[Federal Register Volume 65, Number 81 (Wednesday, April 26, 2000)]
[Notices]
[Pages 24515-24521]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-10255]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24399; File No. 812-11886]


The Kelmoore Strategy TM Variable Trust, et al.

April 19, 2000.
AGENCY: Securities and Exchange Commission (the ``Commission'' or 
``SEC'').

ACTION: Notice of application for an order pursuant to 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.

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SUMMARY OF APPLICATION: Applicants seek exemptive relief to the extent 
necessary to permit shares of any current or future investment 
portfolios of The Kelmoore Strategy TM Variable Trust 
(``Trust''), and shares of any other investment company or portfolio 
that is designed to fund insurance products and for which Kelmoore 
Investment Company, Inc. or nay of its affiliates may serve in the 
future as investment adviser, manager, principal underwriter, sponsor 
administrator (``Future Trusts'') (the Trust together with Future 
Trusts are the ``Trusts''), to be sold to and held by separate accounts 
funding variable annuity and variable life insurance contracts 
(collectively referred to herein as ``Variable Contracts'') issued by 
both affiliated and unaffiliated life insurance companies and by 
qualified pension and retirement plans (``Qualified Plans'' or 
``Plans'') outside of the separate account context.

APPLICANTS: The Kelmoore Strategy TM Variable Trust (the 
``Trust'') and Kelmoore Investment Company, Inc. (``Kelmoore'').

FILING DATE: The application was filed on December 14, 1999, and 
amended and restated on March 22, 2000.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Secretary of the 
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 May 15, 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 writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, DC 20549-0609. Applicants: Kelmoore 
Investment Company, Inc., 2471 East Bayshore Road, Suite 501, Palo 
Alto, CA 94303, Attn: Ralph M. Kelmon, Jr., President.

FOR FURTHER INFORMATION CONTACT: Kevin P. McEnery, Senior counsel, or 
Susan M. Olson, Branch Chief, Office of Insurance Products, Division of 
Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee from the 
SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington, D.C. 
20549-0102 (tel. (202) 942-8090).

Applicant's Representations

    1. The Trust is a Delaware business trust that is registered under 
the 1940 Act as an open-end management investment company. The Trust 
currently consists of a single investment portfolio, The Kelmoore 
Strategy TM Covered Option Fund (the ``Fund''). The Trust 
may offer one or more additional investment portfolios in the future 
(each a ``Future Fund, and together with the Fund, the Funds'').
    2. Kelmoore is registered as an investment adviser under the 1940 
Act, and serves as the investment adviser to the Trust and also acts as 
the underwriter of the shares of the Trust.
    3. Once the Trust commences operations, shares representing 
interests in the Fund will be offered to insurance companies (each a 
``Participating Insurance Company'') as an investment vehicle for 
separate accounts (``Separate Accounts'') supporting Variable 
Contracts.
    4. At the time of their investment in the Trust, the Participating 
Insurance Companies have or will establish their own Separate Accounts 
and design their own Variable Contracts. Each participating Insurance 
Company, on behalf of its Separate Account, has or will enter into an 
agreement with the Trust concerning such Participating Insurance 
Company's participation in the Fund. Each Participating Insurance 
Company has or will have the legal obligation of satisfying all 
applicable requirements under both state and federal law. The role of 
the Trust under this agreement, insofar as the federal securities laws 
are applicable, will consist of, among other things, offering shares of 
the Funds to the participating Separate Accounts and complying with any 
conditions that the Commission may impose upon granting the order 
requested in the application.
    Applicants also propose that the Trust may offer and sell shares 
representing interests in the Funds directly to Qualified Plans outside 
the separate account context.

