[Federal Register Volume 64, Number 168 (Tuesday, August 31, 1999)]
[Notices]
[Pages 47550-47557]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22621]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23967; File No. 812-11552]


Target/United Funds, Inc., et al.

August 24, 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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Summary of Application

    Applicants seek an order to permit shares of Target/United Funds, 
Inc. (``Fund'') and any other similar investment company or investment 
company series that Waddell & Reed Investment Management Company 
(``WRIMCO'') or any of its affiliates serve, now or in the future, as 
investment adviser, administrator, manager, principal underwriter or 
sponsor (the Fund and such other investment companies and series 
thereof, the ``Insurance Products Funds''), to be offered and sold to 
and held by: (1) Separate accounts funding variable annunity and 
variable life insurance contracts issued by both affiliated and 
unaffiliated life insurance companies; and (2) qualified pension and 
retirement plans outside of the separate account context.

Applicants

    Target/United Funds, Inc. and Waddell & Reed Investment Management 
Company.

Filing Date

    The application was filed on March 30, 1999, and amended and 
restated on July 16, 1999.

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 September 17, 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

[[Page 47551]]

hearing may request notification by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW, Washington, DC 20549-
0609. Applicants, c/o Helge K. Lee, Esq., Senior Vice President, 
Secretary and General Counsel, Waddell & Reed, Inc., 6300 Lamar Avenue, 
Overland Park, Kansas 66202.

FOR FURTHER INFORMATION CONTACT: Keith E. Carpenter, 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 Fund is an open-end management investment company organized 
as a corporation under the laws of the State of Maryland. The Fund 
currently consists of eleven separately managed series, each of which 
has its own investment objective and policies. Additional series could 
be added to the Fund in the future.
    2. WRIMCO is registered as an investment adviser under the 
Investment Advisers Act of 1940, and serves as the investment manager 
and accounting services agent for each of the Fund's series.
    3. The Fund currently offers its shares exclusively to insurance 
company separate accounts that fund variable insurance products. The 
Fund's shares are offered only to the separate accounts of United 
Investors Life Insurance Company (``United Investors''). United 
Investors receives no payments from the Fund for services in connection 
with the distribution of the shares. Applicants propose that shares of 
each Insurance Products Fund be offered to United Investors and/or one 
or more other insurance companies, whether affiliated or unaffiliated, 
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 (``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 Sections 3(c)(1), 
3(c)(7) or 3(c)(11) of the 1940 Act. In addition, Applicants propose 
that shares of each Insurance Products Fund be eligible to be offered 
directly to qualified pension and retirement plans (``Qualified Plans'' 
or ``Plans'') outside of the separate account context. Separate 
accounts owning shares of the Insurance Products Funds and their 
insurance company depositors are referred to herein as ``Participating 
Separate Accounts'' and ``Participating Insurance Companies,'' 
respectively.
    4. Participating Insurance Companies establish their own 
Participating Separate Accounts and design their own Variable 
Contracts. Each such Variable Contract has or will have certain unique 
features and probably will differ from other Variable Contracts 
supported by the Insurance Products Funds with respect to insurance 
guarantees, premium structure, charges, options, distribution method, 
marketing techniques, sales literature, and other aspects. Each 
Participating Insurance Company, on behalf of its Participating 
Separate Account(s), will enter into a fund participation agreement 
with each Insurance Products Fund in which such Participating Separate 
Account invests, and will have the legal obligation of satisfying all 
applicable requirements under state and federal law. The role of the 
Insurance Products Funds, so far as the federal securities laws are 
applicable, will be limited to that of offering their shares to 
separate accounts of various insurance companies and fulfilling any 
conditions the Commission may impose upon granting the order requested 
herein.
    5. The Plans will be pension or retirement plans intended to 
qualify under sections 401(a) and 501(c) of the Internet Revenue Code 
of 1986, as amended (``Code''). A plan may include a cash or deferred 
arrangement (permitting salary reduction contributions) intended to 
qualify under Section 401(k) of the Code. The Plans will also be 
subject to, and will be designed to comply with, the provisions of the 
Employee Retirement Income Security Act of 1974, as amended 
(``ERISA''), applicable to pension benefit plans, specifically ``Title 
I--Protection of Employee Benefit Rights.'' The Plans, therefore, will 
be subject requirements under the Code and ERISA regarding, for 
example, reporting and disclosure, participation and vesting, funding, 
fiduciary responsibility, and enforcement.
    6. The Qualified Plans may choose any of the Insurance Products 
Funds as their sole investments or as one of several investments. Plan 
participants may or may not be given an investment choice depending on 
the Plan itself. Shares of any of the Insurance Products Funds sold to 
Qualified Plans would be held by the trustees of those Plans as 
mandated by Section 403(a) of ERISA. WRIMCO (or any other investment 
adviser to an Insurance Products Fund) may, to the extent permitted by 
law, act as investment adviser to any of the Qualified Plans that 
purchase shares of any of the Insurance Products Funds. Applicants 
state that there likely will be no pass-through voting to the 
participants in such Qualified Plans as it is not required to be 
provided to such participants pursuant to ERISA.

