[Federal Register Volume 63, Number 170 (Wednesday, September 2, 1998)]
[Notices]
[Pages 46816-46822]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23611]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23414; File No. 812-11158]


Life & Annuity Trust, et al.; Notice of Application

August 26, 1998.
AGENCY: Securities and Exchange Commission (the ``Commission'').

ACTION: Notice of Application for an order pursuant to Section 6(c) of 
the Investment Company Act of 1940 (the ``1940 Act'').

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[[Page 46817]]

SUMMARY: Applicants seek an order pursuant to Section 6(c) of 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 to the extent necessary to permit shares of Life & Annuity 
Trust (``Trust'') and shares of any other investment company or 
portfolio that is designed to fund insurance products and for which 
Wells Fargo Bank (``Wells Fargo'') may serve in the future, as 
investment manager, investment adviser, or administrator (``Future 
Trusts'') (the Trust together with Future Trusts are the ``Trusts'') to 
be sold to and held by separate accounts funding variable annuity and 
variable life insurance contracts (``Variable Contracts'') issued by 
both affiliated and unaffiliated life insurance companies and by 
qualified pension and retirement plans (``Qualified Plans'' or 
``Plans'') outside of the separate account context.

Applicants: Life & Annuity Trust and Wells Fargo Bank, N.A.

Filing Date: The application was filed on May 28, 1998. Applicants have 
agreed to file an amendment, the substance of which is incorporated in 
this notice, during the notice period.

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, in person or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on September 21, 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 requester'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 
Commission.

ADDRESSES: Secretary, Securities and Exchange Commission: 450 Fifth 
Street, NW., Washington, DC 20549. Applicants, c/o C. David Messman, 
Esq., Wells Fargo Bank, 111 Sutter Street, 18th Floor, San Francisco, 
CA 94104.

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

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee from the 
Public Reference Branch of the Commission, 450 Fifth Street, NW., 
Washington, DC 20549 (202-942-8090).

Applicants' Representations

    1. The Trust is a Delaware business trust that is registered under 
the 1940 Act as an open-end management investment company. The Trust 
consists of six separate portfolios (each a ``Fund''), each of which 
has its own investment objective or objectives, and policies.
    2. Wells Fargo, a bank as defined in Section 2(a)(5) of the 1940 
Act, is a wholly owned subsidiary of Wells Fargo & Company, and serves 
as the investment adviser and administrator to the Trust.
    3. Shares representing interests in each Fund are currently offered 
to insurance companies (each a ``Current Participating Insurance 
Company'') as an investment vehicle for separate accounts supporting 
Variable Contracts.
    4. The Trust intends to offer shares representing interests in each 
Fund, and any other portfolios established by the Trust (``Future 
Portfolios'') (Fund, together with Future Portfolios are the 
``Portfolios'' or each a ``Portfolio''), to separate accounts of both 
the Current Participating Insurance Companies and other insurance 
companies (``Other Insurance Companies'') to serve as the investment 
vehicle for Variable Contracts. The Current Participating Insurance 
Companies and Other Insurance Companies that elect to purchase shares 
of one or more Portfolios are collectively referred to herein as 
``Participating Insurance Companies.'' The Participating Insurance 
Companies have or will establish their own separate accounts 
(``Separate Accounts'') and design their own Variable Contracts. 
Applicants also propose that the Portfolios may offer and sell their 
shares directly to Qualified Plans or Plans outside the separate 
account context.