Applicants' Legal Analysis

    1. Applicants and their affiliates request an order pursuant to 
Section 6(c) of the 1940 Act exempting each insurance company and 
insurance company separate account supporting Variable Contracts which 
may hereafter invest in the Trusts 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, to the extent necessary to permit shares 
of the Trusts to be sold to and held by separate accounts funding 
Variable Contracts issued by both affiliated and unaffiliated insurance 
companies and by Qualified Plans. Applicants also request that the 
relief, to the extent necessary, extend to

[[Page 24516]]

investment advisers, principal underwriters and depositors of such 
separate accounts.
    2. In connection with the funding of scheduled premium variable 
life insurance contracts issued through a separate account registered 
as a unit investment trust (``UIT'') under the 1940 Act, Rule 6e-
2(b)(15) provides partial exemptions from Sections 9(a), 13(a), 15(a), 
and 15(b) of the 1940 Act to the extent those sections require ``pass 
through'' voting with respect to an underlying fund's shares. Rule 6e-
2(b)(15) provides these exemptions only where all of the assets of the 
UIT are shares of management investment companies ``which offer their 
shares exclusively to variable life insurance separate accounts of the 
life insurer of any affiliate life insurance company.'' Therefore, the 
relief granted by Rule 6e-2(b)(15) is not available with respect to a 
scheduled premium life insurance separate account that owns shares of 
an underlying fund that also offers it shares to a variable annuity or 
flexible premium variable life insurance separate account of the same 
company. The use of a common management investment company as the 
underlying investment medium for variable annuity and variable life 
insurance separate accounts of the same and any affiliated life 
insurance company is referred to as ``mixed funding.''
    3. The relief granted by Rule 6e-2(b)(15) also 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 separate accounts funding Variable Contracts of one or more 
unaffiliated life insurance companies. The use of a common management 
investment company as the underlying investment medium for variable 
annuity and/or variable life insurance separate accounts of 
unaffiliated life insurance companies is referred to as ``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) similarly provides partial exemptions 
from Sections 9(a), 13(a), 15(a), and 15(b) of the 1940 Act. The 
exemptions granted by Rule 6e-3(T)(b)(15) are available only where all 
the assets of the separate account consist of the shares of one or more 
registered management investment companies which offer to sell their 
shares ``exclusively to separate accounts of the life issuer, 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.'' Therefore, Rule 6e-3(T) permits 
mixed funding while not permitting shared funding.
    5. In addition, neither Rule 6e-2 nor Rule 6e-3(T) contemplate that 
shares of the underlying portfolio funding Variable Contracts might 
also be sold to Qualified Plans. The use of a common management 
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 herein as ``extended mixed and shared funding.''
    6. Applicants state that changes in the federal tax law created the 
opportunity for the Trust to substantially increase its asset base by 
selling shares to Qualified Plans. Applicants further state that 
Section 817(h) of the Internal Revenue Code of 1986, as amended (the 
``Code''), imposes certain diversified standards on the assets 
underlying Variable Contracts, such as those in each Fund. The Code 
provides that Variable Contracts will not be treated as annuity 
