[Federal Register Volume 65, Number 169 (Wednesday, August 30, 2000)]
[Notices]
[Pages 52794-52800]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-22113]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24619; File No. 812-11942]


Nationwide Separate Account Trust, et al., Notice of Application

August 23, 2000.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of Application for an order of exemption under Section 
6(c) of the Investment Company Act of 1940 (``the Act'') for exemptions 
from the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 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 the extent necessary to permit shares 
of any current or future series of Nationwide Separate Account Trust 
(``NSAT'') and shares of any investment company or series thereof now 
or in the future registered under the Act that is designed to fund 
insurance products and for which Villanova Mutual Fund Capital Trust, 
or any of its affiliates (``VMF''), may serve as investment adviser, 
administrator, manager, principal underwriter or sponsor (NSAT and such 
other investment companies are referred to collectively as ``NSAT''), 
to be sold to and held by (1) variable annuity and variable life 
insurance separate accounts of both affiliated and unaffiliated life 
insurance companies; and (2) qualified pension and retirement plans.

Applicants

    Nationwide Separate Account Trust and Villanova Mutual Fund Capital 
Trust. NSAT and VMF are, collectively, referred to herein as the 
``Applicants.''

Filing Date

    The application was filed on May 16, 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 
on the application by writing to the Secretary of the SEC and serving 
Applicants with a copy of the request, in person or by mail. Hearing 
requests must be received by the Commission by 5:30 p.m. on September 
18, 2000, and accompanied by proof of service on the Applicants in the 
form of an affidavit or, for lawyers, a certificate of service. Hearing 
requests should state the nature of the interest, the reason for the 
request, and the issues contested. Person may request notification of 
the date of a hearing by writing to the Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549-
0609. Applicants, c/o Dina A. Tantra, Counsel, Nationwide Insurance, 
One Nationwide Plaza, 1-35-13, Columbus, Ohio 43215.

FOR FURTHER INFORMATION CONTACT: Rebecca A. Marquigny, Senior Counsel, 
or Keith Carpenter, Branch Chief, Office of Insurance Products, 
Division of Investment Management, (202) 942-0670.

SUPPLEMENTARY INFORMATION: 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, NW., Washington, DC 20549-0102 
(tel. (202) 942-8090).

Applicants' Representations

    1. NSAT is an open-end investment company organized under the laws 
of Massachusetts by Declaration of Trust. NSAT currently is comprised 
of 21 separate series, not all of which have yet commenced operations; 
additional series may be added in the future.
    2. VMF is a registered investment adviser under the Investment 
Advisers Act of 1940 (``Advisers Act'') and is an indirect, majority-
owned subsidiary of Nationwide Financial Services, Inc., a provider, 
through its subsidiaries and affiliates of diversified financial 
services. VMF serves as the investment adviser for each current series 
of NSAT.
    3. NSAT currently offers its shares to affiliated insurance 
companies' separate accounts to fund the benefits under variable 
contracts and variable life insurance policies. NSAT also proposes to 
offer its shares to both affiliated and unaffiliated insurance 
companies for their separate accounts as the underlying investment 
vehicle to fund either variable annuity or variable life insurance 
policies or contracts (collectively, ``Variable Contracts''). 
Affiliated and unaffiliated separate accounts owning shares of NSAT and 
their insurance company depositors are

[[Page 52795]]

