[Federal Register Volume 65, Number 210 (Monday, October 30, 2000)]
[Notices]
[Pages 64727-64734]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-27749]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-24696; File No. 812-12060]


The Wachovia Variable Insurance Funds, et al.

October 25, 2000.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an Order under section 6(c) of the 
Investment Company Act of 1940 (``Act'') for exemption 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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    Applicants: The Wachovia Variable Insurance Funds (``Trust'') and 
Wachovia Bank, N.A., on behalf of Wachovia Asset Management 
(``Wachovia''), a business unit of Wachovia Bank, N.A.
    Summary of Application: Applicants seek an order to permit shares 
of the Trust and shares of any other investment company or series 
thereof that is designed to fund insurance products and for which 
Wachovia, or any of its affiliates, may serve in the future as 
investment adviser, administrator, manager, principal underwriter or 
sponsor (``Future Trusts'', together with Trust, ``Trusts'') to be sold 
to and held by (a) variable annuity and variable life insurance 
separate accounts of both affiliated and unaffiliated life insurance 
companies, (b) qualified pension and retirement plans outside of the 
separate account context, and (c) separate accounts that are not 
registered under the Act pursuant to exemptions from registration under 
Section 3(c) of the Act.
    Filing Date: The application was filed on April 6, 2000, and 
amended and restated on September 14, 2000.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Secretary of 
the Commission and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests should be received by the 
Commission by 5:30 p.m. on November 14, 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 requester's interest, the reason for the request, and the 
issues contested. Persons who wish to be notified of a hearing may 
request notification by writing to the Secretary of the Commission.

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

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, R. Edward Bowling, 
Wachovia Bank, N.A., 100 North Main Street, Winston-Salem, NC 27101.

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

Applicants' Representations

    1. The Trust is a Massachusetts business trust and is registered 
under the Act as an open-end management investment company. The Trust 
currently consists of three separately managed series (``Funds''). 
Additional series could be added to the Trust in the future. Each Fund 
has its own investment objective and policies.
    2. Wachovia, a business unit of Wachovia Bank, N.A., is the 
investment adviser for the Trust. As a ``bank'' within the meaning of 
section 202(a)(2)(A) of the Investment Advisers Act of 1940 (``Advisers 
Act''), Wachovia Bank, N.A. is excluded from the definition of an 
investment adviser in section 202(a)(11) of the Advisers Act and, 
accordingly, is exempt from the registration requirements of section 
203 of the Act.
    3. Upon the granting of the exemptive relief requested by this 
application, the Trust intends to offer its shares representing 
interests in each Fund, and any other series established by the Trust 
(``Future Funds'') (Funds, together with Future Funds, ``Funds'' or 
each a ``Fund'') to separate accounts of both affiliated and 
unaffiliated insurance companies to serve as the investment vehicle for 
variable annuity contracts and variable life insurance contracts 
(``Variable Contracts''). In addition, Applicants propose that the 
Trust offer and sell shares representing interests in the Funds 
directly to qualified pension and retirement plans (``Qualified Plans'' 
or ``Plans'') outside of the separate account context. 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. Participating Insurance Companies will establish their own 
Participating Separate Accounts and design their own Variable 
Contracts. Each Participating Insurance Company will enter into a 
participation agreement with the Trust 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 
Trust, so 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 fulfilling any conditions the Commission may 
impose upon granting the Order requested herein.
    5. The 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

[[Page 64728]]

amended (``Code''). Many of the Plans will include a cash or deferred 
arrangement (permitting salary reduction contributions) intended to 
qualify under section 401(k) of the Code. The Plans will also be 
subject to, and will be designed to comply with, the provisions of the 
Employee Retirement Income Security Act of 1974 (``ERISA'') applicable 
to either defined benefit or to defined contribution profit-sharing 
plans, specifically ``Title I--Protection of Employee Benefit Rights.'' 
The Plans therefore will be subject to regulatory provisions under the 
Code and ERISA regarding, for example, reporting and disclosure, 
participation and vesting, funding, fiduciary, responsibility, and 
enforcement.

