[Federal Register Volume 63, Number 225 (Monday, November 23, 1998)]
[Notices]
[Pages 64745-64750]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31227]



[[Page 64745]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23536; No. 812-10694]


Variable Insurance Funds, et al.; Notice of Application

November 16, 1998.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

-----------------------------------------------------------------------

SUMMARY OF APPLICATION: Applicants seek an amended order \1\ to permit 
shares of each existing and future series of the Variable Insurance 
Funds Trust and any other investment company that is designed to fund 
variable insurance products and for which BISYS Fund Services, or any 
of its affiliates, may serve as principal underwriter or administrator 
to be sold to and held by: (a) separate accounts funding variable 
annuity and variable life insurance contracts issued by both affiliated 
and unaffiliated life insurance companies; (b) qualified pension and 
retirement plans outside of the separate account context (``Qualified 
Plans'' or ``Plans''); (c) the manager of a Fund or certain related 
corporations (``Adviser''); and (d) the general account of any life 
insurance company, or certain related corporations, whose separate 
account holds, or will hold, shares of the Funds (``General 
Accounts'').
---------------------------------------------------------------------------

    \1\ Applicants seek an amendment of a prior order issued by the 
Commission in connection with File No. 812-9236 (``Original 
Order''), which granted exemptive relief to certain of the 
Applicants from the same provisions of the 1940 Act and rules 
thereunder from which Applicants now seek exemptive relief.

    Applicants: Variable Insurance Funds (``Trust''), BISYS Fund 
Services (``BISYS''), Branch Banking and Trust Company (``BB&T''), and 
AmSouth Bank (``AmSouth'').
FILING DATE: The application was filed on June 5, 1997, and amended on 
June 2, 1998. Applicants have agreed to file another agreement, 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 December 9, 1998, and should be 
accompanied by proof of service on the Applicants, in the form of an 
affidavit or, for lawyers, a certificate of service. Hearing requests 
should state the nature of the 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, N.W., Washington, D.C. 20549. Applicants, c/o BISYS, 3435 
Stelzer Road, Columbus, Ohio 43219-3035.

FOR FURTHER INFORMATION CONTACT: Laura A. Novack, Senior 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, N.W., 
Washington, D.C. 20549 (202-942-8090).

Applicants' Representations

    1. The Trust is a business trust organized under the laws of 
Massachusetts on July 20, 1994. It is registered under the 1940 Act as 
an open-end management investment company and currently consists of 
four separate series, each with their own investment objectives and 
policies. The Trust may in the future establish additional series.
    2. BISYS, a division of BISYS Group, Inc., is a registered broker-
dealer and a member of the National Association of Securities Dealers, 
Inc. BISYS serves as the administrator and the principal underwriter 
for each series of the Trust. When the Commission granted the Original 
Order, BISYS operated under its former name, The Winsbury Company.
    3. BB&T, a bank in North Carolina, is the principal bank affiliate 
of BB&T Corporation, a bank holding company whose headquarters are in 
North Carolina. BB&T serves as Adviser to two series of the Trust.
    4. AmSouth is the principal bank affiliate of AmSouth 
Bancorporation, whose headquarters are in the mid-south region. AmSouth 
serves as Adviser to two series of the Trust.
    5. The Funds currently are offered to one or more separate accounts 
of Hartford Life Insurance Company (``Hartford''), to serve as the 
investment medium for variable annuity contracts issued by Hartford. 
The Trust intends, however, to offer shares of its existing and future 
series to separate accounts of other insurance companies, including 
companies that are not affiliated with Hartford, to serve as the 
investment vehicle for various types of insurance products, which may 
include variable annuity contracts, scheduled premium variable life 
insurance contracts, and flexible premium variable life insurance 
contracts (collectively, ``variable contracts''). Insurance companies 
whose separate account or accounts may in the future own shares of the 
Trust or any other Fund are referred to herein as ``participating 
insurance companies.''
    6. Each participating insurance company will have the legal 
obligation of satisfying all requirements applicable to it under the 
federal securities laws in connection with any variable contract issued 
by such company.
    7. Fund shares also may be offered directly to Qualified Plans 
described in Treasury Regulation Sec. 1.817-(f)(3)(iii).
    8. The Qualified Plans may choose any of the Funds as the sole 
investment under the Plan or as one of several investments. Qualified 
Plan participants may or may not be given the right to select among the 
Funds, depending on the Qualified Plan itself. Fund shares sold to 
Qualified Plans will be held by the trustees of such Qualified Plans as 
required by Section 403(a) of the Employee Retirement Income Security 
Act (``ERISA''). No Adviser will act as investment adviser to any of 
the Qualified Plans that will purchase shares of a Fund advised by that 
Adviser.
    9. Fund shares also may be offered to General Accounts whose 
separate account holds, or will hold shares of the Fund and to certain 
related corporations, pursuant to Treasury Regulation Sec. 1.817-
5(f)(3)(i).
    10. Fund shares may also be offered to Advisers and to certain 
related corporations, pursuant to Treasury Regulation Sec. 1.817-
(f)(3)(ii).
    11. Applicants anticipate that sales made pursuant to Treasury 
Regulation Sec. 1.817(f)(3) (i) and (ii) generally will be made to 
Advisers, and generally for the purpose of providing the capital 
required under Section 14(a) of the 1940 Act.