Applicants' Legal Analysis

    1. In connection with the funding of scheduled premium variable 
life insurance contracts issued through a separate account registered 
under the 1940 Act as a unit investment trust (``UIT''), Rule 6e-
2(b)(15) provides partial exemptions from Sections 9(a), 13(a), 15(a) 
and 15(b) of the 1940 Act. The exemptions granted by Rule 6e-2(b)(15) 
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 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 an investment company that also offers its shares to a 
variable annuity separate account or a flexible premium variable life 
insurance account of the same company or of any affiliated or 
unaffiliated insurance company. The use of a common management 
investment company as the underlying investment medium for both 
variable annuity and variable life insurance separate accounts is 
referred to as ``mixed funding.''
    2. The relief granted by Rule 6e-2(b)(15) also 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. The use of a common investment 
company as the underlying investment medium for separate accounts of 
unaffiliated insurance companies is referred to herein as ``shared 
funding.''
    3. Applicants assert that the relief granted by rule 6e-2(b)(15) 
does not

[[Page 47552]]

relate to Qualified Plans, or to a registered investment company's 
ability to sell its shares to these entities. However, because the 
relief under rule 6e-2(b)(15) is available only where shares are 
offered exclusively to separate accounts, additional exemptive relief 
is necessary if the shares of the Insurance Products Funds are also to 
be sold to Plans. The use of a common investment company as the 
underlying investment medium for variable annuity and variable life 
insurance separate accounts of affiliated and unaffiliated insurance 
companies and Qualified Plans is referred to as ``extended mixed and 
shared funding.''
    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), 13(a), 15(a) and 15(b) of the 1940 Act. The exemptions 
granted by rule 6e3(T) 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)(b)(15) 
permits mixed funding for flexible premium variable life insurance 
separate accounts but does not permit shared funding, because the 
relief granted by Rule 6e-3(T)(b)(15) is not available with respect to 
a flexible premium variable life insurance separate account that owns 
shares of an investment company that also offers its shares to separate 
accounts (including flexible premium variable life insurance separate 
accounts) of unaffiliated life insurance companies.
    5. Applicants assert that if shares of the Insurance Products Funds 
were sold only to Qualified Plans, exemptive relief under rule 6e-3(T) 
would not be necessary. Applicants, however, state that because the 
relief under rule 6e-3(T) is available only if shares are offered 
exclusively to separate accounts, additional exemptive relief is 
necessary if the shares of the Insurance Products Funds are also to be 
sold to Plans.
    6. Applicants state that Section 817(h) of the Code imposes certain 
diversification standards on the assets underlying the Variable 
Contracts held by the portfolios of the Insurance Production Funds. The 
Code provides that Variable Contracts will not be treated as annuity 
contracts or life insurance contracts for any period (and any 
subsequent period) for which the investments are not adequately 
diversified in accordance with regulations issued by the Treasury 
Department. Applicants also state that on March 2, 1989, the Treasury 
Department issued Regulations (Treas. Reg Sec. 1.817-5) which 
