[Federal Register Volume 64, Number 168 (Tuesday, August 31, 1999)]
[Notices]
[Pages 47541-47548]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22550]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-23966; File No. 812-11516]


Mitchell Hutchins Series Trust, et al.; Notice of Application

August 24, 1999.
AGENCY: Securities and Exchange Commission (``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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Summary of Application

    Applicants seek an order of exemption to the extent necessary to 
permit shares of the Mitchell Hutchins Series Trust (``Fund'') and 
shares of other Insurance Products Funds, as defined below, to be sold 
to and held by: (a) variable annuity and variable life insurance 
separate accounts of both affiliated and unaffiliated life insurance

[[Page 47542]]

companies; and (b) qualified pension and retirement plans outside of 
the separate account context (``Qualified Plans'' or ``Plans'').

Applicants

    Mitchell Hutchins Series Trust and Mitchell Hutchins Asset 
Management Inc.(``Mitchell Hutchins'').

Filing Date

    The Application was filed on February 19, 1999, and amended and 
restated on August 13, 1999.

Hearing or Notification of Hearing

    An order (``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 Commission 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 September 
20, 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 Commission.

ADDRESSES: Secretary, Commission, 450 Fifth Street, N.W., Washington, 
D.C. 20549-0609. Applicants, c/o Dianne E. O'Donnell, Deputy General 
Counsel, Mitchell Hutchins Asset Management Inc., 1285 Avenue of the 
Americas, New York, New York 10019.

FOR FURTHER INFORMATION CONTACT: Paul G. Cellupica, 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 is available for a fee from the 
Commission's Public Reference Branch, 450 Fifth Street, N.W., 
Washington, D.C. 20549 (202-942-8090).

Applicants' Representations

    1. The fund is a Massachusetts business trust registered under the 
1940 Act as an open-end management company. The Fund currently is 
comprised of thirteen separately managed series, each of which consists 
of two classes of shares and has its own investment objective and 
policies. Additional series could be added in the future. Other 
Insurance Products Funds are those other investment companies or 
investment company series for which Mitchell Hutchins, PaineWebber 
Incorporated (``PaineWebber'') or any of their affiliates serve, now or 
in the future, an investment adviser, administrator, manager, principal 
underwriter or sponsor and which offer their shares only to insurance 
company separate accounts.
    2. Mitchell Hutchins serves as the investment adviser and 
administrator for each of the Fund's series. Mitchell Hutchins is a 
wholly owned asset management subsidiary of Paine Webber, which in turn 
is a wholly owned subsidiary of Paine Webber Group Inc. (``PW Group''), 
a publicly held financial services holding company.
    3. Pacific Investment Management Company (``PIMCO'') serves as the 
sub-adviser for Strategic Fixed Income Portfolio. PIMCO is a subsidiary 
partnership of PIMCO Advisers L.P., a publicly held investment advisory 
firm.
    4. Nicholas-Applegate Capital Management (``NACM''), a California 
limited partnership, serves as the sub-adviser for Aggressive Growth 
Portfolio. NACM's general partner is Nicholas-Applegate Capital 
Management Holdings, L.P., a California limited partnership controlled 
by Arthur E. Nicholas.
    5. Invista Capital Management Inc. (``Invista'') serves as the sub-
adviser for Global Growth Portfolio's foreign investments. Invista is 
an indirect wholly owned subsidiary of Principal Life Insurance 
Company.
    6. The Fund currently offers its shares exclusively to insurance 
company separate accounts that fund variable annuity contracts. 
Applicants propose that shares of each Insurance Product Fund be 
offered to affiliated and unaffiliated insurance companies for their 
separate accounts as an investment vehicle to fund various insurance 
products including, among others, variable annuity contracts, variable 
group life insurance contracts, scheduled premium variable life 
insurance contracts, single premium and modified single premium 
variable life insurance contracts, and flexible premium variable life 
insurance contracts (collectively, ``Variable Contracts''). Some of 
these separate accounts may not be registered as investment companies 
under the 1940 Act pursuant to the exceptions from registration in 
Section 3(c)(1), 3(c)((7) and 3(c)(11) of the Act. In addition, 
Applicants propose that shares of each Insurance Product Fund also be 
offered directly to Qualified Plans. Separate accounts owning shares of 
the Insurance Product Funds and their insurance company depositors are 
referred to herein as ``Participating Separate Accounts'' and 
``Participating Insurance Companies,'' respectively.
    7. 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 separate accounts of unaffiliated insurance 
companies is referred to as ``shared funding.'' The use of a common 
investment company as the underlying investment medium for variable 
annuity and variable life separate accounts of affiliated and 
unaffiliated insurance companies and for Qualified Plans is referred to 
as ``extended mixed and shared funding.''

