[Federal Register Volume 64, Number 28 (Thursday, February 11, 1999)]
[Notices]
[Pages 6922-6928]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3320]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23681; File No. 812-11280]


The Prudential Series Fund, Inc., et al.

February 4, 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 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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[[Page 6923]]

SUMMARY OF APPLICATION: Applicants seek an order to permit shares of 
any current or future series of Prudential Series Fund, Inc. (``Series 
Fund'') and shares of any other investment company that is offered as a 
funding medium for insurance products (the current and future series of 
the Series Fund and such other investment companies are the ``Funds'') 
and for which The Prudential Insurance Company of America 
(`'Prudential''), or any of its affiliates, may serve, now or in the 
future, as manager, investment adviser, administrator, principal 
underwriter or sponsor, to be sold to and held by: (1) separate 
accounts (``Separate Accounts'') funding variable annuity and variable 
life insurance contracts of both affiliated and unaffiliated life 
insurance companies (``Participating Insurance Companies''); and (2) 
certain qualified pension and retirement plans (``Plans'').

APPLICANTS: Prudential Series Fund, Inc. and The Prudential Insurance 
Company of America.

FILING DATE: The application was filed on August 27, 1998, and an 
amended and restated application was filed on November 30, 1998.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the Commission by 5:30 p.m on March 1, 
1999, and should be accompanied by proof of service on applicants, in 
the form of an affidavit or, for lawyers, a certificate of service. 
Hearing requests should state the nature of the writer'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 
SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW, Washington, DC 20549. 
Applicants, c/o Shea & Gardner, 11800 Massachusetts Avenue, NW, 
Washington, DC 20036, Attention: Christopher E. Palmer, Esq.

FOR FURTHER INFORMATION CONTACT:
Laura A. Novack, Senior Counsel, or Kevin M. Kirchoff, Branch Chief, 
Office of Insurance Products, Division of Investment Management, at 
(202) 942-0670.

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

Applicant's Representations

    1. The Series Fund is a Maryland corporation registered under the 
1940 Act as an open-end management investment company. The Series Fund 
currently consists of 15 separate investment portfolios 
(``Portfolios''), each of which has its own investment objective and 
policies. The Series Fund may issue shares of additional Portfolios, 
and expects to issue new classes of shares of each Portfolio in the 
future.
    2. Prudential is an insurance company organized under the laws of 
New Jersey, and is registered as an investment adviser under the 
Investment Advisers Act of 1940. Prudential is the Series Fund's 
investment adviser. Prudential has entered into a service agreement 
with The Prudential Investment Corporation (``PIC''), its wholly-owned 
subsidiary, to provide such services as Prudential may require in 
connection with the performance of its obligations as investment 
adviser of the Series Fund. Prudential also has entered into a 
subadvisory agreement with Jennison Associates LLC (``Jennison'') which 
handles the day-to-day management of the Jennison Portfolio, one of the 
15 Portfolios of the Series Fund.
    3. The Series Fund currently sells its shares to separate accounts 
of Prudential, which are registered as unit investment trusts under the 
1940 Act in connection with the issuance of variable contracts. The 
Series Fund wishes to be able to offer shares of its existing and 
future Portfolios to Separate Accounts of additional insurance 
companies, including insurance companies that are not affiliated with 
Prudential, to serve as the investment vehicle for various types of 
insurance products, which may include variable annuity and flexible 
premium variable life insurance contracts (``Contracts''). Prudential 
also wishes to offer shares of any other current or future investment 
company to serve as the investment vehicle for the Contracts.
    4. Participating Insurance Companies will be those insurance 
companies that purchase Fund shares to fund Contracts. The 
Participating Insurance Companies will establish their own Separate 
Accounts and design their own Contracts. Each Contract will have 
certain features and probably will differ from other Contracts with 
respect to insurance guarantees, premium structure, charges, options, 
distribution method, marketing techniques, sales literature and other 
aspects. Each Participating Insurance Company will have the legal 
obligation of satisfying all requirements applicable to such insurance 
company under the federal securities laws.
    5. The Series Fund also wishes to offer shares to the trustees (or 
custodians) of Plans. The Plans will be qualified pension or retirement 
plans described in Treas. Reg. Sec. 1.817-5(f)(3)(iii), including Rev. 
Ruling 94-62, adopted pursuant to Section 817(h) of the Internal 
Revenue Code of 1986, as amended (``Code''). Prudential also wishes to 
offer shares of any current or future investment company to Plans. Fund 
shares sold to Plans will be held by the trustees or custodians of the 
Plans as required by Section 403(a) of the Employee Retirement Income 
Security Act (``ERISA'') or other applicable provisions of the Code. 
Some Plans may provide participants with the right to give voting 
instructions. The trustee or custodian of each Plan will have the legal 
obligation of satisfying all requirements applicable to such Plan under 
the federal securities laws. A Fund's role with respect to the Separate 
Accounts and the Plans will be limited to that of offering its shares 
to the Separate Accounts and Plans and fulfilling any conditions the 
Commission may impose upon granting the Order requested therein.