Applicants' Legal Analysis

    1. Applicants request an order pursuant to Section 6(c) of the 1940 
Act 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, to 
the extent necessary to permit shares of the Trusts to be sold to and 
held by: (a) separate accounts funding variable annuity and variable 
life insurance contracts issued by the same life insurance company or 
any affiliated insurance companies (``mixed funding''); (b) separate 
accounts funding variable annuity or variable life insurance contracts 
issued by unaffiliated insurance companies (``shared funding''); and 
(c) Qualified Plans.
    2. In connection with the funding of scheduled premium variable 
life insurance contracts issued through a separate account registered 
as a unit investment trust (``UIT'') under the 1940 Act, Rule 6e-
2(b)(15) provides partial exemptions from Sections 9(a), 13(a), 15(a), 
and 15(b) of the 1940 Act. Rule 6e-2(b)(15) provides these exemptions 
only where all of the assets of the UIT are shares of 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 62-2(b)(15) is not available with respect to a scheduled premium 
life insurance separate account that owns shares of an underlying fund 
that also offers it shares to a variable annuity or flexible premium 
variable life insurance separate account of the same company.
    3. The relief granted by Rule 6e-2(b)(15) also 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 separate accounts funding Variable Contracts of one or more 
unaffiliated life insurance companies.
    4. In connection with flexible premium variable life insurance 
contracts issued through a separate account registered under the 1940 
Act as a UIT, Rule 6e-3(T)(b)(15) similarly provides partial exemptions 
from Section 9(a), 13(a), 15(a), and 15(b) of the 1940 Act. The 
exemptions granted by Rule 6e-3(T)(b)(15) are available only where all 
the assets of the separate account consist of the shares of one or more 
registered management investment companies which offer to sell their 
shares exclusively to separate accounts of the life insurer, or of any 
affiliated life insurance companies, 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. Therefore, Rule 6e-3(T) permits 
mixed funding while not permitting shared funding.
    5. In addition, neither Rule 6e-2 nor Rule 6e-3(T) contemplate that 
shares of the underlying portfolio funding Variable Contracts might 
also be soled to Qualified Plans. The use of a common management 
investment company as the underlying investment medium for variable 
annuity and variable life separate accounts of affiliated and 
unaffiliated insurance companies, and the Qualified Plans, is referred 
to herein

[[Page 46818]]

as ``extended mixed and shared funding.''
    6. Applicants state that current tax law permits the Trust to 
increase its asset base by selling its shares to Qualified Plans. 
Section 817(h) of the Internal Revenue Code of 1986, as amended (the 
``Code''), imposes certain diversification standards on the assets 
underlying Variable Contracts, such as those in each Fund. 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).
    7. Applicants note that the promulgation of Rules 6e-2(b)(15) and 
6e-3(T)(b)(15) preceded the issuance of the Regulations which made it 
possible for shares of an investment company portfolio to be held by 
the trustee of a Qualified Plan without adversely affecting the ability 
of shares in the same investment company portfolio also to be held by 
the separate accounts of insurance companies in connection with their 
variable contracts. 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 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 Rules 6e-
3(T)(b)(15)(i) and (ii) under the 1940 Act provide exemptions from 
Section 9(a) under certain circumstances, subject to the limitations 
imposed on mixed and shared funding by the 1940 Act and the rules 
