[Federal Register Volume 64, Number 26 (Tuesday, February 9, 1999)]
[Notices]
[Pages 6392-6397]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3102]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23678; File No. 812-11302]


AAL Variable Product Series Fund, Inc., et al.; Notice of 
Application

February 2, 1999.
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'') granting 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 permit shares of 
certain series of the AAL Variable Product Series Fund, Inc. that are 
designed to fund insurance products (``Funds'') and shares of any other 
investment company that is designed to fund insurance products and for 
which Aid Association for Lutherans or any of its affiliates may serve 
as investment adviser, administrator, manager, principal underwriter, 
or sponsor (collectively with the Funds, the ``Insurance Product 
Funds'') to be sold to and held by: (1) Separate accounts funding 
variable annuity and variable life insurance contracts (``Separate 
Accounts'') of both affiliated and unaffiliated life insurance 
companies (``Participating Insurance Companies''); and (2) qualified 
pension and retirement plans (``Plans'').

APPLICANTS: The AAL Variable Product Series Fund, Inc. (``Company'') 
and Aid Association for Lutherans (``Adviser'').

FILING DATE: The application was filed on September 11, 1998, and 
amended and restated on December 9, 1998.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Secretary of the SEC 
and serving applicants with a copy of the request, personally or by 
mail. Hearing requests must be received by the Commission by 5:30 p.m. 
on March 1, 1999, 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 writer's 
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 SEC.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington DC 20549. Applicants, 125 North Superior 
Avenue, Appleton, Wisconsin 54911.

FOR FURTHER INFORMATION CONTACT:
Elisa D. Metzger, Senior Counsel, 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 20549 (tel. (202) 942-8090).

Applicant's Representations

    1. The Company is a Maryland corporation and is organized under the 
1940 Act as a diversified, open-end management investment company. The 
Company is comprised of seven series, each with its own investment 
objective or objectives and policies.
    2. The Company may in the future create additional series and/or 
issue multiple classes of shares of each series.
    3. The Adviser, is registered under the Investment Advisers Act of 
1940 and is a non-profit, non-stock membership organization licensed to 
do business as a fraternal benefit society.
    4. Shares of the Funds may be offered to Separate Accounts, which 
are either registered or unregistered under the federal securities 
laws, that fund variable annuity contracts or variable life insurance 
policies (``Contracts''). Shares of the Funds may also be offered to 
Plans.

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act authorizes the Commission, by order 
upon application, to conditionally or unconditionally exempt any 
person, security or transaction, or any class or classes of persons, 
securities or transactions from any provisions of the 1940 Act or the 
rules promulgated 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.
    2. In connection with the funding of scheduled premium variable 
life insurance contracts issued through a separate account registered 
under the 1940 Act as a unit investment trust, Rule 6e-2(b)(15) under 
the 1940 Act provides partial exemptions from sections 9(a), 13(a), 
15(a) and 15(b) of the 1940 Act. The exemptions granted by Rule 6e-
2(b)(15) are available, however, only where all of the assets of the 
separate account consist of the shares of one or more registered 
management investment companies which offer their shares ``exclusively 
to variable life insurance separate accounts of the life insurer, or of 
any affiliated life insurance company'' (emphasis added). Therefore, 
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 a management company that also offers its shares to variable 
annuity and variable life insurance separate accounts of the same 
insurance company or any other insurance company or to trustees of a 
Plan. The use of a common management investment company as the 
underlying investment medium for a variable annuity or a variable life 
insurance separate account of the same insurance company or of any 
affiliated life insurance company is referred to herein as ``mixed 
funding.'' In addition, the

[[Page 6393]]