referred to as ``Participating Separate Accounts'' and ``Participating 
Insurance Companies,'' respectively.
    4. NSAT also proposes to offer one or more series of its shares 
directly to qualified pension and retirement plans (``Qualified 
Plans'') outside the separate account context. The Qualified Plans will 
be pension or retirement plans intended to qualify under Sections 
401(a) and 501(c) of the Internal Revenue Code of 1986, as amended 
(``Code''). NSAT's shares will be sold to Qualified Plans which are, or 
are designed to be, subject to the Employee Retirement Income Security 
Act of 1984 (``ERISA''), as amended.
    5. The Participating Insurance Companies will establish their own 
Participating Separate Accounts and design their own contracts. Each 
Participating Insurance Company will enter into a fund participation 
agreement with NSAT on behalf of its Participating Separate Account 
will have the legal obligation of satisfying all requirements under 
state and federal law. The role of NSAT, so far as the federal 
securities laws are applicable, will be to offer their shares to 
separate accounts of Participating Insurance Companies and to Qualified 
Plans and to fulfill any conditions that the Commission may impose upon 
granting the order requested in the application.
    6. Qualified Plans may choose NSAT (or any series thereof) as their 
sole investment or as one of several investments. Qualified Plan 
participants may or may not be given an investment choice depending on 
the Qualified Plan itself. Shares of NSAT sold to Qualified Plans would 
be held by the trustee(s) of the Qualified Plans as mandated by Section 
403(a) of ERISA. VMF will not act as investment adviser to any of the 
Qualified Plans that will purchase shares of NSAT. There will be no 
pass-through voting to the participants in such Qualified Plans as it 
is not required to be provided under ERISA.

Applicants' Legal Analysis

    1. Applicants request that the Commission issue an order pursuant 
to Section 6(c) of the Act granting exemptive relief from Sections 
9(a), 13(a), 15(a) and 15(b) of the Act and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) (including any comparable provisions of a rule that 
replaces Rule 6e-3(T)) thereunder, respectively to the extent necessary 
to permit shares of NSAT to be offered and sold to variable annuity and 
variable life insurance separate accounts of both affiliated and 
unaffiliated insurance companies and to Qualified Plans. Applicants 
submit that the exemptions requested are appropriate in the public 
interest, consistent with the protection of investors, and consistent 
with the purposes fairly intended by the policy and provisions of the 
Act.
    2. Section 6(c) of the Act provides, in part, that the Commission, 
by order upon application, may conditionally or unconditionally exempt 
any person, security or transaction, or any class or classes of 
persons, securities or transactions from any provisions of the Act or 
the rules or regulations thereunder, if and to the extent 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 of the Act.
    3. In connection with the funding of scheduled premium variable 
life insurance contracts issued through a separate account registered 
under the Act as a unit investment trust, Rule 6e-2(b)(15) provides 
partial exemptions from Section 9(a) of the Act, which makes it 
unlawful for certain individuals to act in the capacity of employee, 
officer, or director for a UIT, by limiting the application of the 
eligibility restrictions in Section 9(a) to affiliated persons directly 
participating in the management of a registered investment company; and 
Sections 13(a), 15(a), and 15(b) of the Act to the extent those 
Sections might be deemed to require ``pass through voting'' with 
respect to an underlying fund's shares, by allowing an insurance 
company to disregard voting instructions of contract owners in certain 
circumstances. The exemptions granted by Rule 6e-2(b)(15) are 
available, however, only where the management investment company 
underlying the separate account (``Underlying Fund'') offers its shares 
``exclusively to variable life insurance separate accounts of the life 
insurer or 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 underlying fund that also offers its shares to a variable 
annuity or flexible premium variable life insurance company. The use of 
a common management investment company as the underlying investment 
medium for both variable annuity and variable life insurance separate 
accounts of the same insurance company or of any affiliated life 
insurance company is referred to herein as ``mixed funding.'' In 
addition, the relief granted by Rule 6e-2(b)(15) is not available if 
shares of the underlying management investment company are offered to 
variable annuity or variable life insurance separate accounts of 
unaffiliated life insurance companies. The use of a common management 
investment company as the underlying investment medium for separate 
accounts of unaffiliated life insurance companies is referred to herein 
as ``shared funding.'' Rule 6e-2(b)(15) also does not permit the sale 
of shares of the underlying fund to Qualified Plans.
    4. In connection with the funding of flexible premium variable life 
insurance contracts issued through a separate account, Rule 6e-
3(T)(b)(15) provides partial exemptions from Sections 9(a), 13(a), and 
15(a) and 15(b) of the Act. The exemptions granted by Rule 6e-
3(T)(b)(15) are available, however, only where the separate account's 
underlying fund offers its shares ``exclusively to separate accounts of 
the life insurer, or of any affiliated life insurance company, offering 
either scheduled 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, or which offer 
their shares to any such life insurance company in consideration solely 
for advances made by the life insurer in connection with the operation 
of the separate account * * * '' Therefore, Rule 6e-3(T)(b)(15) permits 
mixed funding with respect to a flexible premium variable life 
insurance separate account. However, Rule 6e-3(T)(b)(15) does not 
permit shared funding because the relief granted by Rule 6e-3(T)(b)(15) 
is not available with respect to a flexible premium variable life 
insurance separate account that owns shares of a management investment 
company that also offers its shares to separate accounts (including 
flexible premium variable life insurance separate accounts) of 
unaffiliated life insurance companies and also does not permit the sale 
of the underlying funds to Qualified Plans.
    5. Applicants state that the relief granted by Rules 6e-2(b)(15) 
and 6e-3(T)(b)(15) is not affected by the purchase of shares of NST by 
a Qualified Plan. However, because the relief under Rules 6e-2(b)(15) 
and 6e-3(T)(b)(15) is available only where shares of the underling fund 
are offered exclusively to separate accounts, exemptive relief is 
necessary if shares of NSAT are also to be sold to Qualified Plans.
    6. Applicants state that the current tax law permits NSAT to 
increase its asset base through the sale of shares to Qualified Plans. 
Section 817(h) of the Code imposes certain diversification standards on 
the underlying assets of the variable contracts. The Code provides that 
such contracts shall not be