Applicants' Legal Analysis

    1. Applicants request an order pursuant to section 6(c) of the Act 
exempting them from sections 9(a), 13(a), 15(a), and 15(b) of the Act, 
and Rules 6e-2(b)(15) and 6e-3T(b)(15) thereunder, to the extent 
necessary to permit shares of the Trusts to be offered and sold to, and 
held by: (a) Both variable annuity and variable life insurance separate 
accounts of the same life insurance company or of any affiliated life 
insurance company (``mixed funding''); (b) separate accounts of 
unaffiliated life insurance companies (including both variable annuity 
separate accounts and variable life insurance separate accounts ) 
(``shared funding''); (c) trustees of Qualified Plans; and (d) separate 
accounts that are not registered under the Act pursuant to exemptions 
from registration under section 3(c) of the Act.
    2. 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 (``UIT''), Rule 6e-2(b)(15) 
provides partial exemptions from the following sections of the Act: (a) 
section 9(a), which makes it unlawful for any company to serve as an 
investment adviser or principal underwriter of any UIT, if an 
affiliated person of that company is subject to a disqualification 
enumerated in section 9(a)(1) or (2); and (b), sections 13(a), 15(a) 
and 15(b) of the Act to the extent that those sections have been deemed 
by the Commission to require ``pass-through'' voting with respect to an 
underlying investment company's shares. The exemptions granted to a 
separate account 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 of 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 separate account or a flexible premium variable life 
insurance account of the same company or of any affiliated or 
unaffiliated insurance company. In addition, the relief granted by Rule 
6e-2(b)(15) is not available if the scheduled premium variable life 
insurance separate account 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. Moreover, because the relief under Rule 6e-2(b)(15) is 
available only where shares are offered exclusively to separate 
accounts, additional exemptive relief is necessary if the shares of the 
Funds are also to be sold to Qualified Plans.
    3. In connection with flexible premium variable life insurance 
contracts issued through a separate account registered under the Act as 
a UIT, Rule 6e-3(T)(b)(15) provides partial exemptions from sections 
9(a) and from 13(a), 15(a) and 15(b) of the Act to the extent that 
those sections have been deemed by the Commission to require ``pass-
through'' voting with respect to an underlying investment company's 
shares. The exemptions granted to a separate account by Rule 6e-
3T(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 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.'' Therefore, Rule 6e-3(T) permits mixed funding for flexible 
premium variable life insurance separate accounts.
    However, Rule 6e-3(T) does not permit shared funding, because the 
relief granted by Rule 6e-3(T)(b)(15) is not available with respect to 
a flexible premium variable life insurance separate account that owns 
shares of an investment company that also offers its shares to separate 
accounts (including flexible premium variable life insurance separate 
accounts) of unaffiliated life insurance companies. Moreover, because 
the relief under Rule 6e-3(T) is available only where shares are 
offered exclusively to separate accounts, additional exemptive relief 
is necessary if the shares of the Trust are also to be sold to 
Qualified Plans.
    4. Due to changes in the federal tax law subsequent to the adoption 
of Rules 6e-2(b)(15) and 6e-3T(b)(15), the Trust is afforded an 
opportunity to increase its asset base by selling shares to Qualified 
Plans. Section 817(h) of the Code imposes certain diversification 
standards on the assets underlying Variable Contracts held in the 
Funds. The Code provides that Variable Contracts will not be treated as 
annuity contracts or life insurance contracts for any period (and any 
subsequent period) for which the investments are not, in accordance 
with regulations issued by the Treasury Department, adequately 
diversified. On March 2, 1989, the Treasury Department issued 
Regulations (Treas. Reg. Sec. 1.817-5), which established 
diversification requirements for the investment portfolios underlying 
Variable Contracts. The Regulations generally provide that, in order 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. However, the 
Regulations also contain certain exceptions to this requirement, one of 
which allows trustees of a Qualified Plan to hold shares of an 
investment company without adversely affecting the status of the 
investment company as an adequately diversified underlying investment 
for Variable Contracts issued through separate accounts of insurance 
companies. (Treas. Reg. Sec. 1.817-5(f)(3)(iii).) As a result of this 
exception to the general diversification requirements, Qualified Plans 
may select the Trust as an investment option without endangering the 
tax status of Variable Contracts issued through Participating Insurance 
Companies.
    5. Qualified Plans may choose the Trust (or any series thereof) as 
their sole investment or as one of several investments. Plan 
participants may or may not be given an investment choice depending on 
the Plan itself. Shares of the Funds sold to such Qualified Plans would 
be held by the trustee(s) of the Plans as mandated by section 403(a) of 
ERISA. As described elsewhere herein, there will be no pass-through 
voting to the participants in such Qualified Plans, as it is not 
required to be provided to such participants pursuant to ERISA.
    6. The promulgation of Rules 6e-2(b)(15) and 6e-3(T)(b)(15) 
preceded the issuance of the Treasury Regulations that made it possible 
for shares of an