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act authorizes the Commission to exempt 
any person, security or transaction, or any class or classes of person, 
securities or transactions from any provisions of the 1940 Act or the 
rules or regulations thereunder, if and to the extend 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 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 the following sections of the 1940 Act: (a) 
Section 9(a), which makes it unlawful for any company to serve as an 
investment adviser or principal underwriter of any registered UIT if an 
affiliated person of that company is subject to a disqualification 
enumerated in Section 9(a) (1) or (2); and (b) Sections 13(a), 15(a) 
and 15(b) of the 1940 Act, to the extent that those sections might be 
deemed to require ``pass-through'' voting with respect to an underlying 
investment company's shares.
    3. The exemptions granted by Rule 6e-2(b)(15), however, are 
available only if the management investment companies underlying the 
UIT (``underlying funds'') offer their shares ``exclusively to variable 
life insurance separate accounts of the life insurer, or any affiliated 
life insurance company'' (emphasis added). Therefore, Rule 6e-2

[[Page 47543]]

does not permit either mixed or shared funding because the relief 
granted by Rule 6e-2(b)(15) is not available with respect to a 
scheduled premium variable life insurance separate account that owns 
shares of an underlying fund that also offers its shares to a variable 
annuity or a flexible premium variable life insurance account of the 
same company or of any affiliated or unaffiliated life insurance 
company. This rule also does not contemplate that shares of the 
underlying fund might also be sold to Qualified Plans.
    4. In connection with flexible premium variable life insurance 
contracts issued through a separate account registered under the 1940 
Act as a UIT, Rule 6e-3(T)(b)(15) provides partial exemptions from 
Sections 9(a), and from Sections 13(a), 15(a) and 15(b) of the 1940 Act 
to the extent that those sections might be deemed by the Commission to 
require ``pass-through'' voting with respect to an underlying fund's 
shares.
    5. The exemptions granted by Rule 6e-3(T) are available only where 
the UIT's underlying funds 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) permits mixed 
funding but does not permit shared funding. Rule 6e-3(T) also does not 
contemplate that shares of the underlying fund might also be sold to 
Qualified Plans.
    6. Section 817(h) of the Internal Revenue Code of 1986, as amended 
(``Code''), imposes certain diversification standards on the underlying 
assets of Variable Contracts held in the portfolios of management 
investment companies. The Code provides that a Variable Contract shall 
not be treated as an annuity contract or life insurance contract, as 
applicable, for any period (and any subsequent period) for which the 
investments are not adequately diversified in accordance with 
regulations issued by the Treasury Department. Treasury Regulation 
Sec. 1.817-5, which establishes diversification requirements for such 
portfolios, specifically permits, among other things, qualified pension 
or retirement plans, general accounts and separate accounts to share 
the same underlying management investment company. As a result, 
Qualified Plans may invest in Insurance Product Funds without 
endangering the tax status of Variable Contracts issued through 
Participating Insurance Companies. Shares of the Insurance Product 
Funds sold to Qualified Plans would be held by the trustees of those 
Plans as required by Section 403(a) of the Employee Retirement Income 
Security Act (``ERISA'').
    7. The promulgation of Rules 6e-2(b)(15) and 6e-3(T)(b)(15) 
preceded the issuance of the Treasury regulations that made it possible 
for shares of an investment company to be held by the trustees of 
Qualified Plans without adversely affecting the ability of separate 
accounts of insurance companies to hold shares of the same investment 
company in connection with their variable annuity and variable life 