[[Page 52796]]

treated as an annuity contract or life insurance contract for any 
period during which the investments are not adequately diversified in 
accordance with regulations prescribed by the Treasury Department. 
Treasury regulations provide that, to meet the diversification 
requirements, all of the beneficial interests in an investment company 
must be held by the segregated asset accounts of one or more insurance 
companies. The regulations do contain certain exceptions to this 
requirement, however, one of which permits shares of an investment 
company to be held by the trustee 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. 1.8 17-5(f)(3)(iii)).
    7. Applicants state that the promulgation of Rules 6e-2(b)(15) and 
6e-3(T)(b)(15) of the Act preceded the issuance of these Treasury 
regulations which made it possible for shares of a fund to be held by 
the trustee of a Qualified Plan without adversely affecting the ability 
of shares of NSAT to also be held by the separate accounts of insurance 
companies in connection with their variable life insurance contracts. 
Thus, Applicants assert that the sale of shares of the same investment 
company both to separate accounts through which variable life insurance 
contracts are issued and Qualified Plans could not have been 
contemplated at the time of the adoption of Rules 6e-2(b)(15) and 6e-
3(T)(b)(15), given the then-current tax law.
    8. Applicants assert that if NSAT were to sell shares only to 
Qualified Plans or to separate accounts funding variable annuity 
contracts, no exemptive relief would be necessary. Applicants state 
that none of the relief provided under Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) relates to Qualified Plans or to a registered investment 
company's ability to sell its shares to such purchasers. Exemptive 
relief is requested in the application only because some of the 
separate accounts that will invest in NSAT (or series thereof) may 
themselves be investment companies that rely on Rules 6e-2 and 6e-3(T) 
and that desire to have the relief continue in place.
    9. In general, Section 9(a) of the Act disqualifies any person 
convicted of certain offenses, and any company affiliated with that 
person, from serving in various capacities with respect to an 
underlying registered management investment company. More specifically, 
Section 9(a)(3) of the Act provides that it is unlawful for any 
registered open-end investment company to act as investment adviser to, 
or principal underwriter for, any registered open-end investment 
company if an affiliated person of that company is subject to a 
disqualification enumerated in Sections 9(a)(1) or (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, subject to 
the limitations on mixed and shared funding. These exemptions limit the 
application of eligibility restrictions to affiliated individuals or 
companies that directly participate in the management of the underlying 
management investment company.
    10. Applicants state that the relief provided by Rules 6e-2(b)(15) 
and 6e-3(T)(b)(15) permits the life insurer to serve as the underlying 
fund's investment adviser or principal underwriter, provided that none 
of the insurer's personnel who are ineligible pursuant to Section 9(a) 
are participating in the management or administration of NSAT. 
Applicants state that the partial relief from Section 9(a) provided by 
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 Section 9. 
Applicants assert that it is not necessary for the protection of 
investors or the purposes fairly intended by the policy and provisions 
of the Act to apply the provisions of Section 9(a) to the many 
individuals in an insurance company complex, most of whom typically 
will have no involvement in matters pertaining to investment companies 
funding the separate accounts. Applicants assert that it also is 
unnecessary to apply the restrictions of Section 9(a) to the many 
individuals in various unaffiliated insurance companies (or affiliated 
companies of participating insurance companies) that may utilize the 
funds as a funding medium for variable contracts. Moreover, Applicants 
state that the appropriateness of the relief requested will not be 
affected by the proposed sale of shares of NSAT to Qualified Plans, 
because the insulation of NSAT from those individuals who are 
disqualified under the Act remains in place.
    11. Applicants state that Rules 6e-2(b)(15)(iii) and 6e-
3(T)(b)(15)(iii) under the Act provide exemptions from the pass-through 
voting requirements 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 an 
insurance company may disregard the voting instructions of the contract 
owners with respect to the investments of an underlying fund or any 
contract between a fund and its investment adviser, when required to do 
so by an insurance regulating 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 the insurance 
company may disregard contract owners' voting instructions if the 
contract owners initiate any change in such company's investment 
policies, principal underwriter, or any investment advisor (provided 
that disregarding such voting instructions is reasonable and subject to 
other provisions of paragraphs (b)(5)(ii) and (b)(7)(ii)(B) and (C) of 
the Rules).
    12. Applicants further represent that the sale of NSAT shares to 
Qualified Plans should not affect the relief requested. With respect to 
Qualified Plans, there is no requirement to pass-through voting rights 
to Qualified Plan participants. Shares of the Funds sold to Qualified 
Plans would be held by the trustees of such Qualified Plans as mandated 
by Section 403(a) of ERISA. Section 403(a) also provides that the 
trustees must have exclusive authority and discretion to manage and 
control the Plan with two exceptions: (1) When the Qualified Plan 
expressly provides that the trustees are subject to the direction of a 
named fiduciary who is not a trustee, in which case the trustees are 
subject to proper directions made in accordance with the terms of the 
Qualified 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 two exceptions stated in Section 403(a) applies. the Plan 
trustees have exclusive authority and responsibility for voting 
proxies.
    13. Applicants state that where a named fiduciary appoints an 
investment manager, the investment manager has the responsibility to 
vote the shares held unless the right to vote such shares is reserved 
to the trustees or the named fiduciary. Accordingly, Applicants submit 
that unlike the case with insurance company separate accounts, the 
issue of the resolution of material irreconcilable conflicts with 
respect to voting is not present with respect to Qualified Plans since 
such Qualified Plans are not entitled to pass-through voting 
privileges.
    14. Applicants generally expect many Qualified Plans to have their 
trustee(s) or other fiduciaries exercise voting rights attributable to 
investment

[[Page 52797]]

