[Federal Register Volume 65, Number 13 (Thursday, January 20, 2000)]
[Notices]
[Pages 3261-3266]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-1285]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24251; File No. 812-11768]


Third Avenue Variable Series Trust and ESQF Advisers, Inc.

January 12, 2000.
AGENCY:  Securities and Exchange Commission (the ``SEC'' or the 
``Commission'').

ACTION:  Notice of application for an order under Section 6(c) of the 
Investment Company Act of 1940 (the ``1940 Act'') for exemptions from 
the provisions of 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.

-----------------------------------------------------------------------

SUMMARY OF APPLICATION:  Applicants seek an order to permit shares of 
any current or future series of the Third Avenue Variable Series Trust 
designed to fund insurance products (``Insurance Funding Series'') and 
shares of any other investment company or series thereof now or in the 
future registered under the 1940 Act that is designed to fund insurance 
products and for which ESQF, Advisers, Inc., or any of its affiliates 
(``Affiliates''), may in the future serve as investment adviser, 
administrator, manager, principal underwriter or sponsor (the Insurance 
Funding Series and each other investment company hereinafter referred 
to, collectively, as the ``Funds''), to be sold to and held by: (a) 
Variable annuity and variable life insurance separate accounts of both 
affiliated and unaffiliated life insurance companies; and (b) qualified 
pension and retirement plans outside of the separate account context.

APPLICANTS: Third Avenue Variable Series Trust (the ``Trust'') and ESQF 
Advisers, Inc. (the ``Adviser'').

FILING DATE: The application was filed on September 3, 1999, and 
amended and restated on November 16, 1999.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing on this application by writing to the 
Secretary of the SEC and serving Applicants with a copy of the request, 
in person or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on February 7, 2000, and accompanied by proof 
of service on the Applicants in the form of an affidavit or, for 
lawyers, a certificate of service. Hearing requests should state the 
nature of the interest, the reason for the request and the issues 
contested. Persons may request notification of the date of a hearing by 
writing to the Secretary of the SEC.

ADDRESSES:  Secretary, SEC, 450 Fifth Street, NW, Washington, DC 20549-
0609. Applicants, Third Avenue Variable Series Trust, c/o Ian M. 
Kirschner, 767 Third Avenue, New York, New York 10017-2023.

FOR FURTHER INFORMATION CONTACT:  Zandra Y. Bailes, Senior Counsel, or 
Susan M. Olson, Branch Chief, Division of Investment Management, Office 
of Insurance Products, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: Following is a summary of the application. 
The complete application is available for a fee from the Public 
Reference Branch of the SEC, 450 Fifth Street, NW, Washington, DC 20549 
(tel. (202) 942-8090).

Applicants' Representations

    1. The Trust is a Delaware business trust registered as an open-end 
diversified management investment company. The Trust currently is 
composed of one series, Third Avenue Value Portfolio. Additional 
portfolios may be added in the future.
    2. The Adviser is registered under the Investment Advisers Act of 
1940 and will be the investment manager for the Trust.
    3. The Trust intends to offer its shares to separate accounts of 
both affiliated and unaffiliated insurance companies (``Participating 
Insurance Companies''), supporting variable annuity and variable life 
insurance contracts.
    4. The Trust also intends to offer one or more portfolios of its 
shares directly to qualified pension and retirement plans (``Eligible 
Plans'' or ``Plans'')

[[Page 3262]]

outside the separate account context. The Funds' shares sold to 
Eligible Plans which are subject to the Employee Retirement Income 
Security Act of 1984 (``ERISA''), as amended, may be held by the 
trustee(s) of the Eligible Plans.
    5. The Participating Insurance Companies will establish their own 
separate accounts and design their own Contracts. Each Participating 
Insurance Company will have the legal obligation of satisfying all 
requirements applicable to such insurance company under the federal 
securities laws. Each Participating Insurance Company will enter into a 
fund participation agreement with the Funds in which the Participating 
Insurance Company invests. The role of the Funds, so far as the federal 
securities laws are applicable, will be to offer their shares to 
separate accounts of Participating Insurance Companies and to Eligible 
Plans and to fulfill any conditions that the Commission may impose upon 
granting the order requested in the application.

