[Federal Register Volume 65, Number 251 (Friday, December 29, 2000)]
[Notices]
[Pages 83110-83116]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-33262]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24796; File No. 812-12282]


First Defined Sector Fund, et al., Notice of Application

December 21, 2000.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order of exemption under Section 
6(c) of the Investment Company Act of 1940 (``1940 Act'') for 
exemptions from the provisions of Sections 9(a), 13(a), 15(a) and 15(b) 
of the 1940 Act and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder.

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    Applicants: First Defined Sector Fund and First Trust Advisors, 
L.P.
    Summary of Application: Applicants seek an order to the extent 
necessary to permit shares of any existing or future portfolio of First 
Defined Sector Fund (``Trust'') designed to fund insurance products and 
shares of any other investment company or series thereof now or in the 
future registered under the 1940 Act that is designed to fund insurance 
products and for which First Trust Advisors, L.P. (``First Trust''), or 
any of its affiliates, may serve as investment adviser, administrator, 
manager, principal underwriter or sponsor (``Future Trusts'') (the 
Trust, together with Future Trusts are referred to, collectively, as 
the ``Trusts''), 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; (3) separate accounts that are not registered as investment 
companies under the 1940 Act pursuant to exemptions from registration 
under Section 3(c) of the 1940 Act; and (4) First Trust or any of its 
affiliates.
    Filing Date: The application was filed on October 2, 2000, and 
amended and restated on December 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 on this application by writing 
to the Secretary of the SEC and serving Applicants with a copy of the 
request, in person or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on January 16, 2001, and accompanied by proof 
of service on the Applicants in the form of an affidavit or, for 
lawyers, a certificate of service. Hearing requests should state the 
nature of your interest, the reason for the request, and the issues you 
contest. Persons may request notification of the date of a hearing by 
writing to the Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549-
0609. Applicants, c/o Eric F. Fess, Esquire, Chapman and Cutler, 111 
West Monroe Street, Chicago, Illinois 60603.

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

[[Page 83111]]


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

Applicants' Representations

    1. The Trust is a Massachusetts business trust registered as an 
open-end management investment company under the 1940 Act. The Trust 
currently consists of nine separate portfolios.
    2. First Trust is registered as an investment adviser under the 
Investment Advisers Act of 1940 and serves as the investment adviser to 
the Trust.
    3. The Trusts intend to offer its shares representing interests in 
each fund, and any other portfolio established by the Trusts, to 
separate accounts of both affiliated and unaffiliated insurance 
companies to serve as the investment vehicle for variable annuity and 
variable life insurance contracts (collectively referred to as 
``Variable Contracts''). The insurance companies that elect to purchase 
shares of one or more portfolio are collectively referred to as 
``Participating Insurance Companies.''
    4. The Trusts also intend to offer shares representing interests in 
their portfolios directly to qualified pension and retirement plans 
(``Plans'') outside the separate account context. Shares of the 
portfolios sold to Plans will be held by the trustees of Plans as 
required by Section 403(a) of the Employee Retirement Income Security 
Act of 1974, as amended (``ERISA'').
    5. The Participating Insurance Companies will establish their own 
separate accounts. Each Participating Insurance Company will enter into 
a fund participation agreement with the portfolios on behalf of its 
Participating Separate Account and will have the legal obligation of 
satisfying all requirements under state and federal law. The role of 
the Trusts, so far as the federal securities laws are applicable, will 
be to offer their shares to separate accounts of Participating 
Insurance Companies and to Plans and to fulfill any conditions that the 
Commission may impose upon granting the order requested in the 
application.
    6. Plans may choose the Fund (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 portfolios sold to Plans would be held by the trustee(s) 
of the Plans as mandated by Section 403(a) of ERISA.
    7. Shares of the portfolios also may be offered and sold to a 
portfolio's investment adviser or an affiliate pursuant to Treasury 
Regulation 1.817-5(f)(3)(ii).
    8. Applicants state that the Treasury Department Regulations permit 
such sales as long as the return on shares held by the adviser or such 
an affiliate is computed in the same manner as for shares held by a 
separate account, the adviser or such affiliate does not intend to sell 
shares of the portfolios held by it to the public, and the adviser or 
such affiliate holds such shares only in connection with the creation 
or management of a portfolio.