securities held by the Qualified Plan in their discretion. Some of the 
Qualified Plans, however, may provide for the trustee(s), or investment 
adviser(s) or another named fiduciary to exercise voting rights in 
accordance with instructions from participants. Applicants submit that 
where a Qualified Plan does not provide participants with the right to 
give voting instructions, there is no potential for material 
irreconcilable conflicts of interest between or among contract owners 
and Plan investors with respect to voting of NSAT's shares. Applicants 
further submit that where a Qualified Plan does provide participants 
with the right to give voting instructions, they 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 contract owners. The purchase of shares of NSAT by 
Qualified Plans that provide voting rights does not present any 
complications not otherwise occasioned by mixed and shared funding.
    15. Applicants submit that even if a Qualified Plan were to hold a 
controlling interest in NSAT, such control would not disadvantage other 
investors in NSAT 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 NSAT by a Qualified Plan will not create any 
of the voting complications occasioned by mixed and shared funding. 
Unlike mixed or shared funding, Qualified Plan investor voting rights 
cannot be frustrated by veto rights of insurers or state regulators.
    16. Applicants state that no increased conflicts of interest would 
be presented by the granting of the requested relief. Applicants assert 
that shared funding does not present any issues that do not already 
exist where a single insurance company is licensed to do business in 
several states. Applicants note that where different Participating 
Insurance Companies are domiciled in different states, it is possible 
that the state insurance regulatory body in a state in which one 
Participating Insurance Company is domiciled could require action that 
is inconsistent with the requirements of other insurance regulators in 
one or more other states in which other Participating Insurance 
Companies are domiciled. Applicants submit that this possibility is no 
different or greater than exists where a single insurer and its 
affiliates offer their insurance products in several states.
    17. Applicants further submit that affiliation does not reduce the 
potential for differences in state regulatory requirements. In any 
event, the conditions discussed below are designed to safeguard against 
any adverse effects that these differences may produce. If a particular 
state insurance regulator's decision conflicts with the majority of 
other state regulators, the affected insurer may be required to 
withdraw its Participating Separate Account's investment in NSAT.
    18. Applicants also argue that affiliation does not eliminate the 
potential, if any exists, for divergent judgments as to when a 
Participating Insurance Company could disregard contract owner voting 
instructions. Potential disagreement is limited by the requirement that 
disregarding voting instructions be both reasonable and based on 
specified good faith determinations. However, if a Participating 
Insurance Company's decision to disregard Contract owner voting 
instructions represents a minority position or would preclude a 
majority vote approving a particular change, such Participating 
Insurance Company may be required, at the election of NSAT, to withdraw 
its separate account investment in NSAT. No charge or penalty will be 
imposed as a result of such a withdrawal.
    19. Applicants submit that there is no reason why the investment 
policies of NSAT with mixed funding would, or should, be materially 
different from what those policies would, or should, be if NSAT 
supported only variable annuity or only variable life insurance 
contracts. Hence, Applicants state, there is no reason to believe that 
conflicts of interest would result from mixed funding. Moreover, 
Applicants represent that NSAT will not be managed to favor or disfavor 
any particular insurer or type of contract.
    20. As noted above, Section 817(h) of the Code imposes certain 
diversification standards on the assets underlying the variable 
contracts held in the portfolios of management investment companies. 
Treasury Regulation Section 1.817-5(f)(3)(iii), which establishes 
diversification requirements for such portfolios, specifically permits, 
among other things, ``qualified pension or retirement plans'' and 
separate accounts to share the same underlying management investment 
company. Therefore, Applicants assert that neither the Code, the 
Treasury regulations, nor the revenue rulings thereunder, recognize or 
proscribe any inherent conflicts of interest if qualified plans, 
variable annuity separate accounts, and variable life separate accounts 
all invest in the same management investment company.
    21. Applicants note that while there are differences in the manner 
in which distributions from variable contracts and Qualified Plans are 
taxed, the tax consequences do not raise any conflicts of interest. 
When distributions are to be made, and the Participating Separate 
Account or a Qualified Plan cannot net purchase payments to make the 
distributions, the Participating Separate Account or Qualified Plan 
will redeem shares of NSAT at their net asset value in conformity with 
Rule 22c-1 under the Act to provide proceeds to meet distribution 
needs. The Qualified Plan will then make distributions in accordance 
with the terms of the Qualified Plan. The life insurance company will 
surrender values from the separate account into the general account to 
make distributions in accordance with the terms of the Variable 
Contract.
    22. Applicants state that the sale of shares to Qualified Plans 
should not increase the potential for material irreconcilable conflicts 
of interest between or among different types of investors. Applicants 
submit that there should be very little potential for such conflicts 
beyond that which would otherwise exist between variable annuity and 
variable life insurance contract owners.
    23. Applicants also state that it is possible to provide an 
equitable means of giving voting rights to Participating Separate 
Account contract owners and to Qualified Plans. The transfer agent for 
NSAT will inform each Participating Insurance Company of each 
Participating Separate Account's share ownership in NSAT, as well as 
inform the trustees of Qualified Plans of their holdings. The 
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 NSAT. 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 NSAT 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.
    24. Applicants submit that the ability of NSAT to sell its shares 
directly to Qualified Plans does not create a ``senior security,'' as 
such term is defined under Section 18(g) of the Act, with respect to 
any contract owner as opposed to a Qualified Plan participant.