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, Rule 6e-2(b)(15) under 
the 1940 Act provides partial exemptions from Sections 9(a), 13(a), 
15(a) and 15(b) of the 1940 Act. The exemptions granted by rule 6e-
2(b)(15) are available, however, only where the management investment 
company underlying the separate account (``underlying fund'') offers 
its shares ``exclusively to variable life insurance separate accounts 
of the life insurer, or of any affiliated life insurance company'' 
(emphasis supplied). 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 underlying fund that 
also offers its shares to a variable annuity or a flexible premium 
variable life insurance separate account of the same company or of any 
affiliated life insurance company. The use of a common management 
investment company as the underlying investment medium for both 
variable annuity and variable life insurance separate accounts of the 
same insurance company or of any affiliated life insurance company is 
referred to herein as ``mixed funding.'' In addition, the relief 
granted by rule 6e-2(b)(15) is not available if shares of the 
underlying management investment company are offered to variable 
annuity or variable life insurance separate accounts of unaffiliated 
life insurance companies. The use of a common management investment 
company as the underlying investment medium for separate accounts of 
unaffiliated life insurance companies is referred to herein as ``shared 
funding.''
    2. In connection with the funding of flexible premium variable life 
insurance contracts issued through a separate account registered under 
the 1940 Act as unit investment trust, Rule 6e-3(T)(b)(15) provides 
partial exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the 
1940 Act. These exemptions, however, are available only where the 
separate account's underlying fund offers its shares ``exclusively to 
separate accounts of the life insurer, or of any affiliated life 
insurance company, offering either scheduled [premium variable life 
insurance] contracts or flexible [premium variable life insurance] 
contracts, or both; or which also offer their shares to variable 
annuity separate accounts of the life insurer or of an affiliated life 
insurance company'' (emphasis supplied). Therefore, Rule 6e-3(T) 
permits mixed funding with respect to a flexible premium variable life 
insurance. However, Rule 6e-3(T) 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 a management investment company that also offers its 
shares to separate accounts (including flexible premium variable life 
insurance separate accounts) of unaffiliated life insurance companies.
    3. Applicants state that the relief granted by Rules 6e-2(b)(15) 
and 6e3(T)(b)(15) is not affected by the purchase of shares of the 
Funds by an Eligible Plan. However, because the relief under Rules 6e-
2(b)(15) and 6e3(T)(b)(15) is available only where shares of the 
underlying fund are offered exclusively to separate accounts, exemptive 
relief is necessary if shares of the Funds are also to be sold to 
Eligible Plans.
    4. Applicants state that Section 817(h) of the Internal Revenue 
Code of 1986, as amended (the ``Code''), imposes certain 
diversification standards on the assets underlying variable annuity 
contracts and variable life insurance contracts issued by insurance 
company separate accounts and held in the portfolios of management 
investment companies. The Code provides that such contracts will not be 
treated as annuity contracts or life insurance contracts for any period 
(or any subsequent period) for which the investments are not, in 
accordance with regulations issued by the Treasury Department, 
adequately diversified. On March 2, 1989, the Treasury Department 
issued regulations (Treas. Reg. 1.817-5)(the ``Regulations'') which 
established specific diversification requirements for investment 
portfolios underlying variable annuity and variable life contracts. The 
Regulations generally provide that, in order to meet these 
diversification requirements, all of the beneficial interests in the 
underlying investment companies. However, the Regulations also contain 
an exception to this requirement that allows shares of an investment 
company to be held by a qualified pension or retirement plan without 
adversely affecting the ability of shares in the same investment 
company to also be held by the separate accounts of insurance companies 
in connection with their variable annuity and variable life contracts 
(Treas. Reg. 1.817-5(f)(3)(iii)).
    5. Applicants also note that the promulgation of Rules 6e-2(b)(15) 
and 6e,(T)(b)(15) preceded the issuance of the Regulations, which made 
is possible for shares of an investment company to be held by an 
Eligible Plan without adversely affecting the ability of shares in the 
same investment company to also be held by the separate accounts of 
insurance companies in connection with their Contracts. Thus, the sale 
of shares of the same investment company to separate accounts and 
eligible plans could not have been envisioned at the time of the 
adoption of Rules 6e-2(b)(1) and 6e-3(T)(b)(15), given the then-current 
tax law.
    6. In general, Section 9(A) of the 1940 Act disqualifies any person 
convicted of certain offenses, and any company affiliated with that 
person, from serving in various capacities with respect to an 
underlying registered management investment company. More specifically, 
Section 9(a)(3) provides that it is unlawful for any company to serve 
as 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) of (2) of 
the 1940 Act. Rules 6e2(b)(15)(i) and (ii) and 6e3(T)(b)(15)(i) and 
(ii) provide exemptions from Section 9(a) under certain circumstances, 
subject to the limitations of mixed and shared funding. These 
exemptions limit the application of the eligibility restrictions to 
affiliated individuals or companies that directly participate in the 
management of the underlying fund.
    7. Applicants state that the partial relief granted in Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) from the requirements of

