[Federal Register Volume 65, Number 166 (Friday, August 25, 2000)]
[Notices]
[Pages 51863-51869]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-21752]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24601; 812-12074]


First American Insurance portfolios, Inc., et al.

August 18, 2000.
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 any current or future series of First American Insurance Portfolios, 
Inc. (the ``Company'') and shares of any future fund that is designed 
to fund variable insurance products and for which U.S. Bank National 
Association (``U.S. Bank'') or any person controlling, controlled by or 
under common control with U.S. Bank may serve as investment adviser, 
investment subadviser, administrator, manager, principal underwriter or 
sponsor (a ``Future Company'') to be offered and sold to and held by: 
(1) Separate accounts funding variable annuity and variable life 
insurance contracts (``Variable Contracts'') issued by both affiliated 
and unaffiliated life insurance companies; (2) qualified pension and 
retirement plans outside of the separate account context (``Qualified 
Plans''); and (3) the Company's or Future Company's investment adviser 
or a person related to such investment adviser (representing seed money 
investments in the Company or Future company). (Hereinafter, the term 
``Company'' refers to the Company and/or any Future company, as 
applicable.)
    Applicants: First American Insurance Portfolios, Inc.; U.S. Bank 
National Association.
    Filing Date: The application was filed on April 25, 2000, and 
amended and restated on July 11, 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 SEC's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the SEC by 5:30 p.m. 
on September 12, 2000, and should be accompanied by proof of service on 
applicants in the form of an affidavit or, for lawyers, a certificate 
of service. Hearing requests should state the nature of the writer's 
interest, the reason for the request, and the issues contested. Persons 
who wish to be notified of a hearing may request notification by 
writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549-0609. Applicants, c/o James D. Alt, Esq., Dorsey & Whitney LLP, 
220 South Sixth Street, Minneapolis, Minnesota 55402.

FOR FURTHER INFORMATION CONTACT: Jane G. Heinrichs, Senior Counsel, at 
(202) 942-0699, or Keith E. Carpenter, Branch Chief, at (202) 942-0679, 
Office of Insurance Products, Division of Investment Management.

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).

Applicants' Representations

    1. The Company is a corporation organized under the laws of 
Minnesota on August 27, 1999. The Company is registered under the 1940 
Act as an open-end, management investment company. The Company 
initially offers shares in three separate series, each of which has its 
own investment objective and policies (such series, together with any 
future series of the Company or a Future Company, the ``Funds'').
    2. U.S. Bank, acting through its First American Asset Management 
group, serves as the investment adviser to each Fund. U.S. Bank is a 
national banking association headquartered in Minneapolis, Minnesota, 
and is a wholly-owned subsidiary of U.S. Bancorp, a publicly held bank 
holding company registered under the Bank Holding Company Act of 1956. 
The First American Asset Management group within U.S. Bank provides 
investment

[[Page 51864]]