Applicants' Legal Analysis

    1. Applicants request that the Commission issue an order pursuant 
to Section 6(c) of the 1940 Act exempting scheduled and flexible 
premium variable life insurance Separate Accounts of Participating 
Insurance Companies (and, to the extent necessary, any investment 
adviser, principal underwriter and depositor of such an account) and 
the other Applicants from the provisions of Sections 9(a), 13(a), 15(a) 
and 15(b) of the 1940 Act, and sub-paragraph (b)(15) of Rules 6e-2 and 
6e-3(T) thereunder, to the extent necessary to permit shares of the 
Funds to be offered and sold to, and held by: (a) variable annuity and 
variable life insurance separate accounts of the same life insurance 
company or of any affiliated life insurance company (``mixed 
funding''); (b) separate accounts of unaffiliated life insurance 
companies (funding both variable annuity and variable life insurance 
separate accounts) (``shared funding''); and (c) Plans.
    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) 
provides partial exemptions from Sections 9(a), 13(a),

[[Page 6924]]

15(a) and 15(b) of the 1940 Act. The exemptions granted to a separate 
account by Rule 6e-2(b) 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 variable life insurance separate accounts of the life insurer or 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 an investment company that also offers its shares to a 
variable annuity separate account of the same company or any affiliated 
or unaffiliated insurance company, or to trustees of a qualified plan.
    3. 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 insurance company (or of 
two or more affiliated insurance companies) is referred to as ``mixed 
funding.'' The use of a common investment company as the underlying 
investment medium for variable annuity and/or variable life insurance 
separate accounts of unaffiliated insurance companies is referred to as 
``shared funding.'' 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 investment company that also 
offers its shares to separate accounts funding variable contracts of 
one or more unaffiliated life insurance companies. Moreover, the relief 
under Rule 6e-2(b)(15) is not available if the scheduled premium 
variable life insurance separate account owns shares of an underlying 
investment company that also offers its shares to Plans.
    4. In connection with 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) provides partial 
exemptions from Sections 13(a), 15(a) and 15(b) of the 1940 Act. These 
exemptions granted to a separate account 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 
premium variable life insurance contracts or flexible premium variable 
life insurance 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). Thus, Rule 6e-
3(T) permits mixed funding, but precludes shared funding or selling 
shares to Plans.
    5. Applicants state that current tax law permits the Funds to 
increase their asset base through the sale of shares to Plans. 
Applicants state that Section 817(h) of the Code imposes certain 
diversification standards on the underlying assets of the Contracts 
invested in the Funds. The Code provides that the Contracts will not be 
treated as annuity contracts or life insurance contracts for any period 
during which the underlying assets are not adequately diversified in 
accordance with regulations prescribed by the Treasury Department. The 
regulations provide that to meet the diversification requirements, all 
of the beneficial interests in the underlying investment company must 
be held by the segregated asset accounts of one or more insurance 
companies. Treas. Reg. Sec. 1.817-5. The regulations do, however, 
contain certain exceptions to this requirement, one of which permits 