contracts or life insurance contracts, as the case may be, for any 
period (or any subsequent period) for which the underlying assets are 
not, in accordance with regulations issued by the Treasury Department 
(the ``Regulations''), adequately diversified. On March 2, 1989, the 
Treasury Department issued regulations (Treas. Reg. 1.817-50 which 
established specific diversification requirements for investment 
portfolios underlying Variable Contracts. The Regulations generally 
provide that, in order to meet these diversification requirements, all 
of the beneficial interests in such portfolio must be held by the 
segregated asset accounts of our or more life insurance companies. 
Notwithstanding this, the Regulations also contain an exception to this 
requirement that permits trustees of Qualified Plans to hold shares of 
an investment company portfolio, the shares of which are also held by 
insurance company segregated asset accounts, without adversely 
affecting the status of the investment company portfolio as an 
adequately diversified underlying investment for Variable Contracts 
issued through such segregated asset accounts (Treas. Reg. 1.817-
5(F)(3)(iii)). Applicants maintain that a result of this exception to 
the great diversification requirement, Qualified Plans may select the 
Funds as investment options without endangering the tax status of the 
Variable Contracts issued through Participation Insurance Companies as 
life insurance or annuities.
    7. Applicants note that the promulgation of Rules 6e-2(b)(15) and 
6e-3(T)(b)(15) preceded the issuance of the Regulations which made it 
possible for shares of an investment company portfolio to be held by 
the trustee of a Qualified Plan without adversely affecting the ability 
of shares in the same investment company portfolio also to be held by 
the separate accounts of insurance companies in connection with their 
Variable Contracts. Thus, the sale of shares of the same portfolio to 
both separate accounts and Qualified Plans was not contemplated at the 
time of the adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15).
    8. 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 
an 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). Rules 6e-2(b)(15)(i) and (ii) and Rules 63-
3((T)(b)(15)(i) and (ii) under the 1940 Act provide exemptions from 
Section 9(a) under certain circumstances, subject to the limitations on 
mixed and shared funding. These exemptions limit the application of the 
eligibility restrictions to affiliated individuals or companies that 
directly participate in the management of the underlying management 
company.
    9. Applicants state that the partial relief granted in Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act from the requiremen4ts 
of Section 9 of the 1940 Act, in effect, limits the amount of 
monitoring necessary to ensure compliance with Section 9 to that which 
is appropriate in light of the policy and purposes of Section 9. 
Applicants state that those 1940 Act rules recognizes 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 the 
provisions of Section 9(a) to individuals in a large insurance company 
complex, most of whom will have no involvement in matters pertaining to 
investment companies in that organization. Applicants state that those 
1940 Act rules further recognizes that it also is unnecessary to apply 
Section 9(a) of the 1940 Act to individuals in various unaffiliated 
insurance companies (or affiliated companies of Participating Insurance 
Companies) that may utilize the Trusts as the funding medium for 
Variable Contracts. According to Applicants, there is not regulatory 
purpose in extending the Section 9(a) monitoring requirements because 
of extended