management services to several open-end and closed-end management 
investment companies in addition to the Funds and to private accounts 
such as pension funds, charitable foundation, and trusts.
    3. The Company intends to offer its shares to insurance companies 
as the investment vehicle for their separate accounts that fund 
variable annuity contracts. Applicants propose that shares of each Fund 
also be offered to affiliated and unaffiliated insurance companies for 
their separate accounts as the investment vehicle to fund either 
variable annuity or variable life insurance contracts. Separate 
accounts owning shares of the Funds and their insurance company 
depositors are referred to herein as ``Participating Separate 
Accounts'' and ``Participating Insurance Companies,'' respectively.
    4. The Participating Insurance Companies will establish their own 
Participating Separate Accounts and design their own Variable 
Contracts. Each Variable Contract is likely to have certain unique 
features and to differ from other Variable Contracts supported by the 
Funds with respect to insurance guarantees, premium structure, charges, 
options, distribution method, marketing techniques, sales literature 
and other aspects. Each Participating Insurance Company will enter into 
a participation agreement with the Company on behalf of its 
Participating Separate Account, and will have the legal obligation of 
satisfying all applicable requirements under state and federal law. The 
role of the Company under this agreement, as far as the federal 
securities laws are applicable, will be limited to that of offering its 
shares to separate accounts of various insurance companies and 
complying with any conditions the Commission may impose upon granting 
the order requested herein.
    5. Applicants state that shares of each Fund also may be offered 
directly to Qualified Plans outside of the separate account context. 
The Qualified Plans will be pension or retirement plans intended to 
qualify under sections 401(a) and 501(a) of the Internal Revenue Code 
of 1985, as amended (``Code''). Many of the Qualified Plans will 
include a cash or deferred arrangement (permitting salary reduction 
contributions) intended to qualify under section 401(k) of the Code. 
The Qualified Plans also will be subject to, and will be designed to 
comply with, the provisions of the Employee Retirement Income Security 
Act of 1974 (``ERISA''). Applicants assert that the Qualified Plans 
therefore will be subject to the regulatory requirements under the Code 
and ERISA including, for example, reporting and disclosure, 
participation and vesting, funding, fiduciary responsibility, and 
enforcement provisions.
    6. Qualified Plans may choose one or more Funds as their sole 
investments or as one or more of several other investments. Fund shares 
sold to the Qualified Plans would be held by the trustees of such Plans 
as required by section 403(a) of ERISA. The trustees or other 
fiduciaries of the Qualified Plans may vote Fund shares held by the 
Qualified Plans in their own discretion or, if the applicable Qualified 
Plan so provides, vote such shares in accordance with instructions from 
participants in such Plans.
    7. Fund shares also may be offered and sold to a Fund's investment 
adviser or an affiliate thereof, pursuant to Treasury Regulation 1.817-
5(f)(3)(ii). Applicants state that this regulation permits such sales 
as long as the return on shares held by the adviser or such an 
affiliate is computed in the same manner as for shares held by a 
separate account; the adviser or such affiliate does not intend to sell 
shares of the Fund held by it to the public; and the adviser or such 
affiliate holds such shares only in connection with the creation or 
management of the Fund. The Applicants anticipate that sales to the 
adviser or such as affiliate in reliance on this regulation generally 
will be made for the purpose of providing the seed capital to the 
Company required by section 14(a) of the 1940 Act.

Applicants' Legal Analysis

    1. Applicants request that the Commission issue an order pursuant 
to section 6(c) of the 1940 Act exempting scheduled and flexible 
premium variable life insurance separate accounts (and, to the extent 
necessary, any investment adviser, sub-adviser, principal underwriter 
and depositor of such an account) from sections 9(a), 15(a) and 15(b) 
of the 1940 Act, and Rules 6e-3(T)(b)(15) thereunder, to the extent 
necessary to permit shares of the Funds to be offered and sold to 
variable annuity and variable life insurance separate accounts, to 
Qualified Plans, and to the Company's investment adviser or a person 
related to such investment adviser (representing seed money investments 
required by the 1940 Act).
    2. Section 6(c) authorizes the Commission to exempt any person, 
security or transaction, or any class or classes of persons, 
securities, or transactions, from the provisions of the 1940 Act, or 
the rules thereunder, if and to the extent that such exemption is 
necessary or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the 1940 Act.
    3. In connection with the funding of scheduled premium variable 
life insurance contracts issued through a separate account registered 
under the 1940 Act as a unit investment trust, Rule 6e-2(b)(15) 
provides partial exemptions from sections 9(a), 13(a), 15(a) and 15(b) 
of the 1940 Act. The exemptions granted to a separate account by Rule 
5e-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 any affiliated 
life insurance company. 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 or flexible 
premium variable life insurance separate account of the same company or 
of an affiliated 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 a 
single insurance company (or of two or more affiliated insurance 
companies) is referred to as ``mixed funding.''
    4. 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 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 for variable annuity 
and/or variable life insurance separate accounts of unaffiliated 
insurance companies is referred to as ``shared funding.'' Moreover, the 
relief under Rule 6e-2(b)(15) is not available if the scheduled premium 
variable life insurance account owns shares of an underlying investment 
company that also offers its shares to Qualified 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.''