shares of an investment company to be held by the trustee of a Plan 
without adversely affecting the ability of the 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).
    6. Applicants state that the promulgation of Rules 6e-2 and 6e-3(T) 
preceded the issuance of these Treasury regulations, and that 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).
    7. Section 9(a)(3) of the 1940 Act provides that it is 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 a disqualification 
enumerated in Section 9(a)(1) or (2).
    8. Rules 6e-2(b)(15)(i) and (ii) and 6e-3(T)(b)(15)(i) and (ii) 
provide partial exemptions from Section 9(a), subject to the 
limitations discussed above on mixed and shared funding. These rules 
provide that the eligibility restrictions of Section 9(a) shall not 
apply to persons disqualified under Section 9(a) who are officers, 
directors, or employees of the life insurer or its affiliates, so long 
as that person does not participate directly in the management or 
administration of the underlying investment company, and that an 
insurer shall be ineligible to serve as an investment adviser or 
principal underwriter of the underlying fund only if an affiliated 
person of the life insurer who is disqualified by Section 9(a) 
participates in the management or administration of the fund.
    9. Applicants state that the partial relief granted in Rules 6e-2 
and 6e-3(T) from the requirements of Section 9 of the 1940 Act, limits, 
in effect, the amount of monitoring necessary to ensure compliance with 
Section 9 to that which is appropriate in light of the policy and 
purposes of that section, when the life insurer serves as investment 
adviser to or principal underwriter for the underlying fund. Applicants 
state that this relief parallels the relief granted by Rules 6e-2(b)(4) 
and 6e-3(T)(b)(4) to the insurer in its role as depositor of the 
separate account. Applicants state that those rules recognize that it 
is not necessary to apply the provisions of Section 9(a) to the many 
individuals who may be involved in a typical insurance company complex, 
most of whom will have no involvement in matters pertaining to 
underlying investment companies. Applicants assert, therefore, that 
there is no regulatory purpose in denying the partial exemptions 
because of mixed and shared funding and sales to Plans because sales to 
Plans do not change the fact that the purposes of the 1940 Act are not 
advanced by applying the prohibitions of Section 9(a) to persons in a 
life insurance complex who have no involvement in the underlying fund.
    10. Subparagraph (b)(15)(iii) of Rules 6e-2 and 6e-3(T) under the 
1940 Act assumes that contract owners are entitled to pass-through 
voting privileges with respect to investment company shares held by a 
separate account. However, subparagraph (b)(15)(iii) of Rules 6e-2 and 
6e-3(T) provides exemptions from the pass-through voting requirement 
with respect to several significant matters, assuming the limitations 
discussed above on mixed and shared funding are observed.
    11. Subparagraph (b)(15)(iii) of Rules 6e-2 and 6e-3(T) provides 
that an insurance company may disregard the voting instructions of its 
contract owners with respect to the investments of an underlying fund 
or any contract between a fund and its investment adviser, when an 
insurance regulatory authority so requires, subject to certain 
requirements. In addition, an insurance company may disregard the 
voting instructions of its contract owners if the contract owners 
initiate any change in the investment company's investment policies, 
principal underwriter, or investment adviser (provided that 
disregarding such voting instructions is

[[Page 6925]]

