[Federal Register Volume 65, Number 231 (Thursday, November 30, 2000)]
[Notices]
[Pages 71337-71347]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-30517]


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SECURITIES AND EXCHANGE COMMISSION

[Release Docket No. IC-24747; File No. 812-12260]


The Ayco Company, et al.

November 22, 2000.
AGENCY: The 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, as amended (``1940 Act'') 
from Sections 9(a), 13(a), 15(a), and 15(b) of the 1940 Act and Rules 
6e-2(b)(15) and 6e-3(T)(b)(15) thereunder.

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    Applicants: Ayco Series Trust (``Trust'') and The Ayco Company, 
L.P. (``Ayco'') (collectively, ``Applicants'').
    Summary of Application: Applicants seek an order to permit shares 
for the Trust and shares of any other existing or future investment 
company that is designed to fund insurance products and for which Ayco, 
or any of its affiliates, may serve as investment manager, investment 
adviser, subadviser, administrator, manager, principal underwriter or 
sponsor (the Trust and such other investment companies being 
hereinafter referred to, collectively, as ``Insurance Trusts''), or 
permit shares of any current or future series of any Insurance Trust 
(``Insurance Fund''), to be sold to and held by: (1) Separate accounts 
funding variable annuity and variable life insurance contracts issued 
by both affiliated and unaffiliated life insurance companies; (2) 
qualified pension and retirement plans outside of the separate account 
context (``Qualified Plans'' or ``Plans''); and (3) any investment 
manager to an Insurance Trust (``Manager'') and the affiliates thereof.
    Filing Date: The application was filed on September 15, 2000. 
Applicants represent that they will file an amendment to the 
application during the notice period to conform to the representations 
set forth herein.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing on the application by writing 
to the Secretary of the SEC and serving Applicants with a copy of the 
request, personally or by mail. Hearing requests must be received by 
the SEC by 5:30 p.m. on December 15, 2000 and should be 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 writer's interest, the reason for the request, and the issues 
contested. Persons may request notification of the date of the hearing 
by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, DC 
20549-0690. Applicants, c/o Margaret M. Keyes, Esq., Deputy General 
Counsel, The Ayco Company, L.P., One Wall Street, Albany, New York 
12205-3894.

FOR FURTHER INFORMATION CONTACT: Ann L. Vlcek, Senior Counsel, or Lorna 
J. MacLeod, Branch Chief, Office of Insurance Products, Division of 
Investment Management at (202) 942-0670.

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

Applicant's Representations

    1. The Trust is a Delaware business trust organized on August 30, 
2000. It is registered under the 1940 Act of the series type as an 
open-end management investment company.\1\ The initial series of the 
Trust is the Ayco Large Cap Growth Fund I (``Fund''). The Trust is 
authorized to establish additional series and classes of shares.
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    \1\ The Trust filed a notification of registration on Form N-8A, 
and filed its initial registration statement on Form N-1A under the 
1940 Act and the Securities Act of 1933, as amended (``1933 Act''), 
on September 5, 2000 (File Nos. 333-45194; 811-10115). Pursuant to 
Rule 0-4(a) under the 1940 Act, Applicants hereby incorporate by 
reference the Trust's registration statement to the extent necessary 
to supplement the representations contained herein.
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    2. Mercer Allied Company, L.P. (``Mercer Allied''), a broker-dealer 
registered with the Commission and a member of the National Association 
of Securities Dealers, Inc., serves as the Trust's distributor. The 
General Partner of Mercer Allied is Breham, Inc., a corporation wholly-
owned by John Breyo, the Trust's Chief Executive Officer and a Trustee 
of the Trust.
    3. Ayco Asset Management, a division of Ayco, serves as the Trust's 
investment manager. Ayco is registered as an investment adviser with 
the SEC under the Investment Advisers Act of 1940, as amended. The 
general partner of Ayco is Hambre, Inc., a corporation also wholly-
owned by John Breyo.
    4. The Insurance Trusts intend to offer shares of the Insurance 
Funds to registered and unregistered separate accounts of affiliated 
and unaffiliated insurance companies (collectively, ``Separate 
Accounts'' \2\ in order to fund

[[Page 71338]]

various types of insurance products. These products may include, but 
are not limited to, variable annuity contracts, scheduled premium 
variable life insurance contracts, single premium variable life 
insurance contracts, and flexible premium variable life insurance 
contracts (collectively referred to herein as ``variable contracts'' or 
``contracts''). Insurance companies whose Separate Account(s) may now 
or in the future own shares of the Insurance Funds are referred to 
herein as ``Participating Insurance Companies.''
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    \2\ The Separate Accounts are, or will be, either registered as 
investment companies under the 1940 Act or exempt from registration 
thereunder pursuant to Section 3(c)(1) of the Act.
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    5. The Participating Insurance Companies will establish their own 
Separate Accounts and design their own variable annuity and variable 
life insurance contracts. Each Participating Insurance Company will 
have the legal obligation to satisfy all applicable requirements under 
both state and federal laws. It is anticipated that Participating 
Insurance Companies will rely on rule 6e-2 or Rule 6e-3(T) under the 
1940 Act, in connection with the establishment and maintenance of 
variable life insurance Separate Accounts, although some Participating 
Insurance Companies, in connection with variable life insurance 
contracts, may rely on individual exemptive orders as well.
    6. Each Participating Insurance Company will enter into a 
participation agreement with the applicable Insurance Trust on behalf 
of the Insurance Funds in which the Participating Insurance Company 
invests. The role of the Insurance Funds under this arrangement, 
insofar as federal securities laws are applicable, will consist of 
offering their shares to the Separate Accounts and fulfilling any 
conditions that the Commission may impose upon granting the order 
requested herein.
    7. The Insurance Trusts intend to offer shares of the Insurance 
funds directly to Qualified Plans outside of the separate accounts 
context. Section 817(h) of the Internal Revenue Code of 1986, as 
amended (the ``Code''), imposes certain diversification standards on 
the underlying assets of separate accounts funding variable annuity 
contracts and variable life insurance contracts. In particular, the 
Code provides that such contracts shall not be treated as an annuity 
contracts or life insurance contract for any period (and any subsequent 
period) for which the separate account investments are not, in 
accordance with regulations prescribed by the Treasury Department, 
adequately diversified. On March 2, 1989, the Treasury Department 
issued regulations (Treas. Reg. 1.817-5) (``Treasury Regulations'') 
that establish diversification requirements for variable annuity and 
variable life insurance contracts, which require the separate accounts 
upon which these contracts are based to be diversified as provided in 
the Treasury Regulations. In the case of separate accounts that invest 
in underlying investment companies, the Treasury Regulations provide a 
``look through'' rule that permits the separate account to look to the 
underlying investment company for purposes of meeting the 
diversification requirements, provided that the beneficial interests in 
the investment company are held only by the segregated asset accounts 
of one or more insurance companies. However, the Treasury Regulations 
also contain certain exceptions to this requirement, one of which 
allows shares in 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 to also be held by the 
separate accounts of insurance companies in connection with their 
variable annuity and variable life contracts (Treas. Reg. 1.817-
5(f)(3)(iii). Another exception allows the investment manager of the 
investment company and certain companies related to the investment 
manager to hold shares of the investment company.
    8. Qualified Plans may choose any of the Insurance Funds that are 
offered as the sole investment under the Plan or as one of several 
investments. Plan participants may or may not be given an investment 
choice depending on the terms of the Plan itself. Shares of any of the 
Insurance Funds sold to such Qualified Plans would be held or deemed to 
be held by the trustee(s) of said Plans.\3\ Certain Qualified Plans, 
including Section 403(b)(7) Plans and Section 408(a) Plans, may vest 
voting rights in Plan participants instead of Plan trustees. Exercise 
of voting rights by participants in any such Qualified Plans, as 
opposed to the trustees of such Plans, cannot be mandated by the 
Applicants. Each Plan must be administered in accordance with the terms 
of the Plan and as determined by its trustee or trustees.
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    \3\ Qualified Plans described in Code Section 403(b)(7) 
(``Section 403(b)(7) Plans'') and in Section 408(a) (``Section 
408(a) Plans'') may invest in mutual funds through custodial 
arrangements. Such custodial arrangements typically provide that 
shares held of record by the custodian are held for the benefit of 
the participant that beneficially owns such shares. Shares of the 
Insurance Trusts may be offered and sold to Section 403(b)(7) Plans 
and Section 408(a) Plans encompassing participants in custodial 
arrangements, to the extent shares owned of record by a custodian 
are deemed to be held in trust. The obligations of custodians of 
Section 403(b)(7) Plans and Section 408(a) Plans to participants in 
such plans are typically much more limited than the obligations of 
trustees of other Qualified Plans to participants in such Plans. For 
example, the decision whether to purchase or sell shares of any 
particular investment option, and the decision of how to vote on any 
particular matter presented to shareholders, typically is vested in 
participants in Section 403(b)(7) Plans and Section 408(a) Plans, 
rather than custodians. Because of the limited role of custodians of 
Section 403(b)(7) Plans and Section 408(a) Plans, Applicants intend 
to treat each participant in a Section 403(b)(7) Plan and a Section 
408(a) Plan as a separate Qualified Plan for purposes of this 
Application.
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    9. shares of each Insurance Trust also may be offered to the 
Manager and its affiliates, in reliance on Treasury Regulation 1.817-
5(f)(3)(ii). Applicants state that the Treasury Regulations permit such 
sales as long as the return on shares held by the Manager or its 
affiliates is computed in the same manner as for shares held by the 
Separate Accounts, and the Manager and its affiliates do not intend to 
sell to the public shares of the Insurance Trust that they hold. An 
additional restriction is imposed by the Treasury Regulations on sales 
to the Manager and its affiliates who may hold shares only in 
connection with the creation or management of the Insurance Trust. 
Applicants anticipate that sales in reliance on these provisions of the 
Treasury Regulations generally will be made to the Manager and its 
affiliates and generally for the purpose of providing necessary capital 
required by Section 14(a) of the 1940 Act.
    10. Applicants state that the promulgation of Rules 6e-2(b)(15) and 
6e-3(T)(b)(15) under the 1940 Act preceded the issuance of the Treasury 
Regulations that made it possible for shares of an investment company 
to be held by a Qualified Plan or the investment company's investment 
manager or its affiliates without adversely affecting the ability of 
shares in the same investment company to also be held by separate 
accounts of insurance companies in connection with their variable life 
insurance contracts. Thus, Applicants believe that the sale of shares 
of the same investment company to separate accounts through which 
variable life insurance contracts and variable annuity contracts are 
issued, to Qualified Plans, or to the investment company's investment 
manager and its affiliates (collectively, ``eligible shareholders'') 
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.