[[Page 51865]]

    5. In connection with the funding of flexible premium variable life 
insurance contracts issued through a separate account registered under 
the 1940 Act as a unit investment trust, Rule 6e-3(T)(b)(15) provides 
partial exemptions from section 9(a), 13(a), 15(a) and 15(b) of the 
1940 Act. These exemptions 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 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. Thus, Rule 6e-3(T)(b)(15) permits 
mixed funding, but precludes shared funding or selling shares to 
Qualified Plans. In addition, neither Rule 6e-2(b)(15) nor Rule 6e-
3(T)(b)(15) contemplates ``seed capital'' being provided by the 
investment adviser of a funding vehicle which is not sponsored or 
advised by an insurance company offering Variable Contracts.
    6. Applicants state that current tax law permits the Funds to 
increase their asset bases through the sale of shares to Qualified 
Plans. Section 817(h) of the Code imposes certain diversification 
standards on the underlying assets of the separate accounts funding the 
Variable Contracts. The Code provides that the Variable Contracts will 
not be treated as annuity contracts or life insurance contracts for any 
period in which the underlying assets are not adequately diversified in 
accordance with regulations issued by the Treasury Department. The 
regulations generally provide that to meet the diversification 
requirements, all of the beneficial interests in the underlying 
investment company must be held by the segregated asset accounts of one 
or more insurance companies. The regulations do contain, however, 
certain exceptions to this requirement, one of which permits shares of 
an investment company to be held by trustees of a Qualified Plan 
without adversely affecting the ability of shares in the same 
investment company also to be held by the separate accounts of 
insurance companies in connection with their Variable Contracts. Treas. 
Reg. 1.817-5(f)(3)(iii). As a result, applicants assert that Qualified 
Plans may select the Funds as investment options without endangering 
the tax status of Variable Contracts issued through Participating 
Insurance Companies. Similarly, the regulations provide for ``seed 
capital'' investments by a funding vehicle's manager or by a person 
related to such manager without endangering the tax status of such 
Variable Contracts. Treas. Reg. 1.817-5(f)(3)(ii).
    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 
permitting extended mixed and shared funding. Applicants assert that 
the sale of shares of the same underlying investment company to both 
separate accounts and Qualified Plans therefore was not contemplated at 
the time the Commission adopted these Rules.
    8. Section 9(a)(3) of the 1940 Act provides that it is unlawful for 
any company to serve as an investment adviser to, or principal 
underwriter for, any registered open-end investment company if an 
affiliated person of that company is subject to a disqualification 
enumerated in sections 9(a)(1) or 9(a)(2). Rules 6e-2(b)(15) (i) and 
(ii) and 6e-3(T)(b)(15) (i) and (ii) provide partial exemptions from 
section 9(a) under certain circumstances. 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.
    9. Applicants state that the partial relief from section 9(a) found 
in Rules 6e-2(b)(15) and 6e-3(T)(b)(15) 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 that section. 
Applicants state that the exemptions recognize that applying the 
pr9ovisions of section 9(a) to the many individuals who may be involved 
in a large insurance company complex, most of whom typically will have 
no involvement in matters pertaining to investment companies funding 
the Participating Separate Accounts, is not necessary or appropriate in 
the public interest nor is it necessary for the protection of investors 
or the purposes fairly intended by the policy and provisions of the 
1940 Act. Applicants submit that the fact that Participating Insurance 
Companies may engage in mixed and shared funding does not alter this 
conclusion. Applicants further state that the sale of shares of an 
underlying fund to Qualified Plans does not change the fact that 
applying the prohibitions of section 9(a) to individuals who have no 
involvement in the underlying fund does not advance the purposes of the 
1940 Act.
    10. Subparagraph (b)(15)(iii) of Rules 6e-2 and 6e-3(T) under the 
1940 Act provide partial exemptions from sections 13(a), 15(a), and 
15(b) of the 1940 Act to the extent that those sections are deemed to 
require ``pass-through'' voting with respect to the shares of an 
underlying fund, by allowing an insurance company to disregard the 
voting instructions of contract owners with respect to several 
significant matters, assuming the limitations on mixed and shared 
funding are observed. Rules 6e-2(b)(15)(iii)(A) and 6e-
3(T)(b)(15)(iii)(A) provide that a Participating Insurance Company may 
disregard the voting instructions of its contract owners if such 
instructions would require an underlying fund's shares to be voted to 
cause such underlying fund to make (or to refrain from making) certain 
investments which would result in changes in the sub classification or 
investment objectives of such underlying fund or to approve or 
disapprove any contract between such underlying fund and an 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 
the Rules). Rules 6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2) 
provide that a Participating Insurance Company may disregard contract 
owners' voting instructions if the contract owners initiate any change 
in the underlying fund's investment objectives, principal underwriter 
or any investment adviser (provided that disregarding such voting 
instructions is reasonable and subject to the other provisions of 
paragraph (b)(5)(ii) and (b)(7)(ii)(B) and (C) of the Rules).
    11. Applicants assert that Rules 6e-2(b)(15) and 6e-3(T)(b)(15) 
recognize that a Variable Contract is primarily an insurance contract, 
and as such is subject to extensive state insurance regulation. In 
adopting Rule 6e-2(b)(15)(iii), the Commission recognized that state 
insurance regulators have authority, pursuant to state insurance laws 
or regulations, to disapprove or require changes in the underlying 
fund's investment policies, investment advisers, or principal 
underwriters. The Commission also expressly recognized that state 
insurance regulators have authority to require an insurance company to 
draw from its general account to cover costs imposed on it by a change 
approved by contract owners over the insurance company's objection. The 
Commission, therefore, considered the exemptions provided by Rules 6e-
2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) necessary ``to assure the 
solvency of the life insurer and performance of its