[[Page 24517]]

mixed or shared funding. The Participating Insurance Companies and 
Qualified Plans are not expected to play any role in the management of 
the Trusts. Those individuals who participate in the management of the 
Trusts will remain the same regardless of which Separate Accounts or 
Qualified Plans invests in a Trust. Applicants argue that applying the 
monitoring requirements of Section 9(a) of the 1940 Act because of 
investment by separate accounts of other insurers or Qualified Plans 
would be unjustified and would not serve any regulatory purpose. 
Applicants further argue that the increased monitoring costs would 
reduce the net rates of return realized by contract owners.
    10. Applicants also state that in the case of Qualified Plans, the 
Plans, unlike the Separate Accounts, are not themselves investment 
companies, and therefore are not subject to Section 9 of the 1940 Act. 
It is not anticipated that a Qualified Plan would be an affiliated 
person of any of the Trusts by virtue of its shareholders.
    11. Applicants state that Rules 6e-2(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.
    12. Rules 6e-2(b)(15)(iii)(A) and 6e-3(T)(b)(15)(iii)(A) provide 
that the insurance company may disregard the voting instructions of its 
contract owners with respect to the investments of an underlying fund, 
or any contract between such a fund and its investment adviser, when 
required to do so by an insurance regulatory authority (subject to the 
provisions of paragraphs (b)(5)(i) and (b)(7)(ii)(A) of Rule 6e-2 and 
6e-3(T) under the 1940 Act).
    13. Rules 6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2) provide 
that the insurance company may disregard the voting instructions of its 
contract owners if the contract owners initiate any change in an 
underlying fund's investment policies, principal underwriter, or any 
investment adviser (provided that disregarding such voting instructions 
is reasonable and subject to the other provisions of paragraphs 
(b)(5)(ii), (b)(7)(ii)(B), and (b)(7)(ii)(C) of Rules 6e-2 and 6e-3(T) 
under the 1940 Act).
    14. With respect to the Qualified 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. Under Section 403(a) of 
the Employee Retirement Income Security Act (``ERISA''), shares of a 
portfolio of a fund sold to a Qualified Plan must be held by the 
trustees of the Plan. Section 403(a) also provides that the trustee(s) 
must have exclusive authority and discretion to manage and control the 
Plan with two exceptions: (1) When the Plan expressly provides that the 
trustee(s) 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 (2) 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 above the two 
exceptions stated in Section 403(a) applies, Plan trustees have the 
exclusive authority and responsibility for voting proxies.
    15. Where a named fiduciary to a Qualified Plan appoints an 
investment manager, the investment manager has the responsibility to 
vote the shares held unless the right to vote such shares is reserved 
to the trustees or the named fiduciary. The Qualified Plans may have 
their trustee(s) or other fiduciaries exercise voting rights 
attributable to investment securities held by the Qualified Plans in 
their discretion. Some of the Qualified 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 participants.
    16. Where a Qualified Plan does not provide participants with the 
right to give voting instructions, Applicants do not see any potential 
for material irreconcilable conflicts of interest between or among 
Variable Contract holders and Plan investors 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 Qualified Plans since the Qualified 
Plans are not required to pass-through voting privileges.
    17. Applicants state that even if a Qualified Plan were to hold a 
controlling interest in a Fund, Applicants do not believe that such 
control would 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 a 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.
    18. Where a Plan provides participants with the right to give 
voting instructions, Applicants see 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 holders. The purchase if shares of Funds by Qualified 
Plans that provide voting rights does not present any complications not 
otherwise occasioned by mixed or shared funding.
    19. Applicants state that shared funding by unaffiliated insurance 
companies does not present any issues that do not already exist where a 
single insurance company is licensed to do business in several or all 
states. A particular state insurance regulatory body could require 
action that is inconsistent with the requirements of other states in 
which the insurance company offers its policies. The fact that 
different insurers may be domiciled in different states does not create 
a significantly different or enlarged problem.
    20. Applicants state that shared funding by unaffiliated insurers, 
in this respect, is no different than the use of the same investment 
company as the funding vehicle for affiliated insurers, which Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act permit. Affiliated 
insurers may be domiciled in different states and be subject to 
differing state law requirements. Applicants state that affiliation 
does not reduce the potential, if any exists, for differences in state 
regulatory requirements. In any event, Applicants submit that the 
conditions set forth in the application and included in this notice are 
designed to safeguard against, and provide procedures for resolving, 
any adverse effects that differences among state regulatory 
requirements may produce. If a particular state insurance regulator's 
decision conflicts with the majority of other state regulators, then 
the affected insurer may be required to withdraw its Separate Account's 
investment in the Trusts. This requirement will be provided for in 
agreements that will be entered into by Participating Insurance 
Companies with respect to their participation in the relevant Fund.