[[Page 71339]]

Applicants' Legal Analysis

    1. In connection with the funding of scheduled premium variable 
life insurance contracts issued through a separate account organized as 
a unit investment trust (``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.\4\ The exemptions granted to a separate account by Rule 6e-
2(b)(15) are available only where each registered management investment 
company underlying the Trust Account (``underlying fund'') offers its 
shares ``exclusively to variable life insurance separate accounts of 
the life insurer or of any affiliated life insurance company * * *.'' 
(emphasis added). Therefore, the relief granted by Rule 6e-2(b)(15) is 
not available with respect to a scheduled premium variable life 
insurance separate account that owns shares of an underlying fund that 
also offers its shares to a variable annuity separate account of the 
same company or of any affiliated life insurance company.\5\ The use of 
a common underlying fund as the underlying investment medium for both 
variable annuity and variable life insurance separate accounts of the 
same life insurance company or of any affiliated life insurance company 
is referred to herein as ``mixed funding.''
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    \4\ The relief provided by Rule 6e-2 is also available to a 
separate account's investment manager, principal underwriter, and 
sponsor or depositor.
    \5\ The Commission has published proposed amendments to Rule 6e-
2 that, if adopted, would permit shares of one underlying fund to be 
sold to separate accounts of the insurer, or any affiliated life 
insurance company, offering variable annuity contracts or scheduled 
premium or flexible premium variable life insurance. See Investment 
Company Act Release No. 14421 (Mar. 15, 1985). However, the proposed 
amendments would not permit shares of one underlying fund to be sold 
to separate accounts of unaffiliated companies.
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    2. In addition, the relief granted by Rule 6e-2(b)(15) is not 
available with respect to a scheduled premium variable life insurance 
separate account that owns shares of an underlying fund that also 
offers its shares to separate accounts funding variable contracts of 
one or more unaffiliated life insurance companies. The use of a common 
underlying fund as the underlying investment medium for variable life 
insurance separate accounts of one insurance company and separate 
accounts funding variable contracts of one or more unaffiliated life 
insurance companies is referred to herein as ``shared funding.''
    3. Moreover, because the relief under Rule 6e-2(b)(15) is available 
only where shares are offered exclusively to variable life insurance 
separate accounts, additional exemptive relief may be necessary if the 
shares of the Insurance Trusts are also to be sold to Qualified Plans 
or to the Manager and its affiliates.
    4. Accordingly, Applicants are requesting an order of the 
Commission granting exemptions from Sections 9(a), 13(a), 15(a), and 
15(b) of the 1940 Act, and Rule 6e-2(b)(15) thereunder, to the extent 
necessary to permit shares of each Insurance Trust to be offered and 
sold to, and held by: (a) Separate Accounts funding variable annuity 
contracts and scheduled premium and flexible premium variable life 
insurance contracts issued by both affiliated and unaffiliated life 
insurance companies; (b) Qualified Plans; and (c) any Manager to an 
Insurance Trust and affiliates thereof.
    5. In connection with the funding of flexible premium variable life 
insurance contracts through a Trust Account, Rule 6e-3(T)(b)(15) 
provides partial exemptions from Sections 9(a), 13(a), 15(a) and 15(b) 
of the 1940 Act to the extent that those sections have been deemed by 
the Commission to require ``pass-through'' voting with the respect to 
an underlying fund's shares. The exemptions granted to a separate 
account by Rule 6e-3(T)(b)(15) are available only where all of the 
assets of the separate account consist of the shares of one or more 
underlying funds 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 offers their shares to variable annuity separate 
accounts of the life insurer or of an affiliated life insurance 
company'' (emphasis added). Therefore, Rule 6e-3(T) permits mixed 
funding with respect to a flexible premium variable life insurance 
separate account, subject to certain conditions.\6\ 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 
underlying fund that also offers its shares to separate accounts 
(including variable annuity and flexible premium and scheduled premium 
variable life insurance separate accounts) of unaffiliated life 
insurance companies.
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    \6\ The relief provided by Rule 6e-3(T) is also available to a 
separate account's investment manager, principal underwriter, and 
sponsor or depositor.
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    6. The relief provided by Rule 6e-3(T) is not relevant to the 
purchase of shares of the Insurance Trusts by Qualified Plans or by the 
Manager and its affiliates. However, because the relief granted by Rule 
6e-3(T)(b)(15) is available only where shares of the underlying fund 
are offered exclusively to separate accounts, or to life insurers in 
connection with the operation of a separate account, additional 
exemptive relief may be necessary if the shares of the Insurance Trusts 
are also to be sold to Qualified Plans or to the Manager and its 
affiliates.
    7. Accordingly, Applicants are requesting an order of the 
Commission granting exemptions from Sections 9(a), 13(a), 15(a), and 
15(b) of the 1940 Act, and Rule 6e-3(T)(b)(15) (and any comparable 
permanent rule) thereunder, to the extent necessary to permit shares of 
each Insurance Fund to be offered and sold to, and held by: (a) 
Separate Accounts funding variable annuity contracts and scheduled 
premium and flexible premium variable life insurance contracts issued 
by unaffiliated life insurance companies; (b) Qualified Plans; and (c) 
any Manager to an Insurance Trust and affiliates thereof.
    8. Applicants state that none of the relief provided for in Rules 
6e-2(b)(15) and 6e-3(T)(b)(15) relates to Qualified Plans, the Manager 
and its affiliates, or to an underlying fund's ability to sell its 
shares to such purchasers. It is only because some of the Separate 
Accounts that may invest in the Insurance Trusts may themselves be 
investment companies that rely upon the relief provided by Rules 6e-2 
and 6e-3(T) and wish to continue to rely upon that relief provided in 
those Rules, that the Applicants are applying for the relief described 
in this Application.
    9. In its most recent release adopting amendments to Rule 6e-3(T), 
the Commission stated that shared funding arrangements presented ``a 
very new and somewhat complicated area from a regulatory perspective'' 
(Investment Company Act Release No. 15651 (March 30, 1987)). In the 
context of mixed funding, the Commission noted in this same Release 
that ``it would prefer to see any evolvement in this area * * * take 
place in the context of the application process.''
    10. Applicants presume that the reason that the Commission did not 
grant greater relief in the area of mixed and shared funding when it 
adopted Rule 6e-3(T) is because of the Commission's uncertainty in this 
area with respect to such issues as conflicts of interest. Applicants 
believe that any Commission concern in this area is not warranted in 
the context of this Application. Applicants state that, if and when a 
material irreconcilable