Applicants' Legal Analysis

    1. Applicants request that the Commission issue an order under 
Section 6(c) of the 1940 Act granting exemptive relief from Sections 
9(a), 13(a), 15(a) and 15(b) thereof and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) thereunder, to the extent necessary to: (a) permit 
``mixed'' and ``shared'' funding as defined below; and (b) allow shares 
of the Funds to be sold to Qualified Plans, Advisers and General 
Accounts. Applicants state that the

[[Page 64746]]

Commission previously granted the first element of the requested relief 
in the Original Order.
    2. Section 6(c) authorizes the Commission to exempt any person, 
security or transaction, or any class or classes of persons, 
securities, or transactions, from the provisions of the 1940 Act, or 
the rules thereunder, if and to the extent that such exemption is 
necessary or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the 1940 Act.
    3. In connection with the funding of scheduled premium variable 
life insurance contracts issued through a separate account registered 
under the 1940 Act as a unit investment trust (the ``Trust Account''), 
Rule 6e-2(b)(15) provides partial exemptions from Sections 9(a), 13(a), 
15(a), and 15(b) of the 1940 Act. The exemptions granted by Rule 6e-
2(b)(15) are available only where the management investment company 
underlying the Trust Account offers its shares ``exclusively to 
variable life insurance separate accounts of the life insurer or any 
affiliated life insurance company * * *'' (emphasis added).
    4. The use of a common management investment company as the 
underlying investment medium for both variable annuity and variable 
life insurance separate accounts of a single life insurance company (or 
of two or more affiliated life insurance companies) is referred to as 
``mixed funding.'' The use of a common management company as the 
underlying investment medium for variable life insurance separate 
accounts of one insurance company and separate accounts funding 
variable contracts of one or more unaffiliated life insurance companies 
is referred to as ``shared funding.'' The relief granted by Rule 6e-
2(b)(15) is not available with respect to a scheduled premium variable 
life insurance separate account that owns shares of an underlying fund 
that also offers its shares to a variable annuity or a flexible premium 
variable life insurance separate account of the same company or of any 
affiliated company. Therefore, Rule 6e-2(b)(15) precludes mixed and 
shared funding.
    5. Moreover, because the relief granted by Rule 6e-2(b)(15) is 
available only where shares are offered exclusively to separate 
accounts, additional exemptive relief may be necessary if the shares of 
the Funds are also to be sold to Plans, General Accounts or Advisers.
    6. In connection with the funding of flexible premium variable life 
insurance contracts issued through a Trust Account, Rule 6e-3(T)(b)(15) 
provides partial exemptions from Sections 9(a), 13(a), 15(a), and 15(b) 
of the 1940 Act. The exemptions granted by Rule 6e-3(T)(b)(15) are 
available only where the underlying fund offers its shares 
``exclusively to separate accounts of the life insurer, or of any 
affiliated life insurance company, offering either scheduled contracts 
or flexible contracts, or both; or which also offer their shares to 
variable annuity separate accounts of the life insurer or of an 
affiliated life insurance company, or which offer their shares to any 
such life insurance company in consideration solely for advances made 
by the life insurer in connection with the operation of the separate 
account * * *'' (emphasis added). Thus while Rule 6e-3(T)(b)(15) 
permits mixed funding with respect to a flexible premium variable life 
insurance separate account, it does not permit shared funding because 
the relief granted by Rule 6e-3(T)(b)(15) is not available with respect 
to a flexible premium variable life insurance separate account that 