[[Page 3263]]

Section 9 of the 1940 Act limits, in effect, the mount 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 purposes of Section 9. Applicants state that those Rules 
recognize that it is unnecessary to apply Section 9(a) to the thousands 
of individuals who may be involved in a large insurance company but 
would have no connection with the investment company funding the 
separate accounts. Those individuals who participate in the management 
or administration of the funds will remain the same regardless of which 
separate accounts or insurance companies use the Funds. Applicants 
maintain that applying the requirements of Section 9(a) because of 
investment by other insurers' separate accounts would not serve any 
regulatory purpose. Therefore, Applicants submit that it is unnecessary 
to apply Section 9(a) to individuals in various unaffiliated insurance 
companies (or affiliated companies or Participating Insurance 
Companies) that may utilize a Fund as a funding medium for variable 
contracts. Additionally, Applicants state that for the same reasons as 
set forth above with respect to investments by separate accounts, there 
is no regulatory purpose to be served in extending the monitoring 
requirements because of investment in the Funds by Plans.
    8. Applicants state the Rules 6e2(b)(15)(iii) and 6e-
3(T)(b)(15)(iii) under the 1940 Act provide exemptions from the pass-
through voting requirement with respect to several significant matters, 
assuming the limitations on mixed and shared funding are observed. More 
specifically, Rules 6e-2(b)2(b)(15)(iii)(A) and 6e3(T)(b)(15)(iii)A 
provide that the insurance company may disregard the footing 
instructions of its contract owners with respect to the investment of 
an underlying fund or any contract between a fund and its investment 
adviser, when required to do so by an insurance regulatory authority 
and 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 
6e3(T)(b)(15)(iii)(A)(2) provide that the insurance company may 
disregard voting instruction of contract owners in favor of any change 
in such company's investment policies, principal underwriter or any 
investment adviser (subject to the other provisions of paragraphs 
(b)(5)(ii) and (b)(7)(ii)(B) and (C) of the Rules).
    9. With respect to Eligible Plans, which are not registered as 
investment companies under the 1940 Act, there is no requirement to 
pass through voting rights to Plan participants. Indeed, to the 
contrary, applicable law expressly reserves voting rights associated 
with Plan assets to certain specified persons. Applicants state that 
shares of the Funds sold to Eligible Plans will be held by the trustees 
of such Plans as required by Section 403(a) of ERISA. Section 403(a) 
also provides that the trustee(s) must have exclusive authority and 
discretion to manage and control Eligible Plans with two exceptions: 
(a) When the Eligible 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 Eligible Plan and not contrary to 
ERISA; and (b) when the authority to manage, acquire or dispose of 
assets of the Eligible Plan is delegated to one or more investment 
managers pursuant to Section 403(c)(3) of ERISA. Unless one of the 
above two exceptions stated in Section 403(a) applies, Plan trustees 
have the exclusive authority and responsibility for voting proxies.
    10. 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. The Eligible Plans may have their trustee(s) or other 
fiduciaries exercise voting rights attributable to investment 
securities held by the Eligible Plans in their discretion. Some of the 
Eligible Plans, however, may provide for the trustee(s), an investment 
adviser (or advisers) or another named fiduciary to exercise voting 
rights in accordance with instructions from Plan participants.
    11. Where an Eligible Plan does not provide participants with the 
right to give voting instructions, Applicants submit that there is no 
potential for material irreconcilable conflicts of interest between or 
among Contract holders and Plan participants with respect to voting of 
the respective Fund's shares. Accordingly, Applicants note 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 such Eligible Plans since the Eligible 
Plans are not entitled to pass-through voting privileges.
    12. Even if an Eligible Plan were to hold a controlling interest in 
a Fund, Applicants argue that such control would not disadvantage other 
investors in such 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 the Fund by a Plan will not create any of the 
voting complications occasioned by mixed funding or shared funding, 
Unlike mixed or shared funding, Plan investor voting rights cannot be 
frustrated by veto rights of insurers or state regulators.
    13. Where an Eligible Plan provides Plan participants with the 
right to give voting instructions, Applicants see no reason to believe 
the participants in Eligible Plans generally or those in a particular 
Plan, either as a single group or in combination with participants in 
other Eligible Plans, would vote in a manner that would disadvantage 
Contract holders. The purchase of shares of the Funds by Eligible Plans 
that provide voting rights does not present any complications not 
otherwise occasioned by mixed or shared funding.
    14. Applicants assert that no increased conflicts of interest would 
be presented by the granting of the requested relief. 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. 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 of other states in which other Participating Insurance 
Companies are domiciled. Applicants submit that the possibility also 
exists when a single insurer and its affiliates offer their insurance 
products in several states, as in currently permitted.
    15. Applicants state that affiliations do not reduce the potential 
for differences in state regulatory requirements. In any event, 
Applicants submit that the conditions set forth in the application and 
included in this notice are designed to safeguard against any adverse 
effects that differences among state regulatory requirements may 
produce. For instance, if a particular state insurance regulator's 
decision conflicts with the majority of other state regulators, the 
affected insurer may be required to withdraw its separate account's 
investment in the relevant Funds.
    16. Applicants further assert that affiliation does not eliminate 
the potential for divergent judgments as to when a Participating 
Insurance Company could disregard Contract holder voting instructions. 
The potential