[[Page 64729]]

investment company to be held by trustees of a Qualified Plan without 
adversely affecting the ability of separate accounts of insurance 
companies to hold shares of the same investment company in connection 
with their variable annuity and variable life contracts. Thus, the sale 
of shares of the same investment company to both separate accounts and 
Qualified Plans could not have been envisioned at the time of the 
adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15).
    7. Accordingly, an Order of the Commission is hereby requested 
exempting flexible premium variable life insurance separate accounts 
(and, to the extent necessary, any investment adviser or sub-adviser, 
principal underwriter and depositor of such an account) from sections 
9(a), 13(a), 15(a), and 15(b) of the Act, and Rule 6e-3(T)(b)(15) (and 
any comparable permanent rule) 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 of both affiliated and 
unaffiliated life insurance companies, to Qualified Plans, and to 
separate accounts that are not registered under the Act pursuant to 
exemptions from registration under section 3(c) of the Act.
    8. Consistent with the Commission's authority under section 6(c) of 
the Act to grant exemptive orders to a class or classes of persons and 
transactions, this application requests relief for the class consisting 
of insurers and separate accounts investing in the Funds (and, to the 
extent necessary, investment advisers, sub-advisers, principal 
underwriters and depositors of such accounts). The Commission staff 
will have an opportunity to review compliance by the Participating 
Insurance Companies with the conditions of the requested Order at the 
time each Participating Separate Account files its registration 
statement.
    9. Section 6(c) authorizes the Commission to exempt any person, 
security or transaction, or any class or classes of persons, securities 
or transactions from any provisions of the Act and the rules or 
regulations 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 Act. Applicants are not aware of any stated 
rationale for the exclusion of separate accounts and investment 
companies, or series thereof, engaged in shared funding from the 
exemptive relief provided under Rules 6e-2(b)(15) and 6e-3(T)(b)(15) or 
for the exclusion of separate accounts and investment companies, or 
series thereof, engaged in mixed funding from the exemptive relief 
provided under Rule 6e-2(b)(15). Indeed, the Commission's proposed 
amendments to Rule 6e-2 would eliminate the exclusion of mixed funding 
from the relief provided under Rule 6e-2(b)(15) and, as noted above, 
numerous exemptions permitting both mixed and shared funding have been 
granted since the adoption of Rules 6e-2 and 6e-3.
    10. Similarly, Applicants are not aware of any stated rationale for 
excluding Participating Insurance Companies from the exemptive relief 
requested because the Funds may also sell their shares to Qualified 
Plans. In fact, Applicants assert that the proposed sale of shares of 
the Funds may allow for the development of larger pools of assets 
resulting in the potential for greater investment and diversification 
opportunities, and for decreased expenses at higher asset levels 
resulting in cost efficiencies. If the Funds were to sell shares only 
to Qualified Plans, no exemptive relief would be necessary. The relief 
provided under Rules 6e-2(b)(15) and 6e-3(T)(b)(15) does not relate to 
Qualified Plans or to a registered investment company's ability to sell 