reasonable and complies with the other provisions of Rules 6e-2 and 6e-
3(T)). Under the rules, voting instructions with respect to a change in 
investment policies may be disregarded if the insurance company makes a 
good-faith determination that such change would: (a) violate state law; 
or (b) result in investments that either would not be consistent with 
the investment objectives of the separate account; or would vary from 
the general quality and nature of investments and investment techniques 
used by other separate accounts of the company or of an affiliated life 
insurance company with similar investment objectives. Voting 
instructions with respect to a change in an investment adviser may be 
disregarded if the insurance company makes a good-faith determination 
that either: (a) the adviser's fees would exceed the maximum rate that 
may be charged against the separate account's assets; or (b) the 
proposed adviser may be expected to employ investment techniques that 
vary from the general techniques used by the current adviser, or the 
proposed adviser may be expected to manage the investments in a manner 
that would be inconsistent with the investment objectives of the 
separate account or in a manner that would result in investments that 
vary from certain standards.
    12. Applicants state that Rule 6e-2 recognizes that variable life 
insurance contracts have important elements unique to insurance 
contracts and are subject to extensive state regulation of insurance. 
Applicants maintain that in adopting Rule 6e-2, the Commission 
recognized that state insurance regulators have authority, pursuant to 
state insurance laws or regulations, to disapprove or require changes 
in investment policies, investment advisers or principal underwriters. 
Applicants also state that the Commission expressly recognized that 
state insurance regulators have authority to require an insurance 
company to draw from its general account to cover costs imposed upon 
the insurance company by a change approved by contract owners over the 
insurance company's objection. Therefore, the Commission deemed 
exemptions from pass-through voting requirements 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 assert 
that in this respect, flexible premium variable life insurance 
contracts are identical to scheduled premium variable life insurance 
contracts; and that therefore the corresponding provisions of Rule 6e-
3(T) undoubtedly were adopted in recognition of the same factors.
    13. Applicants submit that state insurance regulators have much the 
same authority with respect to variable annuity separate accounts as 
they have with respect to variable life insurance separate accounts, 
and that variable annuity contracts pose some of the same kinds of 
risks to insurers as variable life insurance contracts. Applicants 
submit that while the Commission staff has not been called upon to 
address the general issue of state insurance regulators' authority in 
the context of variable annuity contracts, the Commission staff 
apparently recommended the exclusivity requirement of Rule 6e-2 in 
order to reserve the widest possible latitude in regulating what was 
then a new and unfamiliar product.
    14. Applicants further state that the offer and sale of Fund shares 
to Plans will not have any impact on the relief requested in this 
regard. As previously noted, shares of the Funds will be held by the 
trustees or custodians of the Plans as required by Section 403(a) of 
ERISA or other applicable provisions of the Code. Section 403(a) also 
provides that the trustees must have exclusive authority and discretion 
to manage and control the Plan investments with two exceptions: (a) 
when the 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 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 exceptions stated in Section 403(a) applies, Plan 
trustees have the 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, ERISA permits, but does not require, 
pass-through voting to the participants in Plans. Accordingly, 
Applicants submit that unlike the case with insurance company separate 
accounts, the issue of the resolution of material irreconcilable 
conflicts with respect to voting is not present with respect to Plans 
since Plans are not entitled to pass-through voting privileges.
    15. Applicants submit that while some Plans may provide 
participants with the right to give voting instructions, 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 other 
Plans, would vote in a manner that would disadvantage Contract owners. 
In this regard, Applicants submit that the purchase of Fund shares by 
Plans that provide voting rights to participants does not present any 
complications not otherwise occasioned by mixed and shared funding.
    16. Applicants state that no increased conflicts of interest would 
be presented by the granting of the requested relief. Applicants assert 
that shared funding by unaffiliated insurance companies does not 
present any issues that do not already exist where a single insurance 
company is licensed to do business in several or all states. Applicants 
note that where an insurer is domiciled in different states, it is 
possible 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 
submit that this possibility is no different or greater than exists 
where different insurers may be domiciled in different states.
    17. Applicants further submit that affiliation does not reduce the 
potential, if any exists, for differences in state regulatory 
requirements. Affiliated insurers may be domiciled in different states 
and be subject to differing state law requirements. In any event, 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 differences 
among state regulatory requirements 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 Fund.
    18. Applicants also argue 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 adviser initiated by contract owners. 
Potential disagreement is limited by the requirement that disregarding 
voting instructions be reasonable and based on specified good faith 
determinations. However, if an insurer's decision to disregard contract