[[Page 3264]]

for disagreement is limited by the requirements in Rules 6e-2 and 6-
3(T) that an insurance company's disregard of voting instructions be 
reasonable and based on specific good faith determinations. However, if 
the Participating Insurance Company's decision to disregard Contract 
holder voting instructions represents a minority position or would 
preclude a majority vote approving a particular change, such 
Participating Insurance Company may be required, at the election of the 
relevant Fund, to withdraw its separate account's investment in that 
Fund, and no charge or penalty would be imposed upon Contract holders 
as a result of such withdrawal.
    17. Applicants submit that no reason exists why investment policies 
of the Fund with mixed funding would or should be materially different 
from what they would or should be if the Funds or series thereof funded 
only variable annuity contracts or only variable life insurance 
contracts, rather than Contracts and Eligible Plans. Applicants 
represent that the Funds will not be managed to favor or disfavor any 
particular insurer or type of Contract.
    18. Applicants state that they do not see any greater potential for 
material irreconcilable conflicts arising between the interests of Plan 
Participants under the Eligible Plans and holders of Contracts issued 
by separate accounts of Participating Insurance Companies from possible 
future changes in the federal tax laws than that which already exist 
between variable annuity contract holders and variable life insurance 
contract holders.
    19. Applicants note that while there are differences in the manner 
in which distributions are taxed for variable annuity contracts, 
variable life insurance contracts and Eligible Plans, the tax 
consequences do not raise any conflicts of interest. When distributions 
are to be made, and the Eligible Plan or variable annuity or variable 
life insurance separate accounts cannot net purchase payments to make 
the distributions, the separate account or Eligible Plan will redeem 
shares of the Funds at their net asset value. The Eligible Plan will 
make distributions in accordance with the terms of the Plan. The life 
insurance company will make distributions in accordance with the terms 
of the variable contract.
    20. With respect to voting rights, Applicants state that it is 
possible to provide an equitable means of giving voting rights to 
Contract holders and to Eligible Plans. Applicants represent that the 
Fund will inform each shareholder, including each separate account and 
Eligible Plan, of information necessary for the shareholder meeting, 
including their respective share of ownership in the Fund. A 
Participating Insurance Company will then solicit voting instructions 
in accordance with the ``pass-through'' voting requirements of Rules 
6e-2 and 6e-3(T).
    21. Applicants submit that there are no conflicts between the 
Contract holders of the separate accounts and the participants under 
Eligible Plans with respect to state insurance commissioners' veto 
powers over investment objectives. State insurance commissioners have 
been given the veto power to prevent, among other things, insurance 
companies indiscriminately redeeming their separate accounts out of one 
fund and investing in another. Generally, time-consuming complex 
transactions must be undertaken to accomplish such redemptions and 
transfers. Conversely, the Eligible Plans can quickly redeem shares 
from a Fund and reinvest in another funding vehicle without the same 
regulatory impediments or, as is the case with most Plans, even hold 
cash pending suitable investment. Therefore, Applicants conclude that 
even if there should arise issues where the interests of Contract 
holders and the interests of Eligible Plans and Plan Participants 
conflict, the issues can be almost immediately resolved because 
Eligible Plans can, on their own, redeem the shares out of the Funds.
    22. Applicants assert that many insurance companies have been 
hindered in entering the market for offering variable annuity and 
variable life insurance contracts. These factors include the costs of 
organizing and operating a funding medium, the lack of expertise with 
respect to investment management (principally with respect to stock and 
money market investments) and the lack of name recognition by the 
public as investment experts. In particular, some smaller life 
insurance companies may not find it economically feasible, or within 
their investment or administrative expertise, to enter the Contract 
business on their own. Applicants submit that the use of the Funds as 
common investment media for Contracts would lower these barriers.
    23. Applicants assert that Participating Insurance Companies would 
benefit not only from the investment and administrative expertise of 
the Adviser and its Affiliates, but also from the cost efficiencies and 
investment flexibility afforded by a large pool of funds. Therefore, 
making the Funds available for mixed and shared funding will encourage 
more insurance companies to offer Contracts, and accordingly should 
result in increased competition with respect to both Contract design 
and pricing, which can be expected to result in more product variation 
and lower charges. Applicants state that Contract holders would benefit 
because mixed and shared funding eliminates a significant portion of 
the costs of establishing and administering separate funds. Applicants 
also assert that the sale of shares of the Funds to Eligible Plans 
should result in an increased amount of assets available for investment 
by such Funds. This may benefit Contract holders by promoting economies 
of scale, by permitting greater safety of investments through greater 
diversification, and by making the addition of new portfolios to the 
Funds more feasible.

Applicants' Conditions

    Applicants have consented to the following conditions:
    1. A majority of the Trustees or Board of Directors (each, a 
``Board'') of the Trust and each 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. The Boards will monitor their respective Funds for the existence 
of any material irreconcilable conflict between and among the interests 
of the Contract holders of all separate accounts and of Plan 
participants and Eligible Plans investing in the Funds and determine 
what action, if any, should be taken in response to any such conflicts. 
A material irreconcilable conflict may arise for a variety of reasons, 
including: (a) any 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 Funds are being managed; (e) a 
difference in voting instructions given by variable