its shares to such Plans. Exemptive relief is requested in the 
application only because the separate accounts investing in the Funds 
are themselves investment companies seeking relief under Rules 6e-2 and 
6e-3(T) and do not wish to be denied such relief if the Funds sell 
shares to Qualified Plans. As noted above, the Commission has granted 
numerous exemptions permitting extended mixed and shared funding. 
Moreover, for the reasons stated below, applicants believe 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.
    11. Section 9(a) of the Act provides that it is unlawful for any 
company to serve as investment adviser or principal underwriter of any 
registered open-end investment company if an affiliated person of that 
company is subject to a disqualification enumerated in section 9(a)(1) 
or (2). However, 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 discussed above on mixed and 
shared funding. These exemptions limit the disqualification to 
affiliated individuals or companies that directly participate in the 
management or administration of the underlying investment company or 
series thereof.
    12. Rules 6e-2(b)(15)(i) and 6e-3(T)(b)(15)(i) allow an individual 
disqualified under section 9(a)(1) or (2) to be an officer, director, 
or employee of an insurance company, or any of its affiliates that 
serves in any capacity with respect to an underlying investment 
company, so long as the disqualified individual does not participate 
directly in the management or administration of the underlying 
investment company. Similarly, Rules 6e-2(b)(15)(ii) and 6e-
3(T)(b)(15)(ii) permit an insurance company disqualified under section 
9(a) of the Act to serve in any capacity with respect to an underlying 
investment company, provided that the affiliated person, ineligible 
under section 9(a)(1) or (2) of the Act, does not participate directly 
in the management or administration of the investment company.
    13. The partial relief granted in Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) from requirements of section 9 of the Act, in effect, 
limits the amount of monitoring of an insurer's personnel that would 
otherwise be necessary to ensure compliance with section 9 to that 
which is appropriate in light of the policy and purposes of section 9. 
The exemptions contained in Rules 6e-2(b)(15) and 6e-3(T)(b)(15) 
recognize 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 section 9(a) to the many individuals who may be involved in a 
large insurance company but would have no connection with the 
investment company, or any series thereof, funding the separate 
accounts. Applicants believe that it is unnecessary to limit the 
applicability of the rules merely because shares of the Trust may be 
sold in connection with mixed and shared funding. The Participating 
Insurance Companies will not be involved in the management or 
administration of the Trust or the Funds. Therefore, applying the 
restrictions of section 9(a) serves no regulatory purpose. Indeed, 
applying such restrictions would increase the monitoring costs incurred 
by the Participating Insurance Companies and, therefore, would reduce 
the net rates of return realized by Variable Contract owners.
    14. Moreover, the appropriateness of the relief requested herein 
will not be affected by the proposed sale of shares of the Trust to 
Qualified Plans. The insulation of the Trust from those individuals who 
are disqualified under the Act remains in place. Applying the 
requirements of section 9(a) because of investment by Qualified Plans 
would be