contracts. Thus, the sale of shares of the same investment company to 
separate accounts and Qualified Plans could not have been envisioned at 
the time of the adoption of Rules 6e-2(b)(15) and 6e-3(T) (b)(15).
    8. Applicants note that if the Insurance Product Funds were to sell 
shares only to Qualified Plans, exemptive relief under Rule 6e-2 and 
Rule 6e-3(T) would not be necessary. The relief provided by Rule 6e-
2(b)(15) and Rule 6e-3(T)(b)(15) does not relate to qualified pension 
and retirement plans or to a registered investment company's ability to 
sell its shares to such entities.
    9. Applicants are not aware of any stated rationale for excluding 
separate accounts and investment companies, or series thereof, engaged 
in shared funding from the exemptive relief provided under Rules 6e-
2(b)(15) and 6e-3T (b)(15) or for excluding separate accounts and 
investment companies, or series thereof, engaged in mixed funding from 
the exemptive relief provided under Rule 6e-2(b)(15). Indeed, the 
Commission's proposed amendments to Rule 6e-2 would eliminate the 
exclusion of mixed funding from the relief provided under Rule 6e-
2(b)(15) and numerous exemptions permitting both mixed and shared 
funding have been granted since the adoption of Rules 6e-2 and 6e-3.
    10. Applicants similarly are not aware of any stated rationale for 
excluding Participating Insurance Companies from the exemptive relief 
requested because shares of the Insurance Products Funds may also sell 
their respective shares to Qualified Plans. The relief provided under 
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) does not relate to Qualified Plans 
or to a registered investment company's ability to sell its shares to 
such entities. Because the relief accorded under such Rules is 
available where shares are offered exclusively to separate accounts, 
Applicants believe that additional exemptive relief is required if 
shares of Insurance Product Funds are also to be sold to Plans. The 
Commission has granted numerous exemptions permitting extended mixed 
and shared funding.
    11. Applicants believe that the same policies and considerations 
that led the Commission to grant exemptions to other applicants for 
extended mixed and shared funding are present here. Moreover, 
Applicants believe 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.
    12. Section 9(a)(3) of the 1940 Act provides that it is unlawful 
for any company to serve as investment adviser or principal underwriter 
of any registered open-end investment company if an affiliated person 
of that company is subject to a disqualification enumerated in Section 
9(a) (1) or (2). However, 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 the limitations discussed above 
on mixed and shared funding. These exemptions limit the eligibility 
restrictions to affiliated individuals or companies that directly 
participate in the management or administration of the underlying 
investment company or series thereof.
    13. Rules 6e-2(b)(15)(i) and 6e-3(T)(b)(15)(i) allow an individual 
disqualified under Section 9(a) (1) or (2) to be an officer, director, 
or employee of an insurance company, or any of its affiliates that 
serves in any capacity with respect to an underlying investment 
company, so long as the disqualified individual does not participate 
directly in the management or administration of the underlying 
investment company. Similarly, Rules 6e-2(b)(15)(ii) and 6e-
3(T)(b)(15)(ii) permit an insurance company disqualified under Section 
9(a)(3) of the 1940 Act to serve in any capacity with respect to an 
underlying investment company, provided that the affiliated person of 
the disqualified company, ineligible under Section 9(a) (1) or (2) of 
the 1940 Act, does not participate directly in the management or 
administration of the investment company.
    14. The partial relief granted in Rules 6-2(b)(15) and 6e-
3(T)(b)(15) from the requirements of Section 9 limits, in effect, the 
amount of monitoring of an insurer's personnel that would otherwise be 
necessary to ensure compliance with Section 9 to that which is 
appropriate in light of the policy and