owns shares of an underlying fund that also offers its shares to 
separate accounts of unaffiliated life insurance companies. Moreover, 
because the relief under Rule 6e-3(T) is available only where shares 
are offered exclusively to separate accounts, or to life insurers in 
connection with the operation of a separate account, additional 
exemptive relief may be necessary if the shares of the Funds are also 
to be sold to Plans or Advisers or General Accounts.
    7. Applicants state that the current tax law permits the Funds to 
increase their asset base through the sale of shares to Qualified 
Plans. Section 817(h) of the Internal Revenue Code of 1986, as amended 
(the ``Code''), imposes certain diversification standards on the 
underlying assets of the variable contracts. The Code provides that 
such contracts shall not be treated as an annuity contract or life 
insurance contract for any period during which the investments are not 
adequately diversified in accordance with regulations prescribed by the 
Treasury Department. Treasury regulations provide that, to meet the 
diversification requirements, all of the beneficial interests in an 
investment company must be held by the segregated asset accounts of one 
or more insurance companies. The regulations do contain certain 
exceptions to this requirement, however, one of which permits shares of 
an investment company to be held by the trustee of a Qualified Plan 
without adversely affecting the ability of shares in the same 
investment company also to be held by the separate accounts of 
insurance companies in connection with their variable contracts (Treas. 
Reg. Sec. 1.817-5(f)(3)(iii)).
    8. Applicants also state that the current tax law permits the Funds 
to sell shares to Advisers and General Accounts. Treasury regulations 
permit such sales as long as the return on shares held by a General 
Account or Adviser is computed in the same manner as for shares held by 
a separate account, and the General Account or Adviser does not intend 
to sell Fund shares held by it to the public. As to Advisers, Treasury 
regulations also require that the Advisers may only hold the shares in 
connection with the creation or management of the Fund.
    9. Applicants state that the promulgation of Rules 6e-2(b)(15) and 
6e-3(T)(b)(15) preceded the issuance of these Treasury regulations 
which made it possible for shares of a Fund to be held by the trustee 
of a Qualified Plan, an Adviser, or General Account without adversely 
affecting the ability of shares of the Fund to also be held by the 
separate accounts of insurance companies in connection with their 
variable life insurance contracts. Thus, Applicants assert that the 
sale of shares of a Fund to separate accounts through which variable 
life insurance contracts are issued and Qualified Plans, its Adviser or 
General Accounts could not have been envisioned at the time of the 
adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15), given the then-
current tax law.
    10. Applicants assert that if the Funds were to sell shares only to 
Qualified Plans, Advisers and General Accounts, or to separate accounts 
funding variable annuity contracts, no exemptive relief would be 
necessary. Applicants state that none of the relief provided under 
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) relates to Qualified Plans, 
Advisers or General Accounts, or to a registered investment company's 
ability to sell its shares to such purchasers. Exemptive relief is 
required in the application only because some of the separate accounts 
that will invest in the Funds may themselves be investment companies 
that rely on Rules 6e-2 and 6e-3(T) and that desire to have the relief 
continue in place.
    11. Section 9(a)(3) of the 1940 Act provides that it is unlawful 
for any company to act as investment adviser to, 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). Rules 6e-2(b)(15) (i) and (ii), 
and 6e-3(T)(b)(15) (i) and (ii) provide partial

[[Page 64747]]