[[Page 64730]]

unjustified and would not serve any regulatory purpose. Since the 
Qualified Plans are not investment companies and will not be deemed to 
be affiliated solely by virtue of their shareholdings, no additional 
relief is necessary.
    15. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the Act give the 
Participating Insurance Companies the right to disregard voting 
instructions of contract owners. Rules 6e-2(b)(15)(iii)(A) and 6e-
3(T)(b)(15)(iii)(A) each provide that the insurance company may 
disregard the voting instructions of its contract owners with respect 
to the investments of an underlying fund, or any contract between a 
fund and its investment adviser, when required to do so by an insurance 
regulatory authority (subject to the provisions of paragraphs (b)(5)(i) 
and (b)(7)(ii)(A) of Rules 6e-2 and 6e-3(T) under the Act). Rules 6e-
2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2) each provide that the 
insurance company may disregard voting instructions of contract owners 
if the contract owners initiate any change in the underlying investment 
company's investment policies, principal underwriter, or any investment 
adviser (subject to the provisions of paragraphs (b)(5)(ii), 
(b)(7)(ii)(B), and (b)(7)(ii)(C) of Rules 6e-2 and 6e-3(T) under the 
Act). These rights do not raise any issues different from those raised 
by the authority of state insurance administrators over separate 
accounts. Under Rules 6e-2(b)(15) and 6e-3(T)(b)(15), an insurer can 
disregard voting instructions of contract owners only with respect to 
certain specified items.
    16. The potential for disagreement among Participating Separate 
Accounts is limited by the requirements in Rules 6e-2 and 6e-3 that a 
Participating Insurance Company's disregard of voting instructions be 
reasonable and based on specific good faith determinations. Voting 
instructions with respect to a change in investment policies may be 
disregarded only if such disapproval is reasonable and the insurance 
company makes a good faith determination that such change would: (a) 
Violate state law; (b) result in investments that were not consistent 
with the investment objectives of the separate account; or (c) result 
in investments that would vary from the general quality and nature of 
investments and investment techniques used by other separate accounts 
of the company or of an affiliated life insurance company with similar 
investment objectives. Voting instructions with respect to a change in 
the principal underwriter may be disapproved if such disapproval is 
reasonable. Voting instructions with respect to a change in an 
investment adviser may be disregarded only if such disapproval is 
reasonable and the insurance company makes a good faith determination 
that: (a) The adviser's fee would exceed the maximum rate that may be 
charged against the separate account's assets; (b) the proposed adviser 
may be expected to employ investment techniques that vary from the 
general techniques used by the current adviser; or (c) the proposed 
adviser may be expected to manage the investment company's investments 
in a manner that would be inconsistent with its investment objectives 
or in a manner that would result in investments that vary from certain 
standards.
    17. In addition, the sale of shares of the Funds to Qualified Plans 
will not have any impact on the relief requested in this regard. Shares 
of the Funds sold to Qualified Plans will be held by the trustees of 
the Plans as mandated by section 403(a) of ERISA. Section 403(a) 
provides that the trustee(s) must have exclusive authority and 
discretion to manage and control a Plan with two exceptions: (a) when 
the Plan expressly provides that the trustee(s) is (are) subject to the 
direction of a named fiduciary who is not a trustee, in which case the 
trustee(s) is (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, Plan trustees have the exclusive authority and 
responsibility for voting proxies. Where a name 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, 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 Plans are not 
entitled to pass-through voting privileges.
    18. Even if a Qualified Plan were to hold a controlling interest in 
the Trust, Applicants do not believe that such control would 
disadvantage other investors in the Trust to any greater extent than is 
the case when any institutional shareholder holds a majority of the 
voting securities of any open-end management investment company. In 
this regard, Applicants submit that investment in the Funds by a 
Qualified Plan will not create any of the voting complications 
occasioned by mixed and shared funding. Unlike mixed or shared funding, 
Plan investor voting rights cannot be frustrated by veto rights of 
insurers or state regulators.
    19. Applicants generally expect many Qualified Plans to have their 
trustee(s) or other fiduciaries exercise voting rights attributable to 
investment securities held by the Qualified Plan in their discretion. 
Some of the Qualified Plans, however, may provide for the trustee(s), 
an investment adviser(s) or another named fiduciary to exercise voting 
rights in accordance with instructions from participants.\1\
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    \1\ Although section 403(a) of ERISA provides plan trustees with 
complete discretion to manage and control their plan, including 
exercising any voting rights attributable to investment securities 
held by the plan, nothing therein prohibits the trustees from 
obligating themselves to solicit and follow voting instructions from 
plan participants. However, it is not generally a common practice 
for plan trustees to undertake such obligations, even for 401(k) 
plans.
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    20. Where a Qualified Plan does not provide participants with the 
right to give voting instructions, Applicants submit that there is no 
potential for material irreconcilable conflicts of interest between or 
among contract owners and Plan investors with respect to voting of the 
Funds' shares.
    21. Where a Plan provides participants with the right to give 
voting instructions, Applicants see no reason to believe that 
participants in Qualified Plans generally or those in a particular 
Plan, either as a single group or in combination with participants in 
other Qualified Plans, would vote in a manner that would disadvantage 
contract owners. The purchase of shares of the Funds by Qualified Plans 
that provide voting rights does not present any complications not 
otherwise occasioned by mixed and shared funding.
    22. As demonstrated below, no increased conflicts of interest would 
be present if the Commission grants the exemptive relief sought hereby.
    23. 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. For example, when different Participating Insurance 
Companies are domiciled in different states, it is possible that the 
state insurance regulatory body in a state in which one Participating 
Insurance Company is domiciled could require action that is 
inconsistent with the requirements of insurance regulators in one or 
more other states in which other Participating Insurance Companies are 
domiciled.