[[Page 24518]]

    21. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act give 
the insurance company the right to disregard the voting instructions of 
the contract owners. This right does not raise any issues different 
from those raised by the authority of state insurance administrators 
over separate accounts. Under Rules 6e-2(b)(15) and 6e-3(T)(b)(15), an 
insurer can disregard contract owner voting instructions only with 
respect to certain specified items. Applicants assert that affiliation 
does not eliminate the potential, if any exists, for divergent 
judgments as to the advisability or legality of a change in investment 
policies, principal underwriter, or investment adviser initiated by 
contract owners. The potential for disagreement is limited by the 
requirements in Rules 6e-2 and 6e-3(T) under the 1940 Act that the 
insurance company's disregard of voting instructions by reasonable and 
based on specific good-faith determinations.
    22. Applicants state that a particular insurer's disregard of 
voting instructions, nevertheless, could conflict with the majority of 
contract owners' voting instructions. The insurer's action possibly 
could be different than the determination of all or some of the other 
insurers (including affiliated insurers) that the voting instructions 
of contract owners should prevail, and either could preclude a majority 
vote approving the change or could represent a minority view. If the 
insurer's judgment represents a minority position or would preclude a 
majority vote, then the insurer may be required, at the relevant 
Trust's election, to withdraw its Separate Account's investment in such 
Fund. No charge or penalty will be imposed as a result of such 
withdrawal. This requirement will be provided for in the agreements 
entered into with respect to participation by the Participating 
Insurance Companies in each Fund.
    23. Applicants submit that there is not reason why the investment 
policies of a Fund would or should be materially different from what 
these policies would or should be if a Fund funded only variable 
annuity contracts or variable life insurance policies, whether flexible 
premium or scheduled premium policies. Each type of insurance product 
is designed as a long-term investment program. Applicants represent 
that each Fund will be managed to attempt to achieve the investment 
objective or objectives of such Fund, and not to favor or disfavor any 
particular Participating Insurance Company or type of insurance 
product.
    24. Applicants state 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. A Fund supporting even one type of insurance 
product must accommodate these diverse factors in order to attract and 
retain purchasers. Permitting mixed and shared funding will provide 
economic justification for the continuation of the relevant Fund. Mixed 
and shared funding will broaden the base of contract owners which will 
facilitate the establishment of additional Funds serving diverse goals.
    25. Applicants do not believe that the sale of the shares of the 
Funds to Qualified Plans will increase the potential for material 
irreconcilable conflicts of interest between or among different types 
of investors. In particular, Applicants see very little potential for 
such conflicts beyond that which would otherwise exist between variable 
annuity and variable life insurance contract owners. In considering the 
appropriateness of the requested relief, Applicants have analyzed the 
following issues to assure themselves that there either were no 
conflict of interest or that there existed the ability by the affected 
parties to resolve the issues without harm to the contract owners in 
the Separate Accounts or to the participants under the Qualified Plans.
    26. As noted above, Section 817(h) of the Code imposes certain 
diversification standards on the underlying assets of Variable 
Contracts held in an underlying mutual fund. The Code provides that a 
Variable Contract shall not be treated as an annuity contract or life 
insurance, as applicable, for any period (and any subsequent period) 
for which the investments are not, in accordance with regulations 
prescribed by the Treasury Department, adequately diversified.
    27. Regulations issued under Section 817(h) provide that, in order 
to meet the statutory diversification requirements, all of the 
beneficial interests in the investment company must be held by the 
segregated asset accounts of one or more insurance companies. However, 
the Regulations contain certain exceptions to this requirement, one of 
which allows shares in an underlying mutual fund to be held by the 
trustees of a qualified pension or retirement plan without adversely 
affecting the ability of such shares also to be held by separate 
accounts of insurance companies in connection with their Variable 
Contracts. (Treas. Reg. 1.817-5(f)(3)(iii)). Thus, the Regulations 
specifically permit ``qualified pension or retirement plans'' and 
separate accounts to invest in the same underlying fund. For this 
reason, Applicants have concluded that neither the Code, nor 
Regulations, nor Revenue Rulings thereunder, present any inherent 
conflicts of interest.
    28. Applicants note that while there are differences in the manner 
in which distributions from Variable Contracts and Qualified Plans are 
taxed, these differences will have no impact on the Trusts. When 
distributions are to be made, and a Separate Account or Qualified Plan 
is unable to net purchase payments to make the distributions, the 
Separate Account and Qualified Plan will redeem shares of the relevant 
Fund at their respective net asset value in conformity with Rule 22c-1 
under the 1940 Act (without the imposition of any sales charge) to 
provide proceeds to meet distribution needs. A Participating Insurance 
Company then will make distributions in accordance with the terms of 
its Variable Contract, and a Qualified Plan then will make 
distributions in accordance with the terms of the Plan.
    29. Applicants considered whether it is possible to provide an 
equitable means of giving voting rights to contract owners in the 
Separate Accounts and to Qualified Plans, and determined it is 
possible. In connection with any meeting of shareholders, the Trusts 
will inform each shareholder, including each Separate Account and 
Qualified Plan, of information necessary for the meeting, including 
this respective share of ownership in the relevant Fund. Each 
Participating Insurance Company then will solicit voting instructions 
in accordance with Rules 6e-2 and 6e-3(T), as applicable, and its 
agreement with a Trust concerning participation in the relevant 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 a Fund 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.
    30. Applicants concluded that the ability of the Trusts to sell 
shares of each Fund directly to Qualified Plans does not create a 
senior security. ``Senior security'' is defined under Section 18(g) of 
the 1940 Act of include ``any stock of a class having priority over any 
other class as to distribution of assets or payment of dividends.'' 
Regardless of the rights and benefits of participants under Qualified 
Plans, or contract owners under Variable Contracts, the Qualified Plans 
and the Separate Accounts only have rights with