relief granted by Rule 6e-2(b)(15) is not available if the scheduled 
premium variable life insurance separate account owns shares of any 
underlying investment company that also offers its shares to separate 
accounts funding variable contracts of one or more unaffiliated life 
insurance companies. The use of a common management company as the 
underlying investment medium for separate accounts of unaffiliated life 
insurance companies is referred to herein as ``shared funding.'' 
Furthermore, the relief granted by Rule 6e-2(b)(15) is not available if 
the scheduled premium variable life insurance separate account owns 
shares of an underlying management company that also offers its shares 
to Plans.
    3. In connection with the funding of flexible premium variable life 
insurance contracts issued through a separate account registered under 
the 1940 Act as a unit investment trust, Rule 6e-3(T)(b)(15) under the 
1940 Act provides partial exemptions from sections 9(a), 13(a), 15(a) 
and 15(b) of the 1940 Act. These exemptions, however, are available 
only where all of the assets of the separate account consist of the 
shares of one or more registered management investment companies which 
offer their shares ``exclusively to separate accounts of the life 
insurer, or of any affiliated life insurance company, offering either 
scheduled 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'' (emphasis added). 
Therefore, Rule 6e-3(T) grants the exemptions if the underlying fund 
engages in mixed funding, subject to certain conditions, but not if it 
engages in shared funding or sells its shares to Plans.
    4. Applicants state that the current tax law permits the Insurance 
Product Funds to increase their asset base through the sale of shares 
to Plans. Section 817(h) of the Internal Revenue Code of 1986, as 
amended (the ``Code''), imposes certain diversification standards on 
the assets underlying the Contracts. The Code provides that such 
Contracts will not be treated as annuity contracts or life insurance 
contracts for any period (and any subsequent period) during which the 
investments are not adequately diversified in accordance with 
regulations prescribed by the Treasury Department (the 
``Regulations''). 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 Treasury Regulations do contain 
certain exceptions to this requirement, however. One such exception 
permits shares of an investment company to be held by the trustees of a 
Plan without adversely affecting the ability of shares in the same 
investment company also to be held by the separate accounts of 
insurance companies in connection with their Contracts (Treas. Reg. 
Sec. 1.817-5(f)(3)(iii)).
    5. Applicants state that the promulgation of Rules 6e-2(b)(15) and 
6e-3(T)(b)(15) preceded the issuance of the Regulations. Thus, the sale 
of shares of the same investment company to both separate accounts and 
Plans could not have been envisioned at the time of the adoption of 
Rules 6e-2(b)(15) and 6e-3(T)(b)(15), given the then-current tax law.
    6. Moreover, Applicants assert that if the Insurance Product Funds 
were to sell their shares only to Plans, no exemptive relief would be 
necessary. Applicants state that none of the relief provided for in 
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) relates to Plans or to the ability 
of a registered investment company to sell its shares to Plans.
    7. Section 9(a)(3) of the 1940 Act makes it unlawful for any 
company to serve as an investment adviser to, or principal underwriter 
for, any registered open-end investment company if an affiliated person 
of that company is subject to any disqualification specified in either 
Sections 9(a)(1) or 9(a)(2) of the 1940 Act. Rules 6e-2(b)(15) (i) and 
(ii) and 6e-3(T)(b)(15) (i) and (ii) provide partial exemptions from 
section 9(a) under certain circumstances, subject to limitations on 
mixed and shared funding. These exemptions limit the application of the 
eligibility restrictions to affiliated individuals or companies that 
directly participate in the management of the underlying fund.
    8. Applicants state that the partial relief granted under Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) from the requirements of section 9, in 
effect, limits the amount of monitoring necessary to ensure compliance 
with Section 9 to that which is appropriate in light of the policy and 
purposes of Section 9. Applicants submit that Rules 6e-2 and 6e-3(T) 
recognize that it is not necessary for the protection of investors or 
for the purposes of the 1940 Act to apply the provisions of Section 
9(a) to the many individuals who may be involved in an insurance 
company complex, but who would have no involvement in matters 
pertaining to investment companies funding the separate accounts. 
Applicants assert, therefore, that there is no regulatory purpose in 
denying the partial exemptions because of mixed and shared funding and 
sales to Plans.
    9. Applicants state that Rules 6e-2(b)(15)(iii) and 6e-
3(T)(b)(15)(iii) provide exemptions from the pass-through voting 
requirement with respect to several significant matters, assuming the 
limitations on mixed and shared funding are observed. More 
specifically, 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 investment company or any contract between the underlying 
investment company and its investment adviser, when required to do so 
by an insurance regulatory authority and subject to certain 
requirements. In addition, Rules 6e-2(b)(15)(iii)(B) and 6e-
3(T)(b)(15)(iii)(A)(2) provide that the insurance company may disregard 
contract owners' voting instructions if the contract owners initiate 
any change in an underlying investment 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 Rules 6e-2 and 6e-3(T)).
    10. Applicants assert that the offer and sale of shares of the 
Insurance Product Funds to Plans will not have an impact on the relief 
requested. Under Section 403(a) of the Employment Retirement Income 
Security Act (``ERISA''), shares of the Insurance Product Funds sold to 
Plans 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) is (are) 
subject to the direction of a named fiduciary who is not a trustee, in 
which case the trustee(s) is (are) subject to proper directions made in 
accordance with the terms of the Plan and not contrary to ERISA; and
    (b) When the authority to manage, acquire or dispose of assets of 
the Plan is delegated to one or more investment managers pursuant to 
section 402(c)(3) of ERISA.
    Unless one of the two above exceptions stated in section 403(a) 
applies, Plan trustees have the exclusive authority and responsibility 
for voting proxies.
    11. Where a named fiduciary to a Plan appoints an investment 
manager, the investment manager has the responsibility to vote the 
shares held unless the right to vote such shares is reserved to the 
trustees or the named