[[Page 51866]]

contractual obligations by enabling an insurance regulatory authority 
or life insurer to act when certain proposals reasonably could be 
expected to increase the risks undertaken by the life insurer.'' 
Applicants assert that Rule 6e-3(T)'s corresponding provisions for 
flexible premium VLI Contracts presumably were adopted in recognition 
of the same factors. Applicants submit that these considerations are 
not less important or necessary when an insurance company funds its 
separate accounts in connection with mixed and shared funding, and that 
such funding does not compromise the goals of the insurance regulatory 
authorities or of the Commission.
    12. Applicants assert that the sale of shares of an underlying fund 
to a Qualified Plan presents no potential for irreconcilable conflicts 
of interest among the Qualified Plan participants and Variable Contract 
holders also owning shares of the underlying fund. Under section 403(a) 
of ERISA, shares of an underlying fund sold to a Qualified Plan must be 
held by the trustee(s) of the Qualified Plan, and such trustee(s) must 
have exclusive authority and discretion to manage and control the 
Qualified Plan with two exceptions: (a) When the Qualified 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 trustee(s) 
are subject to proper directions made in accordance with the terms of 
the Qualified Plan and not contrary to ERISA, and (b) when the 
authority to manage, acquire, or dispose of assets of the Qualified 
Plan is delegated to one or more investment managers pursuant to 
section 402(c)(3) of ERISA. Unless one of the above two exceptions 
applies, the exclusive authority and responsibility for voting shares 
of an underlying fund is vested in the plan trustees. Where a named 
fiduciary to a Qualified Plan appoints an investment managers, the 
investment manager has the responsibility to vote the shares held 
unless the right to vote such shares is reserved to the plan trustees 
or the named fiduciary. Where a Qualified Plan does not provide 
participants with the right to give voting instructions, the applicants 
submit that there is no potential for material irreconcilable conflicts 
of interest between or among holders of Variable Contracts and 
participants in Qualified Plans with respect to voting of an underlying 
fund's shares.
    13. Applicants assert that even where a Qualified Plan provides 
participants with the right to give voting instructions, there is no 
reason to believe that participants in Qualified Plans generally or 
those in a particular Qualified Plan, either as a single group or in 
combination with participants in other Qualified Plans, would vote in a 
manner that would disadvantage holders of Variable Contracts. 
Therefore, applicants assert that the purchase of shares of the Company 
by Qualified Plans that provide voting rights to participants does not 
present any complications not otherwise occasioned by mixed or shared 
funding.
    14. Applicants assert that the presence of both VLI Accounts and VA 
Accounts as shareholders of an underlying fund will not lead to a 
greater probability of material irreconcilable conflicts than if the 
underlying fund did not engage in mixed funding. They submit that each 
type of insurance product is designed as a long-term investment 
program, and that there is no reason to believe that different features 
of various types of contracts, including the ``minimum death benefit'' 
guarantee under certain VLI Contracts, will lead to different 
investment policies for different types of Variable Contracts. In 
addition, applicants submit that if an underlying fund engages in mixed 
funding, there is no reason why the underlying fund would be managed to 