[[Page 71340]]

conflict between the Separate Accounts arises in this context or 
between Separate Accounts on the one hand and Qualified Plans or the 
Manager and its affiliates on the other hand, the Participating 
Insurance Companies, Qualified Plans and the Manager and its affiliates 
must take whatever steps are necessary to remedy or eliminate the 
conflict, including eliminating the Insurance Funds as an eligible 
investment option. Applicants believe that investment by the Manager 
and its affiliates or the inclusion of Qualified Plans as eligible 
shareholders should not increase the risk of material irreconcilable 
conflicts among shareholders. Applicants further assert, however, that 
even if a material irreconcilable conflict involving the Qualified 
Plans arose, the Qualified Plans, unlike the Separate Accounts, can 
simply redeem their shares and make alternative investments. By 
contrast, insurance companies cannot simply redeem their separate 
accounts out of one fund and invest in another. Time consuming, complex 
transactions must be undertaken to accomplish such redemptions and 
transfers. Applicants thus argue that allowing the Manager and its 
affiliates or Qualified Plans to invest directly in the Insurance 
Trusts should not increase the opportunity for conflicts of interest.
    11. The Commission has previously granted exemptive orders 
permitting open-end management investment companies to offer their 
shares directly to Qualified Plans as well as to separate accounts of 
affiliated or unaffiliated insurance companies that issue variable 
annuity contracts and variable life insurance contracts,\7\ and has 
granted comparable relief in instances in which the investment managers 
of investment companies serving as the underlying investment media for 
variable insurance contracts proposed to purchase shares of such 
investment companies.\8\
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    \7\ E.g., Warburg Pincus Trust, et al., Investment Company Act 
Release No. 24482 (May 30, 2000) (order), Investment Company Act 
Release No. 24442 (May 5, 2000) (notice); Kelmoore Strategy TM 
Variable Trust, et al., Investment Company Act Release No. 24454 
(May 16, 2000) (order), Investment Company Act Release No. 24399 
(April 19, 2000) (notice); Pacific Select Fund, et al., Investment 
Company Act Release No. 24196 (Dec. 14, 1999) (order), Investment 
Company Act Release no. 24140 (Nov. 17, 1999) (notice); Aetna 
Variable Fund, et al., Investment Company Act Release No. 23616 
(Dec. 21, 1998) (order), Investment Company Act Release No. 23545 
(Nov. 23, 1998) (notice); PIMCO Variable Insurance Trust, et al., 
Investment Company Act Release No. 23022 (Feb. 9, 1998) (order), 
Investment Company Release No. 22994 (Jan. 7, 1998) (notice); The 
Dreyfus Socially Responsible Growth Fund, Inc., et al., Investment 
Company Act Release No. 23021 (Feb. 5, 1998) (order), Investment 
Company Act Release No. 22996 (Jan. 9, 1998) (notice); and EQ 
Advisors Trust, et al., Investment Company Act Release No. 22651 
(Apr. 30, 1997) (order), Investment Company Act Release No. 22602 
(Apr. 4, 1997) (notice).
    \8\ E.g., Potomac Insurance Trust, et al., Investment Company 
Act Release No. 24560 (July 18, 2000) (order), Investment Company 
Act Release No. 24544 (June 22, 2000) (notice); SEI Insurance 
Products Trust, et al., Investment Company Act Release no. 24134 
(Nov. 15, 1999) (order), Investment Company Act Release No. 24089 
(Oct. 18, 1999) (notice); Barr Rosenberg Variable Insurance Trust, 
et al., Investment Company Act Release No. 23402 (Aug. 26, 1998) 
(order), Investment Company Act Release No. 23372 (July 31, 1998) 
(notice); Variable Annuity Portfolios, et al., Investment Company 
Act Release No. 22857 (Oct. 16, 1997) (order), Investment Company 
Act Release No. 22823 (Sept. 17, 1997) (notice); and The Palladian 
Trust, et al., Investment Company Act Release No. 22493 (Feb. 5, 
1997) (order), Investment Company Act Release No. 22456 (Jan. 9, 
1997) (notice).
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    12. Consistent with the Commission's authority under Section 6(c) 
of the 1940 Act to grant exemptive orders to a class or classes of 
persons and transactions, this Application requests relief for the 
class consisting of the Insurance Funds. Applicants maintain that there 
is ample precedent, in a variety of contexts, for granting exemptive 
relief not only to the applicants in a given case, but also to members 
of the class not currently identified that may be similarly situated in 
the future. In the context of mixed and shared funding, the Commission 
has granted exemptions covering a class composed of registered 
investment companies designed to fund variable contracts for which a 
named party to the exemptive application or, in some instances, an 
affiliate thereof, would serve in one of more of the following 
capacities: investment manager, investment adviser, sub-adviser, 
administrator, manager, principal underwriter or sponsor.\9\
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    \9\ See Variable Insurance funds, et al., Investment Company Act 
Release No. 21675 (Jan. 16, 1996) (Order), Investment Company Act 
Release No. 21592 (Dec. 12, 1995) (notice) (Commission granted 
relief extending to all investment companies designed to fund 
insurance products for which BISYS Fund Services, or any of its 
affiliates, may serve as principal underwriter and administrator). 
See also precedent cited supra note 9 (Commission granted relief 
extending to all investment companies for which the named investment 
adviser, or an affiliate of the adviser, may serve as investment 
manager, investment adviser, sub-adviser, administrator, manager, 
principal underwriter or sponsor).
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    13. 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 provision or provisions of the 
1940 Act and/or of any rule 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. 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 1940 Act.
    14. In general, Section 9(a) of the 1940 Act disqualifies any 
person convicted of certain offenses, and any company affiliated with 
that person, from acting or serving in various capacities with respect 
to a registered investment company. More specifically, paragraph (3) of 
Section 9(a) provides, among other things, that it is unlawful for any 
company to serve 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 (a)(2). Rule 6e-2(b)(15)(i) and (ii) under the 1940 Act and 
Rule 6e-3(T)(b)(15)(i) and (ii) under the 1940 Act provide exemptions 
from Section 9(a) under certain circumstances, subject to the 
limitations discussed above on mixed and shared funding. These 
exemptions limit the application of the eligibility restrictions to 
affiliated individuals or companies that directly participate in the 
management of the underlying fund.
    15. Applicants state that the relief provided by Rules 6e-
2(b)(15)(i) and 6e-3(T)(b)(15)(i) under the 1940 Act permits a person 
disqualified under Section 9(a) to serve as an officer, director, or 
employee of the life insurer, or any of its affiliates, so long as that 
person does not participate directly in the management or 
administration of the underlying fund.
    16. Applicants contend that the relief provided by Rules 6e-
2(b)(15)(ii) and 63-3(T)(b)(15)(ii) under the 1940 Act permits the life 
insurer to serve as the underlying fund's investment adviser or 
principal underwriter, provided that none of the insurer's personnel 
who are ineligible, pursuant to Section 9(a), are participating in the 
management or administration of the Trust.
    17. Applicants state that the partial relief granted in Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act from the requirements of 
Section 9 of the 1940 Act limits, in effect, the amount of monitoring 
of an insurer's personnel, which 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. Applicants maintain that those Rules 
recognize 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 in 
an insurance company complex, most of whom typically will