[[Page 3265]]

annuity and variable life insurance contract holders and trustees of 
the Plans; (f) a decision by a Participating Insurance Company to 
disregard the voting instructions of Plan participants.
    3. The Adviser (or any investment adviser of a Fund), any 
Participating Insurance Company, and any Plan that executes a fund 
participation agreement upon becoming an owner of 10% or more of the 
issued and outstanding shares of a Fund (such Plans referred to 
hereafter as ``Participating Plans'') will be required to report any 
potential or existing conflicts to the Board of the relevant Fund. The 
Adviser (or any other investment adviser of a Fund), Participating 
Insurance Companies and Participating Plans 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 
includes, but is not limited to, an obligation by a Participating 
Insurance Company to inform the Board whenever it has determined to 
disregard Contract holder voting instructions, and, if pass-through 
voting is applicable an obligation by a Participating Plan to inform 
the Board whenever it has determined to disregard Plan participant 
voting instructions. The responsibility to report such conflicts and 
information, and to assist the Boards will be contractual obligations 
of all Participating Insurance Companies and Participating Plans 
investing in the Funds under their agreements governing participation 
in the Funds, and such agreements, shall provide that these 
responsibilities will be carried out with a view only to the interests 
of the Contract holders, and if applicable, Plan participants.
    4. If a majority of the Board of a Fund, or a majority of its 
disinterested trustees or directors, determine that a material 
irreconcilable conflict exists, the relevant Participating Insurance 
Companies, at their expense and to the extent reasonably practicable 
(as determined by a majority of the disinterested trustees or 
directors), will be required to take whatever steps are necessary to 
remedy or eliminate the material irreconcilable conflict. Such steps 
could include: (a) Withdrawing the assets allocable to some or all of 
the separate accounts from the Fund and reinvesting such assets in a 
different investment medium, which may include another series of the 
Trust or another Fund; (b) in the case of Participating Insurance 
Companies, submitting the questions of whether such segregation should 
be implemented to a vote of all affected Contract holders and, as 
appropriate, segregating the assets of any appropriate group (i.e., 
variable annuity or variable life insurance Contract holders of one or 
more Participating Insurance Companies) that votes in favor of such 
segregation, or offering to the affected Contract holders the option of 
making such a change; and establishing a new registered management 
investment company or managed separate account. If a material 
irreconcilable conflict arises because of a decision by a Participating 
Insurance Company to disregard Contract holders' voting instructions 
and that decision represents a minority position or would preclude a 
majority vote, the Participating Insurance Company may be required, at 
the election of the Fund, to withdraw its separate account's investment 
in such Fund, with no change or penalty imposed as a result of such 
withdrawal. If a material irreconcilable conflict arises because of a 
Participating Plan's decision to disregard Plan participant voting 
instructions, if applicable, and that decision represents a minority 
position or would preclude a majority vote, the Participating Plan may 
be required, at the election of the Fund, to withdraw its investment in 