thereunder. These exemptions limit the application of the eligibility 
restrictions to affiliated individuals or companies that directly 
participate in the management of the underlying management company.
    9. Applicants state that the partial relief granted in Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act from the requirements of 
Section 9 of the 1940 Act, in effect, limits the amount of monitoring 
necessary to ensure compliance with Section 9 to that which is 
appropriate in light of the policy and purposes of Section 9. 
Applicants state that those 1940 Act rules recognize that it is not 
necessary for the protection of investors or the purposes fairly 
intended by the policy and provisions of the 1940 Act to apply the 
provisions of Section 9(a) to individuals in a large insurance company 
complex, most of whom will have no involvement in matters pertaining to 
investment companies in that organization. Applicants state that those 
1940 Act rules further recognize that it also is unnecessary to apply 
Section 9(a) of the 1940 Act to individuals in various unaffiliated 
insurance companies (or affiliated companies of Participating Insurance 
Companies) that may utilize the Trusts as the funding medium for 
Variable Contracts. According to Applicants, there is not regulatory 
purpose in extending the Section 9(a) monitoring requirements because 
of extended mixed or shared funding. The Participating Insurance 
Companies and Qualified Plans are not 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 argue 
that applying the monitoring requirements of Section 9(a) of the 1940 
Act because of investment by separate accounts of other insurers or 
Qualified Plans would be unjustified and would not serve any regulatory 
purpose.
    10. Applicants also state that in the case of Qualified Plans, the 
Plans, unlike the Separate Accounts, are not themselves investment 
companies, and therefore are not subject to Section 9 of the 1940 Act. 
It is not anticipated that a Qualified Plan would be an affiliated 
person of any of the Trusts by virtue of its shareholders.
    11.Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) under the 1940 
Act provide exemptions from the pass-through voting requirement with 
respect to several significant matters assuming the limitations on 
mixed and shared funding imposed by the 1940 Act and the rules 
thereunder are observed.
    12. 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 (subject to the 
provisions of paragraphs (b)(5)(i) and (b)(7)(ii)(A) of Rule 6e-2 and 
6e-3(T) under the 1940 Act.
    13. 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 adviser (provided that disregarding such voting instructions 
is reasonable and subject to the other provisions of paragraphs 
(b)(5)(ii), (b)(7)(ii)(B), and (b)(7)(ii)(C) of Rules 6e-2 and 6e-3(T) 
under the 1940 Act).
    14. With respect to the Qualified Plans, which are not registered 
as investment companies under the 1940 Act, there is no requirement to 
pass through voting rights to Plan participants, Indeed, to the 
contrary, applicable law expressly reserves voting rights associated 
with Plan assets to certain specified persons. Under Section 403(a) of 
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 
trustee(s) are subject to the direction of a named fiduciary who is not 
a trustee, in which case the trustees are subject to proper directions 
made in accordance with the terms of the Plan and not contrary to 
ERISA, and (b) when the authority to manage, acquire, or dispose of 
assets of the Plan is delegated to one or more investment managers 
pursuant to Section 402(c)(3) of ERISA. Unless one of the above two 
exceptions stated in Section 403(a) applies, Plan trustees have the 
exclusive authority and responsibility for voting proxies.
    15. Where a named fiduciary to a Qualified Plan appoints an 
investment