[[Page 52798]]

Regardless of the rights and benefits of Plan participants or contract 
owners, the Qualified Plans and the Participating Separate Accounts 
only have rights with respect to their respective shares of NSAT. No 
shareholder of NSAT has any preference over any other shareholder with 
respect to distribution of assets or payments of dividends.
    25. Applicants state that there are no conflicts between the 
contract owners of Participating Separate Accounts and Plan 
participants with respect to the state insurance commissioners' veto 
powers over investment objectives. The basic premise of shareholder 
voting is that shareholders may not all agree with a particular 
proposal. While interests and opinions of shareholders may differ, 
however, this does not mean that there are any inherent conflicts of 
interest between or among such shareholders. State insurance 
commissioners have been given the veto power in recognition of the fact 
that insurance companies usually cannot simply redeem their separate 
accounts out of one fund and invest in another. Generally, complex and 
time-consuming transactions must be undertaken to accomplish such 
redemptions and transfers. Conversely, trustees of Qualified Plans can 
make the decision quickly and redeem their shares of NSAT 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 a suitable investment. Based on the 
foregoing, Applicants represent that even should the interests of 
contract owners and the interests of Qualified Plans conflict, the 
conflicts can be resolved almost immediately because the trustees of 
the Qualified Plans can, independently, redeem shares out of NSAT.
    26. Applicants also assert that there does not appear to be any 
greater potential for material irreconcilable conflicts arising between 
the interests of Qualified Plan participants and contract owners of 
Participating Insurance Companies from possible future changes in the 
federal tax laws than that which already exists between variable 
annuity and variable life insurance contract owners.
    27. Applicants believe that the summary of the discussion contained 
herein demonstrates that the sale of shares of NSAT to qualified plans 
and variable contracts does not increase the risk of material 
irreconcilable conflicts of interest. Furthermore, Applicants state 
that the use of NSAT with respect to Qualified Plans is not 
substantially different from NSAT's current use, in that Qualified 
Plans, like variable contracts, are generally long-term retirement 
vehicles. In addition, Applicants assert that regardless of the type of 
shareholder in NSAT, VMF is or would be contractually or otherwise 
obligated to manage NSAT solely and exclusively in accordance with 
NSAT's investment objectives, policies and restrictions as well as any 
guidelines established by NSAT's Board of Trustees.
    28. Applicants assert that various factors have prevented more 
insurance companies from offering variable annuity and variable life 
insurance contracts than currently do so. These factors include the 
costs of organizing and operating a funding medium, the lack of 
expertise with respect to investment management, and the lack of public 
name recognition as investment professionals. In particular, some 
smaller life insurance companies may not find it economically feasible, 
or within their investment or administrative expertise, to enter the 
variable contract business on their own. Applicants assert that use of 
NSAT as a common investment medium for variable contracts would 
ameliorate these concerns. Participating Insurance companies would 
benefit not only from the investment advisory and administrative 
expertise of VMF and its affiliates, but also from the cost 
efficiencies and investment flexibility afforded by a large pool of 
funds. Applicants submit that therefore, making NSAT available for 
mixed and shared funding will encourage more insurance companies to 
offer variable contracts. Applicants claim that 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. Moreover, the sale of the shares of NSAT to Qualified 
Plans should further increase the amount of assets available for 
investment by NSAT. This in turn, should inure to the benefit of 
contract owners by promoting economies of scale, by permitting greater 
safety through greater diversification, and by making the addition of 
new portfolios to NSAT more feasible.
    29. Applicants assert that there is no significant legal impediment 
to permitting mixed and shared funding and sales of Fund shares to 
Qualified Plans.