[[Page 47544]]

purposes of Section 9. These 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 Section 9(a) to the many 
individuals who may be involved in a large insurance company but would 
have no connection with the investment company funding the separate 
accounts. Applicants believe that it is unnecessary to limit the 
applicability of these rules merely because shares of the Insurance 
Products Funds may be sold in connection with mixed and shared funding. 
Since the Participating Insurance Companies and Qualified Plans are not 
expected to play any role in the management or administration of the 
Insurance Products Funds, Applicants assert that applying the 
restrictions of Section 9(a) serves no regulatory purpose. Applicants 
further assert that applying such restrictions would increase the 
monitoring costs incurred by the Participating Insurance Companies and, 
therefore, would reduce the net rates of return realized by Variable 
Contract owners.
    15. Moreover, appropriateness of the relief requested will not be 
affected by the proposed sale of shares of Insurance Products Funds to 
Qualified Plans. The insulation of the Insurance Product Fund from 
those individuals who are disqualified under the 1940 Act remains in 
place. Applying the requirements of section 9(a) because of investment 
by Qualified Plans would be unjustified and would not serve any 
regulatory purpose. Since the Qualified Plans are not investment 
companies and will not be deemed to be affiliated solely by virtue of 
their shareholdings, no additional relief is necessary.
    16. Rules 6e-2(b)915)(iii) and 6e-3(T)(b)(15)(iii) assume that 
contract owners are entitled to pass-through voting privileges with 
respect to investment company shares held by a related separate 
account. However, if the limitations on mixed and shared funding are 
satisfied, Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) provide 
exemptions from the pass-through requirements in limited situations. 
These rules provide that an 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 an investment 
company and its investment adviser, when an insurance regulatory 
authority so requires (subject to the provisions of paragraphs 
(b)(5)(i) and (b)(7)(ii)(A) of the rules). 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 
with regard to certain changes initiated by the contract owners in the 
investment company's investment policies, principal underwriter or 
investment adviser.
    17. The Commission has deemed exemptions from the pass-through 
voting requirements as necessary to assure the solvency of the life 
insurer and the performance of its contractual obligations and 
therefore has enabled 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 these considerations are no less important or necessary when an 
insurance company funds its separate accounts in connection with mixed 
and shared funding. Such funding does not compromise the goals of the 
insurance regulatory authorities or of the Commission. While the 
Commission may have wished to reserve wide latitude with respect to the 
once unfamiliar variable annuity product, that product is now familiar 
and there appears to be no reason for the maintenance of prohibitions 
against mixed and shared funding arrangements. Indeed, by permitting 
such arrangements, the Commission eliminates needless duplication of 
start-up and administrative expenses and potentially increases an 
investment company's assets, thereby making effective portfolio 
management strategies easier to implement and promoting other economies 
of scale.
    18. In addition, the Insurance Products funds' sale of shares to 
Qualified Plans will have no impact on the relief requested in this 
regard. Shares of the Insurance Products Funds sold to Qualified Plans 
would be held by the trustees of said Plans as mandated 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 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 
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. 
Accordingly, unlike the case with insurance company separate accounts, 
the issue of the resolution of material irreconcilable conflicts with 
respect to voting is not present with respect to Qualified Plans since 
such plans are not entitled to pass-through voting privileges.
    19. Even if a Qualified Plan were to hold a controlling interest in 
an Insurance Product Fund, Applicants do not believe that such control 
would disadvantage other investors in that Insurance Product Fund to 
any greater extent than is the case when any institutional shareholder 
holds a majority of the voting securities of any open-end management 
investment company. In this regard, Applicants submit that investment 
in an Insurance Product Fund by a Qualified Plan will not create any of 
the voting complications occasioned by mixed or shared funding. Unlike 
mixed or shared funding, Plan investor voting rights cannot be 
frustrated by veto rights of insurers or state regulators.
    20. The Qualified Plan may have their trustees or other fiduciaries 
exercise voting rights attributable to investment securities held by 
the Qualified Plan in their discretion. Some of the Qualified Plans, 
however, may provide for the trustees, an investment adviser or another 
named fiduciary to exercise voting rights in accordance with 
instructions from participants.
    21. Where a Qualified Plan does not provide participants with the 
right to give voting instructions, the Applicants submit that there is 
no potential for material irreconcilable conflicts of interest between 
or among Variable Contract owners and Plan investors with respect to 
voting of the respective Insurance Product Fund's shares.
    22. Where a Plan provides participants with the right to give 
voting instructions, Applicants likewise submit that there is no reason 
to believe that participants in Qualified Plans generally or those in a 
particular Plan, either as a single group or in combination with 
participants in other Qualified Plans, would vote in a manner that 
would disadvantage Variable Contract owners. The purchase of shares of 
the Insurance Product Funds by Qualified Plans that provide voting 
rights does not present an complications not otherwise occasioned by 
mixed or shared funding.
    23. Applicants assert that shared funding does not present any 
conflict of interest issues that do not already exist