exemptions from Section 9(a) under certain circumstances, subject to 
the limitations on mixed and shared funding. These exemptions limit the 
application of eligibility restrictions to affiliated individuals or 
companies that directly participate in the management of the underlying 
management investment company.
    12. Applicants state that the relief provided by Rules 6e-2(b)(15) 
and 6e-3(T)(b)(15) permits the life insurer to serve as the underlying 
fund's investment adviser or principal underwriter, provided that none 
of the insurer's personnel who are ineligible pursuant to Section 9(a) 
are participating in the management or administration of the fund. 
Applicants state that the partial relief from Section 9(a) provided by 
Rules 6e-2(b)(15) and 6e-3(T)(b)(15), 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 assert that it is not necessary for the protection of 
investors or the purposes fairly intended by the policy and provisions 
of the 1940 Act to apply the provisions of Section 9(a) to the many 
individuals in an insurance company complex, most of whom typically 
will have no involvement in matters pertaining to investment companies 
in that organization. Applicants assert that it also is unnecessary to 
apply the restrictions of Section 9(a) to the many individuals in 
various unaffiliated insurance companies (or affiliated companies of 
participating insurance companies) that may utilize the Funds as a 
funding medium for variable contracts.
    13. Applicants further state that there is no regulatory purpose in 
extending the monitoring requirements to embrace a full application of 
Section 9(a)'s eligibility restrictions because of mixed or shared 
funding. Applicants maintain that the relief previously granted in the 
Original Order and requested herein will in no way be affected by the 
proposed sale of shares of the Funds to Qualified Plans, Advisers or 
General Accounts. Applicants state that the insulation of the Funds 
from those individuals who are disqualified under the 1940 Act remains 
in place, and that since Qualified Plans, Advisers, and General 
Accounts are not investment companies and will not be deemed to be 
affiliates solely by virtue of their shareholdings, no additional 
relief is necessary.
    14. Applicants submit that Sections 13(a), 15(a) and 15(b) of the 
1940 Act require ``pass-through'' voting with respect to management 
investment company shares held by a separate account to permit the 
insurance company to disregard the voting instructions of its contract 
holders in certain limited circumstances. For example, Applicants state 
that subparagraph (b)(15)(iii)(B) of Rules 6e-2 and 6e-3(T) under the 
1940 Act provide that the insurance company may disregard contract 
owners' voting instructions if the contract owners initiate any changes 
in the investment company's investment policies, principal underwriter 
or investment adviser, provided that disregarding such voting 
instructions is reasonable and complies with the other provisions of 
Rules 6e-2 and 6e-3(T).
    15. Applicants state that Rule 6e-2 recognizes that a variable life 
insurance contract has important elements unique to insurance contracts 
and is subject to extensive state regulation of insurance. Applicants 
assert that in adopting Rule 6e-2(b)(15)(iii), the Commission expressly 
recognized that state insurance regulators have authority to disapprove 
or require changes in investment policies, investment advisers, or 
principal underwriters. Applicants also maintain that the Commission 
has expressly recognized that state insurance regulators have authority 
to require an insurer to draw from its general account to cover costs 
imposed upon the insurer by a change approved by contract owners over 
the insurer's objection. Applicants state that the Commission deemed 
such exemptions necessary to assure the solvency of the life insurer 
and the performance of its contractual obligations by enabling an 
insurance regulatory authority or the life insurer to act when certain 
proposals reasonably could be expected to increase the risks undertaken 
by the life insurer. Applicants further state that in this respect, 
flexible premium variable life insurance contracts are identical to 
scheduled premium variable life insurance contracts, and that therefore 
corresponding provisions of Rule 6e-3(T) were adopted in recognition of 
the same considerations as the Commission applied in adopting Rule 6e-
2.
    16. Applicants further represent that the sale of Fund shares to 
Qualified Plans, Advisers, or General Accounts does not affect the 
relief previously granted by the Commission in the Original Order and 
requested herein in this regard. Shares of the Funds sold to Plans 
would be held by the trustees of such Plans as mandated by Section 
403(a) of ERISA. Section 403(a) also provides that the trustees 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 trustees are subject to the direction of a 
named fiduciary who is not a trustee, in which case the trustees are 
subject to proper directions made in accordance with the terms of the 
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 two exceptions stated in Section 403(a) 
applies, the Plan trustees have exclusive authority and responsibility 
for voting proxies. Where a named fiduciary appoints an investment 
manager, the investment manager has the responsibility to vote the 
shares held unless the right to vote such shares is reserved to the 
trustees or the named fiduciary. In any event, there is no pass-through 
voting to the participants in such Plans. Similarly, Advisers and 
General Accounts are not subject to any pass-through voting 
requirements. Accordingly, Applicants assert that, unlike the case with 
the insurance company separate accounts, the issue of the resolution of 
material irreconcilable conflicts with respect to voting is not present 
with Qualified Plans, Advisers or General Accounts.
    17. Applicants note that Section 817(h) of the Code in effect 
requires that the investments made by variable annuity and variable 
life insurance separate accounts be ``adequately diversified.'' 
Applicants state that if a separate account is organized as a unit 
investment trust that invests in a single fund or series, the separate 
account will not be diversified. In this situation, however, Applicants 
state that Section 817(h) provides, in effect, that the diversification 
test will be applied at the underlying fund level rather than the 
separate account level, but only if ``all of the beneficial interests'' 
in the underlying fund ``are held by one or more insurance companies 
(or affiliated companies) in their general account or in segregated 
asset accounts * * * .'' Applicants state that Treasury Regulation 
1.817-5, which established diversification requirements for such funds, 
specifically permits, among other things, investment company managers, 
insurance company general accounts, ``qualified pension or retirement 
plans'' and separate accounts to share the same underlying investment 
company. Therefore, Applicants have concluded that neither the Code, 
the Treasury regulations nor revenue rulings thereunder present any 
inherent conflicts of interest if Advisers, General

