[Federal Register Volume 64, Number 23 (Thursday, February 4, 1999)]
[Notices]
[Pages 5685-5690]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2603]


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SECURITIES AND EXCHANGE COMMISSION

[Rel No. IC-23671; File No. 812-11344]


Rydex Variable Trust, et al.

January 29, 1999.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the 
``Commission'').

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

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    Summary of Application: Applicants seek an order to the extent 
necessary to permit shares of the Rydex Variable Trust and shares of 
any other investment company that is designed to fund insurance 
products and for which PADCO Advisors II, Inc. (``PADCO''), or any of 
its affiliates, may serve as investment advisor, administrator, 
manager, principal underwriter, or sponsor (collectively, the 
``Trust'') to be sold to and held by: (a) Variable annuity and variable 
life insurance separate accounts of both affiliated and unaffiliated 
life insurance companies (the ``Participating Insurance Companies''); 
and (b) qualified pension and retirement plans outside the separate 
account context (the ``Qualified Plans'').
    Applicants: Rydex Variable Trust and PADCO Advisors II, Inc.
    Filing Date: The application was filed on October 7, 1998, amended 
and restated on December 17, 1998, and amended and restated on January 
28, 1999.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing on this application by writing 
to the Secretary of the SEC and serving Applicants with a copy of the 
request, personally or by mail. Hearing requests must be received by 
the Commission by 5:30 p.m. on February 24, 1999, and accompanied by 
proof of service on the Applicants in the form of an affidavit or, for 
lawyers, a certificate of service. Hearing requests should state the 
nature of the interest, the reason for the request and the issues 
contested. Persons may request notification of the date of a hearing by 
writing to the Secretary of the Commission.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, c/o Morgan, Lewis & Bockius LLP, Attention: John H. 
Grady, Jr., Esq., and C. Ronald Rubley, Esq., One Logan Square, 
Philadelphia, PA 19103-6993.

FOR FURTHER INFORMATION CONTACT: Martha Peterson, Attorney, or Susan 
Olson, 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 SEC, 450 Fifth Street, NW, Washington, 
DC (tel. (202) 942-8090).

Applicants' Representations

    1. Rydex Variable Trust, a Delaware business trust, currently 
consists of 22 separate series, each for a separate portfolio (such 
portfolios, and additional portfolios that may be added in the future, 
are referred to herein individually as a ``Portfolio'' and collectively 
as ``Portfolios'').
    2. PADCO serves as the investment advisor to Rydex Variable Trust 
and is registered as an investment advisor under the Investment 
Advisers Act of 1940.
    3. Applicants state that shares of Portfolios of the Trust may be 
offered to variable annuity separate accounts and variable life 
insurance separate accounts established by Participating Insurance 
Companies that may or may not be affiliated with one another, and to 
Qualified Plans.
    4. The Participating Insurance Companies will establish their own 
separate accounts (the ``Separate Accounts'') and design their own 
variable annuity and variable life insurance contracts (``Variable 
Contracts''). Applicants state that the role of the Trust under this 
arrangement will consist of offering shares to the Separate Accounts 
and fulfilling any conditions that the Commission may impose upon 
granting the order requested in the application.
    5. Applicants state that the Trust can increase its asset base 
through the sale of shares of the Trust to the Qualified Plans. The 
Qualified Plans may choose the Trust as the sole investment option 
under a Plan or as one of several investment options. Participants in 
the Qualified Plans may be given an investment choice depending upon 
the Qualified Plan. Shares of the Trust sold to a Qualified Plan will 
be held by the trustees of the Qualified Plans as mandated by Section 
403(a) of the Employee Retirement Income Security Act (``ERISA'').

