[Federal Register Volume 65, Number 176 (Monday, September 11, 2000)]
[Notices]
[Pages 54866-54872]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-23171]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24632; File No. 812-12040]


Brazos Insurance Funds, Notice of Application

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 (``1940 Act''), as amended, 
for exemptions from the provisions of Sections 9(a), 13(a), 15(a) and 
15(b) of the 1940 Act and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) 
thereunder.

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    Summary of Application: Applicants seek an order to the extent 
necessary to permit shares of any current or future series of Brazos 
Insurance Funds (``Trust'') and shares of any other investment company 
that is designed to fund variable insurance products and for which John 
McStay Investment Counsel, L.P. (``Adviser''), or any of its 
affiliates, may serve now or in the future, as investment adviser, 
administrator, principal underwriter or sponsor (the Trust and such 
other investment companies referred to collectively as ``Insurance 
Products Funds'') to be sold to, and held by, (1) variable annuity and 
variable life insurance separate accounts of both affiliated and 
unaffiliated life insurance companies; (2) qualified pension and 
retirement plans outside of the separate account context; and (3) the 
Adviser to an Insurance Products Fund and affiliates thereof (the 
``Application'').
    Applicants: Brazos Insurance Funds and John McStay Investment 
Counsel, L.P. (collectively, ``Applicants'').
    Filing Date: The application was filed on March 23, 2000, and 
amended and restated on August 18, 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 this application by writing 
to the Secretary of the SEC and serving Applicants with a copy of the 
request, in person or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on September 26, 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 your interest, the reason for the request, and the issues you 
contest. Persons may request notification of the date of a hearing by 
writing to the Commission's Secretary.

ADDRESSES: Secretary, SEC, 450, 5th Street, NW., Washington, DC 20549-
0609. Applicants, c/o Audrey C. Talley, Drinker Biddle & Reath LLP, One 
Logan Square, 18th and Cherry Streets, Philadelphia, Pennsylvania 
19103-6996.

FOR FURTHER INFORMATION CONTACT: Ronald A. Holinsky, Senior Counsel or 
Lorna MacLeod, Branch Chief, Office of Insurance Products, Division of 
Investment Management, at (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. The Adviser, a Delaware limited partnership, is registered as an

[[Page 54867]]

investment adviser under the Investment Advisers Act of 1940 and serves 
as the investment adviser for the Trust.
    2. The Trust, an open-end management investment company, is a 
Delaware business trust currently consisting of one series. In the 
future, additional series of shares may be added to the Trust.
    3. Shares of the Trust are offered to separate accounts of both 
affiliated and unaffiliated insurance companies (``Participating 
Insurance Companies'') to serve as investment vehicles for variable 
annuity and variable life insurance contracts (including single 
premium, scheduled premium, modified single premium and flexible 
premium contracts). These separate accounts either will be registered 
as investment companies under the 1940 Act or will be exempt from such 
registration.
    4. The Participating Insurance Companies will establish their own 
separate accounts and design their own contracts. Each Participating 
Insurance Company will have the legal obligation of satisfying all 
applicable requirements under the federal securities laws in connection 
with any variable contract issued by such company. The role of the 
Insurance Products Funds, so far as the federal securities law are 
applicable, will be limited to that of offering their shares to 
separate accounts of Participating Insurance Companies and to Plans and 
fulfilling any conditions the Commission may impose upon granting the 
order requested in the application. Each Participating Insurance 
Company will enter into a fund participation agreement with an 
Insurance Products Fund in which the Participating Insurance Company 
invests.
    5. An Insurance Products Fund shares may be offered directly to 
Plans outside the separate account, in reliance on Treasury Regulation 
Sec. 1.817-(f)(3)(iii).
    6. The Plans may choose one or more Insurance Products Fund as the 
sole investment under the Plan or as one of several investments. 
Depending on the Plan, Plan participants may or may not be given the 
right to select among Insurance Products Funds. Insurance Products 
Funds shares sold to Plans will be held by the trustees of such Plans 
as required by Section 403(a) of the Employee Retirement Income 
Security Act (``ERISA'').
    7. An Insurance Products Fund shares may also be offered to the 
Adviser and its affiliates, in reliance on Treasury Regulation 
Sec. 1.817-5(f)(3)(i) and (ii).
    8. Applicants state that the Treasury Department Regulations permit 
such sales as long as the return on shares held by the Adviser and its 
affiliates is computed in the same manner as for shares held by a 
separate account, and the Adviser and its affiliates do not intend to 
sell shares of the Insurance Products Funds held by it to the public. 
An additional restriction is imposed by the Regulations on sales to the 
Adviser and its affiliates, who may hold shares only in connection with 
the creation or management of an Insurance Products Fund. Applicants 
anticipate that sales in reliance on these provisions of the 
Regulations generally will be made to the Adviser and its affiliates 
and generally for the purpose of providing necessary capital required 
by Section 14(a) of the 1940 Act.