such Fund, with no charge or penalty imposed as a result of such 
withdrawal. To the extent permitted by applicable law, the 
responsibility of taking remedial action in the event of a Board 
determination of a material irreconcilable conflict and bearing the 
cost of such remedial action, will be contractual obligation of all 
Participating Insurance Companies and Participating Plans under the 
agreements governing participation in the Funds, and these 
responsibilities will be carried out with a view only to the interests 
of Contract holders and Plan participants, as applicable.
    For purposes of this 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 a Fund, or the Adviser (or any other 
investment adviser of the Funds) be required to establish a new funding 
medium for any Contract. No Participating Insurance Company will be 
required by this Condition 4 to establish a new funding medium for any 
Contract if a majority of Contract holders materially and adversely 
affected by the irreconcilable material conflict vote to decline this 
offer. No Participating Plan shall be required by this Condition 4 to 
establish a new funding medium for such Plan if: (a) A majority of Plan 
participants materially and adversely affected by the irreconcilable 
material conflict vote to decline such offer, or (b) pursuant to 
governing plan documents and applicable law, the Participating Plan 
makes such decision with a Plan participant plan.
    5. The Adviser, all Participating Insurance Companies with respect 
to a Fund and Participating Plans with respect to a Fund will be 
promptly informed in writing of any determination by the Board of such 
Fund that a material irreconcilable conflict exists and its 
implications.
    6. Participating Insurance Companies will be required to provide 
pass-through voting privileges to all Contract holders so long as the 
Commission interprets the 1940 Act to require pass-through voting 
privileges for Contract holders. Accordingly, the Participating 
Insurance Companies will vote shares of a Fund held in their separate 
accounts in a manner consistent with voting instructions timely 
received from Contract holders. Participating Insurance Companies shall 
be responsible for assuring that each of their separate accounts 
calculates voting privileges in a manner consistent with all other 
Participating Insurance Companies. The obligation to calculate voting 
privileges in a manner consistent with all other separate accounts 
investing in the fund will be a contractual obligation of all 
Participating Insurance Companies under the agreements governing 
participation in the Fund. Each Participating Insurance Company will be 
required to vote shares for which it has not received voting 
instructions as well as shares attributable to it, in the same 
proportions as it votes shares for which it has received instructions. 
Each Participating Plan will vote as required by applicable law 
governing plan documents.
    7. 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 the Adviser, Participating Insurance Companies 
and Participating Plans of a conflict and determining whether any 
proposed action adequately remedies a conflict, will be properly 
recorded in the minutes of the appropriate Board or other appropriate 
records, and such minutes or other records will be made available to 
the Commission upon request.
    8. Each Fund will notify all Participating Insurance Companies and 
Participating Plans that disclosure in separate account prospectuses or 
plan prospectuses or other plan disclosure documents regarding 
potential risks of