[[Page 46819]]

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 direction. 
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.
    16. 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.
    17. Applicants state that 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 where 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.
    18. 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.
    19. Applicants state that shared funding by unaffiliated insurance 
companies does not present any issues that do not already exist where a 
single insurance company is licensed to do business in several or all 
states. A particular state insurance regulatory body could require 
action that is inconsistent with the requirements of other states in 
which the insurance company offers its policies. The fact that 
different insurers may be domiciled in different states does not create 
a significantly different or enlarged problem.
    20. Applicants state 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 1940 Act permit. Affiliated 
insurers may be domiciled in different states and be subject to 
differing state law requirements. Affiliation does not reduce the 
potential, if any exists, for differences in state regulatory 
requirements. In any event, the conditions set forth below are designed 
to safeguard against, and provide procedures for resolving, any adverse 
effects that differences among state regulatory requirements may 
produce. If a particular state insurance regulator's decision conflicts 
with the majority of other state regulators, then the affected insurer 
will be required to withdraw its Separate Account's investment in the 
Portfolios. This requirement will be provided for in agreements that 
will be entered into by Participating Insurance Companies with respect 
to their participation in the relevant Portfolio.
    21. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act give 
the insurance company the right to disregard the voting instructions of 
the contract owners. This right does not raise any issues different 
from those raised by the authority of state insurance administrators 
over separate accounts. Under Rules 6e-2(b)(15) and 6e-3(T)(b)(15), an 
insurer can disregard contract owner voting instructions only with 
respect to certain specified items. Affiliation does not eliminate the 
potential, if any exists, for divergent judgments as to the 
advisability or legality of a change in investment policies, principal 
underwriter, or investment adviser initiated by contract owners. The 
potential for disagreement is limited by the requirements in Rules 6e-2 
and 6e-3(T) under the 1940 Act that the insurance company's disregard 
of voting instructions be reasonable and based on specific good-faith 
determinations.
    22. Applicants state that 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 than the determination of all or some of the other 
insurers (including affiliated insurers) that the voting instructions 
of contract owners should prevail, and either could preclude a majority 
vote approving the change or could represent a minority view. If the 
insurer's judgment represents a minority position or would preclude a 
majority vote, then the insurer may be required, at the relevant 
Trust's election, to withdraw its Separate Account's investment in such 
Portfolio. No charge or penalty will be imposed as a result of such 
withdrawal. This requirement will be provided for in the agreements 
entered into with respect to participation by the Participating 
Insurance Companies in the Portfolios.
    23. Applicants submit that there is no reason why the investment 
policies of the Portfolios would or should be materially different from 
what these policies would or should be if the Portfolios funded only 
variable annuity contracts or variable life insurance policies, whether 
flexible premium or scheduled premium policies. Each type of insurance 
product is designed as a long-term investment program. Each Portfolio 
will be managed to attempt to achieve the investment objective or 
objectives of such Portfolio, and not to favor or disfavor any 
particular Participating Insurance Company or type of insurance 
product.
    24. Applicants state that no one investment strategy can be 
identified as appropriate to a particular insurance product. Each pool 
of variable annuity and variable life insurance contract owners is 
composed of individuals of diverse financial status, age, insurance, 
and investment goals. A Portfolio supporting even one type of insurance 
product must accommodate these diverse factors in order to attract and 
retain purchasers. Permitting mixed and shared funding will provide 
economic justification for the continuation of the relevant Portfolio. 
Mixed and shared funding will broaden the base of contract owners which 
will facilitate the establishment of additional Portfolios serving 
diverse goals.
    25. Applicants do not believe that the sale of the shares of the 
Portfolios to qualified Plans will increase the potential for material 
irreconcilable conflicts of interest between or among different types 
of investors. In particular, Applicants see very little potential for 
such conflicts beyond that which would otherwise exist between variable 
annuity and variable life insurance contract owners.
    26. As noted above, Section 817(h) of the Code imposes certain 
diversification