[[Page 6394]]

fiduciary. In any event, Applicants assert that ERISA does not require 
pass-through voting to participants in Plans. Some of the Plans, 
however, may provide participants with the right to give voting 
instructions.
    12. Where a Plan provides participants with the right to give 
voting instructions, Applicants assert that there is no reason to 
believe that participants in Plans generally or those in a particular 
Plan, either as a single group or in combination with participants in 
other Plans, would vote in a manner that would disadvantage Contract 
owners. The purchase of shares of the Insurance Product Funds by Plans 
that provide voting rights to participants does not present any 
complications not otherwise occasioned by mixed and shared funding.
    13. Applicants also maintain that no increased conflicts of 
interest would be presented by the granting of the requested relief. In 
this regard, 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. A particular state 
insurance regulatory body could require action that is inconsistent 
with the requirements of insurance regulators 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.
    14. Applicants submit that shared funding is, in this respect, 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) permit under various circumstances. Affiliated insurers may 
be domiciled in different states and be subject to differing state law 
requirements. Affiliation does not reduce the potential, if any exists, 
for differences in state regulatory requirements. In any event, 
Applicants submit that the conditions set forth in the application and 
included in this notice are designed to safeguard against, and provide 
procedures for, resolving any adverse effects that differences among 
state regulatory requirements may produce.
    15. Applicants assert that the right of an insurance company under 
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) to disregard contract owners' 
voting instructions 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) 
that an insurance company's disregard of voting instructions be 
reasonable and based on specific good-faith determinations.
    16. A particular insurer's disregard of voting instructions 
nevertheless could conflict with the majority of Contract owner voting 
instructions. The insurer's action could be different from the 
determination of all or some of the other insurers (including 
affiliated insurers) that the contract owners' voting instructions 
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, the 
insurer may be required, at the election of the relevant Insurance 
Product Fund, to withdraw its Separate Account's investment in that 
Insurance Product Fund, and no charge or penalty would be imposed as a 
result of such withdrawal.
    17. Applicants submit that there is no reason why the investment 
policies of the Insurance Product Funds would or should be materially 
different from what those policies would or should be if the Insurance 
Product Funds funded only annuity contracts or only scheduled or 
flexible premium life contracts. In this regard, Applicants note that 
each type of insurance product is designed as a long-term investment 
program. In addition, Applicants represent that each Insurance Product 
Fund will be managed to attempt to achieve the investment objective of 
that Insurance Product Fund and not to favor or disfavor any particular 
insurer or type of insurance product.
    18. Furthermore, Applicants submit that no one investment strategy 
can be identified as appropriate to a particular insurance product or 
to a Plan. Each pool of variable annuity and variable life insurance 
contract owners is composed of individuals of diverse financial status, 
age, insurance and investment goals. A fund supporting even one type of 
insurance product must accommodate those factors in order to attract 
and retain purchasers.
    19. Applicants note that section 817(h) of the Code imposes certain 
diversification standards on the underlying assets of variable annuity 
and variable life insurance contracts held in the portfolios of 
management investment companies. The Regulations specifically permit 
``qualified pension or retirement plans'' and insurance company 
separate accounts to share the same underlying investment company. For 
this reason, Applicants have concluded that neither the Code, nor the 
Treasury Regulations, nor the revenue rulings thereunder, present any 
inherent conflicts of interest of Plans, variable annuity separate 
accounts, and variable life insurance separate accounts all invest in 
the same management investment company.
    20. Applicants note that while there are differences in the manner 
in which distributions from variable annuity contracts, variable life 
insurance contracts and Plans are taxed, the tax consequences do not 
raise any conflicts of interest. When distributions are to be made, and 
a Separate Account or Plan is unable to net purchase payments to make 
the distributions, the Separate Account or the Plan will redeem shares 
of the Insurance Product Fund at their net asset value. A Plan will 
make distributions in accordance with the terms of the Plan, and the 
Participating Insurance Company will make distributions in accordance 
with the terms of the Contract.
    21. With respect to voting rights, Applicants state that it is 
possible to provide an equitable means of giving voting rights to 
Contract owners and to Plans. Applicants represent that the Insurance 
Product Funds will inform each shareholder, including each Separate 
Account and each Plan, of information necessary for the shareholder 
meeting, including its respective share of ownership in the respective 
Insurance Product Fund. Each Participating Insurance Company will then 
solicit voting instructions in accordance with the ``pass-through'' 
voting requirement.
    22. Applicants content that the ability of the Insurance Product 
Funds to sell their shares directly to Plans does not crease a ``senior 
security,'' as that term is defined in section 18(g) of the 1940 Act. 
Regardless of the rights and benefits of participants under the Plans 
or Contract owners under the Contracts, the Plans and the Separate 
Accounts have rights only with respect to their respective shares of 
the Insurance Product Funds. They can only redeem such shares at their 
net asset value. No shareholder of any of the Insurance Product Funds 
has any preference over any other shareholder with respect to 
distribution of assets or payments of dividends.
    23. Applicants submit that there are no conflicts between the 
Contract