[[Page 47545]]

when a single insurance company is licensed to do business in several 
states. For example, when different Participating Insurance Companies 
are domiciled in different states, it is possible that the state 
insurance regulatory body in a state in which one Participating 
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 Participating Insurance Companies are 
domiciled. That possibility, however, is no different and no greater 
than that which exists when a single insurer and its affiliates offer 
their insurance products in several states, as currently is permitted.
    24. In addition, affiliations among insurers do not reduce the 
potential, if any exists, for differences in state regulatory 
requirements. In any event, the conditions discussed below (which are 
adapted from the conditions included in Rule 6e-3(T)(b)(15)) are 
designed to safeguard against any adverse effects that differences 
among state regulatory requirements may produce. Similarly, affiliation 
does not eliminate the potential, if any exists, for divergent 
judgments as to when a Participating Insurance Company could disregard 
contract owner voting instructions. The potential for disagreement in 
limited by the requirement that disregarding voting instructions be 
reasonable and based on specified good faith determinations. However, 
if a particular state insurance regulator's decision conflicts with the 
majority of other state regulators or if a Participating Insurance 
Company's decision to disregard contract owner voting instructions 
represents a minority position or would preclude a majority vote 
approving a particular change, the Participating Insurance Company may 
be required, at the election of the relevant Insurance Products Fund, 
to withdraw its Participating Separate Accounts' investment in that 
fund and no charge or penalty will be imposed as a result of such 
withdrawal.
    25. Similarly, there is no reason why the investment policies of an 
Insurance Products Fund that engages in mixed funding would or should 
materially differ from what those policies would or should be if that 
fund only supported variable annuity or only variable life insurance 
contracts. Hence, there is no reason to believe that conflicts of 
interest would result from mixed funding. Moreover, no one investment 
strategy can be identified as appropriate to a particular insurance 
product. Each pool of variable annuity and variable life insurance 
contract owners is composed of individuals of diverse financial status, 
age, insurance and investment goals. Those diversities are of greater 
significance than any differences in insurance products. An investment 
company supporting even one type of insurance product must accommodate 
those diverse factors. The sale of shares to Qualified Plans should not 
increase the potential for material irreconcilable conflicts of 
interest between or among different types of investors. There should be 
very little potential for such conflicts beyond that which would 
otherwise exist between variable annuity and variable life contract 
owners.
    26. Moreover, the Code, Treasury regulations, and revenue rulings 
do not present any inherent conflicts of interest if Qualified Plans 
and separate accounts invest in the same underlying investment company. 
As described above, Section 817(h) imposes certain diversification 
standards on the underlying assets of variable annuity contracts and 
variable life contracts held in the portfolios of management investment 
companies. However, Treasury Regulation Sec. 1.817-5(f)(3), which 
established diversification requirements for such portfolios, 
specifically permits, among other things, qualified pension or 
retirement plans, general accounts and separate accounts to share the 
same underlying management investment company.
    27. While there are differences in the manner in which 
distributions from Variable Contracts and Qualified Plans are taxed, 
these tax consequences do not raise any conflicts of interest. When 
distributions are to be made, and a Participating Separate Account or 
Qualified Plan cannot net purchase payments to make the distributions, 
the Participating Separate Account and Qualified Plan will redeem 
shares of the Insurance Product Funds at their respective net asset 
value in conformity with Rule 22c-1 under the 1940 Act to provide 
proceeds to meet distribution needs. The Qualified Plan will then make 
distributions in accordance with the terms of the Plan. The 
Participating Life Insurance Company will surrender values from the 
Participating Separate Account into the general account to make 
distributions in accordance with the terms of the Variable Contract.
    28. It is possible to provide an equitable means of giving voting 
rights to Participating Separate Account contract owners and Qualified 
Plans. The transfer agent for the Insurance Product Fund will inform 
each Participating Insurance Company of each Participating Separate 
Account's share ownership in the Fund, as well as inform the trustees 
of Qualified Plans of their holdings. Each Participating Insurance 
Company then will solicit voting instructions in accordance with Rules 
6e-2 and 6e-3(T), as applicable, and its participation agreement with 
the relevant Insurance Product Fund. Shares held by Qualified Plans 
will be voted in accordance with applicable law. The voting rights 
provided to Qualified Plans with respect to shares of Insurance Product 
Funds would be no different from the voting rights that are provided to 
Qualified Plans with respect to shares of funds sold to the general 
public.
    29. The ability of Insurance Products Funds to sell their 
respective shares directly to Qualified Plans 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 Qualified 
Plan participant. As noted above, regardless of the rights and benefits 
of Qualified Plan participants or contract owners, the Qualified Plans 
and Participating Separate Accounts only have rights with respect to 
their respective shares of the Fund. They can only redeem such shares 
at their net asset value. No shareholder of any of the Insurance 
Products Funds has any preference over any other shareholder with 
respect to distribution of assets or payment of dividends.
    30. There are no conflicts between the contract owners of 
Participating Separate Accounts and Qualified Plan participants with 
respect to the state insurance commissioner's veto powers (direct with 
respect to variable life and indirect with respect to variable annuity) 
over investment objectives. The basic premise of shareholder voting is 
that shareholders may not all agree with a particular proposal. While 
the interests and opinions of shareholders may differ, however, this 
does not mean that there are any inherent conflicts of interest between 
or among such shareholders. State insurance commissioners have been 
given the veto power in recognition of the fact that insurance 
companies usually cannot simply redeem their separate accounts out of 
one fund and invest in another. Generally, time-consuming, complex 
transactions must be undertaken to accomplish such redemptions and 
transfers. Trustees of Qualified Plans, on the other hand, can make the 
decision quickly and redeem their shares of an Insurance Products 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