[[Page 71341]]

have no involvement in matters pertaining to investment companies in 
that organization. Applicants assert that it is also unnecessary to 
apply Section 9(a) of the 1940 Act to the many individuals employed by 
Participating Insurance Companies (or affiliated companies of 
Participating Insurance Companies) who do not directly participate in 
the administration or management of the Insurance Trusts.
    18. Applicants believe that there is no regulatory purpose in 
extending the monitoring requirements to embrace a full application of 
Section 9(a)'s eligibility restrictions because of mixed funding or 
shared funding. Applicants state that the Participating Insurance 
Companies are not expected to play any role in the management or 
administration of the Insurance Trusts, and that those individuals who 
participate in the management or administration of the Insurance Trusts 
will remain the same regardless of which separate accounts or insurance 
companies use the Insurance Trusts. Applicants maintain that, 
therefore, applying the monitoring requirements of Section 9(a) to the 
thousands of individuals employed by the participating Insurance 
Companies would not serve any regulatory purpose. Applicants also state 
that, furthermore, the increased monitoring costs would reduce the net 
rates of return realized by contract owners and Plan participants.
    19. Applicants state that, moreover, the relief requested should 
not be affected by the sale of shares of the Insurance Trusts to 
Qualified Plans or the Manager and its affiliates. Applicants believe 
that the insulation of the Insurance Trusts from those individuals who 
are disqualified under the 1940 Act remains in place. Because Qualified 
Plans and the Manager and its affiliates are not investment companies 
and will not be deemed to be affiliated with the Insurance Trusts 
solely by virtue of their shareholdings, Applicants state that no 
additional relief is necessary.
    20. Applicants submit that Sections 13(a), 15(a), and 15(b) of the 
1940 Act have been deemed by the Commission to require ``pass-through'' 
voting with respect to underlying fund shares held by a separate 
account. Applicants state that Rules 6e-2(b)(15)(iii) and 6e-
3(T)(b)(15)(iii) under the 1940 Act provide partial exemptions from 
those sections to permit the insurance company to disregard the voting 
instructions of its contract owners in certain limited circumstances. 
Applicants maintain that Rules 6e-2(b)(15)(iii)(A) and 6e-
3(T)(b)(15)(iii)(A)(1) under the 1940 Act provide that the insurance 
company may disregard the voting instructions of its contract owners in 
connection with the voting of shares of an underlying fund if such 
instructions would require such shares to be voted to cause such 
underlying funds to make (or refrain from making) certain investments 
that would result in changes in the subclassification or investment 
objectives of such underlying funds or to approve or disapprove any 
contract between an underlying fund and its investment manager, 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 such Rules). 
Applicants further state that Rules 6e-2(b)(15)(iii)(B) and 6e-
3(T)(b)(15)(iii)(A)(2) under the 1940 Act provide that the insurance 
company may disregard contract owners' voting instructions if the 
contract owners initiate any change in such underlying funds' 
investment policies, principal underwriter, or any investment manager 
(provided that disregarding such voting instructions is reasonable and 
subject to the other provisions of paragraphs (b)(5)(ii) and 
(b)(7)(ii)(B) and (C) of Rules 6e-2 and 6e-3(T)).
    21. Applicants state that Rule 6e-2 recognizes that a variable life 
insurance contract is an insurance contract; it has important elements 
unique to insurance contracts; and it is subject to extensive state 
regulation of insurance. In adopting Rule 6e-2(b)(15)(iii), Applicants 
believe that the Commission expressly recognized that state insurance 
regulators have authority, pursuant to state insurance laws or 
regulations, to disapprove or require changes in investment policies, 
investment advisers, or principal underwriters.\10\Applicants state 
that the Commission also 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 owners over the insurer's objection.\11\ 
Applicants further state that the Commission therefore deemed such 
exemptions necessary ``to assure the solvency of the life insurer and 
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.'' \12\ Applicants conclude that, in this respect, 
flexible premium variable life insurance contracts are identical to 
scheduled premium variable life insurance contracts; therefore, Rule 
6e-3(T)'s corresponding provisions presumably were adopted in 
recognition of the same factors.
---------------------------------------------------------------------------

    \10\ Investment Company Act Release No. 9482 (Oct. 18, 1976) 
(adopting Rule 6e-2).
    \11\ Investment Company Act Release No. 8000 (Sept. 20, 1973) 
(proposing to amend Rule 3c-4, the predecessor of Rule 6e-2).
    \12\ Investment Company Act Release No. 9104 (Dec. 30, 1975) 
(proposing Rule 6e-2).
---------------------------------------------------------------------------

    22. Applicants believe that state insurance regulators have much 
the same authority with respect to variable annuity separate accounts 
as they have with respect to variable life insurance separate accounts. 
Insurers generally assume both mortality and expense risks under 
variable annuity contracts. Therefore, Applicants note that variable 
annuity contracts pose some of the same kinds of risks to insurers as 
variable life insurance contracts. Applicants state that the Commission 
staff has not addressed the general issue of state insurance 
regulators' authority in the context of variable annuity contracts and 
has not developed a single comprehensive exemptive rule for variable 
annuity contracts.\13\
---------------------------------------------------------------------------

    \13\ Applicants are not aware of any rule or exemptive order 
granting relief for variable annuity separate accounts from the 
disqualification or pass-through voting provisions, and no such 
relief is requested herein.
---------------------------------------------------------------------------

    23. Applicants assert that the Insurance Trusts' sale of shares to 
Qualified Plans for the Manager and its affiliates will not have any 
impact on the relief requested herein in this regard. Applicants note 
that shares of the Insurance Trusts sold to Qualified Plans would be 
held by the trustees of such Plans.\14\ Applicants state that the 
exercise of voting rights by Qualified Plans, whether by the trustees, 
by participants, by beneficiaries, or by investment managers engaged by 
the Plans, does not present the type of issues respecting the disregard 
of voting rights that are presented by variable life separate accounts. 
With respect to the Qualified Plans, which are not registered as 
investment companies under the 1940 Act, Applicants submit that there 
is no requirement to pass through voting rights to Plan participants. 
Applicants believe that, indeed, to the contrary, applicable law 
expressly reserves voting rights associated with certain types of Plan 
assets to certain specified persons. Applicants state that, for 
example, under Section 403(a) of ERISA, shares of