Applicants' Legal Analysis

    1. Applicants request that the Commission issue an order under 
Section 6(c) of the 1940 Act granting exemptions 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, to the extent necessary to permit shares of the 
Insurance Products Funds to be sold to, and held by: (a) Variable 
annuity and variable life insurance separate accounts of the same life 
insurance company or of any affiliated life insurance company 
(``mixed'' funding) and separate accounts of unaffiliated life 
insurance companies (including both variable annuity and variable life 
separate accounts) (``shared'' funding); (b) Plans; and (c) the Adviser 
and its affiliates.
    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. Applicants assert that the requested 
exemptions and appropriate in the public interest and consistent with 
the protection of investors and the purposes fairly intended by the 
policy and provisions of the 1940 Act.
    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 (the ``Trust Account''), 
Rule 6e-2(b)(15) provides partial exemptions from Sections 9(a), 13(a), 
15(a), and 15(b) of the 1940 Act. The exemptions granted by Rule 6e-
2(b)(15) are available only where all of the assets of the separate 
account consist of the shares of one or more registered management 
investment companies which offer their shares exclusively to variable 
life insurance separate accounts of the life insurer or any affiliated 
life insurance company. Therefore, the relief granted by Rule 6e-
2(b)(15) is not available if the scheduled premium variable life 
insurance separate account owns shares of a management investment 
company that also offers its shares to a variable annuity separate 
account of the same insurance company or an affiliated insurance 
company. In addition, the relief granted by Rule 6e-2(6)(15) is not 
available if the scheduled premium variable life insurance separate 
account owns shares of an underlying management investment company that 
also offers its shares to a variable annuity separate account of the 
same insurance company or an affiliated insurance company or to 
separate accounts funding variable contracts of one or more 
unaffiliated life insurance companies. The relief granted by Rule 6e-
2(b)(15) also is not available if the shares of the Insurance Products 
Funds are sold to Plans or the Advisers.
    4. 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 Sections 9(a), 13(a), 15(a), and 15(b) of the 
1940 Act. The exemptions granted by Rule 6e-3(T)(b)(15) are available 
only where all of the assets of the separate account consists of the 
shares of one ore 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 
schedule 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, the exemptions provided by rule 6e-
3(T)(b)(15) are available if the underlying fund is engaged in mixed 
funding, but not available if the fund is engaged in shared funding or 
if the fund sells shares to Plans or the Advisers. The relief granted 
by Rule 6e-3(T)(b)(15) also is not available if the shares of the 
Insurance Products Funds are sold to Plans or the Advisers.
    5. Applicants state that the current tax law permits the Insurance 
Products Funds to increase their asset base