[[Page 6395]]

owners of the Separate Accounts and Plan participants with respect to 
the state insurance commissions' veto powers over investment 
objectives. 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 
another. Generally, time-consuming complex transactions must be 
undertaken to accomplish such redemptions and transfers. Conversely, 
trustees of Plans can make the decision quickly and redeem their 
interest in an Insurance Product Fund and reinvest in another funding 
vehicle without the same regulatory impediments faced by separate 
accounts or, as is the case with most Plans, even hold cash pending 
suitable investment. Based on the foregoing, Applicants have concluded 
that even if there should arise issues where the interest of Contract 
owners and the interests of participants in Plans are in conflict, the 
issues can be resolved almost immediately because the trustees of Plans 
can, on their own, redeem the shares out of the Insurance Product Fund.
    24. Applicants assert that various factors have limited the number 
of insurance companies that offer variable annuities and variable life 
insurance 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. In particular, some 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.
    25. Applicants content that the use of the Insurance Product Funds 
as common investment vehicles for variable contracts would reduce or 
alleviate these concerns. Mixed and shared funding should provide 
several benefits to variable contract owners by eliminating a 
significant portion of the costs of establishing and administering 
separate funds. Participating Insurance Companies will benefit not only 
from the investment and administrative expertise of the Adviser, but 
also from the cost efficiencies and investment flexibility afforded by 
a larger pool of assets. Therefore, making the Insurance Product Funds 
available for mixed and shared funding will encourage more insurance 
companies to offer variable contracts, and accordingly 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. Applicants also assert that the sale of shares of the 
Insurance Product Funds to Plans can also be expected to increase the 
amount of assets available for investment by the Insurance Product 
Funds and thus promote economies of scale and diversification.