[[Page 71342]]

a fund sold to a Qualified Plan must be held by the trustee(s) of the 
Plan. Applicants further note that Section 403(a) also provides that 
the trustee(s) must have exclusive authority and discretion to manage 
and control the Plan with two exceptions: (1) When the Plan expressly 
provides that the trustee(s) are subject to the direction of the named 
fiduciary who is not a trustee, in which case the trustee(s) are 
subject to proper directions made in accordance with the terms of the 
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 above two exceptions stated in Section 403(a) applies, 
Applicants state that Plan trustee(s) have the exclusive authority and 
responsibility for voting proxies.
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    \14\ As noted supra note 8, Section 403(b)(7) Plans and Section 
408(a) Plans may permit shares beneficially owned by participants to 
be owned of record by custodians. Offers and sales of Insurance Fund 
shares to such plans would be permitted to the extent that Insurance 
Fund shares owned of record by the custodians are deemed to be held 
by Section 403(b)(7) Plan and Section 408(a) Plan trustees.
---------------------------------------------------------------------------

    24. Applicants note that, if a named fiduciary to a Qualified Plan 
appoints an investment manager, the investment manager has the 
responsibility to vote the shares held unless the right to vote such 
shares is reserved to the trustees or the named fiduciary. Applicants 
further note that the Qualified Plans may have their trustee(s) or 
other fiduciaries exercise voting rights attributable to investment 
securities held by the Qualified Plans in their discretion. Applicants 
state that certain Qualified Plans, however, may provide for the 
trustees(s) or another named fiduciary to exercise voting rights in 
accordance with instructions from participants.
    25. If a Qualified Plan does not provide participants with the 
right to give voting instructions, Applicants do not see any potential 
for material irreconcilable conflicts of interest between or among 
variable contract owners and Plan participants with respect to voting 
of the respective Insurance Fund's shares. Accordingly, unlike the case 
with insurance company separate accounts, Applicants argue that the 
issue of the resolution of material irreconcilable conflicts with 
respect to voting is not present with respect to such Qualified Plans 
because the Qualified Plans are not entitled to pass-through voting 
privileges.
    26. Applicants further note that there is no reason to believe that 
participants in Qualified Plans which provide participants with the 
right to give voting instructions generally, or those in a particular 
Plan, either as a single group or in combination with participants in 
other Qualified Plans, would vote in a manner that would disadvantage 
variable contract owners. Applicants, therefore, assert that the 
purchase of shares of the Insurance Funds by Qualified Plans that 
provide voting rights does not present any complications not otherwise 
occasioned by mixed or shared funding.
    27. Applicants note that, similarly, the Manager and its affiliates 
are not subject to any pass-through voting requirements. Accordingly, 
unlike the case with Separate Accounts, Applicants state that the issue 
of the resolution of material irreconcilable conflicts with respect to 
voting is not present with Qualified Plans or the Manager and its 
affiliates.
    28. Applicants submit that the prohibitions on mixed and shared 
funding might reflect some concern with possible divergent interests 
among different classes of investors. Applicants note that when Rule 
63-2 was adopted, variable annuity separate accounts could (and some 
did) invest in mutual funds whose shares were also offered to the 
general public. Therefore, at the time of the adoption of Rule 6e-2, 
Applicants state that the Commission staff contemplated underlying 
funds with public shareholders, as well as with variable life insurance 
separate account shareholders. Applicants believe that the Commission 
staff may have been concerned with the potentially different investment 
motivations of public shareholders and variable life insurance contract 
owners. Applicants further believe that there also may have been some 
concern with the problems of permitting a state insurance regulatory 
authority to affect the operations of a publicly-available mutual fund, 
and hence, affect the investments decisions of public shareholders.
    29. However, for reasons unrelated to the 1940 Act, Applicants note 
that Internal Revenue Service Ruling 81-225 (Sept 25, 1981) (``Ruling 
81-225'') effectively deprived variable annuities funded by publicly-
available mutual funds of their tax-benefited status. Applicants state 
that the Tax Reform Act of 1984 codified the prohibition against the 
use of publicly available mutual funds as an investment medium for 
variable contracts (including variable life contracts). Applicants 
further state that Section 817(h) of the Code in effect requires that 
the investments made by variable annuity and variable life insurance 
separate accounts be ``adequately diversified.'' If a separate account 
is registered as a unit investment trust that invests in a single fund 
or series, Applicants maintain that Section 817(h) and the Treasury 
Regulations provide, in effect, that the diversification test will be 
applied at the underlying fund level rather that at the separate 
account level, but only if, subject to certain exceptions, ``all of the 
beneficial interests'' in the underlying fund ``are held by one or more 
insurance companies (or affiliated companies) in their general account 
or in segregated asset accounts * * *.'' \15\ Applicants state that, 
accordingly, a Trust Account that invests solely in a publicly 
available mutual fund would not be adequately diversified. In addition, 
Applicants state that any underlying fund, including the Insurance 
Funds, that sells its shares to separate accounts would, in effect, be 
precluded from selling its shares to the public. Consequently, 
Applicants submit that the Insurance Funds will be obligated not to 
sell their shares directly to the public.
---------------------------------------------------------------------------

    \15\ Treas. Reg. 1.817-5, which established diversification 
requirements for such funds, specifically permits, among other 
things, investment company managers, insurance company general and 
separate accounts and ``qualified pension or retirement plans'' to 
share the same underlying management investment company. Therefore, 
neither the Code, the Treasury Regulations nor Revenue Rulings 
thereunder present any inherent conflicts of interest if investment 
company managers, insurance company general accounts, Qualified 
Plans, variable annuity separate accounts and variable life 
insurance separate accounts all invest in the same management 
investment company.
---------------------------------------------------------------------------

    30. While there are differences in the manner in which 
distributions are taxed for variable annuity contracts, variable life 
insurance contracts and Qualified Plans, Applicants assert that the tax 
consequences do not raise any conflicts of interests. When 
distributions are to be made, and the separate account or the Qualified 
Plan cannot net purchase payments to make the distributions, Applicants 
state that the separate account or the Plan will redeem shares of the 
Insurance Trusts at their net asset value. Applicants further state 
that the Qualified Plan will then make distributions in accordance with 
the terms of the Qualified Plan and the insurance company will make 
distributions in accordance with the terms of the variable contract.
    31. Applicants state that shared funding by unaffiliated insurance 
companies does not present any issues that do not already exist where a 
single insurance company is licensed to do business in several or all 
states. Applicants assert 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 submit that the fact that different Participating Insurance 
Companies may be domiciled in different states does not create a 
significantly different or enlarged problem.

[[Page 71343]]