[[Page 64748]]

Accounts, Qualified Plans, variable annuity separate accounts and 
variable life separate accounts all invest in the same management 
investment company.
    18. Applicants state that while there are differences in the manner 
in which distributions are taxed for variable annuity contracts, 
variable life insurance contracts and Qualified Plans, the tax 
consequences do not raise any conflicts of interest. When distributions 
are to be made, and the separate account or the Qualified Plan cannot 
net purchase payments to make the distributions, the separate account 
or the Plan will redeem shares of the Funds at their net asset value. 
The Plan will then make distributions in accordance with the terms of 
the Plan and the insurance company will make distributions in 
accordance with the terms of the variable contract.
    19. Applicants state that there are no conflicts of interest 
between the contract owners of the separate accounts and the 
participants under the Qualified Plans with respect to the state 
insurance commissioners' veto powers over investment objectives. The 
state insurance commissioners have been given the veto power in 
recognition of the fact that insurance companies cannot simply redeem 
their separate accounts out of one Fund and invest in another. To 
accomplish such redemptions and transfers, complex and time consuming 
transactions must be undertaken. Conversely, trustees of Qualified 
Plans can make the decision quickly and implement redemption of shares 
from a Fund and reinvest the moneys in another funding vehicle without 
the same regulatory impediments or, as is the case with most Plans, 
even hold cash pending suitable investment. Based on the foregoing, 
Applicants represent that even should the interests of contract owners 
and the interests of Qualified Plans conflict, the conflicts can be 
almost immediately resolved because the trustees of the Qualified Plans 
can, independently, redeem shares out of the Funds.
    20. Applicants submit that shared funding by unaffiliated insurance 
companies does not present any conflict of interest issues that do not 
already exist where a single insurance company is licensed to do 
business in several or all states. Applicants note that a particular 
state insurance regulatory body could require action that is 
inconsistent with the requirements of other states in which the 
insurance company offers its policies. Applicants state that if a 
particular state insurance regulator's decision conflicts with a 
majority of other insurance regulators, the affected insurer may be 
required to withdraw its separate account's investment in a Fund. 
Applicants submit that the fact that different insurers may be 
domiciled in different states does not create a significantly different 
or enlarged problem.
    21. Applicants further submit that affiliation does not reduce the 
potential, if any exists, for differences in state regulatory 
requirements. In any event, the conditions discussed below are designed 
to safeguard against, and provide procedures for resolving, any adverse 
effects that these differences may produce.
    22. Applicants also argue that affiliation does not eliminate the 
potential, if any exists, for divergent judgments as to when an 
insurance company can disregard contract owners' voting instructions. 
Potential disagreement is limited by the requirements that the 
insurance company's disregard of voting instructions be reasonable and 
based on specific good faith determinations. However, if a particular 
insurance company's decision to disregard voting instructions 
represents a minority position or would preclude a majority vote, the 
insurance company may be required, at a Fund's election, to withdraw 
its separate account's investment in that Fund. No charge or penalty 
will be imposed as a result of such a withdrawal.
    23. Applicants submit that there is no reason why the investment 
policies of a Fund, or a series thereof, would or should be materially 
different from what they would or should be if such Fund or series 
funded only variable annuity contracts or variable life insurance 
policies, whether flexible premium or scheduled premium policies. 
Applicants state that each type of insurance product is designed as a 
long-term investment program, and Applicants represent that each Fund, 
or series thereof, will be managed to attempt to achieve its investment 
objective, and not to favor or disfavor any particular participating 
insurer or type of insurance product.
    24. Applicants argue that the ability of the Funds to sell their 
respective shares directly to Qualified Plans, Advisers, and General 
Accounts does not create a ``senior security'' as such term is defined 
under Section 18(g) of the 1940 Act, with respect to any contract owner 
as opposed to a participant under a Qualified Plan, an Adviser, or an 
insurer. Regardless of the rights and benefits of participants under 
the Qualified Plans or contract owners, the Qualified Plans, Advisers, 
General Accounts and the separate accounts have rights only with 
respect to their respective shares of the Funds. They only can redeem 
such shares at their net asset value. No shareholder of any of the 
Funds has any preference over any other shareholder with respect to 
distribution of assets or payment of dividends.
    25. Applicants assert that with respect to voting rights, it is 
possible to provide an equitable means of giving such voting rights to 
contract owners and to Qualified Plans, Advisers, and General Accounts. 
The transfer agent will inform each participating insurance company of 
its share ownership in each separate account, as well as inform the 
trustees of Qualified Plans, Advisers and insurers of their holdings. 
The participating insurance company will then solicit voting 
instructions in accordance with Rules 6e-2 and 6e-3(T).
    26. Applicants assert that permitting a Fund to sell its shares to 
its Adviser(s) or to the general account of a participating insurance 
company in compliance with Treasury Regulation Sec. 1.817-5 will 
enhance Fund management without raising significant concerns regarding 
material irreconcilable conflicts. Applicants state that unlike the 
circumstances of many investment companies that serve as underlying 
investment media for variable insurance products, the Trust may be 
deemed to lack an insurance company ``promoter'' for purposes of Rule 
14a-2 under the 1940 Act. Applicants state that they anticipate that 
many other Funds may lack an insurance company promoter. Accordingly, 
Applicants state that such Funds will be subject to the requirements of 
Section 14(a) of the 1940 Act, which generally requires that an 
investment company have a net worth of $100,000 upon making a public 
offering of its shares.
    27. Applicants assert that given the conditions of Treas. Reg. 
Sec. 1.817-5(f)(3) and the ``harmony of interest'' between a Fund and 
its Adviser or a participating insurance company, little incentive for 
overreaching exists. Applicants also argue that such investments should 
not implicate the concerns discussed above regarding the creation of 
material irreconcilable conflicts. Instead, Applicants represent that 
permitting investment by Advisers or General Accounts will permit the 
orderly and efficient creation and operation of Funds, or series 
thereof, and reduce the expense and uncertainty of using outside 
parties at the early stages of Fund operations.
    28. Applicants state that various factors have limited the number 
of insurance companies that offer variable contracts. These factors 
include the cost