Applicants' Conditions

Applicants Consent to the Following Conditions

    1. A majority of the Board of each Insurance Product Fund shall 
consist of persons who are not ``interested persons'' thereof, 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 Board Member or Members, than the 
operation of this condition shall be suspended: (a) For a period of 45 
days if the vacancy or vacancies may be filled by the remaining Board 
Members; (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 their respective Insurance Product Fund 
for the existence of any material irreconcilable conflict among the 
interests of the Contract owners of all Separate Accounts investing in 
the Insurance Product Funds and of the Plans participants investing in 
the Insurance Product Funds. The Board will determine what action, if 
any, shall 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 
interpretive 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 the Insurance Product Funds are being managed; (e) a 
difference in voting instructions given by variable annuity Contract 
owners, variable life insurance Contract owners, and trustees of Plans; 
(f) a decision by an insurer to disregard the voting instructions of 
Contract owners; or (g) if applicable, a decision by a Plan to 
disregard the voting instructions of Plan participants.
    3. Participating Insurance Companies, the Adviser, and any Plan 
that executes a fund participation agreement upon becoming an owner of 
10 percent or more of the assets of an Insurance Product Fund (a 
``Participating Plan''), will report any potential or existing 
conflicts of which it becomes aware to the Board of any relevant 
Insurance Product Fund. Participating Insurance Companies, the Adviser 
and the Participating Plans 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 voting instructions of Contract 
owners are disregarded and, if pass-through voting is applicable, an 
obligation by each Participating 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 obligations of all Participating 
Insurance Companies investing in the Insurance Product Funds under 
their agreements governing participation in the Insurance Product 
Funds, and such agreements shall provide that 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, will be contractual obligations of all 
Participating Plans under their agreements governing participation in 
the Insurance Product Funds, and such agreement will provide that their 
responsibilities will be carried out with a view only to the interests 
of Plan participants.
    4. If it is determined by a majority of the Board of an Insurance 
Product Fund, or by a majority of the disinterested Board Members, that 
a material irreconcilable conflict exists, the relevant Participating 
Insurance Companies and Participating Plans will, at their own expense 
and to the extent reasonably practicable as determined by a majority of 
the disinterested Board Members, take whatever steps are necessary to 
remedy or eliminate the material irreconcilable conflict, which steps 
could include: (a) In the case of Participating Insurance Companies, 
withdrawing the assets allocable to some or all of the Separate 
Accounts from the Insurance Product Fund or any portfolio thereof and 
reinvesting such assets in a different investment medium,

[[Page 6396]]