[[Page 64731]]

That possibility, however, is no different and no greater than that 
which exists when a single insurer and its affiliates offer their 
insurance products in several states, as currently is permitted.
    24. Affiliations among insurers do not reduce the potential, if any 
exists, for differences in state regulatory requirements. In any event, 
the conditions discussed below (which are adapted from the conditions 
included in Rule 6e-3(T)(b)(15)) are designed to safeguard against any 
adverse effects that differences among state regulatory requirements 
may produce. For example, 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 the Trust.
    25. Similarly, 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. The 
potential for disagreement is limited by the requirement that 
disregarding voting instructions be 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 the Trust, to withdraw its separate 
account's investment in the Trust and no charge or penalty will be 
imposed as a result of such withdrawal.
    26. There is no reason why the investment policies of the Trust, 
were it to engage in mixed funding, would or should materially differ 
from what those policies would or should be if the Trust supported only 
variable annuity or only variable life insurance contracts. Hence, 
there is no reason to believe that conflicts of interest would result 
from mixed funding. Moreover, the Trust will not be managed to favor or 
disfavor any particular insurer or any type of contract.
    27. No one investment strategy can be identified as appropriate to 
a particular insurance product or to a Plan. Each pool of variable 
annuity and variable life insurance contract owners is composed of 
individuals of diverse financial status, age, insurance and investment 
goals. Those diversities are of greater significance than any 
differences in insurance products. An investment company supporting 
even one type of insurance product must accommodate those diverse 
factors.
    28. The sale of shares of the Funds to Qualified Plans should not 
increase the potential for material irreconcilable conflicts of 
interest between or among different types of investors. There should be 
very little potential for such conflicts beyond that which would 
otherwise exist between variable annuity and variable life insurance 
contract owners.
    29. Section 817(h) of the Code imposes certain diversification 
standards on the assets underlying Variable Contracts held in the 
portfolios of management investment companies. Treasury Regulation 
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, 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.
    30. 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 distribution, 
the Separate Account or the Plan will redeem shares of the Trust 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 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.
    31. 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 the Trust will inform each 
Participating Insurance Company of each Participating Separate 
Account's share ownership in the Trust, 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 
the Trust. 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 Trust 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.
    32. The ability of the Trust 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. As noted above, 
regardless of the rights and benefits of Qualified Plan participants or 
contract owners, the Qualified Plans and the Participating Separate 
Accounts only have rights with respect to their respective shares of 
the Trust. They can only redeem such shares at their net asset value. 
No shareholder of any of the Trust has any preference over any other 
shareholder with respect to distribution of assets or payment of 
dividends.
    33. There are no conflicts between the contract owners of 
Participating Separate Accounts and Qualified Plan participants with 
respect to the state insurance commissioners' veto powers (direct with 
respect to variable life and indirect with respect to variable annuity) 
over investment objectives. The basic premise of shareholder voting is 
that shareholders may not all agree with a particular proposal. While 
the 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, time-consuming, complex 
transactions must be undertaken to accomplish such redemptions and 
transfers. Trustees of Qualified Plans, on the other hand, can make the 
decision quickly and redeem their shares of the Trust and reinvest in 
another funding vehicle without the same regulatory impediments faced 
by separate accounts or, as is the case with most Plans, even hold cash 
pending suitable investment. Based on the foregoing, even if there 
should arise issues where the interests of contract owners and the 
interests of Qualified Plans are in conflict, the issues can be almost 
immediately resolved because the trustees of the Qualified Plans can, 
on their own, redeem the shares out of the Trust.
    34. There does not appear to be any greater potential for material 
irreconcilable conflicts arising between the interests of Qualified 
Plan