[[Page 3266]]

mixed and shared funding may be appropriate. Each Fund will disclose in 
its prospectus that: (a) shares of the Fund may be offered to insurance 
company separate accounts of both annuity and life insurance variable 
contracts, and to Plans; (b) due to differences of tax treatment and 
other considerations, the interests of various Contract holders 
participating in the Fund and the interests of Plans investing in the 
Fund may conflict; and (c) the Board will monitor such Fund for any 
material conflicts of interest and determine what action, if any, 
should be taken.
    9. Each Fund will comply with all provisions of the 1940 Act 
requiring voting by shareholders (which, for these purposes, shall be 
the persons having a voting interest in the shares of the respective 
Fund), and, in particular, each 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(c) of the 1940 Act (although the Funds are not within 
the trusts described in Section 16(c) of the 1940 Act), as well as with 
Section 16(a), and, if applicable, Section 16(b) of the 1940 Act. 
Further, each Fund will act in accordance with the Commission's 
interpretation of the requirements of Section 16(a) with respect to 
periodic elections of directors (or trustees) and with whatever rules 
the Commission may promulgate with respect thereto.
    10. If and to the extent 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 promulgated thereunder 
with respect to mixed or shared funding on terms and conditions 
materially different from any exemptions granted in the order requested 
by Applicants, then the Funds shall and the Participating Insurance 
Companies, as appropriate, shall be required to 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.
    11. No less than annually, the Adviser (or any other investment 
adviser of a Fund) the Participating Insurance Companies and 
Participating Plans shall submit to the Boards such reports, materials 
or data as such Boards may reasonably request so that the Boards may 
fully carry out 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 Adviser, Participating Insurance 
Companies and Participating Plans to provide these reports, materials 
and data to the Boards, shall be a contractual obligation of the 
Adviser, all Participating Insurance Companies and Participating Plans 
under their agreements governing participation in the Funds.
    12. If a Plan or Plan participating shareholder should become an 
owner of 10% or more of the issued and outstanding shares of a Fund, 
such Plan will execute a participation agreement with such Fund, 
including the conditions set forth herein to the extent applicable. A 
Plan or Plan participant shareholder will execute an application 
containing an acknowledgment of this condition at the time of its 
initial purchase of shares of the Fund.

Conclusion

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

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.


Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-1285 Filed 1-19-00; 8:45 am]
BILLING CODE 8010-01-M