[[Page 54868]]

through the sale of shares to Plans. Section 817(h) of the Internal 
Revenue Code of 1986, as amended (the ``Code''), imposes certain 
diversification standards on the underlying assets of the variable 
contracts. The Code provides that such contracts shall not be treated 
as an annuity contract or life insurance contract for any period (and 
any subsequent 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 pension 
or retirement 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. Sec. 1.817-5(f)(3)(iii)).
    6. Applicants also state that the current tax law permits the 
Insurance Products Funds to sell shares to the Adviser and its 
affiliates subject to certain conditions (Treas. Reg. Sec. 1.817-
(f)(3)(i) and (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 which 
made it possible for shares of an investment company to be held by a 
Plan or an investment adviser, or its affiliates, without adversely 
affecting the ability of shares in the same investment company also to 
be held by separate accounts of insurance companies in connection with 
their contracts. Thus, Applicants assert, the sale of shares of the 
same investment company to separate accounts, Plans, the Adviser and 
its affiliates could not have been envisioned 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 the Insurance Products Funds were to 
sell only to other Plans, the Adviser and its affiliates, and 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 and 6e-3(T) relates to Plans or to the 
Adviser and its affiliates or to a registered investment company's 
ability to sell its shares to such purchasers. Exemptive relief is 
requested only because some of the separate accounts that will invest 
in an Insurance Products Fund may themselves be investment companies 
that rely on Rules 6e-2 and 6e-3(T) and need to have the relief 
continue in place.
    9. Section 9(a)(3) of the 1940 Act provides that it is unlawful for 
any 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) does not disqualify the insurance company or any of 
its affiliates from serving as the underlying investment company's 
investment adviser or principal underwriter, provided that the 
disqualified individual does not participate directly in the management 
or administration of the underlying investment company. Applicants 
further state that the 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 1940 Act to apply the provisions of Section 9(a) to the many 
individuals who do not directly participate in the admission or 
management of the Insurance Products Funds. Applicants assert that it 
also is not necessary to apply the restrictions of Section 9(a) to 
individuals employed by various unaffiliated insurance companies (or 
affiliated companies of Participating Insurance Companies) that may 
utilize the Insurance Products Funds as the funding medium for 
contracts. Applicants do not expect the Participating Insurance 
Companies to play any role in the management or administration of the 
Insurance Products Funds.
    11. Applicants assert that applying the restrictions of Section 
9(a) to individuals employed by Participating Insurance Companies 
serves no regulatory purpose.
    12. Applicants state that the relief requested should not be 
affected by the proposed sale of the Insurance Products Funds to Plans, 
the Adviser and its affiliates since Plans, the Adviser and its 
affiliates are not investment companies and will not be deemed 
affiliates solely by virtue of their shareholdings.
    13. Applicants submit that Sections 13(a), 15(a) and 15(b) of the 
1940 Act require ``pass-through'' voting with respect to management 
investment company shares held by a separate account to permit the 
insurance company to disregard the voting instructions of its contract 
holders in certain limited circumstances. For example, Applicants state 
that subparagraph (b)(15)(iii)(B) of Rules 6e-2 and 6e-3(T) under the 
1940 Act provide that the insurance company may disregard contract 
owners' voting instructions if the contract owners initiate any changes 
in the investment company's investment policies, principal underwriter 
or investment adviser, provided that disregarding such voting 
instructions is reasonable and complies with the other provisions of 
Rules 6e-2 and 6e-3(T).
    14. Applicants state that Rule 6e-2 recognizes that a variable life 
insurance contract has important elements unique to insurance contracts 
and is subject to extensive state regulation of insurance. Applicants 
assert that in adopting Rule 6e-2(b)(15)(iii), the Commission expressly 
recognized that state insurance regulators have authority to disapprove 
or require changes in investment policies, investment advisers, or 
principal underwriters. Applicants also maintain that the Commission 
has expressly recognized that state insurance regulators have authority 
to require an insurer to draw from its general account to cover costs 
imposed upon the insurer by a change approved by contract owner over 
the insurer's objection. Applicants state that the Commission deemed 
such exemptions necessary to assure the solvency of the life insurer 
and the performance of its contractual obligations by enabling an 
insurance regulatory authority or the life insurer to act when certain 
proposals reasonably could be expected to increase the risks undertaken 
by the life insurer. Applicants further state that in this respect, 
flexible premium variable life insurance contracts are identical to 
scheduled premium variable life insurance contracts, and that therefore 
corresponding provisions of Rule 6e-3(T) were adopted in recognition of 
the same considerations as the Commission applied in adopting Rule 6e-
2.