[[Page 64749]]

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. In particular, a 
number of smaller life insurance companies may not find it economically 
feasible, or within their investment or administrative expertise, to 
enter the variable contract business on their own. Applicants state 
that use of the Funds as a common investment medium for variable 
contracts and Qualified Plans would help alleviate these concerns for 
smaller life insurance companies because participating insurance 
companies and Qualified Plans will benefit not only from the investment 
and administrative expertise of BB&T, AmSouth, any other Adviser and 
BISYS, but also from the cost efficiencies and investment flexibility 
afforded by a large pool of funds. Therefore, making the Funds 
available for mixed and shared funding and permitting the purchase of 
fund shares by Qualified Plans may encourage more life insurance 
companies to offer variable contracts. Applicants submit that this 
should result in increased competition with respect to both variable 
contract design and pricing, which can be expected to result in more 
product variation and lower charges.
    29. Applicants assert that mixed and shared funding also should 
benefit variable contract owners by eliminating a significant portion 
of the costs of establishing and administering separate funds. 
Furthermore, granting the requested relief should result in an 
increased amount of assets available for investment by the Funds. 
Applicants assert that this also may benefit variable contract owners 
by promoting economies of scale, by permitting increased safety through 
greater diversification, or by making the addition of new portfolios 
more feasible.
    30. Applicants believe that mixed and shared funding and sales of 
Fund shares to Qualified Plans, Advisers, and General Accounts will 
have no adverse federal income tax consequences.