[[Page 24519]]

respect to their respective shares of the Funds. They only can redeem 
such shares at net asset value. No shareholder of a Fund has any 
preference over any other shareholder with respect to distribution of 
assets or payment of dividends.
    31. Applicants also considered whether there are any conflicts 
between the contract owners of the Separate Accounts and the 
participants under the Qualified Plans with respect to the state 
insurance commissioners' veto powers over investment objectives. 
Applicants note that the basic premise of corporate democracy and 
shareholder voting is that not all shareholders may agree with a 
particular proposal. Although the interests and opinions of 
shareholders may differ, this does not mean that inherent conflicts of 
interest exist 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.
    32. Conversely, the trustees of Qualified Plans or the participants 
in participant-directed Qualified Plans can make the decision quickly 
and redeem their interests in a Fund and reinvest in another funding 
vehicle without the same regulatory impediments faced by the Separate 
Accounts or, as is the case with most Qualified Plans, even hold cash 
pending suitable investment. Therefore, issues where the interests of 
contract owners and the interests of Qualified Plans are in conflict 
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 Funds.
    33. Applicants considered whether there is a potential for future 
conflicts of interest between Participating Insurance Companies and 
Qualified Plans created by future changes in the tax laws. Applicants 
do not see any greater potential for material irreconcilable conflicts 
arising between the interests of participants in the Qualified Plans 
and contract owners of the Separate Accounts from future changes in the 
federal tax laws than that which already exists between variable 
annuity contract owners and variable life insurance contract owners.
    34. Applicants recognize that the foregoing is not an all inclusive 
list, but rather is representative of issues which they believe are 
relevant to the application. Applicants believe that the discussion 
contained in the application demonstrates that the sale of shares of 
the Funds to Qualified Plans does not increase the risk of material 
irreconcilable conflicts of interest. Further, Applicants submit that 
the use of the Funds with respect to Qualified Plans is not 
substantially dissimilar from the Funds' anticipated use, in that 
Qualified Plans, like Variable Contracts, are generally long-term 
retirement vehicles.
    35. Applicants state that various factors have kept more insurance 
companies from offering variable annuity and variable life insurance 
contracts than currently offer such contracts. These factors include 
the costs of organizing and operating a funding medium, the lack of 
expertise with respect to investment management (principally with 
respect to stock and money market investments), and the lack of name 
recognition by the public of certain insurers as investment experts 
with whom the public feels comfortable entrusting their investment 
dollars. Use of a Fund, as a common investment media for Variable 
Contracts would reduce or eliminate these concerns. Applicants assert 
that mixed and shared funding should provide several benefits to 
Variable Contract owners by eliminating a significant portion of the 
costs of establishing and administering separate funds. Applicants 
maintain that Participating Insurance Companies will benefit not only 
from the investment and administrative expertise of Kelmoore, but also 
from the cost efficiencies and investment flexibility afforded by a 
large pool of funds. Mixed and shared funding also would permit a 
greater amount of assets available for investment by a Fund, thereby 
promoting economics of scale, by permitting increased safety through 
greater diversification, or by making the addition of new Funds more 
feasible. Therefore, making the Funds available for mixed and shared 
funding will encourage more insurance companies to offer Variable 
Contracts, and this should result in increased competition with respect 
to both Variable Contract design and pricing, which can be expected to 
result in more product variation and lower charges. Applicants also 
assert that the sale of shares of the Funds to Qualified Plans, in 
addition to the Separate Accounts, will result in an increased amount 
of assets available for investment by such Funds. This may benefit 
Variable Contract owners by promoting economics of scale, by permitting 
increased safety of investments through greater diversification, and by 
making the addition of new Funds more feasible.
    36. Applicants submit that, regardless of the type of shareholder 
in the Fund or Future Fund, Kelmoore is or would be contractually and 
otherwise obligated to manage the Fund or such Future 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 Trustee of the Trust (the ``Board''). Kelmoore will work with 
a pool of money and will not take into account the identity of the 
shareholders. Thus, each Fund and any Future Fund will be managed in 
the same manner as any other mutual fund.
    37. Applicants see no significant legal impediment to permitting 
mixed and shared funding. Separate accounts organized as unit 
investment trusts historically have been employed to accumulate shares 
of mutual funds which have not been affiliated with the depositor or 
sponsor of the separate account. Applicants assert that mixed and 
shared funding will not have any adverse Federal income tax 
consequences.

