflicts 
to a Trust's Board of Trustees; (iii) provide the Board, at least 
annually, with all information reasonably necessary for the Board to 
consider any issues raised by such existing or potential conflicts and 
any other information and reports that the Board may reasonably 
request; (iv) inform the Board whenever it (or another fiduciary) 
disregards the voting instructions of Qualified Plan participants (of a 
Qualified Plan that provides voting rights to its participants); and 
(v) ensure that the Qualified Plan votes Trust shares as

[[Page 42471]]

required by applicable law and governing Qualified Plan documents. The 
trustees or plan committees of the Qualified Plan will carry out these 
obligations with a view only to the interests of Qualified Plan 
participants in its Qualified Plan.
    b. In the event that a material irreconcilable conflict of interest 
arises between Qualified Plan investors and VA Contract owners, VLI 
Contract owners or other investors in the Trust, each Qualified Plan 
will, at its own expense, take whatever action is necessary to remedy 
such conflict as it adversely affects that Qualified Plan or 
participants in that Qualified Plan up to and including: (i) 
Establishing a new registered management investment company, and (ii) 
withdrawing Qualified Plan assets subject to the conflict from the 
Trusts and reinvesting such assets in a different investment medium 
(including another Fund of the Trusts) or submitting the question of 
whether such withdrawal should be implemented to a vote of all affected 
Qualified Plan investors, and, as appropriate, segregating the assets 
of any group of such participants that votes in favor of such 
withdrawal, or offering to such participants the option of making such 
a change. Each Qualified Plan will carry out the responsibility to take 
the foregoing action with a view only to the interests of Qualified 
Plan investors in its Qualified Plan. Notwithstanding the foregoing, no 
Qualified Plan will be obligated to establish a new funding medium for 
any group of participants or Qualified Plan investors if an offer to do 
so has been declined by a vote of a majority of the Qualified Plan's 
participants or Qualified Plan investors adversely affected by the 
conflict.
    c. If a material irreconcilable conflict arises because of a 
Qualified Plan trustee's (or other fiduciary's) decision to disregard 
the voting instructions of Qualified Plan participants (of a Qualified 
Plan that provides voting rights to its participants) and that decision 
represents a minority position or would preclude a majority vote at any 
shareholder meeting, then, at the request of the Trust's Board of 
Trustees, the Qualified Plan will redeem the shares of that Trust to 
which the disregarded voting instructions relate. No charge or penalty, 
however, will be imposed in connection with such a redemption.
    4. Applicants also represent and agree that if the exemptions 
requested are granted, a Trust will not sell shares of any Fund to a 
Qualified Plan until the Qualified Plan executes an application 
containing an acknowledgment of the condition that the Trust cannot 
sell shares of any Fund to such Qualified Plan if such sale would 
result in that Qualified Plan owning 10% or more of that Fund's 
outstanding shares unless that Qualified Plan first enters into a 
participation agreement as described above.

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 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 98-21172 Filed 8-6-98; 8:45 am]
BILLING CODE 8010-01-M