including another portfolio of an Insurance Product Fund or another 
Insurance Product Fund, or submitting the question as to whether such 
segregation should be implemented to a vote of all affected Contract 
owners and, as appropriate, segregating the assets of any appropriate 
group (i.e., variable annuity Contract owners or variable life 
insurance Contract owners of one or 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) in the 
case of Participating Plans, withdrawing the assets allocable to some 
or all of the Plans from the Insurance Product Fund and reinvesting 
such assets in a different investment medium; 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 insurer may be 
required, at the Insurance Product Fund's election, to withdraw the 
insurer's Separate Account investment in such Insurance Product Fund, 
and no charge or penalty will be imposed as a result of such 
withdrawal. If a material irreconcilable conflict arises because of a 
Participating Plan's decision to disregard Plan participant voting 
instructions, if applicable, and that decision represents a minority 
position or would preclude a majority vote, the Participating Plan may 
be required, at the Insurance Product Fund's election, to withdraw its 
investment in such Insurance Product Fund, and no charge or penalty 
will be imposed as a result of such withdrawal. The responsibility to 
take remedial action in the event of a determination by a Board of a 
material irreconcilable conflict and to bear the cost of such remedial 
action will be a contractual obligation of all Participating Insurance 
Companies and Participating Plans under their agreements governing 
participation in the Insurance Product Funds, and these 
responsibilities will be carried out with a view only to the interest 
of Contract owners and Plan participants.
    5. For purposes of Condition 4, a majority of the disinterested 
Board Members of the applicable Board will determine whether or not any 
proposed action adequately remedies any material irreconcilable 
conflict, but in no event will the relevant Insurance Product Fund or 
the Adviser be required to establish a new funding medium for any 
Contract. No Participating Insurance Company shall be required by 
Condition 4 to establish a new funding medium for any Contract if any 
offer to do so has been declined by vote of a majority of the Contract 
owners materially and adversely affected by the material irreconcilable 
conflict. Further, no Participating Plan shall be required by Condition 
4 to establish a new funding medium for any Participating Plan if (a) a 
majority of Plan participants materially and adversely affected by the 
irreconcilable material conflict vote to decline such offer, or (b) 
pursuant to governing Plan documents and applicable law, the 
Participating Plan makes such decision without a Plan participant vote.
    6. The determination of the Board of the existence of a material 
irreconcilable conflict and its implications will be made known in 
writing promptly to all Participating Insurance Companies and 
Participating Plans.
    7. Participating Insurance Companies will provide pass-through 
voting privileges to Contract owners who invest in registered Separate 
Accounts so long as and to the extent that the Commission continues to 
interpret the 1940 Act as requiring pass-through voting privileges for 
Contract owners. As to Contracts issued by unregistered Separate 
Accounts, pass-through voting privileges will be extended to 
participants to the extent granted by issuing insurance companies. Each 
Participating Insurance Company will also vote shares of the Insurance 
Product Funds held in its Separate Accounts for which no voting 
instructions from Contract owners are timely received, as well as 
shares of the Insurance Product Funds which the Participating Insurance 
Company itself owns, in the same proportion as those shares of the 
Insurance Product Funds for which voting instructions from contract 
owners are timely received. Participating Insurance Companies will be 
responsible for assuring that each of their registered Separate 
Accounts participating in the Insurance Product Funds 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 the 
Insurance Product Funds will be a contractual obligation of all 
Participating Insurance Companies under their agreements governing 
their participation in the Insurance Product Funds. Each Participating 
Plan will vote as required by applicable law and governing Plan 
documents.
    8. All reports of potential or existing conflicts received by the 
Board of an Insurance Product Fund and all action by such Board with 
regard to determining the existence of a conflict, notifying 
Participating Insurance Companies and Participating Plans of a 
conflict, and determining whether any proposed action adequately 
remedies a conflict, will be properly recorded in the minutes of the 
meetings of such Board or other appropriate records, and such minutes 
or other records shall be made available to the Commission upon 
request.
    9. Each Insurance Product Fund will notify all Participating 
Insurance Companies that separate disclosure in their respective 
Separate Account prospectuses may be appropriate to advise accounts 
regarding the potential risks of mixed and shared funding. Each 
Insurance Product Fund shall disclose in its prospectus that (a) the 
Insurance Product Fund is intended to be a funding vehicle for variable 
annuity and variable life insurance contracts offered by various 
insurance companies and for qualified pension and retirement plans; (b) 
due to differences of tax treatment and other considerations, the 
interests of various Contract owners participating in the Insurance 
Product Fund and/or the interests of Plans investing in the Insurance 
Product Fund may at some time be in conflict; and (c) the Board of such 
Fund will monitor events in order to identify the existence of any 
material irreconcilable conflicts and to determine what action, if any, 
should be taken in response to any such conflict.
    10. Each Insurance Product Fund will comply with all provisions of 
the 1940 Act requiring voting by shareholders (which, for these 
purposes, will be the persons having a voting interest in the shares of 
the Insurance Product Funds), and, in particular, the Insurance Product 
Funds will either provide for annual shareholder meetings (except 
insofar as 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 Insurance Product Funds are not the type of trust 
described in 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 Insurance Product Fund will act in accordance 
with the Commission's interpretation of the requirements of section 
16(a) with respect to periodic elections of Board Members and with 
whatever rules the Commission may promulgate with respect thereto.
    11. If and to the extent Rules 6e-2 or 6e-3(T) under the 1940 Act 
is amended, or proposed Rule 6e-3 under the 1940

[[Page 6397]]

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 
Insurance Product Funds and/or Participating Insurance Companies and 
Participating Plans, as appropriate, shall take such steps as may be 
necessary to comply with such Rules 6e-2 and 6e-3(T), as amended, or 
proposed Rule 6e-3, as adopted, to the extent that such Rules are 
applicable.
    12. The Participating Insurance Companies and Participating Plans 
and/or the Adviser, at least annually, will submit to the Board such 
reports, materials or data as the Board may reasonably request so that 
the Board may fully carry out obligations imposed upon it by the 
conditions contained in the application. Such reports, materials and 
data will be submitted more frequently if deemed appropriate by the 
Board. The obligations of the Participating Insurance Companies and 
Participating Plans to provide these reports, materials and data to the 
Board, when the Board so reasonably requests, shall be a contractual 
obligation of all Participating Insurance Companies and Participating 
Plans under their agreements governing participation in the Insurance 
Product Funds.
    13. If a Plan should ever become a holder of ten percent or more of 
the assets of an Insurance Product Fund, such Plan will execute a 
participation agreement with the Insurance Product Fund that includes 
the conditions set forth herein to the extent applicable. A Plan will 
execute an application containing an acknowledgment of this condition 
upon such Plan's initial purchase of the shares of any Insurance 
Product Fund.

Conclusion

    For the reasons summarized above, Applicants submit that the 
exemptive relief requested is 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. 99-3102 Filed 2-8-99; 8:45 am]
BILLING CODE 8010-01-M