[[Page 54869]]

    15. Applicants further represent that the sale of an Insurance 
Products Fund shares to Plans, the Adviser and its affiliates should 
not have any impact on the relief requested. Shares of the Insurance 
Products Funds will be held by the trustees of such 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: (a) When the Plan expressly 
provides that the trustees are subject to the direction of a named 
fiduciary who is not a trustee, in which case the trustees are subject 
to proper directions made in accordance with the terms of the Plan and 
not contrary to ERISA; and (b) when the authority to manage, acquire or 
dispose of assets of the Plan is delegated to one or more investment 
managers pursuant to section 402(c)(3) of ERISA. Unless one of the two 
exceptions stated in Section 403(a) applies, the Plan trustees have 
exclusive authority and responsibility for voting proxies. 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. 
Applicants state that there is no pass-through voting to Plan 
participants. Similarly, the Adviser and its affiliates are not subject 
to any pass-through voting requirements. Accordingly, Applicants assert 
that, unlike the case with the insurance company separate accounts, the 
issue of the resolution of material irreconcilable conflicts with 
respect to voting is not present with Plans, the Adviser and its 
affiliates.
    16. Applicants state that some of the Plans may provide for the 
trustee(s), investment adviser(s) or another named fiduciary to 
exercise voting rights in accordance with instructions from Plan 
participants. Applicants state that, in such cases, the purchase of 
shares by the Plans does not present any complications not otherwise 
occasioned by mixed or shared funding.
    17. Applicants note that Section 817(h) of the Code imposes certain 
diversification standards on the underlying assets of variable annuity 
and variable life insurance separate accounts. Applicants state that 
Treasury Regulations Sec. 1.817-5(f)(3)(iii), which established 
diversification requirements for such funds, specifically permits, 
among other things, ``qualified pension or retirement plans'' and 
insurance company separate accounts to share the same underlying 
investment company. Therefore, Applicants have concluded that neither 
the Code, the Treasury regulations nor the revenue rulings thereunder 
present any inherent conflicts of interest if Plans, variable annuity 
separate accounts, variable life separate accounts, and the Advisor and 
its affiliates all invest in the same management investment company.
    18. Applicants state that while there are differences in the manner 
in which distributions are taxed for variable annuity contracts, 
variable life insurance contracts and Plans, the tax consequences do 
not raise any conflicts of interest. When distributions are to be made, 
and the separate account or the Plan cannot net purchase payments to 
make the distributions, the separate account or the Plan will redeem 
shares of the Insurance Products Funds at their net asset value. The 
Plan will then make distributions in accordance with the terms of the 
Plan and the insurance company will make distributions in accordance 
with the terms of the variable contract.
    19. Applicants submit that the ability of the Insurance Products 
Funds to sell their respective shares directly to Plans, the Adviser 
and its affiliates does not create a ``senior security,'' as such term 
is defined under Section 18(g) of the 1940 Act, with respect to any 
contract owner as opposed to a Plan participant, the Adviser and its 
affiliates. Regardless of the rights and benefits of participants under 
Plans, contract owners, or the Adviser and its affiliates under the 
contracts, the Plans, the Adviser and its affiliates, and the separate 
accounts of Participating Insurance Companies have rights only with 
respect to their respective shares of the Insurance Products Funds. No 
shareholder of any Insurance Products Fund has any preference over any 
other shareholder with respect to distribution of assets or payment of 
dividends.
    20. Applicants state that there are no conflicts of interest 
between the contract owners of the separate accounts and the 
participants under the Plans with respect to the state insurance 
commissioners' veto powers over investment objectives. The state 
insurance commissioners have been given the veto power in recognition 
of the fact that insurance companies cannot simply redeem their 
separate accounts out of one fund and invest in another. To accomplish 
such redemptions and transfers, complex and time consuming transactions 
must be undertaken. Conversely, trustees of Plans can make the decision 
quickly and implement redemption of shares from a fund and reinvest the 
moneys in another funding vehicle without the same regulatory 
impediments or, as is the case with most Plans, even hold cash pending 
suitable investment. Therefore, Applicants assert that even if issues 
arise whether the interests of the variable contract owners and the 
interests of Plan participants conflict, the issues can be resolved 
almost immediately because the trustees of the Plans can, on their own, 
redeem shares out of an Insurance Products Fund.
    21. Applicants submit that shared funding by unaffiliated insurance 
companies does not present any conflict of interest issues that do not 
already exist where a single insurance company is licensed to do 
business in several or all states. Applicants note that a particular 
state insurance regulatory body could require action that is 
inconsistent with the requirements of other states in which the 
insurance company offers its policies. Applicants state that if a 
particular state insurance regulator's decision conflicts with a 
majority of other insurance regulators, the affected insurer may be 
required to withdraw its separate account's investment in an Insurance 
Products Fund. Applicants submit that the fact that different insurers 
may be domiciled in different states does not create a significantly 
different or enlarged problem.
    22. Applicants further submit that affiliation does not reduce the 
potential, if any exists, for differences in state regulatory 
requirements. In any event, the conditions discussed below are designed 
to safeguard against, and provide procedures for resolving, any adverse 
effects that differences among state regulatory requirements may 
produce.
    23. Applicants also assert that affiliation does not eliminate the 
potential, if any exists, for divergent judgment as to when a 
Participating Insurance Company can disregard contract owners' voting 
instructions. Potential disagreement is limited by the requirements 
that the disregarding of voting instructions be reasonable and based on 
specific good faith determinations. However, if a Participating 
Insurance Company's decision to disregard voting instructions 
represents a minority position or would preclude a majority vote, the 
Participating Insurance Company may be required, at the election of an 
Insurance Products Fund, to withdraw its separate account's investment 
in that Insurance Products Fund. No charge or penalty will be imposed 
upon contract owners as a result of such a withdrawal.
    24. Applicants submit that there is no reason why the investment 
policies of an Insurance Products Fund with mixed funding would or 
should be materially different from what those policies