[[Page 64732]]

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.
    35. Applicants recognize that the foregoing is not an all inclusive 
list, but rather is representative of issues which they believe are 
relevant to this application. Applicants believe that the discussion 
contained herein demonstrates that the sale of shares of the Funds to 
Qualified Plans and Variable Contracts does not increase the risk of 
material irreconcilable conflicts of interest. Furthermore, the use of 
the Trust with respect to variable life insurance contracts and 
Qualified Plans is not substantially different from the Trust's current 
use, in that variable insurance contracts and Qualified Plans, like 
variable annuity contracts, are generally long-term retirement 
vehicles.
    36. 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 (principally with respect to stock and money 
market investments) 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.
    37. Use of the Funds as common investment media for Variable 
Contracts would ameliorate these concerns. Participating Insurance 
Companies would benefit not only from the investment advisory and 
administrative expertise of Wachovia and its affiliates, but also from 
the cost efficiencies and investment flexibility afforded by a large 
pool of funds. Therefore, making the Funds available for mixed and 
shared funding will encourage more insurance companies to offer 
Variable Contracts. 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. 
Contract owners would benefit because mixed and shared funding should 
eliminate a significant portion of the costs of establishing and 
administering separate funds.
    38. Moreover, sale of the shares of the Funds to Qualified Plans 
should further increase the amount of assets available for investment 
by the Funds. 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 
series to the Trust more feasible.
    39. Regardless of the type of shareholder in the Funds, Wachovia is 
or would be contractually or otherwise obligated to manage each Fund 
solely and exclusively in accordance with that series' investment 
objectives, policies and restrictions as well as any guidelines 
established by the board of trustees of the Trust.

Applicants' Conditions

    Applicants consent to the following conditions:
    1. A majority of the Board of Trustees of each Trust (``Board'') 
will consist of persons who are not ``interested persons'' of the 
Trust, 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 Trustees, 
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. Each Board will monitor its respective Trust 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 such Trust and determine 
what action, if any, should be taken in response to such conflicts. A 
material irreconcilable conflict may arise for a variety of reasons, 
including: (a) An action by any state insurance regulatory authority; 
(b) a change in applicable federal or state insurance, tax, or 
securities laws or regulations, or a public ruling, private letter-
ruling, no-action or 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 investment of such Trust 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 Plan to disregard the voting instructions 
of its participants.
    3. Participating Insurance Companies, Wachovia or an affiliate, or 
any other investment adviser of the Trusts, and any Qualified Plans 
that execute a fund participation agreement upon becoming an owner of 
10% or more of the assets of any Fund (``Participants'') will report 
any potential or existing conflicts to the relevant Board. Participants 
will be responsible for assisting the relevant Board in carrying out 
its responsibilities under these conditions by providing the relevant 
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 relevant Board whenever it has determined to disregard 
contract owner voting instructions and, when pass-through voting is 
applicable, an obligation of each Plan to inform the Board whenever it 
has determined to disregard voting instructions from 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 Plans under their participation agreements with 
the Trusts, 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 interest of Plan participants.
    4. If it is determined by a majority of a Board, or by a majority 
of its disinterested Trustees, that a material irreconcilable conflict 
exists, the relevant Participating Insurance Companies and Plans will, 
at their expense and to the extent reasonably practicable (as 
determined by a majority of the disinterested Trustees), take whatever 
steps are necessary to remedy or eliminate the material irreconcilable 
conflict, which steps could include: (a) withdrawing the assets 
allocable to some or all of the Participating Separate Accounts form 
the relevant Fund 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

[[Page 64733]]