established diversification requirements for the investment portfolios 
underlying Variable Contracts. The Regulations generally provide that, 
in order 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. 
However, the Regulations also contain certain exceptions to this 
requirement, one of which allows trustees of Qualified Plans to hold 
shares of an investment company without adversely affecting the status 
of the investment company as an adequately diversified underlying 
investment for Variable Contracts issued through separate accounts of 
insurance companies (Treas. Reg. Sec. 1.817-5(f)(3)(iii)). As a result 
of this exception to the general diversification requirements, 
Applicants assert that Qualified Plans may select the Insurance 
Products Funds as investment options without endangering the tax status 
of Variable Contracts issued through Participating Insurance Companies.
    7. Applicants state that the promulgation of rules 6e-2(b)(15) and 
6e-3(T)(b)(15) preceded the issuance of the treasury Regulations which 
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, Applicants assert that 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. Accordingly, 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 (and, to the 
extent necessary, any investment adviser, sub-adviser, principal 
underwriter and depositor of such an account) from Sections 9(a), 
13(a), 15(a) and 15(b) of the 1940 Act, and subparagraph (b)(15) of 
rules 6e2 and 6e3(T) (and any comparable permanent rule) thereunder, to 
the extent necessary to permit shares of the Insurance Products Funds 
to be offered and sold in connection with extended mixed and shared 
funding.
    9. In general, Section 9(a) of the 1940 Act disqualifies any person 
convicted of certain offenses, and any company affiliated with that 
person from acting or serving in various capacities with respect to a 
registered investment company. More specifically, Section 9(a)(3) 
provides that it is unlawful for any company to serve as a investment 
adviser to, or principal underwriter for, any registered open-end 
investment company if an affiliated person of that company is subject 
to a disqualification enumerated in Sections 9(a)(1) or (2).
    10. Rules 6e2(b)(15)(i) and (ii) and 6e-3(T)(b)(15)(i) and (ii) 
however, 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 application of the 
eligibility restrictions to affiliated individuals or companies that 
directly participate in the management or administration of the 
underlying investment company or series thereof. The relief provided by 
the rules permits a person 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 any 
underlying investment company, so long as the disqualified individual 
does not participate directly in the management or administration of 
the underlying investment company.
    11. 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. Applicants state the exemptions contained in 
Rules 6e-29(b)(15) and 6e-3(T) recognize that it is not necessary for 
the protection of investors or the purposes fairly intended under 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, or any series thereof, funding the separate 
accounts. Applicants believe that is unnecessary to limit the 
applicability of the rules merely because shares of the Insurance 
Products funds may be sold in connection with mixed and shared funding. 
Applicants state that neither the Participating Insurance Companies nor 
the Qualified Plans are expected to play any role in the management or 
administration of the

[[Page 47553]]