[[Page 54870]]

would or should be if such Insurance Products Fund or series thereof 
funded only variable annuity contracts or variable life insurance 
policies. Applicants state that the Insurance Products Funds will not 
favor or disfavor any particular participating insurer or type of 
insurance product. Applicants further note that an Insurance Products 
Fund's adviser is legally obligated to manage the fund in accordance 
with its investment objective, policies and restrictions as well as any 
guidelines established by the fund's Board.
    25. Applicants assert that with respect to voting rights, it is 
possible to provide an equitable means of giving such voting rights to 
contract owners and to Plans, the Adviser, and affiliates of the 
Adviser. The transfer agent for the Insurance Products Funds will 
inform each Participating Insurance Company of its share ownership in 
each separate account, as well as inform the trustees of Plans, the 
Adviser and its affiliates. The Participating Insurance Company then 
solicits voting instructions in accordance with Rules 6e-2 and 6e-3(T).
    26. Applicants assert that permitting an Insurance Products Fund to 
sell its shares to the Adviser and its affiliates in compliance with 
Treasury Regulation Sec. 1.817-5 will enhance fund management without 
raising significant concerns regarding material irreconcilable 
conflicts. Applicants state that unlike the circumstances of many 
investment companies that serve as underlying investment media for 
variable insurance products, an Insurance Products Fund may be deemed 
to lack an insurance company ``promoter'' for purposes of Rule 14a-2 
under the 1940 Act. Applicants state that they anticipate that many 
other Insurance Products Funds man lack an insurance company promoter. 
Accordingly, Applicants state that such Insurance Products Funds will 
be subject to the requirements of Section 14(a) of the 1940 Act, which 
generally requires that an investment company have a net worth of 
$100,000 upon making a public offering of its shares.
    27. Applicants assert that given the conditions of Treasury 
Regulation Sec. 1.817-5(f)(3) and the harmony of interest between an 
Insurance Products Fund and its Adviser or a Participating Insurance 
Company, little incentive for overreaching exists. Applicants also 
argue that such investments should not implicate the concerns discussed 
above regarding the creation of material irreconcilable conflicts. 
Instead, Applicants represent that permitting investment by the Adviser 
and its affiliates will permit the orderly and efficient creation and 
operation of the Insurance Products Funds, or series thereof, and 
reduce the expense and uncertainty of using outside parties at the 
early stages of an Insurance Products Fund's operations.
    28. Applicants state that various factors have limited the number 
of insurance companies that offer variable contracts. These factors 
include the cost 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. In 
particular, a number of 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 state that use of the Insurance Products Funds as a common 
investment medium for variable contracts and Plans would help alleviate 
these concerns for smaller life insurance companies because 
Participating Insurance Companies and Plans will benefit not only from 
the investment and administrative expertise of the Adviser and its 
affiliate but also from the cost efficiencies and investment 
flexibility afforded by a large pool of funds. Therefore, making the 
funds available for mixed and shared funding and permitting the 
purchase of fund shares by Plans may encourage more life insurance 
companies to offer variable contracts. Applicants submit 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. Applicants further assert that 
mixed and shared funding would permit a greater amount of assets 
available for investment by the Insurance Products Funds thereby 
promoting economies of scale, by permitting increased safely through 
greater diversification, or by making the addition of new portfolios 
more feasible.
    29. Applicants believe that mixed and shared funding and sales of 
the Insurance Products Funds shares to Plans, the Adviser and its 
affiliates will have no adverse federal income tax consequences.