[[Page 47546]]

suitable investment. Based on the foregoing, even if there should arise 
issues where the interests of contract owners and the interests of 
Qualified Plan participants are in conflict, the issues can be almost 
immediately resolved because the trustees of the Qualified Plans can, 
on their own, redeem the shares out of the Insurance Product Funds.
    31. There does not appear to be any greater potential for material 
irreconcilable conflicts arising between the interests of Qualified 
Plan participants and the contract owners from possible future changes 
in federal tax laws than that which already exists between variable 
annuity contract owners and variable life contract owners.
    32. Applicants have concluded that even if there should arise 
issues where the interests of Variable Contract owners and the 
interests of Qualified Plan participants are in conflict, the issues 
can be almost immediately resolved since the trustees of (or 
participants in) the Qualified Plans can, on their own, redeem the 
shares out of the Insurance Product Funds.
    33. Various factors have prevented more insurance companies from 
offering variable annuity and variable life insurance contracts than 
currently do so. 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 public name recognition as 
investment professionals. 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. Use of the Insurance Products Funds as common 
investment media for Variable Contracts would ameliorate these 
concerns. Participating Insurance Companies would benefit not only from 
the investment advisory and administrative expertise of Mitchell 
Hutchins and its affiliates, but also from the cost efficiencies and 
investment flexibility afforded by a large pool of funds. Therefore, 
making the Insurance Products Funds available for mixed and shared 
funding will encourage more insurance companies to offer Variable 
Contracts. This should result in increased competition with respect to 
both Variable Contract design and pricing, which can be expected to 
result in more product variation and lower charges. Mixed and shared 
funding should also benefit Variable Contracts by eliminating a 
significant portion of the costs of establishing and administering 
separate funds.
    34. Moreover, sale of the shares of Insurance Products Funds to 
Qualified Plans should further increase the amount of assets available 
for investment by such funds. This, in turn, should benefit Variable 
Contract owners by promoting economies of scale, by permitting greater 
safety through greater diversification, and by making the addition of 
new portfolios to an Insurance Product Fund more feasible.