Insurance Products Funds. Applicants assert that, therefore, applying 
the restrictions of Section 9(a) serves no regulatory purpose. 
Furthermore, Applicants 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. Applicants further assert that the relief 
requested will in no way be affected by the proposed sale of shares of 
the Insurance Products Funds to Qualified Plans, and that the 
insulation of the Insurance Products Funds from those individuals who 
are disqualified under the 1940 Act will remain intact even if shares 
of the Insurance Products Funds are sold to Qualified Plans. Applicants 
state that 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.
    12. Subgaragraph (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 
related separate account. However, subparagraph (b)(15)(iii) of Rules 
6e-2 and 6e3(T) provides exemptions from the pass-through voting 
requirement in limited situations, if the limitations on mixed and 
shared funding are satisfied.
    13. 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 
investment company or any contract between and investment company and 
its adviser, when an insurance regulatory authority so requires. 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 policies, principal underwriter, or 
investment adviser. Voting instructions with respect to a change in 
investment policies may be disregarded only 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 
(c) result in investments that would vary from the general quality and 
nature of investments and investment and 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 the principal underwriter may be disregarded if 
such disapproval is reasonable. Voting instructions with respect to a 
change in an investment adviser may be disregarded only if the 
insurance company makes a good-faith determination that: (a) The 
adviser's fees would exceed the maximum rate that may be charged 
against the separate account's assets; (b) the proposed adviser may be 
expected to employ investment techniques that vary from the general 
techniques used by the current adviser; or (c) the proposed adviser may 
be expected to manage the investment company's investments in a manner 
that would be inconsistent with its investment objectives or in a 
manner that would result in investments that vary from certain 
standards.
    14. Applicants state that Rule 6e-2 recognizes that variable life 
insurance contracts have important elements unique to insurance 
contracts and are subjects to extensive state regulation. 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 objections. 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 of the 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 and 
variable annuity contracts are subject to substantially the same state 
insurance regulatory authority and, therefore, the corresponding 
provisions of Rule 6e-3(T) for flexible premium insurance contracts 
presumably were adopted in recognition of the same factors.
    15. Applicants assert that these considerations are no less 
important or necessary in connection with mixed and shared funding. 
Applicants state that mixed and shared funding does not compromise the 
goals of state insurance regulatory authorities or of the Commission. 
Indeed, Applicants assert that by permitting these 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. 
Applicants further state that the sale of Fund shares to Qualified 
Plans will not have any impact on the relief requested in this regard. 
Shares of the Insurance Products Funds sold to Qualified Plans will be 
held by the trustees of those Plans as required by Section 403(a) of 
ERISA. Section 403(a) also provides that the trustees must have 
exclusive authority and discretion to manage and control the 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. If a abed 
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, Applicant assert 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 Qualified Plans since such plans are not entitled to pass-
though voting privileges.
    16. Applicants submit that even if a Qualified Plan were to hold a 
controlling interest in an Insurance Products Fund, Applicants do not 
believe that such control would disadvantage other investors in that 
Insurance Products Fund to any greater extent than is the case when any 
institutional shareholder holds a controlling interest in the voting 
securities of any open-end management investment company. In this 
regard, Applicants submit that investment in an Insurance Products Fund 
by a Qualified Plan will not create any of the voting complications 
occasioned by mixed or

[[Page 47554]]