Applicants' Conditions

    Applicants consent to the following conditions if the application 
is granted:
    1. A majority of each Insurance Products Fund's Board of Trustees 
or Directors (each a ``Board'') shall consist of persons who are not 
``interested persons'' thereof, as defined by Section 2(a)(19) of the 
1940 Act and the rules thereunder and as modified by any applicable 
orders of the Commission, except that if this condition is not met by 
reason of the death, disqualification, or bona fide resignation of any 
trustee or director, then the operation of this condition shall be 
suspended: (a) For a period of 45 days if the vacancy or vacancies may 
be filled by the remaining Board members; (b) for a period of 60 days, 
if a vote of shareholders is required to fill the vacancy or vacancies; 
or (c) for such longer period as the Commission may prescribe by order 
upon application.
    2. The Boards will monitor their respective Insurance Products Fund 
for the existence of any material irreconcilable conflict among the 
interests of the Variable Contract owner of all separate accounts 
investing in an Insurance Products Fund and of the Plan participants, 
Plans, and the Adviser or its affiliates investing in the Insurance 
Products Funds. The Board will determine what action, if any, shall be 
taken in response to such conflicts. A material irreconcilable conflict 
may arise for a variety of reasons, including: (a) An action by any 
state insurance regulatory authority; (b) a change in applicable 
federal or state insurance, tax, or securities laws or regulations, or 
a public ruling, private letter ruling, no-action or interpretative 
letter, or any similar action by insurance, tax, or securities 
regulatory authorities; (c) an administrative or judicial decision in 
any relevant proceeding; (d) the manner in which the investments of the 
Insurance Products Funds are being managed; (e) a difference in voting 
instructions given by variable annuity contract owners, variable life 
insurance contract owners and trustees of the Plans; (f) a decision by 
a participating Insurance Company to disregard the voting instructions 
of Variable Contract owners; or (g) if applicable, a decision by a Plan 
to disregard voting instructions of Plan participants.
    3. In the event that a Plan participant should become an owner of 
10% or more of the assets of an Insurance Products Fund, such 
participant will execute a fund participation agreement providing for 
the conditions of this herein. A Plan participant will execute an 
application containing an acknowledgment of this condition at the time 
of its initial purchase of shares of an Insurance Products Fund.
    4. Participating Insurance Companies, the Adviser and its 
affiliates, and any Plan that executes a fund participation agreement 
(collectively ``Participants'') upon becoming an owner of 10% or