Applicants' Conditions

    Applicants consent to the following conditions if the application 
is granted:
    1. A majority of the Board of Trustees or Board of Directors 
(``Board'') of NSAT shall consist of persons who are not ``interested 
persons'' of NSAT, as defined by Section 2(a)(19) of the Act and the 
Rules thereunder and as modified by any applicable orders of the 
Commission, except that if this condition is not met by reason of the 
death, disqualification, or bona fide resignation of any trustee or 
director, then the operation of this condition shall be suspended: (a) 
For a period of 45 days if the vacancy or vacancies may be filled by 
the Board; (b) for a period of 60 days if a vote of shareholders is 
required to fill the vacancy or vacancies; or (c) for such longer 
period as the Commission may prescribe by rule, or by order upon 
application.
    2. The Board will monitor NSAT for the existence of any material 
irreconcilable conflict among the interests of the contract owners of 
all Participating Separate Accounts and of the participants of 
Qualified Plans investing in NSAT. 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 
letter, or any similar action by insurance, tax, or securities 
regulatory authorities; (c) an administrative or judicial decision in 
any relevant proceeding; (e) a difference in voting instructions given 
by variable annuity contract owners and variable life insurance 
contract owners; (f) a decision by an insurer to disregard the voting 
instructions of contract owners; or (g) if applicable, a decision by a 
Plan to disregard voting instructions of Plan participants.
    3. Participating Insurance Companies, VMF, any other investment 
adviser to any series of NSAT, and any Qualified Plans that execute a 
fund participation agreement upon becoming an owner of 10% or more of 
the assets of NSAT (``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 reasonable 
necessary for the Board to consider any issues raised. This 
responsibility includes, but is not limited to, an obligation by 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

[[Page 52799]]