Applicants' Legal Analysis

    1. In connection with the funding of scheduled premium variable 
life insurance contracts issued through a Separate Account registered 
under the 1940 Act as a unit investment trust (``UIT''), 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 provided under Rule 6e-
2(b)(15) are available only where the management investment company 
underlying the UIT offers its shares ``exclusively to variable life 
insurance separate accounts of the life insurer, or of any affiliated 
life insurance company.'' The use of a common management investment 
company as the underlying investment medium for both variable annuity 
and variable life insurance separate accounts is referred to as `mixed 
funding,'' The use of a common investment company as the underlying 
investment medium for separate accounts of unaffiliated insurance 
companies is referred to as ``shared funding.'' The relief provided 
under Rule 6e-2(b)(15) is not applicable to a scheduled premium 
variable life insurance separate account that owns shares of an 
underlying fund where the underlying fund offers its shares to a 
variable annuity separate account of the same company or of any other 
affiliated or unaffiliated insurance company. Therefore, Rule 6e-
2(b)(15) does not provide exemptive relief for either mixed funding or 
shared funding.
    2. Applicants state that with respect to Rule 6e-2, exemptive 
relief is also necessary if shares of the Trust are to be sold to 
Qualified Plans since the relief under Rule 6e-2 is available only 
where shares are offered exclusively to separate accounts of insurance 
companies.
    3. In connection with flexible premium variable life insurance 
contracts issued through a separate account registered under the 1940 
Act

[[Page 5686]]

as a UIT, 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 provided 
under 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 their shares ``exclusively 
to separate accounts of the life insurer, or of any affiliated life 
insurance company, offering either scheduled 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, but does not 
permit shared funding.
    4. Applicants state that with respect to Rule 6e-3(T), exemptive 
relief is also necessary if shares of the Trust are to be sold to 
Qualified Plans since the relief under Rule 6e-3(T) is available only 
where shares are offered exclusively to separate accounts of insurance 
companies.
    5. Applicants state that changes in the tax law have created the 
opportunity for the Trust to increase its asset base through the sale 
of Trust shares to the Qualified Plans. Applicants state that Section 
817(h) of the Internal Revenue Code of 1986, as amended (the ``Code''), 
imposes certain diversification standards on fund investments 
underlying variable contracts. Specifically, the Code provides that a 
variable contract shall not be treated as an annuity contract or life 
insurance contract for any period (and any subsequent period) for which 
the investments, in accordance with regulations prescribed by the 
Treasury Department, are not adequately diversified. On March ,m 1989, 
the Treasury Department issued regulations which established 
diversification requirements for the investment portfolios underlying 
variable contracts (Treas. Reg. Sec. 1.817-5(1989)). The regulations 
provide in pertinent part, an insurance company separate account may 
look through to the investments of a regulated investment company in 
which it invests in order to meet the diversification requirements, if 
all of the beneficial interests in the regulated investment company are 
held by separate accounts of one or more insurance companies. The 
regulations, however, contain certain exceptions to this requirement, 
one of which allows shares in an investment company to be held by the 
trustee of a qualified pension or retirement plan without adversely 
affecting the ability of life insurance companies to hold shares in the 
same investment company in their separate accounts (Treas. Reg. 
Sec. 1.817-5(f)(3)(iii)).
    6. Applicants state that the promulgation of Rules 6e-2 and 6e-3(T) 
under the 1940 Act preceded the issuance of these Treasury regulations. 
Applicants assert that, in all probability, the sale of shares of the 
same investment company to both separate accounts and Qualified Plans 
was not envisioned at the time of the adoption of Rules 6e-2(b)(15) and 
6e-3(T)(15).
    7. Applicants therefore request relief from Sections 9(a), 13(a), 
15(a) and 15(b) of the 1940 Act, and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) thereunder, to the extent necessary to permit shares of the 
Trust to be offered and sold to, and held by, Qualified Plans, as well 
as separate accounts.
    8. Section 9(a) of the 1940 Act provides that it is unlawful for 
any company to serve as investment advisor 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 Section 
9(a)(1) or (2). Rules 6e-2(b) and 6e-3(T)(b)(15) provide exemptions 
from Section 9(a) under certain circumstances, subject to the 
limitations on mixed and shared funding. The relief provided by Rules 
6e-2(b)(15)(i) and 6e-3(T)(b)(15)(i) permits a person disqualified 
under Section 9(a) to serve as an officer, director, or employee of the 
life insurer, or any of its affiliates, so long as that person does not 
participate directly in the management or administration of the 
underlying fund. The relief provided by Rules 6e-2(b)(15)(ii) and 6e-
3(T)(b)(15)(ii) permits the life insurer to serve as the underlying 
fund's investment advisor or principal underwriter, provided that none 
of the insurer's personnel who are ineligible pursuant to Section 9(a) 
participate in the management or administration of the fund.
    9. Applicants state that the partial relief from Section 9(a) found 
in 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 the 
Section. 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 the many individuals in a large insurance 
company complex, most of whom will have no involvement in matters 
pertaining to investment companies within the organization. Applicants 
note that the Participating Insurance Companies are not expected to 
play any role in the management or administration of the Funds. 
Therefore, Applicants assert, applying the restrictions of Section 9(a) 
serves no regulatory purpose. The application states that the relief 
requested should not be affected by the proposed sale of shares of the 
Trust to Qualified Plans because the Plans are not investment companies 
and are not, therefore, subject to Section 9(a).
    10. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15(iii) under the 1940 
Act assume the existence of a pass-through voting requirement with 
respect to management investment company shares held by a separate 
account. Applicants state that the Participating Insurance Companies 
will provide pass-through voting privileges to all Variable Contract 
owners so long as the Commission interprets the 1940 Act to require 
such privileges.
    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 observance of the 
limitations on mixed and shared funding imposed by the 1940 Act and the 
rules thereunder. Rules 6e-2(b)(15)(iii)(A) and 6e-3(T)(b)(15)(iii)(A) 
provide that the insurance company may disregard voting instructions of 
its contract owners with respect to the investments of an underlying 
fund, or any contract between a fund and its investment advisor, when 
required to do so by an insurance regulatory authority. Rules 6e-
2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(B) provide that the insurance 
company may disregard voting instructions of its contract owners if the 
contract owners initiate any change in the company's investment 
policies, principal underwriter, or any investment advisor, provided 
that disregarding such voting instructions is reasonable and subject to 
the other provisions of paragraphs (b)(15)(ii) and (b)(7)(ii)(B) and 
(C) of each rule.
    12. Applicants further represent that the sale of Trust shares to 
Qualified Plans does not impact the relief requested in this regard. 
Applicants note that shares of the Trust sold to Qualified Plans would 
be held by the trustees of such Qualified Plans as required by Section 
403(a) of ERISA. Section 403(a) provides that the 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) is subject to the direction of a named 
fiduciary who