[[Page 6926]]

owner voting instructions represents a minority position or would 
preclude a majority vote approving a particular change, such insurer 
may be required, at the Fund's election, to withdraw its separate 
account's investment in the Fund. No charge or penalty will be imposed 
as a result of such a withdrawal. Applicants submit, however, that the 
likelihood that voting instructions of insurance company separate 
account holders will ever be disregarded or that withdrawal will occur 
is extremely remote, and that this possibility will be known through 
prospectus disclosure.
    19. Applicants submit that investment by Plans in any of the Funds 
will similarly present no conflict. While votes cast by the Plan 
trustees cannot be disregarded and must be counted and given effect, if 
a material irreconcilable conflict involving Plans arises, the Plans 
may simply redeem their shares and make alternative investments.
    20. Applicants submit that there is no reason why the investment 
policies of the Funds would or should be materially different from what 
these policies would or should be if the Funds funded only variable 
annuity contracts or variable life insurance contracts, whether 
flexible premium or scheduled premium contracts. Each type of insurance 
product is designed as a long-term investment program. Similarly, the 
investment objectives of Plans are long-term. Moreover, Applicants 
represent that each Fund will be managed to attempt to achieve its 
investment objective, and not to favor or disfavor any particular 
Participating Insurance Company insurer or type of insurance product.
    21. As noted above, Section 817(h) of the Code imposes certain 
diversification standards on the assets underlying variable annuity 
contracts and variable life insurance contracts held in the portfolios 
of management investment companies. Treasury Regulation Sec. 1.817-
5(f)(3)(iii), which established diversification requirements for such 
portfolios, specifically permits ``qualified pension or retirement 
plans'' and insurance company separate accounts to share the same 
underlying management investment company. Therefore, Applicants assert 
that neither the Code, nor the Treasury regulations, nor the revenue 
rulings thereunder, recognize any inherent conflicts of interest if 
Plans and variable life insurance separate accounts all invest in the 
same management investment company.
    22. Applicants note that while there may be 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 the Separate Account or Plan cannot net purchase payments to make 
the distributions, the Separate Account or Plan will redeem Fund shares 
at their net asset value. The Plan will then 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.
    23. Applicants also state that it is possible to provide an 
equitable means of giving voting rights to Contract owners and to 
Plans. Each Fund will inform each shareholder, including each Separate 
Account and each Plan, of its respective share of ownership in the 
Fund. Each Participating Insurance Company will then solicit voting 
instructions in accordance with the ``pass-through'' voting 
requirement.
    24. Applicants submit that the ability of the Funds to sell their 
respective shares directly to qualified plan 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 Plan. Regardless of the rights and benefits of participants 
under the Plans or Contract owners under the Contracts, the Plans and 
the Separate Accounts only have rights with respect to their respective 
shares of the Funds. They can only 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 
payments of dividends.
    25. Applicants state that there are no conflicts between the 
Contract owners of Separate Accounts and participants under the Plans 
with respect to the state insurance commissioners' veto powers over 
investment objectives. The basic premise of shareholder voting is that 
not all shareholders may all agree with a particular proposal. The 
state insurance commissioners have been given the veto power in 
recognition of the fact that insurance companies usually cannot simply 
redeem their Separate Accounts out of one Fund and invest in another. 
Complex and time-consuming transactions must be undertaken to 
accomplish such redemptions and transfers. Conversely, trustees of 
Plans can make the decision quickly and redeem their shares from a 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 a suitable investment. Based on the 
Foregoing, Applicants represent that even should the interests of 
Contract owners and Plans conflict, thru conflicts can be resolved 
almost immediately because the trustees of the Plans can, 
independently, redeem shares out of the Fund.
    26. Applicants state 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. Applicants further state that a 
Fund supporting even one type of insurance product must accommodate 
these diverse factors in order to attract and retain purchasers. 
Applicants also state that permitting mixed and shared funding will 
provide economic support for the continuation of the Funds. In 
addition, Applicants assert that permitting mixed and shared funding 
will facilitate the establishment of additional Funds serving diverse 
goals.
    27. Applicants assert that various factors have kept more insurance 
companies from offering variable annuity and variable life insurance 
contracts. Applicants state that these factors include the costs of 
organizing and operating a fund 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. Applicants assert 
that use of the Funds as common investment mediums for variable 
contracts would reduce or eliminate these concerns.
    28. Applicants also submit that mixed and shared funding should 
provide benefits to 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 Prudential, PIC, and 
Jennison, but also from the cost efficiencies and investment 
flexibility afforded by a larger pool of assets. Mixed and shared 
funding also would permit a greater amount of assets available for 
investment by the Funds, thereby promoting economies of scale, by 
permitting increased safety through greater diversification and by 
making the addition of new series more feasible. Therefore, making the 
Funds available for mixed and shared funding will encourage more 
insurance companies to offer variable contracts, and this should result 
in increased competition with