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 Participating 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 relevant Trust's election, to withdraw its separate 
account's investment in such Trust, and no charge or penalty will be 
imposed as a result of such withdrawal. If a material irreconcilable 
conflict arises because of a 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 relevant Trust's election, to withdraw its 
investment in such Trust 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 cost 
of such remedial action will be a contractual obligation of all 
Participating Insurance Companies and Qualified Plans under their 
agreements governing participation in the Trust and these 
responsibilities will be carried out with a view only to the interests 
of contract owners and Plan participants, respectively.
    For purposes of this Condition 4, a majority of the disinterested 
Trustees of a Board will determine whether or not any proposed action 
adequately remedies any material irreconcilable conflict, but in no 
event will the Trust, Wachovia, or Wachovia's affiliate, as relevant, 
be required to establish a new funding medium for any Variable 
Contract. No Participating Insurance Company shall be required by this 
Condition 4 to establish a new funding medium for any Variable Contract 
if 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 
this Condition 4 to establish a new funding medium for the Plan if (a) 
an offer to do so has been declined by vote of a majority of Plan 
participants materially and adversely affected by the material 
irreconcilable conflict or (b) pursuant to governing Plan documents and 
applicable law, the Plan makes such decision without a vote of its 
participants.
    5. 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.
    6. As to Variable Contracts issued by Participating Separate 
Accounts registered under the Act, Participating Insurance Companies 
will provide pass-through voting privileges to all contract owners so 
long as the Commission interprets the Act to require pass-through 
voting for contract owners. However, as to Variable Contracts issued by 
unregistered Participating Separate Accounts, pass-through voting 
privileges will be extended to contract owners to the extent granted by 
the issuing insurance company. Accordingly, the Participating Insurance 
Companies will vote shares of the applicable Fund 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 their 
Participating Separate Accounts calculates voting privileges in a 
manner consistent with all other Participating Insurance Companies. The 
obligation to calculate voting privileges in a manner consistent with 
all other Participating Separate Accounts will be contractual 
obligation of all Participating Insurance Companies under their 
participation agreements with the Trusts. 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.
    7. Each Qualified Plan will vote as required by applicable law and 
governing Plan documents.
    8. All reports of potential or existing conflicts received by a 
Board, and all Board action with regard to determining the existence of 
a conflict, notifying Participants of a conflict, and determining 
whether any proposed action adequately remedies a conflict, will be 
properly recorded in the minutes of the Board or other appropriate 
records, and such minutes or other records shall be made available to 
the Commission upon request.
    9. The Trusts will notify all Participants that disclosure in 
separate account prospectuses or any Qualified Plan prospectuses or 
other Plan disclosure documents regarding potential risks of mixed and 
shared funding may be appropriate. Each Trust will disclose in its 
prospectus that: (a) The Trust is intended to be a funding vehicle for 
variable annuity and variable life insurance contracts offered by 
various insurance companies and for Plans; (b) due to differences of 
tax treatment and other considerations, the interests of various 
contract owners participating in the Trust and the interest of 
Qualified Plans investing in the Trust may conflict; and (c) the Board 
will monitor the Trust for the existence of any material conflicts and 
determine what action, if any, should be taken.
    10. The Trusts will comply with all provisions of the Act requiring 
voting by shareholders (which, for these purposes, shall be the persons 
having a voting interest in shares of the Trusts), and, in particular, 
each Trust 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 the Trusts are not within the trusts described in section 
16(c)) as well as with Section 16(a), and, if applicable, section 16(b) 
of the Act. Further, each Trust will act in accordance with the 
Commission's interpretation of the requirements of section 16(a) with 
respect to periodic elections of directors (or trustees) and with 
whatever rules the Commission may promulgate with respect thereto.
    11. If and to the extent that Rules 6e-2 and 6e-3(T) are amended 
(or if 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 
the Trusts and/or Participating Insurance Companies, as appropriate, 
shall take such steps as may be necessary to comply with Rules 6e-2 and 
6e-3(T), as amended, or Rule 6e-3, as adopted, to the extent 
applicable.
    12. No less than annually, the Participants shall submit to each 
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 a Board when it so 
reasonably requests shall be a contractual obligation of all 
Participants under their participation agreements with the Trusts.

[[Page 64734]]

    13. 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 relevant Trust including 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 the relevant 
Fund.

Conclusion

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

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-27749 Filed 10-27-00; 8:45 am]
BILLING CODE 8010-01-M