favor one class of investors over another. Regardless of the type of 
shareholder in the Company, the investment manager is obligated to 
manage a 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 responsible for such 
Fund. Thus, the Funds will be managed in the same manner as any other 
fund and there is no incentive for any Fund's investment manager to 
invest to benefit a particular class of shareholders.
    15. Applicants also assert that shared funding does not present any 
issues that do not already exist where an underlying fund sells its 
shares to a single insurance company which is licensed to do business 
in several or all states. Where insurers offer their contracts in 
different states, the state insurance regulatory body in one state in 
which the contracts are offered could require the insurer to take 
action that is inconsistent with the requirements of insurance 
regulators of other states in which the contracts also are offered. 
Applicants assert that the fact that unaffiliated insurers may be 
domiciled in different states does not create a significantly different 
or enlarged problem. Shared funding by unaffiliated insurers is, in 
this respect, no different from the use of the same investment company 
as the funding vehicle for affiliated insurers, a situation to which 
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) provide relief under various 
circumstances. In any event, applicants contend that the proposed 
conditions to the order are designed to safeguard against and provide 
procedures for resolving any adverse effects that differences among 
state regulatory requirements may produce.
    16. Applicants assert that the right of an insurance company in 
certain circumstances to disregard contract owners' voting instructions 
regarding shares of an underlying fund that engages in shared funding 
raises no different issues from those raised by the authority of state 
insurance administrators over Participating 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 
and under certain specified conditions. Requiring that only affiliated 
insurance companies invest in the funds does not eliminate the 
potential for divergent judgments as to the advisability or legality of 
a change in investment policies, principal underwriter, or investment 
adviser initiated by contract owners. Moreover, the potential for 
disagreement is limited by the requirements in Rules 6e-2 and 6e-3(T) 
that an insurance company's disregard of voting instructions be 
reasonable and based on specific good faith determinations. However, 
applicants state that a particular Participating Insurance Company's 
disregard of voting instructions nevertheless could conflict with the 
majority of contract owner voting instructions. The Participating 
Insurance Company's action arguably could be different from the 
determination of all or some of the other Participating Insurance 
Companies (including affiliated insurers) that the contract owners' 
voting instructions should prevail, and could either preclude a 
majority vote approving the change or could represent a minority view. 
Under the proposed conditions, if the insurer's judgment represents a 
minority position or would preclude a majority vote, the insurer may be 
required, at the election of the relevant Fund, to withdraw its 
Participating Separate Account's investment in such Fund, and no charge 
or penalty would be imposed as a result of such withdrawal.
    17. Applicants assert that the sale of the shares of the Company to 
Qualified Plans will not increase the potential for material 
irreconcilable conflicts of interest between or among different types 
of investors. Section 817(h) of the