[[Page 5687]]

is not a trustee, in which case the trustee(s) is 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, Qualified Plan 
trustees have the exclusive authority and responsibility for voting 
proxies. Some Qualified Plans, however, may provide for the trustee, an 
investment advisor, or another named fiduciary to vote shares in 
accordance with instructions from plan participants. With respect to 
Qualified Plans whose governing documents do not provide plan 
participants with pass through voting, the issue of resolving any 
irreconcilable conflict with respect to voting is not present. With 
respect to Qualified Plans whose governing documents do provide plan 
participants with pass through voting privileges, Applicants state 
there is no reason to believe that plan participants will vote in a 
manner that would disadvantage Variable Contract owners.
    13. Applicants state that no increased conflicts of interest would 
be presented by the granting of the requested relief. Applicants assert 
that shared funding does not present any issues that do not already 
exist where a single insurance company is licensed to do business in 
several, or all, states. Applicants note that where insurers are 
domiciled in different states, it is possible that the state insurance 
regulatory body in a state in which one insurance company is domiciled 
could require action that is inconsistent with the requirements of 
insurance regulators in one or more other states in which other 
insurance companies are domiciled. Applicants submit that this 
possibility is no different and no greater than exists where a single 
insurer and its affiliates offer their insurance products in several 
states.
    14. Applicants further submit that affiliation does not reduce the 
potential, if any exists, for differences among state regulatory 
requirements. In any event, Applicants state that the conditions 
(adapted from the conditions included in Rule 6e-3(T)(b)(15)) discussed 
below are designed to safeguard against, and provide procedures for 
resolving, any adverse effects that these differences may produce. If a 
particular state insurance regulator's decision conflicts with the 
majority of other state regulators, the affected insurer may be 
required to withdraw its separate account's investment in the relevant 
portfolio or fund.
    15. Applicants also state that affiliation does not eliminate the 
potential, if any exists, for divergent judgments as to the 
advisability or legality of a change in investment policies, principal 
underwriter, or investment advisor initiated by contract owners. 
Potential disagreement is limited by the requirement that the 
Participating Insurance Company's disregard of voting instructions be 
both reasonable and based on specified good faith determinations. 
However, if a Participating Insurance Company's decision to disregard 
contract owner instructions represents a minority position or would 
preclude a majority vote approving a particular change, such 
Participating Insurance Company may be required, at the election of the 
Trust, to withdraw its investment in the Trust. No charge or penalty 
will be imposed as a result of such withdrawal.
    16. Applicants state that there is no reason why the investment 
policies of the Trust would or should be materially different from what 
those policies would or should be if such investment company or series 
thereof funded only variable annuity or variable life insurance 
contracts. Applicants therefore argue that there is no reason to 
believe that conflicts of interest would result from mixed funding. 
Applicants represent that the Trust will not be managed to favor or 
disfavor any particular Participating Insurance Company or type of 
insurance product.
    17. Section 817(h) imposes certain diversification standards on the 
underlying assets of variable annuity contracts and variable life 
insurance contracts held in the portfolios of management investment 
companies. Treasury Regulation 1.817-5(f)(3)(iii), which established 
diversification requirements for such portfolios, specifically permits 
``qualified pension or retirement plans'' and separate accounts to 
share the same underlying management investment company. Therefore, 
Applicants have concluded that neither the Code, nor the Treasury 
regulations nor the revenue rulings thereunder present any inherent 
conflicts of interest if Qualified Plans, variable annuity separate 
accounts and variable life insurance 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, these tax 
consequences do not raise any conflicts of interest with respect to the 
use of the Trust. When distributions are made, and the separate account 
or the Qualified Plan is unable to net purchase payments to make the 