    32. Applicants submit that shared funding by unaffiliated 
Participating Insurance Companies is, in this respect, no different 
than the use of the same investment company as the funding vehicle for 
affiliated Participating Insurance Companies, which Rules 6e-2(b)(15) 
and 6e-3(T)(b)(15) under the 1940 Act permit under various 
circumstances. Applicants state that affiliated Participating Insurance 
Companies may be domiciled in different states and be subject to 
differing state law requirements, and that affiliation does not reduce 
the potential, if any exists, for differences in state regulatory 
requirements. Applicants assert that, 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.
    33. Applicants maintain that the right under Rules 6e-2(b)(15) and 
6e-3(T)(b)(15) of an insurance company to disregard contract owners' 
voting instructions does not raise any issues different from those 
raised by the authority of state insurance administrators over separate 
accounts. Applicants believe that, under Rules 6e-2(b)(15) and 6e-
3(T)(b)(15), an insurer can disregard contract owner voting 
instructions only with respect to certain specified items and under 
certain specified conditions. Applicants state that affiliation does 
not eliminate the potential, if any exists, for divergent judgments as 
to the advisability or legality of a change in investment policies, 
principal underwriter, or investment adviser initiated by contract 
owners. Applicants submit that the potential for disagreement is 
limited by the requirements in Rules 6e-2 and 6e-3(T) that the 
insurance company's disregard of voting instructions be reasonable and 
based on specific good faith determinations.
    34. Applicants note, however, that a particular Participating 
Insurance Company's disregard of voting instructions, nevertheless, 
could conflict with the majority of contract owner voting instructions. 
Applicants state that the Participating Insurance Company's action 
could arguably be different than the determination of all or some of 
the other Participating Insurance Companies (including affiliated 
insurers) that the contract owners' voting instructions should prevail, 
and could either preclude a majority vote approving the change or could 
represent a minority view. If the Participating Insurance Company's 
judgment represents a minority position or would preclude a majority 
vote, Applicants note that the Participating Insurance Company may be 
required, at an Insurance Trust's election, to withdraw its Separate 
Account's investment in that Insurance Trust, and no charge or penalty 
would be imposed as a result of such withdrawal.
    35. With respect to voting rights, Applicants maintain that it is 
possible to provide an equitable means of giving such voting rights to 
contract owners and to Qualified Plans and the Manager and its 
affiliates. Applicants note that the transfer agent(s) for the 
Insurance Trusts will inform each shareholder, including each Separate 
Account, each Qualified Plan, and the Manager and its affiliates, of 
its share ownership, in an Insurance Trust. According to the 
Applicants, each Participating Insurance Company will then solicit 
voting instructions in accordance with the ``pass-through'' voting 
requirement.
    36. Applicants assert that investment by Qualified Plans in any 
Insurance Trust will similarly present no conflict. Applicants submit 
that the likelihood that voting instructions of variable contract 
owners will ever be disregarded or the possible withdrawal referred to 
immediately above is extremely remote and this possibility will be 
known, through prospectus disclosure, to any Qualified Plan choosing to 
invest in an Insurance Trust. Applicants state that, moreover, even if 
a material irreconcilable conflict involving Qualified Plans arises, 
the Qualified Plans may simply redeem their shares and make alternative 
investments. Applicants note that votes cast by the Qualified Plans, of 
course, cannot be disregarded but must be counted and given effect.
    37. Applicants believe that there is no reason why the investment 
policies of an Insurance fund would or should be materially different 
from what they would or should be if such Insurance Fund funded only 
variable annuity contracts or variable life insurance policies, whether 
flexible premium or scheduled premium policies. Applicants contend that 
each type of insurance product is designed as a long-term investment 
program. Applicants further submit that, similarly, the investment 
strategy of Qualified Plans (i.e., long-term investment) coincides with 
that of variable contracts and should not increase the potential for 
conflicts.
    38. Applicants maintain that each of the Insurance Funds will be 
managed to attempt to achieve its investment objective, and not to 
favor or disfavor any particular Participating Insurance Company or 
type of insurance product or other investor. Applicants submit that 
there is no reason to believe that different features of various types 
of contracts will lead to different investment policies for different 
types of variable contracts. Applicants note that the sale and ultimate 
success of all variable insurance products depends, at least in part, 
on satisfactory investment performance, which provides an incentive for 
the Participating Insurance Company to seek optimal investment 
performance.
    39. Applicants state that, furthermore, no one investment strategy 
can be identified as appropriate to a particular insurance product. 
Applicants state that each pool of variable annuity and variable life 
insurance contract owners is composed of individuals of diverse 
financial status, age, insurance and investment goals. Applicants note 
that an underlying fund supporting even one type of insurance product 
must accommodate these diverse factors in order to attract and retain 
shareholders. Applicants maintain that permitting mixed and shared 
funding will provide economic justification for the growth of the 
Insurance Funds. In addition, Applicants assert that permitting mixed 
and shared funding will facilitate the establishment of additional 
Insurance Funds serving diverse goals. Finally, Applicants submit that 
the broader base of shareholders can also be expected to provide 
economic justification for the creation of additional Insurance Funds 
with a greater variety of investment objectives and policies.
    40. Applicants note that Section 817(h) of the Code is the only 
section in the Code where separate accounts are discussed. Applicants 
state that Section 817(h) imposes certain diversification standards on 
the underlying assets of variable annuity contracts and variable life 
contracts held in the portfolios of underlying funds. Applicants 
further state that Treasury Regulation 1.817-5, which established 
diversification requirements for such portfolios, specifically permits, 
in paragraph (f)(3), among other things, ``qualified pension or 
retirement plans'' and separate accounts to share the same underlying 
fund. Applicants assert that, therefore, neither the Code nor the 
Treasury Regulations thereunder present any inherent conflicts of 
interest if Qualified Plans, Separate Accounts and the Manager and its 
affiliates all invest in the same underlying fund.
    41. Applicants maintain that the ability of the Insurance Trusts to 
sell their respective shares directly to Qualified Plans or the Manager 
and its affiliates does not create a ``senior security,'' as such term 
is defined under

[[Page 71344]]

Section 18(g) of the 1940 Act, with respect to any contract owner as 
opposed to a participant under a Qualified Plan or the Manager and its 
affiliates. Applicants state that, as noted above, regardless of the 
rights and benefits of contract owners or Qualified Plan participants, 
the Separate Accounts, Qualified Plans and the Manager and its 
affiliates have rights only with respect to their respective shares of 
the Insurance Trusts. Applicants state that they can only redeem such 
shares at net asset value, and that no shareholder of any of the 
Insurance Trusts has any preference over any other shareholder with 
respect to distribution of assets or payment of dividends.
    42. Applicants assert that permitting an Insurance Trust to sell 
its shares to the Manager and its affiliates in compliance with Treas. 
Reg. 1.817-5 will enhance Insurance Trust management without raising 
significant concerns regarding material irreconcilable conflicts.
    43. Applicants state that, unlike the circumstances of many 
investment companies that serve as underlying investment media for 
variable insurance products, the Insurance Trusts may be deemed to lack 
an insurance company ``promoter'' for purposes of Rule 14a-2 under the 
1940 Act. Applicants note that it is anticipated that many other 
Insurance Trusts may lack an insurance company promoter. Applicants 
state that, accordingly, such Insurance Trusts 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. Applicants further state that Insurance 
Trusts also will require more limited amounts of initial capital in 
connection with the creation of new series and the voting of initial 
shares of such series on matters requiring the approval of 
shareholders.
    44. Applicants note that a potential source of the requisite 
initial capital is an Insurance Trust's Manager or a Participating 
Insurance Company, and that either of these parties may have an 
interest in making the requisite capital expenditure and in 
participating with the Insurance Trust in its organization. Applicants 
submit, however, that provision of seed capital or the purchase of 
shares in connection with the management of an Insurance Trust by the 
Manager and its affiliates or by a Participating Insurance Company may 
be deemed to violate the exclusivity requirement of Rule 6e-2(b)(15) 
and/or Rule 6e-3(T)(b)(15) under the 1940 Act.
    45. Applicants anticipate that such investment by the Manager and 
its affiliates generally will be limited in scope and duration, and 
will be made only in connection with the operation of the Insurance 
Trusts. Applicants maintain that the return on shares held by the 
Manager and its affiliates will be calculated in the same manner as for 
shares held by a Separate Account. Applicants state that any shares of 
an Insurance Trust purchased by the Manager or its affiliates will be 
automatically redeemed if and when the Manager's investment management 
agreement terminates, to the extent required by applicable Treasury 
Regulations. Applicants further states that neither the Manager nor its 
affiliates will sell such shares of the Insurance Trust to the public. 
Given the conditions of Treas. Reg. 1.817-5(i)(3) under the Code and 
the harmony of interest between an Insurance Trust, on the one hand, 
and its Manager(s) or a Participating Insurance Company, on the other, 
Applicants assert that little incentive for overreaching exists. 
Furthermore, Applicants state that such investments should not 
implicate the concerns discussed above regarding the creation of 
material irreconcilable conflicts. Applicants state that, instead, 
permitting investments by the Manager and its affiliates will permit 
the orderly and efficient creation and operation of Insurance Trusts, 
and reduce the expense and uncertainty of using outside parties at the 
early states of Insurance Trust operations.
    46. Applicants maintain that various factors have limited the 
number of insurance companies that offer variable contracts. Applicants 
state that these factors include the costs of organizing and operating 
a funding medium, the lack of expertise with respect to investment 
management (principally with respect to stock and money market 
investments) and the lack of name recognition by the public of certain 
Participating Insurance Companies as investment experts. Applicants 
believe that, in particular, some smaller life insurance companies may 
not find it economically feasible, or within their investment or 
administrative expertise, to enter the variable contract business on 
their own. Applicants contend that use of the Insurance Trusts as a 
common investment medium for variable contracts and Qualified Plans 
would help alleviate these concerns, because Participating Insurance 
Companies and Qualified Plans will benefit not only from the investment 
and administrative expertise of Ayco, or any other investment manager 
to an Insurance Fund, but also from the cost efficiencies and 
investment flexibility afforded by a large pool of funds. Applicants 
submit, therefore, that making the Insurance Trusts available for mixed 
and shared funding and permitting the purchase of Insurance Trust 
shares by Qualified Plans may encourage more insurance companies to 
offer variable contracts, and this should result in increased 
competition with respect to both variable contract design and pricing, 
which can be expected to result in more product variation. Applicants 
assert that mixed and shared funding also may benefit variable contract 
owners by eliminating a significant portion of the costs of 
establishing and administering separate funds. Applicants state, 
furthermore, granting the requested relief should result in an 
increased amount of assets available for investment by the Insurance 
Trusts, which may benefit variable contract owners by promoting 
economies of scale, by reducing risk through greater diversification 
due to increased money in the Insurance Trusts, or by making the 
addition of new Insurance Funds more feasible.
    47. Applicants note that the Commission has previously issued 
orders permitting mixed funding \16\ and shared funding. \17\ 
Applicants also maintain that, in addition, the Commission has 
broadened its grant of exemptive relief by issuing orders permitting 
mixed and shared funding while fund shares are also sold directly to 
Qualified Plans and to an investment