[[Page 51867]]

Code imposes certain diversification standards on the underlying assets 
of VA Contracts and VLI Contracts held in the portfolios of management 
investment companies. Treasury Regulation 1.817-5(f)(3)(iii), which 
established diversification requirements for such portfolios, 
specifically permits, among other things, ``qualified pension or 
retirement plans'' and separate accounts to invest in the same 
underlying fund without jeopardizing the tax status of VLI and VA 
Accounts. Therefore, applicants argue, neither the Code, the Treasury 
Regulations, nor Revenue Rulings thereunder present any inherent 
conflicts of interest if Qualified Plans, VA Accounts, and VLI Accounts 
all invest in the same underlying fund.
    18. Applicants contend that, while there are differences in the 
manner in which distributions are taxed for VA Contracts, VLI 
Contracts, and Qualified Plans, the differing tax consequences do not 
raise any conflicts of interest. When distributions are to be made and 
the Participating Separate Account or the Qualified Plan cannot net 
purchase payments to make the distributions, the Participating Separate 
Account or the Qualified Plan will redeem shares of the Funds at their 
net asset value. The Qualified Plan then will make distributions in 
accordance with the terms of the Qualified Plan and the Participating 
Insurance Company will make distributions in accordance with the terms 
of the Variable Contract. Therefore, applicants contend, distributions 
and dividends will be declared and paid by the Funds without regard to 
the character of the shareholder.
    19. Applicants contend that the Company's ability to sell its 
shares directly to Qualified Plans does not create a ``senior 
security'' as defined under section 18(g) of the 1940 Act, with respect 
to any contract owner as opposed to a participant under a Qualified 
Plan. Regardless of the rights and benefits of participants under 
Qualified Plans or Variable Contract owners, the Qualified Plans and 
Participating Separate Accounts have rights only with respect to their 
respective shares of the Funds. They can only redeem such shares at 
their net asset value. No shareholder of the Funds will have any 
preference over any other shareholder with respect to the distribution 
of assets or payment of dividends.
    20. With respect to voting rights, applicants assert that it is 
possible to provide an equitable means of giving such voting rights to 
Variable Contract owners and to the trustees of Qualified Plans. The 
transfer agent for the Funds will inform each Participating Insurance 
Company of its share ownership in each Participating Separate Account, 
as well as inform the trustees of Qualified Plans of their holdings. 
Each Participating Insurance Company then will solicit voting 
instructions in accordance with Rules 6e-2 and 6e-3(T), as applicable, 
and its participation agreement with the relevant Funds. 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 the 
Funds will be no different from the voting rights that are provided to 
Qualified Plans with respect to shares of funds sold to the general 
public.
    21. Applicants assert that the veto power of state insurance 
commissioners over an underlying fund's investment objectives does not 
create any inherent conflicts of interest between the contract owners 
of the Participating Separate Accounts and Qualified Plan participants. 
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. In contrast, the trustees of Qualified Plans 
or the participants in participant-directed Qualified Plans can quickly 
decide to redeem their interest in the Trust and reinvest in another 
funding vehicle without the same regulatory impediments faced by 
separate accounts or, as is the case with most Qualified Plans, even 
hold cash pending suitable investment. Thus, applicants state, even if 
issues arise where the interest of contract owners and the interests of 
Qualified Plans are in conflict, the issues can be almost immediately 
resolved since the trustees of (or participants in) the Qualified Plans 
can, on their own, redeem their shares from the Funds.
    22. Applicants also assert that the investment of seed capital in 
the Company presents no potential for irreconcilable conflicts of 
interest. Seed capital for the Company will be provided by the 
Company's investment adviser or a person related to such investment 
adviser (as permitted by Treas. Reg. 1.817-5(f)(3)(ii)) or by the 
participating insurance companies. Applicants note that Rule 14a-2(b) 
provides an exemption from the seed capital requirement for investment 
companies that are sponsored by an insurance company. Because U.S. Bank 
is not an insurance company, the exemption is not available to the 
Company, to the extent it might be deemed the sole promoter of the 
Company.
    23. Applicants contend that permitting the Company to engage in 
mixed, shared, and extended mixed and shared funding subject to the 
proposed conditions will benefit the Company's shareholders. First, 
they state, permitting mixed, shared, and extended mixed and shared 
funding will provide a greater variety of investment options with lower 
costs to Participating Insurance Companies and Variable Contract 
owners. They note that various factors, including 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 to whom the public 
feels comfortable entrusting their investment dollars, have limited the 
number of insurance companies that offer VA Contracts and VLI 
Contracts. Applicants assert that use of the Funds as common investment 
vehicles for Variable Contracts could reduce or alleviate these 
concerns. In addition, Participating Insurance Companies will benefit 
from the cost efficiencies and investment flexibility afforded by a 
larger pool of funds. Therefore, making the Funds available for mixed 
and shared funding may encourage more insurance companies to offer 
Variable Contract design and pricing, which can be expected to result 
in greater product variation and lower charges. Applicants contend that 
the sale of shares of the Funds to Qualified Plans in addition to 
Participating Separate Accounts also could result in an increased 
amount of assets available for investment by the Funds, again promoting 
economies of scale and greater diversification.

Applicants' Conditions

    Applicants have consented to the following conditions:
    1. A majority of the Board of Directors of the Company (``Board'') 
will consist of persons who are not ``interested persons'' of the 
Company, 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