instructions from Plan participants. The responsibilities to report 
such information and conflicts and to assist the Board will be a 
contractual obligation of all Participating Insurance Companies and 
Qualified Plans under their agreements governing participation in NSAT, 
and such agreements shall provide, in the case of Participating 
Insurance Companies, that such responsibilities will be carried out 
with a view only to the interests of contract owners, or in the case of 
Qualified Plans, Qualified Plan participants.
    4. If it is determined by a majority of the Board, or a majority of 
its disinterested trustees or directors, that a material irreconcilable 
conflict exists, the relevant Participating Insurance Companies and 
Qualified Plans, at their expense and to the extent reasonably 
practicable (as determined by a majority of the disinterested trustees 
or directors), shall take whatever steps are necessary to remedy or 
eliminate the material irreconcilable conflict. Such steps could 
include: (a) Withdrawing the assets allocable to some or all of the 
separate accounts from NSAT or any series thereof and reinvesting such 
assets in a different investment medium which may include another 
series of NSAT; (b) in the case of Participating Insurance Companies, 
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 or life insurance contract owners, or variable 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 (c) establishing a new registered 
management investment company or managed separate account. If a 
material irreconcilable conflict arises because of an insurer's 
decision to disregard contract owner voting instructions and that 
decision represents a minority position or would preclude a majority 
vote, the insurer may be required, at the election of NSAT, to withdraw 
its separate account's investment in NSAT, and no charge or penalty 
will be imposed as a result of such withdrawal. If a material 
irreconcilable conflict arises because of a 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 NSAT, to withdraw 
its investment in such Fund, and no charge or penalty will be imposed 
as a result of such withdrawal. To the extent permitted by applicable 
law, the responsibility to take remedial action in the event of a Board 
determination of a material irreconcilable conflict and bear the cost 
of such remedial action shall be a contractual obligation of all 
Participating Insurance Companies and Qualified Plans under their 
agreements governing participation in NSAT and these responsibilities 
will be carried out with a view to the interests of the contract owners 
and Plan participants, as appropriate.
    For purposes of Condition 4, a majority of the disinterested 
members of the Board shall determine whether or not any proposed action 
adequately remedies any material irreconcilable conflict but in no 
event will NSAT, or VMF (or any other investment adviser) 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 if an offer to 
do so has been declined by a vote of the majority of contract owners 
materially and adversely affected by the material irreconcilable 
conflict. No Qualified Plan shall be required by this Condition 4 to 
establish a new funding medium for such Qualified Plan if: (a) An offer 
to do so has been declined by a vote of a majority of Qualified Plan 
participants materially and adversely affected by the irreconcilable 
material conflict, or (b) pursuant to governing Qualified Plan 
documents and applicable law, such Qualified Plan makes such decision 
without a vote of its participants.
    5. Participants will be informed promptly in writing of the Board's 
determination of the existence of a material irreconcilable conflict 
and its implications.
    6. Participating Insurance Companies will provide pass-through 
voting privileges to contract owners who invest in Participating 
Separate Accounts so long as the Commission continues to interpret the 
Act as requiring pass-through voting privileges for contract owners. 
Accordingly, Participating Insurance Companies will vote shares of NSAT 