Applicants' Conditions

    To the extent required by the Commission, Applicants consent to the 
following conditions:
    1. A majority of the board of trustees or board directors (each a 
``Board'') of each Insurance Products Fund will 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 trustee or director, 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. Each Board will monitor its respective Insurance Products Fund 
for the existence of any material irreconcilable conflict between the 
interests of the contract owners of all Participating Separate Accounts 
and the interests of Qualified Plan participants investing in the 
Insurance Products 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 the 
Insurance Products Fund are being managed; (e) a difference in voting 
instructions given by variable annuity contract owners and variable 
life insurance contract owners and trustees of the Qualified Plans; (f) 
a decision by a Participating Insurance Company to disregard the voting 
instructions of contract owners; or (g) if applicable, a decision by a 
Plan to disregard the voting instructions of its participants.
    3. Participating Insurance Companies, Mitchell Hutchins (or any 
other investment adviser of an Insurance Products Fund), and Qualified 
Plans that execute a participating agreement upon becoming an owner of 
10% or more of an Insurance Product Fund's assets (collectively, 
``Participants'') will report any potential or existing conflicts to 
the Board of any relevant Insurance Products Fund. Participants will be 
responsible for assisting the appropriate 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 of each Participating Insurance Company to inform the Board 
whenever it has determined to disregard voting instructions from 
contract owners and, when pass-through voting is applicable, an 
obligation of each Plan to inform the Board whenever it has determined 
to disregard voting instructions from Plan participants. The 
responsibilities to report such information and conflicts and to assist 
the Boards will be contractual obligations of all Participants under 
their agreements governing participation in the Insurance Products 
Funds and these agreements shall provide, in the case of Participating 
Insurance Companies, that these responsibilities will be carried out 
with a view only to the interests of contract owners, and, in the case 
of Qualified Plans, that these responsibilities will be carried out 
with a view only to the interest of Plan participants.
    4. If a majority of the Board of an Insurance Products Fund, or a 
majority of its disinterested members, determines that a material 
irreconcilable conflict exists, the relevant Participants will, at 
their 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 irreconcilable material 
conflict, including: (a) withdrawing the assets allocable to some or 
all of the Participating Separate Accounts or Plans from the Insurance 
Products Fund or any series thereof and reinvesting such assets in a 
different investment medium, which may include another series of an 
Insurance Products Fund or another Insurance Products Fund, or 
submitting the question of whether such reinvestment should be 
implemented to

[[Page 47547]]