[[Page 51868]]

by reason of the death, disqualification, or bona fide resignation of 
any Director or Directors, then the operation of this condition shall 
be suspended: (a) For a period of 45 days, if the vacancy or vacancies 
may be filled by the 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 Board will monitor the Funds for the existence of any 
material irreconcilable conflict between the interests of the contract 
owners of all Participating Separate Accounts and of the participants 
in Qualified Plans investing in the Funds 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 Funds are being managed; (e) a difference in voting 
instructions given by variable annuity contract owners and variable 
life insurance contract owners and trustees of the Qualified Plans; (f) 
a decision by a Participating Insurance Company to disregard the voting 
instructions of contract owners; or (g) if applicable, a decision by a 
Qualified Plan to disregard the voting instructions of its 
participants.
    3. Participating Insurance Companies, U.S. Bank, or any other 
investment adviser of the Funds, and any Qualified Plans that execute a 
fund participation agreement upon becoming an owner of 10% or more of a 
Fund's assets (``Participants'') will report any potential or existing 
conflicts to the Board. Participants will be responsible for assisting 
the Board in carrying out its responsibilities under these conditions 
by providing the Board with all information reasonably necessary for 
the Board to consider any issues raised. This responsibility includes, 
but is not limited to, an obligation of each Participating Insurance 
Company to inform the Board whenever it has determined to disregard 
contract owner voting instructions and, when pass-through voting is 
applicable, an obligation of each Qualified Plan to inform the Board 
whenever it has determined to disregard voting instructions from 
Qualified Plan participants. The responsibilities to report such 
information and conflicts and to assist the Board will be contractual 
obligations of all Participating Insurance Companies and Qualified 
Plans under their agreements governing participation in the 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 contract owners, and in the case of Qualified 
Plans, that these responsibilities will be carried out with a view only 
to the interests of Qualified Plan participants.
    4. If it is determined by a majority of the Board, or by a majority 
of its disinterested Directors, that a material irreconcilable conflict 
exists, the relevant Participating Insurance Companies and Qualified 
Plans will, at their expense and to the extent reasonably practicable 
(as determined by a majority of the disinterested Directors), take 
whatever steps are necessary to remedy or eliminate the material 
irreconcilable conflict, which steps could include: (a) Withdrawing the 
assets allocable to some or all of the Participating Separate Accounts 
from the applicable Fund or Funds and reinvesting such assets in a 
different investment medium, which may include another Fund, or 
submitting the question of whether such reinvestment should be 
implemented to a vote of all affected contract owners and, as 
appropriate, segregating the assets of any appropriate group (i.e., 
variable annuity contract owners or variable life insurance contract 
owners of one or more Participating Insurance Companies) that votes in 
favor of such segregation, or offering to the affected contract owners 
the option of making such a change; and (b) establishing a new 
registered management investment company or managed separate account. 
If a material irreconcilable conflict arises because of a Participated 
Insurance Company's decision to disregard contract owners' voting 
instructions, and that decision represents a minority position or would 
preclude a majority vote, then that insurer may be required, at the 
Fund's election, to withdraw its separate account's investment in the 
Fund, and no change 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 Qualified Plan participant 
voting instructions, if applicable, and that decision represents a 
minority position or would preclude a majority vote, the Qualified Plan 
may be required, at the Fund's election, to withdraw its investment in 
the Fund, and no charge or penalty will be imposed as a result of such 
withdrawal. To the extent permitted by applicable law, the 
responsibility of taking remedial action in the event of a Board 
determination of material irreconcilable conflict and bearing the costs 
of such remedial action will be a contractual obligation of all 
Participating Insurance Companies and Qualified Plans under their 
agreements governing participation in the Funds and these 
responsibilities will be carried out with a view only to the interests 
of contract owners and Qualified Plan participants, respectively.
    5. For purposes of Condition 4, a majority of the disinterested 
Directors will determine whether or not any proposed action adequately 
remedies any material irreconcilable conflict, but in no event will the 
Company or U.S. Bank be required to establish a new funding medium for 
any Variable Contract. No Participating Insurance Company shall be 
required by Condition 4 to establish a new funding medium for any 
Variable Contract is an offer to do so has been declined by vote of a 
majority of contract owners materially and adversely affected by the 
material irreconcilable conflict. Further, no Qualified Plan will be 
required by Condition 4 to establish a new funding medium for the 
Qualified Plan if: (a) an offer to do so has been declined by vote of a 
majority of Qualified Plan participants materially and adversely 
affected by the material irreconcilable conflict; or (b) pursuant to 
governing Qualified Plan documents and applicable law, the Qualified 
Plans makes such decision without a vote of its participants.
    6. Any Board's determination of the existence of a material 
irreconcilable conflict and its implications will be made known 
promptly and in writing to all Participants.
    7. Participating Insurance Companies will provide pass-through 
voting privileges to contract owners who invest in Participating 
Separate Accounts so long as the Commission interprets the 1940 Act to 
require pass-through voting for contract owners. Accordingly, the 
Participating Insurance Companies will vote shares of the Funds 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 the 
Participating Separate Accounts calculates voting privileges in a 
manner consistent with all other Participating Insurance