shared funding. Unlike mixed or shared funding, Plan investor voting 
rights cannot be frustrated by veto rights of insurers or state 
regulators.
    17. Applicants generally expect many Qualified Plans to 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, 
investment advisers or another named fiduciary to exercise voting 
rights in accordance with instructions from participants. Where a 
Qualified Plan does not provide participants with the right to given 
voting instructions, the Applicants submit that there is no potential 
or material irreconcilable conflicts of interest between or among 
contract owners and Plan investors with respect to voting of an 
Insurance Products Fund's shares. 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 contract owners. In this regard, 
Applicants submit that the purchase of shares of an Insurance Product 
Fund by Qualified Plans that provide voting rights does not present any 
complications nor otherwise occasioned by mixed or shared funding.
    18. Applicants assert that no increased conflicts of interest would 
be presented by the granting of the requested relief. Applicants assert 
that shared funding does not present any issues that do not already 
exist where a single insurance company is licensed to do business in 
several states. Applicants note that it is possible that the state 
insurance regulatory body in a state in which one Participant Insurance 
Company is domiciled could require action that is inconsistent with the 
requirements of insurance regulators in one or more states in which 
other Participating Insurance Companies are domiciled. Applicants 
submit that this possibility 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.
    19. Applicants further submit that affiliation does not reduce the 
potential, if any exists, for differences in state regulatory 
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 any adverse effects that differences among state 
regulatory requirements may produce. For example, 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 
Participating Separate Account's investment in the relevant Insurance 
Products Funds.
    20. Applicants also argue that 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 is limited by the 
requirement that disregarding voting instructions be reasonable and 
based on specific good faith determinations. However, if Participating 
Insurance Company's decision to disregard contract owner voting 
instructions represent 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 separate account's investment in that fund, and 
no charge or penalty will be imposed as a result of such a withdrawal.
    21. Applicants submit that 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, or a series thereof, supported only variable 
annuity or only variable life insurance contracts. Hence, Applicants 
assert there is no reason to believe that conflicts of interest would 
result from mixed funding. Moreover, Applicants state that the 
Insurance Products Funds will not be managed to favor or disfavor any 
particular insurer or type of contract.
    22. Applicants submit that 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. An investment company supporting even one type of 
insurance product must accommodate these diverse factors. Applicants 
assert that 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. Applicants also assert that 
regardless of the type of shareholder in each Insurance Product Fund, 
WRIMCO is or would be contractually or otherwise obligated to manage 
each Insurance Products Fund solely and exclusively in accordance with 
that fund's investment objectives, policies and restrictions as well as 
any guidelines established by the board of directors (or trustees) of 
each Insurance Products Fund.
    23. As noted above, Section 817(h) of the Code imposes certain 
diversification standards on the assets underlying Variable Contracts 
held in the portfolios of management investment companies. Treasury 
Regulation Sec. 1.817-5, which establishes diversification requirements 
for such portfolios, specifically permits, among other things, 
qualified pension or retirement plans and 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, present any inherent conflicts of 
interest if Qualified Plans, variable annuity separate accounts and 
variable life separate accounts all invest in the same management 
investment company.
    24. Applicants note that while there may be differences in the 
manner in which distributions from Variable Contracts and Qualified 
Plans are taxed, the tax consequences do not raise any conflict of 
interest. When distributions are to be made, and Participating Separate 
Account or the Qualified Plan cannot net purchase payments to make the 
distributions, the Separate Account or Qualified Plan will redeem 
shares of the relevant Insurance Products Funds at their net asset 
value. The Qualified Plan will then make distributions in accordance 
with the terms of the Plan. The Participating Insurance Company will 
surrender values from the Separate Account into the general account to 
make distributions in accordance with the terms of the Variable 
Contract.
    25. Applicants also state that it is possible to provide an 
equitable means of giving voting rights to Participating Separate 
Account Variable Contract owners and to Qualified Plans. Each Insurance 
Products Fund or its agent will inform each Participating Insurance 
Company of each Participating Separate Account's ownership in the Fund 
shares, as well as inform the trustees of Qualified Plans of their 
holdings. Each Participating Insurance Company will then solicit voting 
instructions in accordance with Rules 6e-2 and 6e-3(T), as applicable, 
and its participation agreement with the relevant Insurance Products 
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 Products Funds would be no different 
from the voting rights that are provided to Qualified Plans with 
respect

[[Page 47555]]