[[Page 46820]]

standards on the underlying assets of Variable Contracts held in an 
underlying mutual fund. The Code provides that a variable contract 
shall not be treated as an annuity contract or life insurance, as 
applicable, for any period (and any subsequent period) for which the 
investments are not, in accordance with regulations prescribed in the 
Treasury Department, adequately diversified.
    27. 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 contain certain exceptions to this requirement, one of 
which allows shares in an underlying mutual fund to be held by the 
trustees of a qualified pension or retirement plan without adversely 
affecting the ability of such shares also to be held by separate 
accounts of insurance companies in connection with their variable 
contracts. (Treas. Reg. 1.817-5(f)(3)(iii)). Thus, the Regulations 
specifically permit ``qualified pension or retirement plans'' and 
separate accounts to invest in the same underlying fund. For this 
reason, Applicants have concluded that neither the Code, nor 
Regulations, nor Revenue Rulings thereunder, present any inherent 
conflicts of interest.
    28. 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 in conformity with Rule 
22c-1 under the 1940 Act (without the imposition of any sales charge) 
to provide proceeds to meet distribution needs. A Participating 
Insurance Company then will make distributions in accordance with the 
terms of its Variable Contract, and a Qualified Plan then will make 
distributions in accordance with the terms of the Plan.
    29. Applicants determined it is possible to provide an equitable 
means of giving voting rights to contract owners in the Separate 
Accounts and to Qualified Plans. In connection with any meeting of 
shareholders, the Trusts will inform each shareholder, including each 
Separate Account and Qualified Plan, of information necessary for the 
meeting, including their respective share of ownership in the relevant 
Portfolio. Each Participating Insurance Company then will solicit 
voting instructions in accordance with Rules 6e-2 and 6e-3(T), as 
applicable, and its 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.
    30. Applicants further concluded that the ability of the Trusts to 
sell shares of Portfolios directly to Qualified Plans does not create a 
senior security. ``Senior security'' is defined under Section 18(g) of 
the 1940 Act to include ``any stock of a class having priority over any 
other class as to distribution of assets or payment of dividends.'' As 
noted above, regardless of the rights and benefits of participants 
under Qualified Plans, or contract owners under Variable Contracts, the 
Qualified Plans and 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.
    31. Applicants submit that there are no conflicts between the 
contract owners of the Separate Accounts and of the participants under 
the Qualified Plans with respect to the state insurance commissioners' 
veto powers over investment objectives. Applicants note that the basic 
premise of corporate democracy and shareholder voting is that not all 
shareholders may agree with a particular proposal. Although the 
interests and opinions of shareholders may differ, this does not mean 
that inherent conflicts of interest exist between or among such 
shareholders. State insurance commissioners have been given the veto 
power in recognition of the fact that insurance companies usually 
cannot simply redeem their separate accounts out of one fund and invest 
in another. Generally, time-consuming, complex transactions must be 
undertaken to accomplish such redemptions and transfers.
    32. Conversely, the trustees of Qualified Plans or the participants 
in participant-directed Qualified Plans can make the decision quickly 
and redeem their interests in the Portfolios and reinvest in another 
funding vehicle without the same regulatory impediments faced by the 
Separate Accounts or, as is the case with most Qualified Plans, even 
hold cash pending suitable investment.
    33. Applicants do not see any greater potential for material 
irreconcilable conflicts arising between the interests of participants 
in the Qualified Plans and contract owners of the Separate Accounts 
from future changes in the federal tax laws than that which already 
exists between variable annuity contract owners and variable life 
insurance contract owners. Applicants recognize that the foregoing is 
not an all inclusive list, but rather is representative of issues which 
they believe are relevant. Applicants believe that the sale of shares 
of the Portfolios to Qualified Plans does not increase the risk of 
material irreconcilable conflicts of interest. Further, Applicants 
submit that the use of the Portfolios with respect to Qualified Plans 
is not substantially dissimilar from the Portfolio's anticipated use, 
in that Qualified Plans, like Variable Contracts, are generally long-
term retirement vehicles.
    34. Applicants state that various factors have kept more insurance 
companies from offering variable annuity and variable life insurance 
contracts than currently offer such contracts. These factors include 
the costs of organizing and operating a funding medium, the lack of 
expertise with respect to investment management (principally with 
respect to stock and money market investments), and the lack of name 
recognition by the public of certain insurers as investment experts 
with whom the public feels comfortable entrusting their investment 
dollars. Use of a Portfolio, as a common investment media for variable 
contracts, would reduce or eliminate these concerns. Mixed and shared 
funding also should provide several benefits to variable contract 
owners by eliminating a significant portion of the costs of 
establishing and administering separate funds. Participating Insurance 
Companies will benefit not only from the investment and administrative 
expertise of Wells Fargo, 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 economies of scale, by 
permitting increased safety through greater diversification, or by 
making the addition of new Portfolios more feasible. 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,

[[Page 46821]]

which can be expected to result in more product variation and lower 
charges. Applicants also assert that the sale of shares of the 
Portfolios to Qualified Plans, in addition to the Separate Accounts, 
will result in an increased amount of assets available for investment 
by such Portfolios. This may benefit variable contract owners by 
promoting economies of scale, by permitting increased safety of 
investments through greater diversification, and by making the addition 
of new Portfolios more feasible.
    35. Applicants submit that, regardless of the type of shareholder 
in a Fund or Future Portfolio, Wells Fargo is or would be contractually 
and otherwise obligated to manage the Fund or such Future Portfolio 
solely and exclusively in accordance with that portfolio's investment 
objectives, policies and restrictions as well as any guidelines 
established by the Board of Trustees or Directors of such Trust (the 
``Board''). Wells Fargo will work with a pool of money and will not 
take into account the identity of the shareholders. Thus, each Fund and 
any Future Portfolio will be managed in the same manner as any other 
mutual fund.
    36. Applicants see no significant legal impediment to permitting 
mixed and shared funding. Separate accounts organized as unit 
investment trusts historically have been employed to accumulate shares 
of mutual funds which have not been affiliated with the depositor or 
sponsor of the separate account. As noted above, Applicants assert that 
mixed and shared funding will not have any adverse Federal income tax 
consequences.