[[Page 6927]]

respect to both variable contract design and pricing, which can be 
expected to result in more product variation and lower charges. 
Applicants assert that the sale of Fund shares to Plans also can be 
expected to increase the amount of assets available for investment by 
the Funds and thus promote economies of scale and greater 
diversification.
    29. Applicants assert that they do not believe that mixed and 
shared funding and sales to qualified Plans will have any adverse 
federal income tax consequences.

Applicants' Conditions

    Applicants have consented to the following conditions:
    1. A majority of the Board of Directors of each Fund (``Board'') 
will consist of persons who are not ``interested persons'' thereof, as 
defined by Section 2(a)(19) of the 1940 Act and 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 remaining directors; (b) 
for a period of 60 days, if a vote of shareholders is required to fill 
the vacancy or vacancies; or (c) of such longer period as the 
Commission may prescribe by order upon application.
    2. Each Board will monitor its respective Fund for the existence of 
any material irreconcilable conflict between the interests of the 
Contract owners of all Separate Accounts and of the Plan participants 
investing in the Fund 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 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 any 
Fund 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, 
decision by a Plan to disregard voting instructions of Plan 
participants.
    3. Participating Insurance Companies, Prudential (or any other 
investment adviser of the Fund), and any Plan that executes a fund 
participation agreement upon becoming an owner of 10% or more of the 
assets of the Fund (collectively, the ``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, and if 
pass-through voting is applicable, an obligation of each Plan to inform 
the Board whenever it is determined to disregard Plan participants' 
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 Fund under their 
agreements governing participation in the Fund, and Plans under their 
participation agreements, and such agreements shall provide that these 
responsibilities will be carried out with a view only to the interests 
of Contract owners and, if applicable, Plan participants.
    4. If a majority of the Board, or a majority of its disinterested 
directors, determine that a material irreconcilable conflict exists 
with respect to a Fund, the relevant Participating Insurance Companies 
and Plans will, at their own expense and the extent reasonably 
practicable (as determined by a majority of the disinterested 
directors), 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, and reinvesting such assets in a different 
investment medium, which may include another Fund, or submitting the 
question of 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 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; and (b) 
establishing a new registered management investment company or managed 
separate account. If a material irreconcilable conflict arises because 
of a Participating Insurance Company's decision to disregard contract 
owners' voting instructions, and that decision represents a minority 
position or would preclude a majority vote, then that insurer may be 
required, at the Fund's election, to withdraw its separate account's 
investment in the Fund, and no charge or penalty will be imposed as a 
result of such withdrawal. If a material irreconcilable conflict arises 
because of a 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 Plan may be required, 
at the Fund's election, to withdraw its investment in the Fund, and no 
charge or penalty will be imposed as a result of such withdrawal. The 
responsibility of taking remedial action in the event of a Board 
determination of material irreconcilable conflict and bearing the cost 
of such remedial action will be a contractual obligation of all 
Participating Insurance Companies and Plans under their agreements 
governing participation in the Fund, and these responsibilities will be 
carried out with a view only to the interests of Contract owners and, 
if applicable, Plan participants.
    5. For purposes of Condition 4, a majority of the disinterested 
directors of the Board will determine whether or not any proposed 
action adequately remedies any material irreconcilable conflict, but in 
no event will the Fund or Prudential (or any other investment adviser 
of a Fund) 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 a 
majority of Contract owners materially and adversely affected by the 
material irreconcilable conflict vote to decline such offer. No Plan 
shall be required by Condition 4 to establish a new funding medium for 
such Plan if: (a) a majority of Plan participants materially and 
adversely affected by the material irreconcilable conflict vote to 
decline such offer; or (b) pursuant to governing Plan documents and 
applicable law, the Plan makes such decision without Plan participant 
vote.
    6. The Board's determination of the existence of a material 
irreconcilable conflict and its implications will be made known in 
writing promptly to all Participants.
    7. Participating Insurance Companies will provide pass-through 
voting privileges to all Contract owners so long as the Commission 
continues to interpret the 1940 Act to require pass-through voting for 
Contract owners.