Applicants' Conditions

    Applicants have consented to the following conditions:
    1. A majority of the Board of each Trust will consist of persons 
who are not ``interested persons'' of such Trust, 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 trustees, then the operation of this 
condition will 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 Trust for the existence 
of any material irreconcilable conflict between the interests of the 
contract owners of all Separate Accounts and participants of all 
Qualified Plans investing in such Trust, 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 
interpretative

[[Page 24520]]

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 
such Trust are being managed; (e) a difference in voting instructions 
given by variable annuity contact owners, variable life insurance 
contract owners, and trustees of the 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 Qualified Plan 
to disregard the voting instructions of Plan participants.
    3. Participating Insurance Companies, Kelmoore, and any Qualified 
Plan that executes a participation agreement upon becoming an owner of 
10 percent or more of the assets of any Fund (collectively, the 
``Participants'') will report any potential or existing conflicts to 
the relevant Board. Participants will be responsible for assisting the 
relevant Board in carrying out the Board's 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 each Participating Insurance 
Company to inform the relevant Board whenever contract owner voting 
instructions are disregarded, and, if pass-through voting is 
applicable, an obligation by each Qualified Plan to inform the Board 
whenever it has determined to disregard Plan participant voting 
instructions. The responsibility to report such information and 
conflicts, and to assist the Board, will be a contractual obligation of 
all Participating Insurance Companies under their participation 
agreements with the Trusts, and these responsibilities will be carried 
out with a view only to the interests of the contract owners. The 
responsibility to report such information and conflicts, and to assist 
the Board, also will be contractual obligations of all Qualified Plans 
with participation agreements, and such agreements will provide that 
these responsibilities will be carried out with a view only to the 
interests of Plan participants.
    4. If it is determined by a majority of a Board, or a majority of 
the disinterested trustees of such Board, that a material 
irreconcilable conflict exists, then the relevant Participant will, at 
its expense and to the extent reasonably practicable (as determined by 
a majority of the disinterested trustees), take whatever steps are 
necessary to remedy or eliminate the material irreconcilable conflict, 
up to and including: (a) Withdrawing the assets allocable to some or 
all of the Separate Accounts from the relevant Fund and reinvesting 
such assets in a different investment medium, including another Fund, 
or in the case of insurance company participants submitting the 
question as to whether such segregation should be implemented to a vote 
of all affected contract owners and, as appropriate, segregating the 
assets of any appropriate group (i.e., annuity contract owners or life 
insurance contract owners of one or more Participating Insurance 
Companies) that votes in favor of such segregation, or offering to the 
affected contract owners the option of making such a change; and (b) 
establishing a new registered management investment company or managed 
separate account. If a material irreconcilable conflict arises because 
of a decision by a Participating Insurance Company to disregard 
contract owner voting instructions, and that decision represents a 
minority position or would preclude a majority vote, then the insurer 
may be required, at the election of the relevant Trust, to withdraw 
such insurer's Separate Account's investment in such Trust, and no 
charge or penalty will be imposed as a result of such withdrawal. If a 
material irreconcilable conflict arises because of a Qualified Plan's 
decision to disregard Plan participant voting instructions, if 
applicable, and that decision represents a minority position or would 
preclude a majority vote, the Plan may be required, at the election of 
the relevant Trust, to withdraw its investment in such Trust, and no 
charge or penalty will be imposed as a result of such withdrawal. The 
responsibility to take remedial action in the event of a Board 
determination of a 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 each 
Trust, and these responsibilities will be carried out with a view only 
to the interests of contract owners and Plan participants.
    For purposes of this Condition 4, a majority of the disinterested 
members of a Board will determine whether or not any proposed action 
adequately remedies any material irreconcilable conflict, but, in no 
event, will any Trust or Kelmoore be required to establish a new 
funding medium for any Variable Contract. No Participating Insurance 
Company will be required by this Condition 4 to establish a new funding 
medium for any Variable Contract if any offer to do so has been 
declined by vote of a majority of the contract owners materially and 
adversely affected by the material irreconcilable conflict. Further, no 
Qualified Plan will be required by this Condition 4 to establish a new 
funding medium for the Plan if (a) A majority of the Plan participants 
materially and adversely affected by the irreconcilable material 
conflict vote to decline such offer, or (b) pursuant to documents 
governing the Qualified Plan, the Plan makes such decision without a 
Plan participant vote.
    5. The Board's determination of the existence of a material 
irreconcilable conflict and its implications will be made known in 
writing promptly to all Participants.
    6. Participating Insurance Companies will provide pass-through 
voting privileges to all contract owners as required by the 1940 Act. 
Accordingly, such Participants, where applicable, will vote shares of 
the applicable Fund held in its Separate Accounts in a manner 
consistent with voting instructions timely received from contract 
owners. Participating Insurance Companies will be responsible for 
assuring that each Separate Account investing in a Fund calculates 
voting privileges in a manner consistent with other Participants. The 
obligation to calculate voting privileges in the application will be a 
contractual obligation of all Participating Insurance Companies under 
their agreement with the Trusts governing participating in a Fund. Each 
Participating Insurance Company will vote shares for which it has not 
received timely voting instructions as well as shares it owns in the 
same proportion as it votes those shares for which it has received 
voting instructions. Each Qualified Plan will vote as required by 
applicable law and governing Plan documents.
    7. Each Trust 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 Trust 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 Trusts are not one of the 
trusts of the type described in the Section 16(c) of the 1940 Act), as 
well as with Section 16(a) of the 1940 Act and, if and when applicable, 
Section 16(b) of the 1940 Act. Further, each Trust will act in 
accordance with the Commission's interpretation of the requirements of 
Section 16(a) with respect to periodic elections of trustees and with 
whatever