Applicants' Conditions

    Applicants have consented to the following conditions:
    1. A majority of the Board of Trustees or Directors (``Board'') of 
each Fund shall consist of persons who are not ``interested persons'' 
of the Fund, as defined by Section 2(a)(19) of the 1940 Act and the 
rules thereunder and as modified by any applicable orders of the 
Commission, except that if this condition is not met by reason of 
death, disqualification, or bona fide resignation of any trustee or 
director, then the operator of this condition shall 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 Fund's Board will monitor the Fund for the existence of any 
material irreconcilable conflict among the interests of the contract 
owners of all separate accounts investing in the Fund and of Plan 
participants investing in the Fund. A material irreconcilable conflict 
may arise for a variety of reasons, including: (a) an action by any 
state insurance regulatory authority; (b) a change in applicable 
federal or state insurance, tax, or securities laws or regulations, or 
a public ruling, private letter ruling, no-action or interpretative 
letter, or any similar action by insurance, tax, or securities 
regulatory authorities; (c) an administrative or judicial decision in 
any relevant proceeding; (d) the manner in which the investments of any 
Fund or series are being managed; (e) a difference in voting 
instructions given by owners of variable annuity contract owners and 
variable life insurance contract owners; (f) a decision by an insurer 
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. In the event that a Qualified Plan shareholder should become an 
owner of 10% or more of the assets of a Fund selling its shares in 
reliance on the requested exemptive relief, such Qualified Plan 
shareholder will execute a fund participation agreement providing for 
the conditions of this Application (to the extent applicable) with such 
Fund. A Qualified Plan shareholder will execute an application 
containing an acknowledgment of this condition at the time of its 
initial purchase of shares of a Fund.
    4. Participating insurance companies (on their own behalf as well 
as by virtue of any investment of general account assets in a Fund), 
BISYS, the Adviser, and any Qualified Plan that executes a fund 
participation agreement (collectively ``Participants'') will report any 
potential or existing conflicts to the Board. Participants will be 
responsible for assisting the Board in carrying out its 
responsibilities under these conditions by providing the Board with all 
information reasonably necessary for the Board to consider any issues 
raised. This responsibility includes, but is not limited to, an 
obligation by each participating insurance company to inform the Board 
whenever contract owner voting instructions are disregarded. The 
responsibility to report such information and conflicts and to assist 
the Board will be a contractual obligation of all insurers investing in 
a Fund under their agreements governing participation in the Fund, as 
well as a contractual obligation of any Qualified Plan that executes 
such a participation agreement, and such agreements shall provide that 
such responsibilities will be carried out with a view only to the 
interests of the contract owners or, as appropriate, Qualified Plan 
participants.
    5. If a majority of the Board, or a majority of its disinterested 
trustees or directors, determine that a material irreconcilable 
conflict exists, the relevant participating insurance companies and 
Qualified Plans, at their expense and to the extent reasonably 
practicable (as determined by a majority of the disinterested trustees 
or directors), shall take whatever steps are necessary to remedy or 
eliminate the material irreconcilable conflict. Such steps could 
include: (a) withdrawing the assets allocable to some or all of the 
separate accounts from the Fund or any series thereof and reinvesting 
such assets in a different investment medium, which may include another 
series of the Fund; (b) 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 or life insurance contract owners or variable 
contract owners of one or more participating insurance companies) that 
votes in favor of such segregation, or offering to the affected 
contract owners the option of making such a charge; and (c) 
establishing a new registered management investment company or managed 
separate account. If a material irreconcilable conflict arises because 
of an insurer's decision to disregard contract owner voting 
instructions and that decision represents a minority position or would 
preclude a majority vote, the insurer may be required, at the election 
of the Fund, to withdraw its separate account's investment in such 
Fund, and no charge or penalty will be imposed as a result of such 
withdrawal.
    The reponsibility 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 shall be a contractual obligation of all 
participating insurance companies and Plans that have executed 
participation agreements under their agreements

[[Page 64750]]