[[Page 6928]]

Accordingly, Participating Insurance Companies will vote shares of the 
Funds held in their separate accounts in a manner consistent with 
voting instructions timely received from Contract owners. In addition, 
each Participating Insurance Company will vote shares of the Fund held 
in its separate accounts for which it has not received timely voting 
instructions as well as shares of the Funds which the Participating 
Insurance Company itself owns, in the same proportion as those shares 
for which voting instructions from Contract owners are timely received. 
Participating Insurance Companies will be responsible for assuring that 
each of their separate accounts investing in each Fund calculates 
voting privileges in a manner consistent with other Participating 
Insurance Companies investing in that Fund. The obligation to calculate 
voting privileges in a manner consistent with all other separate 
accounts investing in each Fund will be a contractual obligation of all 
Participating Insurance Companies under the agreements governing their 
participation in that Fund.
    8. Each Plan will vote as required by applicable law and governing 
Plan documents.
    9. All reports of potential or existing conflicts received by a 
Board, and all Board actions 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 meetings of 
the Board or other appropriate records. Such minutes or other records 
shall be made available to the Commission upon request.
    10. Each Fund will notify all Participants in that Fund that 
disclosure in separate account prospectuses regarding potential risks 
of mixed and shared funding may be appropriate. Each Fund shall 
disclose in its prospectus that: (a) the 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) because of differences of tax 
treatment and other considerations, the interests of various Contract 
owners participating in the Fund and the interests of Plans investing 
in the Fund may conflict; and (c) the 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.
    11. Each Fund 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 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)), as well as Section 16(a) of the 1940 Act and, if 
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 and 
with whatever rules the Commission may promulgate with respect thereto.
    12. If and to the extent that Rules 6e-2, 6e-3(T) under the 1940 
Act are amended, or if 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 the Funds and/or Participating 
Insurance Companies, as appropriate, shall take such steps as may be 
necessary to comply with Rules 6e-2 and 6e-3(T), as amended, or Rule 
6e-3, as adopted, to the extent applicable.
    13. The Participants no less than annually, shall submit to the 
Board such reports, materials or data as the Board may reasonably 
request so that the Board may carry out fully the obligations imposed 
upon it by the conditions contained in the Application. Such reports, 
materials and data shall be submitted more frequently if deemed 
appropriate by the Board. The obligations of the Participants to 
provide these reports, materials and data to the Board when it so 
reasonably requests, shall be a contractual obligation of all 
Participants under the agreements governing their participation in the 
Fund.
    14. If a Plan should become a holder of 10% or more of the assets 
of a Fund, such Plan will execute a participation agreement with the 
Fund which will include the conditions set forth herein, to the extent 
applicable. A Plan will execute an application containing an 
acknowledgment of this condition at the time of its initial purchase of 
shares of any Fund.

Conclusion

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

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-3320 Filed 2-10-99; 8:45 am]
BILLING CODE 8010-01-M