[[Page 54871]]

more of the assets of an Insurance Products Fund (collectively 
``Participants''), will report any potential or existing conflicts to 
the Board of any relevant Insurance Products Fund. 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 by each Participating Insurance Company to inform the Board 
whenever Variable Contract owner voting instructions are disregarded 
and, if pass-through voting is applicable, an obligation by a Plan to 
inform the Board whenever it has determined to disregard Plan 
participant voting instructions. The responsibility to report such 
information and conflicts and to assist the Board will be contractual 
obligations of all Participating Insurance Companies and Plans 
investing in the Insurance Products Funds under their respective 
agreements governing participation in the Insurance Products Funds, as 
well as a contractual obligation of any Plan that executes such a 
participation agreement, and such agreements shall provide that such 
responsibilities will be carried out with a view only to the interests 
of the Variable Contract owners and, if applicable, Plan participants.
    5. 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 
Plans shall, 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 the Insurance Products Funds or any series 
thereof and reinvesting such assets in a different investment medium 
which may include another series of the Insurance Products Funds; (b) 
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 a Participating 
Insurance Company's decision to disregard contract owner voting 
instructions and that decision represents a minority position or would 
preclude a majority vote, the Participating Insurance Company may be 
required, at the election of the Insurance Products Fund, to withdraw 
the separate account's investment in an Insurance Products Fund, 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 
an Insurance Products Fund, to withdraw its investment in the fund, and 
no charge or penalty will be imposed as a result of such withdrawal.
    The responsibility to take remedial action in the event of a Board 
determination of a material irreconcilable conflict and to bear the 
cost of such remedial action shall be a contractual obligation of all 
Participating Insurance Companies and Plans that have executed 
participation agreements under their agreements governing participation 
in an Insurance Products Fund. These responsibilities will be carried 
out with a view only to the interests of the contract owners and Plan 
participants, as appropriate.
    6. For the purposes of Condition 5, a majority of the disinterested 
members of the Board shall determine whether or not any proposed action 
adequately remedies any material irreconcilable conflict. In no event 
will the Insurance Products Funds or Adviser be required to establish a 
new funding medium for any variable contract. No Participating 
Insurance Company shall be required by Condition 5 to establish a new 
funding medium for any variable contract if a majority of contract 
owners materially and adversely affected by the material irreconcilable 
conflict vote to decline such offer. No Plan shall be required by 
Condition 5 to establish a new funding medium for such Plan if: (a) A 
majority of Plan participants materially and adversely affected by the 
irreconcilable material conflict vote to decline such offer; or (b) 
pursuant to governing plan documents and applicable law, the Plan makes 
such decision without a Plan participant.
    7. Participants will be informed promptly in writing of a Board's 
determination of the existence of a material irreconcilable conflict 
and its implications.
    8. Participating insurance companies will provide pass-through 
voting privileges to all variable contract owners whose contracts are 
funded through a registered separate account so long as the Commission 
continues to interpret the 1940 Act as requiring pass-through voting 
privileges for variable contract owners. Accordingly, Participating 
Insurance Companies will vote shares of the Insurance Products Funds or 
series thereof held in their registered separate accounts in a manner 
consistent with timely voting instructions received form contract 
owners.
    In addition, each Participation Insurance Company will vote shares 
of the Insurance Products Funds, or series thereof, held in its 
separate accounts for which it has not received timely voting 
instructions as well as shares it beneficially owns or are attributable 
to it, 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 registered separate 
accounts participating in an Insurance Products Fund calculates voting 
privileges in a manner consistent with other Participating Insurance 
Companies. The obligation to calculate voting privileges in a manner 
consistent with all other registered separate accounts investing in an 
Insurance Products Fund shall be a contractual obligation of all 
Participating Insurance Companies under their agreements governing 
participating in the Insurance Products Funds. Each Plan will vote as 
required by applicable law and governing Plan documents.
    9. The Insurance Products Funds will notify Participating Insurance 
Companies and Plans that prospectuses or plan documents disclosure 
regarding potential risks of mixed and shared funding may be 
appropriate. The Insurance Products Funds shall disclose in its 
prospectus that: (a) Its shares are offered to insurance company 
separate accounts which fund both annuity and life insurance contracts 
and to Plans; (b) differences in tax treatment or other considerations 
may cause the interests of various contract owners participating in an 
Insurance Products Fund and the interest of Plans investing in an 
Insurance Products Fund to conflict; and (c) the Board will monitor for 
any material conflicts and determine what action, if any, should be 
taken.
    10. 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