distributions, the separate account or the Qualified Plan will request 
redemption of shares of the Trust at their respective net asset value 
in conformity with Rule 22c-1 under the 1940 Act. The Qualified Plan 
will then 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.
    19. With respect to voting rights, Applicants state that it is 
possible to provide an equitable means of giving such voting rights to 
contract owners and to the trustees of Qualified Plans. Applicants 
represent that the transfer agent for the Trust will inform each 
Participating Insurance Company of its share ownership in each Separate 
Account, and will inform the trustees of Qualified Plans of their 
holdings. Each Participating Insurance Company will then solicit voting 
instructions in accordance with the ``pass-through'' voting requirement 
of Rules 6e-2 and 6e-3(T).
    20. Applicants contend that the ability of the Trust to sell its 
shares directly to Qualified Plans does not create a ``senior 
security,'' as such term is defined under Section 18(g) of the 1940 
Act, in favor of any contract owner or any participant under a 
Qualified Plan. Regardless of the rights and benefits of participants 
and contract owners under the respective Qualified Plans and Variable 
Contracts, the Qualified Plans and the Separate Accounts have rights 
only with respect to their shares of the Trust. Such shares may be 
redeemed only at net asset value. No shareholder of the Trust has any 
preference over any other shareholder with respect to distribution of 
assets or payment of dividends.
    21. Finally, Applicants state that there are no conflicts between 
contract owners and participants under the Qualified Plans with respect 
to the state insurance commissioners' veto powers (direct with respect 
to variable life insurance and indirect with respect to variable 
annuities) over investment objectives. The basic premise of shareholder 
voting is that not all shareholders may agree that there are inherent 
conflicts of interest between shareholders. The state insurance 
commissioners have been given the veto power in recognition that 
insurance companies usually are unable simply to request redemption out 
of one fund and invest those moneys in another fund. Generally, to 
accomplish such redemptions and transfers, complex and

[[Page 5688]]

time consuming transactions must be undertaken. Conversely, trustees of 
Qualified Plans can make the decision quickly and implement redemption 
of shares from a Trust and reinvest the moneys in another funding 
vehicle without the same regulatory impediments or, as is the case with 
most Qualified Plans, even hold cash pending suitable investment. Based 
on the foregoing, Applicants represent that even should there arise 
issues where the interests of contract owners and the interests of 
Qualified Plans conflict, the issues can be almost immediately resolved 
because the trustees of the Qualified Plans can, on their own, redeem 
shares out of the Trusts.
    22. Applicants state that various factors have kept certain 
insurance companies from offering variable annuity and variable life 
insurance contracts. According to Applicants, these factors include: 
The cost of organizing and operating an investment 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 
professionals. Applicants contend that use of the Trust as common 
investment media for the Variable Contracts would reduce these 
concerns. Participating Insurance Companies would benefit not only from 
the investment and administrative expertise of the responsible advisors 
and their affiliates, but also from the cost efficiencies and 
investment flexibility afforded by a large pool of funds. Applicants 
state that making the Trust available for mixed and shared funding may 
encourage more insurance companies to offer variable contracts such as 
the Variable Contracts which may then increase competition with respect 
to both the design and the pricing of variable contracts. Applicants 
submit that this can be expected to result in greater product variation 
and lower charges. Thus, Applicants represent that contract owners 
would benefit because mixed and shared funding will eliminate a 
significant portion of the costs of establishing and administering 
separate funds. Moreover, Applicants assert that sales of shares of the 
Trust to Qualified Plans should increase the amount of assets available 
for investment by the Trust, thereby promoting economies of scale and 
increased safety through greater diversification.
    23. Applicants believe that there is no significant legal 
impediment to permitting mixed and shared funding. Additionally, 
Applicants note the previous issuance of orders permitting mixed and 
shared funding where shares of a fund were sold directly to qualified 
plans such as the Qualified Plans.