to shares of funds sold to the general public.
    26. Applicants submit that the ability of the Insurance Products 
Funds to sell their respective shares directly to Qualified Plans does 
not create a ``senior security,'' as this term is defined under Section 
18(g) of the 1940 Act, with respect to any contract owner as opposed to 
a participant in a Qualified Plan. Regardless of the rights and 
benefits of participants in the Qualified Plans or contract owners, the 
Qualified Plans and the Participating Separate Accounts have rights 
only with respect to their respective shares of the Insurance Products 
Funds. 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.
    27. Applicants state that there are no conflicts between the 
contract owners of Participating Separate Accounts and Qualified Plan 
participants with respect to the state insurance commissioners' veto 
power over investment objectives. 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. Generally, time-
consuming, complex transactions must be undertaken to accomplish these 
redemptions and transfers. On the other hand, trustees of Qualified 
Plans 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 suitable investment. 
Based on the foregoing, Applicants represent that even if conflicts of 
interest arise between contract owners and Qualified Plans 
participants, the issues can be almost immediately resolved because the 
trustees of the Qualified Plans can, on their own, redeem the shares of 
the Insurance Products Funds.
    28. Applicants assert that various factors have prevented more 
insurance companies from offering variable annuity and variable life 
insurance contracts than currently do so. Applicants state that 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. 
Applicants state that 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. Applicants assert that use of the Insurance 
Products Funds as common investment medium for Variable Contracts would 
alleviate these concerns. Participating Insurance Companies would 
benefit not only from the investment advisory and administrative 
expertise of WRIMCO, but also from the cost efficiencies and investment 
flexibility afforded by a large pool of funds. Therefore, Applicants 
assert, making the Insurance Products Funds available for mixed and 
shared funding may 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.
    29. Applicants also submit that mixed and shared funding also 
should benefit Variable Contract owners by eliminating a significant 
portion of the costs of establishing and administering separate funds. 
Furthermore, the sale of shares of the Insurance Products Funds to 
Qualified Plans should further increase the amount of assets available 
for investment by those funds. This 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 Products Fund more feasible.

Applicants' Conditions

    Applicants have consented to the following conditions:
    1. A majority of the board of directors (``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 for: (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 the participants in Qualified Plans 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, 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 voting instructions of its participants.
    3. Participating Insurance Companies, WRIMCO (or any other 
investment adviser of an Insurance Products Fund), and Qualified Plans 
that execute a fund participation agreement upon becoming an owner of 
10% or more of an Insurance Products Fund's assets (``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 such 
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 the contract owners, and,

[[Page 47556]]

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 a vote of all affected contract owners and Plan 
participants 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 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 contract owner voting instructions 
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 the 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 the contract owners and Plan participants.
    5. For the 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, WRIMCO or 
any of their respective affiliates be required to establish a new 
funding medium for any Participant. No Participating Insurance Company 
or Qualified Plan shall be required by condition 4 to establish a new 
funding medium for any variable Contract or Plan if: (a) An offer to do 
so has been declined by a vote of a majority of the Variable Contract 
owners or Plan participants materially and adversely affected by the 
irreconcilable material 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 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 privileges as provided in the 
Application 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 voting instructions. Each Qualified 
Plan will vote as required by applicable law and governing Plan 
documents.
    8. All reports of potential or existing conflicts received 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.
    9. 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 Products 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 the 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 Products Fund may conflict; and (c) the 
Board of that Insurance Products Fund will monitor for the existence of 
any material conflicts and determine what action, if any, should be 
taken.
    10. Each Insurance Products 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 shares of the 
Insurance Products Fund), and in particular, each Insurance Products 
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.
    11. if, and to the extent that, Rules 6e-2 and 6e-3(T) are amended 
(or Rule 6e-3 under the 1940 Act is adopted) to provide exemptive 
relief from any provision of the 1940 Act or the rules thereunder with 
respect to mixed or shared funding on terms and conditions materially 
different from any exemptions granted in the Order requested by 
Applicants, then the Insurance Products Funds and the Participants, as 
appropriate, will 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.
    12. No less than annually, the Participants shall submit to the 
Boards such reports materials, or data as the Boards may reasonably 
request so that the Boards may carry out fully the

[[Page 47557]]

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 of all Participating Insurance Companies 
and Qualified plans under the agreements governing their participation 
in the Insurance Products Funds.
    13. 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 Products 
Fund. A plan will execute an application containing an acknowledge of 
this condition at the time of its initial purchase of shares of the 
Insurance Products 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. 99-22621 Filed 8-30-99; 8:45 am]
BILLING CODE 8010-01-M