[[Page 71345]]

manager and its affiliates. \18\ Applicants submit that the exemptive 
relief requested herein is similar to exemptive recent relief granted 
by the Commission in Potomac Insurance Trust, et al., Investment 
Company Act Release No. 24560 (July 18, 2000) (order), Investment 
Company Act Release No. 24454 (June 22, 2000) (notice). See also Barr 
Rosenberg Variable Insurance Trust, et al., Investment Company Act 
Release No. 23402 (Aug. 26, 1998) (order), Investment Company Act 
Release No. 23372 (July 31, 1998) (notice); U.S. Global Leaders 
Variable Insurance Trust, et al., Investment Company Act Release No. 
23256 (June 16, 1998) (order), Investment Company Act Release No. 23199 
(May 20, 1998) (notice); and Variable Annuity Portfolios, et al., 
Investment Company Act Release No. 22823 (Sept. 17, 1997) (notice). 
Applicants assert that granting the exemptions requested herein is in 
the public interest and, as discussed above, will not compromise the 
regulatory purposes of Sections 9 (a), 13(a), 15(a), or 15(b) of the 
1940 Act or Rules 6e-2 or 6e-3(T) thereunder.
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    \16\ See, e.g., New York Life MFA Series Fund, Inc., et al., 
Investment Company Act Release No. 19069 (Oct. 30, 1992) (order), 
Investment Company Act Release No. 19010 (Oct. 8, 1992) (notice); 
The Manufacturers Life Insurance Company of America, et al., 
Investment Company Act Release No. 18112 (Apr. 25, 1991) (order), 
Investment Company Act Release No. 18070 (Mar. 29, 1991)(notice); 
United Services Life Insurance Company, Investment Company Release 
No. 16384 (Apr. 28, 1988) (order), Investment Company Act Release 
No. 16348 (Apr. 5, 1988) (notice); and Mass. Variable Life Separate 
Account I, Investment Company Act Release No. 14342 (Jan. 30, 1985) 
(order), Investment Company Act Release No. 14306 (Jan. 4, 1985) 
(notice).
    \17\ See, e.g., Pacific Select Fund, et al., Investment Company 
Act Release No. 24196 (Dec. 14, 1999) (order), Investment Company 
Act Release No. 24140 (Nov. 17, 1999) (notice); Aetna Variable Fund, 
et al., Investment Company Act Release No. 23616 (Dec. 21, 1998) 
(order), Investment Company Act Release No. 23545 (Nov. 23, 1998) 
(notice); EQ Advisors Trust, et al., Investment Company Act Release 
No. 22651 (Apr. 30, 1997) (order), Investment Company Act Release 
No. 22602 (Apr. 2, 1997) (notice); Neuberger & Berman Advisers 
Management Trust, et al., Investment Company Act Release No. 21046 
(May 5, 1995) (order), Investment Company Act Release No. 21003 
(April 12, 1995) (notice); and Janus Aspen Series, et al., 
Investment Company Act Release No. 20108 (Mar. 2, 1994) (order), 
Investment Company Act Release No. 20054 (Feb. 3, 1994) (notice).
    \18\ See, e.g., supra note 8.
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Conditions

Applicants Consent to the Following Conditions

    1. A majority of the Board of Trustees or Board of Directors 
(``Board'') of each Insurance Trust shall consist of persons who are 
not ``interested persons'' of the Insurance Trust, as defined by 
Section 2(a)(19) of the 1940 Act and the rules thereunder and as 
modified by any applicable orders of the Commission, except that if 
this condition is not met by reason of the death, disqualifications, or 
bona fide resignation of any trustee or director, then the operator 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 the respective Insurance Trust for the 
existence of any material irreconcilable conflict among and between the 
interests of the contract owners of all Separate Accounts, and of the 
Plan participants, Qualified Plans, and the Manager or its affiliates 
investing in that Insurance Trust, and determine what action, if any, 
should be taken in response to such conflicts. A material 
irreconcilable conflict may arise for a variety of reasons, including: 
(a) An action by any state insurance regulatory authority; (b) a change 
in applicable federal or state insurance, tax, or securities laws or 
regulations, or a public ruling, private letter ruling, no-action or 
interpretative 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 any Insurance Fund are being managed; (e) a difference 
in voting instructions given by variable annuity contract owners, 
variable life insurance contract owners, Plan trustees, or Plan 
participants; (f) a decision by a Participating Insurance Company to 
disregard the voting instructions of contract owners; or (g) if 
applicable, a decision by a Qualified Plan to disregard the voting 
instructions of Plan participants.
    3. Any Qualified Plan that executes a fund participation agreement 
upon becoming an owner of 10% or more of the assets of an Insurance 
Trust, any Participating Insurance Company, and the Manager and its 
affiliates (collectively, ``Participants'') will report any potential 
or existing conflicts to the Board. Each of the Participants will be 
responsible for assisting the Board in carrying out the Board's 
responsibilities under these conditions by providing the Board will all 
information reasonably necessary for the Board to consider any issues 
raised. This includes, but is not limited to, an obligation by each 
Participating Insurance Company to inform the Board whenever contract 
owner voting instructions are disregarded and, if pass-through voting 
is applicable, an obligation by each Qualified Plan that is a 
Participant to inform the Board whenever it has determined to disregard 
Plan participant voting instructions. The responsibility to report such 
information and conflicts and to assist the Board will be a contractual 
obligation of all Participating Insurance Companies and Qualified Plans 
investing in an Insurance Trust under their agreements governing 
participation in the Insurance Trust, and such agreements shall provide 
that such responsibilities will be carried out with a view only to the 
interests of the contract owners or, if applicable, Plan participants.
    4. If it is determined by a majority of the Board of an Insurance 
Trust, or a majority of its disinterested trustees or directors, that a 
material irreconcilable conflict exists, the relevant Participating 
Insurance Companies and Qualified Plan shall, at their expense or, at 
the discretion of a Manager to an Insurance Trust, at that Manager's 
expense, and to the extent reasonably practicable (as determined by a 
majority of the disinterested trustees or directors), take whatever 
steps are necessary to remedy or eliminate the material irreconcilable 
conflict, up to an including: (a) Withdrawing the assets allocable to 
some or all of the Separate Accounts from the relevant Insurance Trust 
or any series therein and reinvesting such assets in a different 
investment medium (including another Insurance Fund, if any); (b) in 
the case of Participating Insurance Companies, submitting the question 
of 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., variable annuity contract owners or 
variable life insurance contract owners of one or more Participating 
Insurance Company) that does in favor of such segregation, or offering 
to the affected contract owners of 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 Insurance Trust's election, 
to withdraw its Separate Account's investment in the Insurance Trust, 
and no charge or penalty will be imposed as a result of such 
withdrawal. If a material irreconcilable conflict arises because of a 
Qualified Plan's decision to disregard Plan participant voting 
instructions, if applicable, and that decision represents a minority 
position or would preclude a majority vote, the Qualified Plan may be 
required, at the election of the Insurance Trust, to withdraw its 
investment in the Insurance Trust, and no charge or penalty will be 
imposed as a result of such withdrawal. The responsibility to take 
remedial action in the event of a Board determination of a material 
irreconcilable conflict and to bar the cost of such remedial action 
shall be a contractual obligation of all Participating Insurance 
Companies and Qualified Plans under their agreements governing 
participation in the Insurance Trust, and these responsibilities will 
be carried out with a view only to the interests of the contract owners 
or, as applicable, Plan participants.
    For the purposes of this Condition (4), a majority of the 
disinterested members of the Board shall determine whether or not any 
proposed action adequately remedies any material irreconcilable