Applicants' Conditions

    Applicants have consented to the following conditions:
    1. A majority of the Trust's Board shall consist of persons who are 
not ``interested persons'' of the 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 director or directors, then the operation of this 
condition shall be suspended: (a) For a period of 45 days if the 
vacancy or vacancies may be filled by the 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. The Board will monitor the Trust for the existence of any 
material irreconcilable conflict between and among the interests of the 
variable annuity and variable life insurance contract owners investing 
in the Separate Accounts and in Portfolios of the Trust, and all other 
persons investing in the Portfolios, including Qualified Plans, 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 any series are being managed; (e) a 
difference in voting instructions given by variable annuity contract 
owners, variable life insurance contract owners and the trustees of a 
Qualified Plan that does not provide voting rights to its investors (or 
Qualified Plan participants if they have the right to give instructions 
under the Qualified Plan governing documents); (f) a decision by a 
Participating Insurance Company to disregard the voting instructions of 
contract owners and (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 ever should become an owner 
of 10 percent or more of the assets of a Portfolio of the Trust, 
Applicants will require the Qualified Plan to execute a participation 
agreement with the Trust that provides appropriate protection 
consistent with the representations in the Application. In connection 
with the initial purchase of Trust shares, the Qualified Plan 
shareholder will be required to acknowledge this condition in its 
application to purchase the shares.
    4. Participating Insurance Companies, the responsible advisors, and 
any Qualified Plan that executes a Trust participation agreement upon 
becoming an owner of 10% or more of the assets of a Portfolio of the 
Trust (collectively, the ``Participating Entities'') will report any 
potential or existing conflicts to the Board. Participating Entities 
will be responsible for assisting the board in carrying out its 
responsibilities 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 Board whenever contract owner voting instructions 
are disregarded and, if pass-through voting is applicable, an 
obligation by each Participating Entity to inform the Board whenever 
Plan Participant voting instructions are disregarded. The 
responsibility to report such information and any conflicts to the 
Board and to assist the Board will be a contractual obligation of all 
Participating Insurance Companies and Qualified Plans investing in the 
Trust; those responsibilities will be carried out with a view only to 
the interests of the contract owners and participants under the 
Qualified Plans.
    5. If it is determined by a majority of the Board, or a majority of 
the disinterested members of the Board, that a material irreconcilable 
conflict exists, then 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 
directors, as the case may be), shall 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 affected Portfolio of the Trust and 
reinvesting such assets in a different investment medium, including 
another Portfolio, or submitting the question as to whether such 
segregation should be implemented to a vote of all affected contract 
owners and, as appropriate, segregating the assets of any appropriate 
group (i.e., variable annuity contract owners or variable life 
insurance contract owners of one or

[[Page 5689]]