[[Page 24521]]

rules the Commission may promulgate with respect thereto.
    8. The Trusts will notify all Participants that separate account 
prospectus disclosure or Plan prospectus or other Plan document 
disclosure regarding potential risks of mixed and shared funding may be 
appropriate. Each trust will disclose in its prospectus that (a) Shares 
of such Trust may be offered to insurance company separate accounts of 
both variable annuity and variable life insurance contracts and, if 
applicable, to Qualified Plans, (b) due to differences in tax treatment 
and other considerations, the interests of various contract owners 
participating in such Trust and the interests of Qualified Plans 
investing in such Trust, if applicable, may conflict, and (c) the 
Trust's Board will monitor events in order to identify the existence of 
any material irreconcilable conflicts and to determine what actions, if 
any, should be taken in response to any such conflict.
    9. If and to the extent that Rule 6e-2 and Rule 6e-3(T) under the 
1940 Act are amended, or proposed 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 in the application, then the 
Trusts and/or Participating Insurance Companies, as appropriate, shall 
take such steps as may be necessary to comply with Rules 6e-2 and 6e-
3(T), or Rule 6e-3, as such rules are applicable.
    10. The Participants, at least annually, will submit to the Board 
such reports, materials, or data as a Board reasonably may request so 
that the trustees of the Board may fully carry out the obligations 
imposed upon a Board by the conditions contained in the application, 
and said reports, materials, and data will be submitted more frequently 
if deemed appropriate by a Board. The obligations of the Participants 
to provide these reports, materials, and data to a Board, when it so 
reasonably requests, will be a contractual obligation of all 
Participants under this agreements governing participation in the 
Funds.
    11. 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 Board or other appropriate 
records, and such minutes or other records shall be made available to 
the Commission upon request.
    12. The Trusts will not accept a purchase order from a Qualified 
Plan if such purchase would make the Plan shareholder an owner of 10 
percent or more of the assets of such Fund unless such Plan executes an 
agreement with the relevant Trust governing participation in such Fund 
that includes the conditions set forth herein to the extent applicable. 
A Plan or Plan Participant will execute an application containing an 
acknowledgment of this condition at the time of its initial purchase of 
shares of any Fund.

Conclusion

    For the reasons summarized above, Applicants believe that the 
requested exemptions, in accordance with the standards of Section 6(c), 
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. 00-10255 Filed 4-25-00; 8:45 am]
BILLING CODE 8010-01-M