or series thereof held in Participating Separate Accounts in a manner 
consistent with voting instructions timely received from contract 
owners. In addition, each Participating Insurance Company will vote 
shares of NSAT, or series thereof, held in its separate accounts for 
which it has not received timely voting instructions as well as shares 
it owns, in the same proportion as those shares for which it has 
received voting instructions. Participating Insurance Companies will be 
responsible for assuring that each of their Participating Separate 
Accounts calculate voting privileges in a manner consistent with all 
other Participating Insurance Companies. The obligation to vote NSAT's 
shares and calculate voting privileges in a manner consistent with all 
other Participating Separate Accounts shall be a contractual obligation 
of all Participating Insurance Companies under the agreements governing 
participation in NSAT. Each Plan will vote as required by applicable 
law and governing Plan documents.
    7. All reports of potential or existing conflicts of interest 
received by the 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 and such minutes or other records 
shall be made available to the Commission upon request.
    8. NSAT will notify all Participating Insurance Companies and 
Qualified Plans that disclosure in separate account prospectuses or 
plan prospectuses or other plan disclosure documents regarding 
potential risks of mixed and shared funding may be appropriate. NSAT 
shall disclose in its prospectus that: (a) Its shares are offered to 
insurance company separate accounts which fund both annuity and life 
insurance contracts, (b) due to differences in tax treatment and other 
considerations, the interests of various contract owners participating 
in NSAT and the interest of Qualified Plans investing in NSAT may 
conflict, and (c) the Board will monitor for the existence of any 
material conflicts and determine what action, if any, should be taken.
    9. NSAT will comply with all provisions of the Act requiring voting 
by shareholders (for these purposes, the persons having a voting 
interest in the shares of NSAT). In particular, NSAT will either 
provide for annual meetings (except to the extent that the Commission 
may interpret Section 16 of the Act not to require such meetings) or 
comply with Section 16(c) of the Act (although NSAT is not one of the 
trusts described in Section 16(c) of the Act) as well as with Section 
16(a) and, if and when applicable, Section 16(b) of the Act. Further, 
NSAT will act in accordance with the Commission's interpretation of the 
requirements of Section 16(a) with respect to periodic elections of 
Board members and with whatever rules the Commission may promulgate 
with respect thereto.

[[Page 52800]]

    10. If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or 
Rule 6e-3 under the Act is adopted, to provide exemptive relief from 
any provision of the 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 NSAT 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), as 
amended, and proposed Rule 6e-3, as adopted, to the extent applicable.
    11. 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 it 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 
NSAT.
    12. NSAT and its respective series will not accept a purchase from 
a Qualified Plan or a Qualified Plan participant shareholder if such 
purchase would make the shareholder an owner of 10% or more of the 
shares of any series of NSAT, unless such Qualified Plan executes a 
participation agreement including the conditions of the Application set 
forth herein, to the extent applicable. A qualified Plan or Qualified 
Plan participant will execute an application containing an 
acknowledgement of this condition at the time of its initial purchase 
of shares of any series of NSAT.

Conclusion

    For the reasons and upon the facts stated 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 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-22113 Filed 8-29-00; 8:45 am]
BILLING CODE 8010-01-M