more Participating Insurance Companies) that votes in favor of such 
segregation, or offering to the affected contract owners the option of 
making such a change; (b) withdrawing the assets allocable to some or 
all of the Qualified Plans from the affected Portfolio of the Trust and 
reinvesting such assets in a different investment medium, including 
another Portfolio of the Trust; and (c) 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 Participating Insurance Company may 
be required, at the Trust's election, to withdraw the Participating 
Insurance Company's Separate Account's investment in the 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 shall be a contractual obligation of all 
Participating Insurance Companies and all Qualified Plans under their 
agreements governing participation in the Trust and those 
responsibilities will be carried out with a view only to the interests 
of contract owners and participants in the Qualified Plans.
    For purposes of this Condition 5, a majority of the disinterested 
members of the Board shall determine whether or not any proposed action 
adequately remedies any material irreconcilable conflict, but, in no 
event, will the Trust or its investment advisor be required to 
establish a new funding medium for any Variable Contract. No 
Participating Insurance Company shall be required by this Condition 5 
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 adversely affected by the material irreconcilable 
conflict. No Qualified Plan will be required by this Condition 5 to 
establish a new funding medium for such Qualified Plan if (a) an offer 
to do so has been declined by vote of a majority of plan participants 
materially and adversely affected by the irreconcilable material 
conflict or (b) pursuant to governing Qualified Plan documents and 
applicable law, the Qualified Plan makes such decision without a plan 
participant vote.
    6. A Board's determination of the existence of a material 
irreconcilable conflict and its implications shall be made known in 
writing promptly to all Participating Entities.
    7. Participating Insurance Companies will provide pass-through 
voting privileges to all owners of Variable Contracts so long as the 
Commission continues to interpret the 1940 Act as requiring pass-
through voting privileges for variable annuity and variable life 
insurance owners. As to variable annuity and variable life insurance 
contracts that participate in a Portfolio through unregistered separate 
accounts, pass-through voting privileges will be extended to the owners 
of such contracts to the extent granted by the issuing insurance 
company. Participating Insurance Companies will be responsible for 
assuring that each of their registered Separate Accounts participating 
in a Portfolio calculate voting privileges in a manner consistent with 
other Participating Insurance Companies. The obligation to calculate 
voting privileges in a manner consistent with all other Separate 
Accounts investing in a Portfolio will be a contractual obligation of 
Participating Insurance Companies under their agreements governing 
participation in a Portfolio. Each Participating Insurance Company will 
vote Trust shares held by a Separate Account for which it has not 
received voting instructions, as well as shares attributable to it, in 
the same proportion as it votes shares for which it has received voting 
instructions. Each Qualified Plan will vote in accordance with 
applicable law and governing plan documents.
    8. The Trust will comply with all provisions of the 1940 Act 
requiring voting by shareholders (which for these purposes, shall be 
the persons having a voting interest in the Trust) and, in particular, 
the 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 is not one of the trusts 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, 
the Trust will act in accordance with the Commission's interpretation 
of the requirements of Section 16(a) with respect to periodic elections 
of directors and with whatever rules the Commission may promulgate with 
respect thereto.
    9. The Trust will disclose in its prospectus that (a) the Trust is 
intended to be a funding vehicle for all types of variable annuity and 
variable life insurance contracts offered by various insurance 
companies and for certain qualified pension and retirement plans, (b) 
material irreconcilable conflicts possibly could arise, and (c) the 
Trust's Board 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. The Trust will 
notify all Participating Insurance Companies and Qualified Plans that 
similar disclosure may be appropriate in Separate Account prospectuses 
and Qualified Plan disclosure documents.
    10. If, and to the extent that, Rule 6e-2 and Rule 6e-3(T) under 
the 1940 Act 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 promulgated thereunder, with respect to mixed or shared funding, 
on terms and conditions materially different from any exemptions 
granted in the Order requested in this Application, then the Trust and/
or the Participating Entities, as appropriate, shall take such steps as 
may be necessary to comply with Rules 6e-2 and 6e-3(T), as may be 
amended, and Rule 6e-3, as may be adopted, to the extent such rules are 
applicable.
    11. All reports of potential or existing conflicts received by the 
Board, and all Board action with regard to (a) determining the 
existence of a conflict, (b) notifying Participation Entities of a 
conflict, and (c) determining whether any proposed action adequately 
remedies a conflict, will be properly recorded in the minutes of the 
Board or other appropriate records, and such minutes or other records 
shall be made available to the Commission upon request.
    12. 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 as a Unit Investment 
Trust of any Fund. These individuals will continue to be subject to the 
automatic disqualification provisions of Section 9(a).
    13. No less often than annually, each Participating Insurance 
Company, Qualified Plan, and/or the investment advisor will submit to 
the Boards such reports, materials or data as each Board may reasonably 
request so that the Boards may carry out fully the obligations imposed 
upon them by the conditions contained in the application. These 
reports, materials, and data will be submitted more frequently if 
deemed appropriate by the relevant Board. The obligations of a 
Participating Insurance Company, Qualified Plan, and/or

[[Page 5690]]

investment advisor to provide these reports, materials and data to the 
Boards will be contractual obligations of each Participating Insurance 
Company, Qualified Plan, and investment advisor under the participation 
agreements.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-2603 Filed 2-3-99; 8:45 am]
BILLING CODE 8010-01-M