Applicants' Conditions

    Applicants have consented to the following conditions:
    1. A majority of the Board of each Trust, or Trusts, will consist 
of persons who are not ``interested persons'' of such Trust, as defined 
by Section 2(a)(19) of the 1940 Act, and the rules thereunder, and as 
modified by any applicable orders of the Commission, except that if 
this condition is not met by reason of the death, disqualification or 
bona-fide resignation of any trustee or trustees, then the operation of 
this condition will be suspended: (a) for a period of 45 days if the 
vacancy or vacancies may be filled by the Board; (b) for a period of 60 
days if a vote of shareholders is required to fill the vacancy or 
vacancies; or (c) for such longer period as the Commission may 
prescribe by order upon application.
    2. Each Board will monitor its respective Trust for the existence 
of any material irreconcilable conflict between the interests of the 
contract owners of all Separate Accounts and participants of all 
Qualified Plans investing in such Trust, and determine what action, if 
any should be taken in response to such conflicts. A material 
irreconcilable conflict may arise for a variety of reasons, including: 
(a) an action by any state insurance regulatory authority; (b) a change 
in applicable Federal or state, insurance, tax, or securities laws or 
regulations, or a public ruling, private letter ruling, no-action or 
interpretative letter, or any similar action by insurance, tax, or 
securities regulatory authorities; (c) an administrative or judicial 
decision in any relevant proceeding; (d) the manner in which the 
investments of such Trust are being managed; (e) a difference in voting 
instructions given by variable annuity contract owners, variable life 
insurance contract owners, and trustees of the Plans; (f) a decision by 
a Participating Insurance Company to disregard the voting instructions 
of contract owners; or (g), if applicable, a decision by a Qualified 
Plan to disregard the voting instructions of Plan participants.
    3. Participating Insurance Companies, Wells Fargo, and any 
Qualified Plan that executes a participation agreement upon becoming an 
owner of 10 percent or more of the assets of any Portfolio 
(collectively, the ``Participants'') will report any potential or 
existing conflicts to the relevant Board. Participants will be 
responsible for assisting the relevant Board in carrying out the 
Board's responsibilities under these conditions by providing the Board 
with all information reasonably necessary for the Board to consider any 
issues raised. This includes, but is not limited to, an obligation by 
each Participating Insurance Company to inform the relevant Board 
whenever contract owner voting instructions are disregarded, and, if 
pass-through voting is applicable, an obligation by each Qualified Plan 
to inform the Board whenever it has determined to disregard Plan 
participant voting instructions. The responsibility to report such 
information and conflicts, and to assist the Board, will be contractual 
obligation of all Participating Insurance Companies under their 
participation agreements with the Trusts, and these responsibilities 
will be carried out with a view only to the interests of the contract 
owners. The responsibility to report such information and conflicts, 
and to assist the Board, also will be contractual obligations of all 
Qualified Plans with participation agreements, and such agreements will 
provide that these responsibilities will be carried out with a view 
only to the interests of Plan participants.
    4. If it is determined by a majority of a Board, or a majority of 
the disinterested trustees of such Board, that a material 
irreconcilable conflict exists, then the relevant Participant will, at 
its expense and to the extent reasonable 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 instructions, and 
that decision represents a minority position or would preclude a 
majority vote, then the insurer may be required, at the election of the 
relevant Trust, to withdraw such insurer's Separate Account's 
investment in such Trust, and no charge or penalty will be imposed as a 
result of such withdrawal. If a material irreconcilable conflict arises 
because of a Qualified Plan's decision to disregard Plan participating 
voting instructions, if applicable, and that decision represents a 
minority position or would preclude a majority vote, the Plan may be 
required, at the election of the relevant Trust, to withdraw its 
investment in such Trust, and no charge or penalty will be imposed as a 
result of such withdrawal. The responsibility to take remedial action 
in the event of a Board determination of a material irreconcilable 
conflict and to bear the cost of such remedial action will be a 
contractual obligation of all Participants under their agreements 
governing participation in the Trusts, and these responsibilities will 
be carried out with a view only to the interests of contract owners and 
Plan participants.