[[Page 54872]]

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.
    11. If and to the extent Rule 6e-2 or Rule 6e-3(T) are amended, or 
Rule 6e-3 under the 1940 Act is adopted, to provide exemptive relief 
from any provision of the 1940 Act or the rules thereunder with respect 
to mixed or shared funding on terms and conditions materially different 
from any exemptions granted in the order requested by Applicants, then 
the fund and/or Participating Insurance Companies, as appropriate, 
shall take such steps as may be necessary to comply with Rule 6e-2 or 
Rule 6e-3(T), as amended, or Rule 6e-3, as adopted, to the extent such 
rules are applicable.
    12. The Insurance Products Funds will comply with all provisions of 
the 1940 Act requiring voting by shareholders (for these purposes, the 
persons having a voting interest in the shares of an Insurance Products 
Fund). In particular, the Insurance Products Funds will either provide 
for annual meetings (except to the extent that the Commission may 
interpret Section 16 of the 1940 Act not to require such meetings) or 
comply with Section 16(c) of the 1940 Act (although the fund is not one 
of the trusts described in Section 16(c) of the 1940 Act) as well as 
with Section 16(a) and, if and when applicable, Section 16(b) of the 
1940 Act. Further, the Insurance Funds will act in accordance with the 
Commission's interpretation of the requirements of Section 16(a) with 
respect to periodic elections of directors (or trustees) and with 
whatever rules the Commission may promulgate with respect thereto.
    13. As long as the Commission continues to interpret the 1940 Act 
as requiring pass-through voting privileges for variable contract 
owners, the Adviser will vote its shares in the same proportion as all 
contrast owners having voting rights with respect to the Insurance 
Products Funds; provided, however, that the Adviser shall vote its 
shares in such other manner as may be required by the Commission or its 
staff.
    14. No less than annually, the Participants shall submit to the 
Board of an Insurance Products Fund such reports, materials or data as 
the Board may reasonably request so that such Board may carry out fully 
the obligations imposed upon it by the conditions contained in this 
Application. Such reports, materials and data shall be submitted more 
frequently if deemed appropriate by the Board. The obligations of the 
Participating Insurance Companies and Plans to provide these reports, 
materials and data upon reasonable request of a Board shall be 
contractual obligation of all Participating Insurance Companies and any 
Plan that has executed a participation agreement under the agreements 
governing their participation in an Insurance Products Fund.
    15. Any shares of a fund purchased by the Adviser or its affiliates 
will be automatically redeemed if and when the Adviser's investment 
advisory agreement terminates, to the extent required by applicable 
Treasury regulations. Neither the Adviser nor its affiliates will sell 
such shares of the Insurance Products Funds to the public.
    16. A Participating Insurance Company, or any affiliate, will 
maintain at its home office, available to the Commission, (a) a list of 
its officers, directors and employees who participate directly in the 
management or administration of the funds or any variable annuity or 
variable life insurance separate account, organized as a unit 
investment trust, that invests in the funds and/or (b) a list of its 
agents who, as registered representatives, offer and sell the variable 
annuity and variable life contracts funded through such a separate 
account. These individuals will continue to be subject to the automatic 
disqualification provisions of Section 9(a).

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. 00-23171 Filed 9-8-00; 8:45 am]
BILLING CODE 8010-01-M