a vote of all affected contract owners and Plan participants and, as 
appropriate, reinvesting 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 or Plan 
participants) that votes in favor of such reinvestment, or offering to 
the affected contract owners and Plan participants 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 Participant's decision to 
disregard voting instructions of contract owners or Plan participants 
and that decision represents a minority position or would preclude a 
majority vote, the Participant may be required, at the election of the 
Insurance Products Fund, to withdraw its investment in such Fund, and 
no charge or penalty will be imposed as a result of such withdrawal. To 
the extent permitted by applicable law, the responsibility to take 
remedial action in the event of a Board determination of material 
irreconcilable conflict and to bear the cost of such remedial action 
will be a contractual obligation of all Participants under their 
agreements governing participation in the Insurance Products Fund, and 
these responsibilities will be carried out with a view only to the 
interests of contract owners and Plan participants.
    5. For purposes of Condition 4, a majority of the disinterested 
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 Insurance Products Fund or Mitchell 
Hutchins or an affiliate be required to establish a new funding medium 
for any Participant. No Participting Insurance Company or Qualified 
Plan shall be required to establish a new funding medium for any 
Variable Contract or Plan if: (a) an offer to do so has been declined 
by vote of a majority of the contract owners or Plan participants 
materially and adversely affected by the material irreconcilable 
conflict; or (b) pursuant to governing Plan or Variable Contract 
documents and applicable law, the Plan or Participating Insurance 
Company makes such decision without a vote of the Plan participants or 
Variable Contract owners.
    6. Any Board's determination of the existence of a material 
irreconcilable conflict and its implications will be made known 
promptly and in writing to all Participants.
    7. Participating Insurance Companies will provide pass-through 
voting privileges to contract owners who invest in Participating 
Separate Accounts so long as the Commission interprets the 1940 Act to 
require pass-through voting for contract owners. Accordingly, the 
Participating Insurance Companies will vote shares of an Insurance 
Products Fund held in their Participating Separate Accounts in a manner 
consistent with voting instructions timely received from contract 
owners. Participating Insurance Companies will be responsible for 
assuring that each of their Participating Separate Accounts investing 
in an Insurance Products Fund calculates voting privileges in a manner 
consistent with all other Participating Insurance Companies. The 
obligation to calculate voting privilege in this manner will be a 
contractual obligation of all Participating Insurance Companies under 
the agreements governing participation in the Insurance Products Fund. 
Each Participating Insurance Company will vote shares for which it has 
not received timely voting instructions, as well as shares attributable 
to it, in the same proportion as it votes shares for which it has 
received instructions.
    8. Each Qualified Plan will vote as required by applicable law and 
governing Plan documents.
    9. All reports of potential or existing conflicts by a Board, and 
all Board action with regard to determining the existence of a 
conflict, notifying Participants of a conflict, and determining whether 
any proposed action adequately remedies a conflict, will be properly 
recorded in the minutes of the appropriate Board or other appropriate 
records, and such minutes or other records shall be made available to 
the Commission upon request.
    10. Each Insurance Products Fund will notify all Participants that 
disclosure in separate account prospectuses or Plan prospectuses or 
other Plan disclosure documents regarding potential risks of mixed and 
shared funding may be appropriate. Each Insurance Products Fund will 
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 
Plans; (b) due to differences of tax treatment and other 
considerations, the interests of various contract owners participating 
in an Insurance Products Fund and the interests of Qualified Plans 
investing in that Insurance Product Fund may conflict; and (c) the 
Board of that Insurance Product Fund will monitor for the existence of 
any material conflicts and determine what action, if any, should be 
taken.
    11. Each Insurance Products 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 shares of 
the Insurance Products Fund), and, in particular, each Insurance 
Product Fund 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(a), and, if 
applicable, Section 16(b) of the 1940 Act. Further, each Insurance 
Products Fund will act in accordance with the Commission's 
interpretation of the requirements of Section 16(a) with respect to 
periodic elections of directors or trustees and with whatever rules the 
Commission may promulgate with respect thereto.
    12. If, and to the extent that, Rule 6e-2 and 6e-3(T) 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 Insurance Products Funds and the Participants, as 
appropriate, shall take such steps as may be necessary to comply with 
Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the 
extent applicable.
    13. No less than annually, the Participants shall submit to the 
Boards of the Insurance Products Funds such reports, materials, or data 
as such Boards may reasonably request so that the Boards may carry out 
fully the obligations imposed upon them by the conditions contained in 
the Application. Such reports, materials, and data shall be submitted 
more frequently if deemed appropriate by the applicable Boards. The 
obligations of the Participating Insurance Companies and Qualified 
Plans to provide these reports, materials, and data to the Boards shall 
be a contractual obligation under the agreements governing their 
participation in the Insurance Products Funds.
    14. In the event that a Plan should ever become an owner of 10% or 
more of the assets of an Insurance Products Fund, such Plan will 
execute a fund participation agreement including the conditions set 
forth herein, to the extent applicable, with that Insurance Product 
Fund. A Plan will execute an application containing an acknowledgment 
of this condition at the time of its initial purchase of shares of the 
Insurance Products Fund.

[[Page 47548]]

Conclusion

    For the reasons summarized above, Applicants believe that the 
requested exemptions, in accordance with the standards of Section 6(c) 
of the 1940 Act, 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. 99-22550 Filed 8-31-99 8:45 am]
BILLING CODE 8010-01-M