[[Page 46822]]

    For purposes of this Condition 4, a majority of the disinterested 
members of a Board will determine whether or not any proposed action 
adequately remedies any material irreconcilable conflict, but, in no 
event, will any Trust or Wells Fargo be required to establish a new 
funding medium for any variable contract. No Participating Insurance 
Company will be required by this Condition 4 to establish a new funding 
medium for any variable contract if any offer to do so has been 
declined by vote of a majority of the contract owners materially and 
adversely affected by the material irreconcilable conflict. Further, no 
Qualified Plan will be required by this Condition 4 to establish a new 
funding medium for the Plan if: (a) a majority of the Plan participants 
materially and adversely affected by the irreconcilable material 
conflict vote to decline such offer; or (b) pursuant to documents 
governing the Qualified Plan, the Plan makes such decision without a 
plan participant vote.
    5. A Board's determination of the existence of a material 
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 
obligations to calculate voting privileges as provided in the 
Application will be a contractual obligation of all Participating 
Insurance Companies under their agreement with the Trusts governing 
participation in a Portfolio. Each Participating Insurance Company will 
vote shares for which it has not received timely voting instructions as 
well as shares it owns in the same proportion as it votes those shares 
for which it has received voting instructions. Each Qualified Plan will 
vote as required by applicable law and governing Plan documents.
    7. Each Trust will comply with all provisions of the 1940 Act 
requiring voting by shareholders, and, in particular, each Trust will 
either provide for annual meetings (except to the extent that the 
Commission may interpret Section 16 of the 1940 Act not to require such 
meetings) or comply with Section 16(c) of the 1940 Act (although the 
Trust are not trusts of the type described in the 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 Trust will notify all Participants that separate account 
prospectus disclosure regarding potential risk of mixed and shared 
funding may be appropriate. Each Trust will disclose in its prospectus 
that: (a) shares of Trust may be offered to insurance company separate 
accounts for both variable annuity and variable life insurance 
contracts and, if applicable 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, if applicable may conflict; 
and (c) the Trust's Board of Trustees will monitor events in order to 
identify the existence of any material irreconcilable conflicts and to 
determine what action, if any, should be taken in response to any such 
conflict.
    9. If and to the extent that Rule 6e-2 and Rule 6e-3(T) under the 
1940 Act are amended, or proposed Rule 6e-3 under the 1940 Act is 
adopted, to provide exemptive relief from any provision of the 1940 
Act, or the rules promulgated thereunder, with respect to mixed or 
shared funding, on terms and conditions materially different from any 
exemptions granted in the Order requested in the Application, then the 
Trust and/or Participating Insurance Companies, as appropriate, shall 
take such steps as may be necessary to comply with Rules 6e-2 and 6e-
3(T), or Rule 6e-3, as such rules are applicable.
    10. The Participants, at least annually, will submit to the Board 
of each Trust such reports, materials, or data as a Board reasonably 
may request so that the trustees of the Board may fully carry out the 
obligations imposed upon a Board by the conditions contained in the 
Application, and said reports, materials, and data will be submitted 
more frequently if deemed appropriate by the Board. The obligations of 
the Participants to provide these reports, materials, and data to a 
Board, when it so reasonably requests, will be a contractual obligation 
of all Participants under their agreements governing participation in 
the Portfolios.
    11. All reports of potential or existing conflicts received by a 
Board, and all Board action with regard to determining the existence of 
a conflict, notifying Participants of a conflict, and determining 
whether any proposed action adequately remedies a conflict, will be 
properly recorded in the minutes of the relevant Board or other 
appropriate records, and such minutes or other records shall be made 
available to the Commission upon request.
    12. The Trusts will not accept a purchase order from a Qualified 
Plan if such purchase would make the Plan shareholder an owner of 10 
percent or more of the assets of such Portfolio unless such Plan 
executes an agreement with the relevant Trust governing participation 
in such Portfolio that includes these conditions 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 believe that the 
requested exemptions, in accordance with the standards of Section 6(c), 
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.
Johathan Katz,
Secretary.
[FR Doc. 98-23611 Filed 9-1-98; 8:45 am]
BILLING CODE 8010-01-M