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conflict, but in no event will the Insurance Trust or its Manager 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 adversely affected by the material irreconcilable 
conflict. No Qualified Plan shall be required by this Condition (4) to 
establish a new funding medium for such Qualified Plan if (a) a 
majority of Plan participants materially and adversely affected by the 
material irreconcilable conflict vote to decline such offer or (b) 
pursuant to governing Plan documents and applicable law, the Plan makes 
such decision without Plan participant vote.
    5. The Board's determination of the existence of a material 
irreconcilable conflict and its implications shall be made known 
promptly in writing to all Participants.
    6. Participating insurance companies will provide pass-through 
voting privileges to all variable contract owners whose contracts are 
funded through a registered separate account for so long as the 
Commission continues to interpret the 1940 Act as requiring pass-
through voting privileges for variable contract owners. Accordingly, 
such Participating Insurance Companies will vote shares of each 
Insurance Fund held in their registered separate accounts in a manner 
consistent with voting instructions timely received from such contract 
owners. Each Participating Insurance Company will vote shares of each 
Insurance Fund held in its registered Separate Accounts for which no 
timely voting instructions are received, as well as shares held by any 
such registered Separate Account, in the same proportion as those 
shares for which voting instructions are received. Participating 
insurance companies shall be responsible for assuring that each of 
their Separate Accounts investing in an Insurance Trust calculates 
voting privileges in a manner consistent with all other Participating 
Insurance Companies. The obligation to vote an Insurance Trust's shares 
and to calculate voting privileges in a manner consistent with all 
other registered Separate Accounts investing in an Insurance Trust 
shall be a contractual obligation of all Participating Insurance 
Companies under their agreements governing participation in the 
Insurance Trust. Each Plan will vote as required by applicable law and 
governing Plan documents.
    7. An Insurance Trust will notify all Participating Insurance 
Companies and Qualified Plans that disclosure regarding potential risks 
of mixed and shared funding may be appropriate in prospectuses for any 
of the Separate Accounts and in Plan documents. Each Insurance Trust 
will disclose in its prospectus that: (a) Shares of the Insurance Trust 
are offered to insurance company Separate Accounts that fund both 
variable annuity and variable life insurance contracts, and to 
Qualified Plans; (b) due to differences of tax treatment or other 
considerations, the interests of various contract owners participating 
in the Insurance Trust and the interests of Qualified Plans investing 
in the Insurance Trust might at some time be in conflict; and (c) the 
Board will monitor the Insurance Trust for any material conflicts and 
determine what action, if any, should be taken.
    8. All reports received by the Board of potential or existing 
conflicts, 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. If and to the extent Rule 6e-2 and Rule 6e-3(T) under the 1940 
Act are amended, or Rule 6e-3 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 in this Application, 
then each Insurance Trust and/or the Participating Insurance Companies, 
as appropriate, shall take such steps as may be necessary to comply 
with Rule 6e-2 and Rule 6e-3(T), as amended, and Rule 6e-3, as adopted, 
to the extent such rules are applicable.
    10. Each Insurance Trust will comply with all provisions of the 
1940 Act requiring voting by shareholders (which, for these purposes, 
shall be persons having a voting interest in the shares of that 
Insurance Trust), and in particular each Insurance Trust will either 
provide for annual meetings (except insofar as 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 Trust is not 
one of the trusts described in Section 16(c) of the 1940 Act) as well 
as with Section 16(a) of the 1940 Act and, if and when applicable, 
Section 16(b) of the 1940 Act. Further, each Insurance Trust will act 
in accordance with the Commission's interpretation of the requirements 
of Section 16(a) of the 1940 Act with respect to periodic elections of 
directors (or trustees) and with whatever rules the Commission may 
promulgate with respect thereto.
    11. As long as the Commission continues to interpret the 1940 Act 
as requiring pass-through voting privileges for variable contract 
owners, the Manager and its affiliates will vote their shares in the 
same proportion as all contract owners having voting rights with 
respect to the relevant Insurance Trust; provided, however, that the 
Manager and its affiliates shall vote their shares in such other manner 
as may be required by the Commission or its staff.
    12. The Participants shall at least annually submit to the Board of 
an Insurance Trust such reports, materials or data as the Board may 
reasonably request sot that it may fully carry out the obligations 
imposed upon it by the conditions contained in this Application and 
said reports, materials and data shall be submitted more frequently, if 
deemed appropriate, by the Board. The obligations of a Participant to 
provide these reports, materials and data to the Board of the Insurance 
Trust when it so reasonably requests, shall be a contractual obligation 
of all Participating Insurance Companies and Qualified Plans under 
their agreements governing participation in each Insurance Trust.
    13. If a Qualified Plan should become an owner of 10% or more of 
the assets of an Insurance Trust, the Insurance Trust shall require 
such Plan to execute a participation agreement with such Insurance 
Trust which includes the conditions set forth herein to the extent 
applicable. A Qualified Plan will execute an application containing an 
acknowledgment of this condition upon such Plan's initial purchase of 
the shares of any Insurance Trust.
    14. Any shares of an Insurance Trust purchased by the Manager or 
its affiliates will be automatically redeemed if and when the Manager's 
investment management agreement terminates, and to the extent required 
by the applicable Treasury Regulations. Neither the Manager nor its 
affiliates will sell such shares of the Insurance Trusts to the public.
    15. A Participating Insurance Company, or an 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 Insurance

[[Page 71347]]

Trusts or any variable annuity or variable life insurance separate 
account, organized as a unit investment trust, that invests in the 
Insurance Trusts 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

    Applicants submit, based on the grounds summarized above, that 
their exemptive request meets the standards set out in Section 6(c) of 
the 1940 Act, namely, that the exemptions requested are 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, and that, therefore, the Commission should 
grant the requested order.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-30517 Filed 11-29-00; 8:45 am]
BILLING CODE 8010-01-M