[[Page 51869]]

Companies. The obligation to calculate voting privileges in a manner 
consistent with all other Participating Separate Accounts will be a 
contractual obligation of all Participating Insurance Companies under 
the agreements governing participation in the Funds. Each Participating 
Insurance Company will vote shares for which it has not received timely 
voting instructions, as well as shares attributable to it, in the same 
proportion as it votes shares for which it has received instructions.
    8. Each Qualified Plan will vote as required by applicable law and 
governing Qualified Plan documents.
    9. All reports of potential or existing conflicts received by a 
Board, and all Board action with regard to: (a) determining the 
existence of a conflict; (b) notifying Participants of a conflict; and 
(c) determining whether any proposed action adequately remedies a 
conflict, will be properly recorded in the minutes of the Board or 
other appropriate records. Such minutes or other records shall be made 
available to the Commission upon request.
    10. The Company will notify all Participants that disclosure in 
separate account prospectuses or any Qualified Plan prospectuses or 
other Qualified Plan disclosure documents regarding potential risk of 
mixed and shared funding may be appropriate. The Company will disclose 
in its prospectus that: (a) The Funds are intended to be funding 
vehicles for variable annuity and variable life insurance contracts 
offered by various insurance companies and Qualified Plans; (b) due to 
differences of tax treatment and other considerations; the interests of 
various contract owners participating in the Funds and the interests of 
Qualified Plans investing in the Funds may conflict; and (c) the Board 
will monitor for the existence of any material conflicts and determined 
what action, if any, should be taken.
    11. The Company will comply with all provisions of the 1940 Act 
requiring voting by shareholders (which, for these purposes, shall be 
the persons having a voting interest in shares of the Fund), and, in 
particular, the Company 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, the Company will 
act in accordance with the Commission's interpretation of the 
requirements of section 16(a) with respect to periodic elections of 
directors and with whatever rules the Commission may promulgate with 
respect thereto.
    12. If and to the extent that Rules 6e-2 and 6e-3(T) are amended 
(or if Rules 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 Company and/or Participating Insurance 
Companies, as appropriate, shall take such steps as may be necessary to 
comply with the Rules 6e-2 and 6e-3(T), as amended, or Rules 6e-3, as 
adopted, to the extent applicable.
    13. As long as the Commission continues to interpret the 1940 Act 
as requiring pass-through voting privileges for variable contract 
owners, the investment adviser or its affiliate holding shares in a 
Fund will vote such shares in the same proportion as all contract 
owners having voting rights with respect to the Fund; provided, 
however, that such investment adviser or affiliate shall vote its 
shares in such other manner as may be required by the Commission or its 
staff.
    14. Any shares of a Fund purchased by the investment adviser or its 
affiliate will be automatically redeemed if and when the adviser's 
investment advisory agreement terminates, to the extent required by 
applicable Treasury regulations. Neither the investment adviser nor its 
affiliates will sell such shares of the Fund to the public.
    15. No less than annually, the Participants shall submit to the 
Board such reports, materials or data as the Board may reasonably 
request so that the Board may carry out fully the obligations imposed 
upon its by the Conditions contained in the Application. Such reports, 
materials and data shall be submitted more frequently if deemed 
appropriate by the Board. The obligations of the Participants to 
provide these reports, materials and data to the Board when it so 
reasonably requests shall be a contractual obligation of all 
Participants under the agreements governing their participation in the 
Funds.
    16. In the event that a Qualified Plan should ever become an owner 
of 10% or more of the assets of a Fund, such Qualified Plan will 
execute a participation agreement with the Fund with includes the 
conditions set forth herein, to the extent applicable. A Qualified Plan 
will execute an application containing an acknowledgment of this 
condition at the time of its initial purchase of shares of a 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. 00-21752 Filed 8-24-00; 8:45 am]
BILLING CODE 8010-01-M