governing participation in the Fund. These responsibilities shall be 
carried out with a view only to the interests of contract owners and 
Plan participants, as appropriate.
    6. For purposes of Condition 5, a majority of the disinterested 
members of the Board shall determine whether any proposed action 
adequately remedies any material irreconcilable conflict. In no event 
will the Fund be required to establish a new funding medium for any 
variable contract. No participating insurance company shall be required 
by Condition 5 to establish a new funding medium for any variable 
contract if a majority of variable contract owners materially and 
adversely affected by the material irreconcilable conflict, vote to 
decline such offer.
    7. Participants will be informed promptly in writing of a Board's 
determination of the existence of a material irreconcilable conflict 
and its implications.
    8. Participating insurance companies will provide pass-through 
voting privileges to all variable contract owners whose contracts are 
funded through a registered separate account so long as the Commission 
continues to interpret the 1940 Act as requiring pass-through voting 
privileges for variable contract owners. Accordingly, such 
participating insurance companies will vote shares of each Fund or 
series thereof held in its registered separate accounts in a manner 
consistent with voting instructions timely received from contract 
owners. In addition, each participating insurance company will vote 
shares of each Fund, or series thereof, held in its registered separate 
accounts for which it has not received timely voting instructions, as 
well as shares it owns, in the same proportion as those shares for 
which it has received voting instructions. Participating insurance 
companies will be responsible for assuring that each of their 
registered separate accounts participating in a Fund calculates voting 
privileges in a manner consistent with other participating insurance 
companies. The obligation to calculate voting privileges in a manner 
consistent with all other registered separate accounts investing in a 
Fund shall be a contractual obligation of all participating insurance 
companies under the agreements governing their participation in the 
Fund. Each Qualified Plan will vote as required by applicable law and 
governing Plan documents.
    9. Each Fund will notify all participating insurance companies that 
prospectus disclosure regarding potential risks of mixed and shared 
funding may be appropriate. Each Fund shall disclose in its prospectus 
that: (a) its shares are offered to insurance company separate accounts 
that fund both annuity and life insurance contracts; (b) differences in 
tax treatment or other considerations may cause the interests of 
various contract owners participating in the Fund to conflict; and (c) 
the Board will monitor for any material conflicts and determine what 
action, if any, should be taken.
    10. All reports of potential or existing conflicts of interest 
received by a Board, and all Board action with regard to: (a) 
determining the existence of a conflict; (b) notifying Participants of 
a conflict; and (c) determining whether any proposed action adequately 
remedies a conflict, will be properly recorded in the minutes of the 
relevant Board or other appropriate records. Such minutes or other 
records shall be made available to the Commission upon request.
    11. If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or 
Rule 6e-3 under the 1940 Act is adopted, to provide exemptive relief 
from any provision of the 1940 Act or the rules thereunder with respect 
to mixed or shared funding on terms and conditions materially different 
from any exemptions granted in the order requested by Applicants, then 
each Fund and/or participating insurance companies, as appropriate, 
shall take such steps as may be necessary to comply with Rule 6e-2 and 
Rule 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such 
rules are applicable.
    12. Each Fund will comply with all the provisions of the 1940 Act 
requiring voting by shareholders (for these purposes, the persons 
having a voting interest in the shares of the Fund). In particular, 
each Fund either will 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 Funds are not one of the trusts described in Section 
16(c) of the 1940 Act) as well as with Section 16(a) and, if and when 
applicable, Section 16(b) of the 1940 Act. Further, each Fund will act 
in accordance with the Commission's interpretation of the requirements 
of Section 16(a) with respect to periodic elections of directors (or 
trustees) and with whatever rules the Commission may promulgate with 
respect thereto.
    13. As long as the Commission continues to interpret the 1940 Act 
as requiring pass-through voting privileges for variable contract 
owners, each Adviser and insurance company general account will vote 
its shares in the same proportion as all contract owners having voting 
rights with respect to that Fund, provided, however, that the Adviser 
or insurance company general account shall vote its shares in such 
other manner as many be required by the Commission or its staff.
    14. No less than annually, the Participants shall submit to a Board 
such reports, materials or data as the Board may reasonably request so 
that such Board may carry out fully the obligations imposed upon it by 
the conditions contained in this application. Such reports, materials 
and data shall be submitted more frequently if deemed appropriate by 
the Board. The obligations of the participating insurance companies and 
Plans to provide these reports, materials and data upon reasonable 
request of a Board shall be a contractual obligation of all 
participating insurance companies and any Qualified Plan that has 
executed a participation agreement under the agreements governing their 
participation in each Fund.
    15. A participating insurance company, or any affiliate, will 
maintain at its home office, available to the Commission, (a) a list of 
its officers, directors and employees who participate directly in the 
management or administration of the Funds or any variable annuity or 
variable life insurance separate account, organized as a unit 
investment trust, that invests in the Funds and/or (b) a list of its 
agents who, as registered representatives, offer and sell the variable 
annuity and variable life contracts funded through such a separate 
account. These individuals will continue to be subject to the automatic 
disqualification provisions of Section 9(a).

Conclusion

    For the reasons summarized above, Applicants represent that the 
exemptions requested are necessary and appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-31227 Filed 11-20-98; 8:45 am]
BILLING CODE 8010-01-M