Applicants' Legal Analysis

    1. Applicants request that the Commission issue an order under 
Section 6(c) of the 1940 Act granting exemptive relief from Sections 
9(a), 13(a), 15(a) and 15(b) of the 1940 Act and Rules 6e-2(b)(15) and 
6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of 
the portfolios to be offered and sold to variable annuity and variable 
life insurance separate accounts of both affiliated and unaffiliated 
insurance companies, Plans, and First Trust and its affiliates.
    2. Section 6(c) of the 1940 Act provides, in part, that the 
Commission, by order upon application, may conditionally or 
unconditionally exempt any person, security, or transaction, or any 
class or classes of persons, securities, or transactions, from any 
provision of the 1940 Act, or 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 1940 
Act.
    3. In connection with the funding of scheduled premium variable 
life insurance contracts issued through a separate account registered 
under the 1940 Act as a unit investment trust, Rule 6e-2(b)(15) 
provides partial exemptions from Sections 9(a), 13(a), 15(a), and 15(b) 
of the 1940 Act. The exemptions granted by Rule 6e-2(b)(15) are 
available, however, only where the management investment company 
underlying the separate account (``underlying fund'') offers its shares 
``exclusively to variable life insurance separate accounts of the life 
insurer or any affiliated life insurance company . . .'' Therefore, the 
relief granted by Rule 6e-2(b)(15) is not available with respect to a 
scheduled premium variable life insurance separate account that owns 
shares of an underlying fund that also offers its shares to a variable 
annuity or flexible premium variable life insurance separate account of 
the same company or of any affiliated life insurance company. The use 
of a common management investment company as the underlying investment 
medium for both variable annuity and variable life insurance separate 
accounts of the same insurance company or of any affiliated life 
insurance company is referred to herein as ``mixed funding.'' In 
addition, the relief granted by Rule 6e-2(b)(15) is not available if 
shares of the underlying management investment company are offered to 
variable annuity or variable life insurance separate accounts of 
unaffiliated life insurance companies. The use of a common management 
investment company as the underlying investment medium for both 
variable annuity and variable life insurance separate accounts of the 
same insurance company or of any unaffiliated life insurance company is 
referred to herein as ``shared funding.''
    4. In connection with the funding of flexible premium variable life 
insurance contracts issued through a separate account, Rule 6e-
3(T)(b)(15) provides partial exemptions from Sections 9(a), 13(a), 
15(a), and 15(b) of the 1940 Act. The exemptions granted by Rule 6e-
3(T)(b)(15) are available, however, only where the separate account's 
underlying fund offers its shares ``exclusively to separate accounts of 
the life insurer, or of any affiliated life insurance company, offering 
either scheduled contracts or flexible contracts, or both; or which 
also offer their shares to variable annuity separate accounts of the 
life insurer or of an affiliated life insurance company, or which offer 
their shares to any such life insurance company in consideration solely 
for advances made by the life insurer in connection with the operation 
of the separate account. . . .'' Therefore, Rule 6e-3(T)(b)(15) permits 
mixed funding with respect to a flexible premium variable life 
insurance separate account. However, Rule 6e-3(T)(b)(15) does not 
permit shared funding because the relief granted by Rule 6e-3(T)(b)(15) 
is not available with respect to a flexible premium variable life 
insurance separate account that owns shares of a management investment 
company that also offers its shares to separate accounts (including 
flexible premium variable life insurance separate accounts) of 
unaffiliated life insurance companies.
    5. Applicants state that the current tax law permits the Fund to 
increase its asset base through the sale of shares to Plans. Section 
817(h) of the Code imposes certain diversification standards on the 
underlying assets of

[[Page 83112]]

the variable contracts. The Code provides that such contracts shall not 
be treated as an annuity contract or life insurance contract for any 
period during which the investments are not adequately diversified in 
accordance with regulations prescribed by the Treasury Department. 
Treasury regulations provide that, to meet the diversification 
requirements, all of the beneficial interests in an investment company 
must be held by the segregated asset accounts of one or more insurance 
companies. The regulations do contain certain exceptions to this 
requirement, however, one of which permits shares of an investment 
company to be held by the trustee of a Plan without adversely affecting 
the ability of shares in the same investment company also to be held by 
the separate accounts of insurance companies in connection with their 
variable contracts (Treas. Reg. 1.8 17-5(f)(3)(iii)).
    6. Applicants state that the promulgation of Rules 6e-2(b)(15) and 
6e-3(T)(b)(15) preceded the issuance of these Treasury regulations 
which made it possible for shares of a portfolio to be held by the 
trustee of a Plan without adversely affecting the ability of shares of 
the Fund to also be held by the separate accounts of insurance 
companies in connection with their variable life insurance contracts. 
Thus, Applicants assert that the sales of shares of a portfolio to 
separate accounts through which variable life insurance contracts are 
issued and Plans 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.
    7. Section 9(a)(3) of the 1940 Act provides that it is unlawful for 
any company to act as investment adviser to, or principal underwriter 
for, any registered open-end investment company if an affiliated person 
of that company is subject to a disqualification enumerated in Sections 
9(a)(1) or (2). Rules 6e-2(b)(15)(i) and (ii), and 6e-3(T)(b)(15)(i) 
and (ii) provide partial exemptions from Section 9(a) under certain 
circumstances, subject to the limitations on mixed and shared funding. 
These exemptions limit the application of eligibility restrictions to 
affiliated individuals or companies that directly participate in the 
management of the underlying management investment company.
    8. Applicants state that the relief provided by Rules 6e-2(b)(15) 
and 6e-3(T)(b)(15) permits the life insurer to serve as the underlying 
fund's investment adviser or principal underwriter, provided that none 
of the insurer's personnel who are ineligible pursuant to Section 9(a) 
are participating in the management or administration of the fund. 
Applicants state that the partial relief from Section 9(a) provided by 
Rules 6e-2(b)(15) and 6e-3(T)(b)(15), in effect, limits the amount of 
monitoring necessary to ensure compliance with Section 9 to that which 
is appropriate in light of the policy and purposes of Section 9. 
Applicants assert that it is not necessary for the protection of 
investors or the purposes fairly intended by the policy and provisions 
of the 1940 Act to apply the provisions of Section 9(a) to the many 
individuals in an insurance company complex, most of whom typically 
will have no involvement in matters pertaining to investment companies 
funding the separate accounts. Applicants assert that it also is 
unnecessary to apply the restrictions of Section 9(a) to the many 
individuals in various unaffiliated insurance companies (or affiliated 
companies of participating insurance companies) that may utilize the 
Funds as a funding medium for variable contracts. Moreover, Applicants 
state that the appropriateness of the relief requested will not be 
affected by the proposed sale of shares of the Fund to Plans, because 
the insulation of the Fund from those individuals who are disqualified 
under the 1940 Act remains in place.
    9. Applicants state that Rules 6e-2(b)(15)(iii) and 6e-3 [T] 
(b)(15) iii under the 1940 Act provide exemptions from the pass-through 
voting requirements with respect to several significant matters, 
assuming the limitations on mixed and shared funding are observed.
    10. Applicants further represent that the sale of portfolio shares 
to Plans should not affect the relief requested. With respect to Plans, 
there is no requirement to pass-through voting rights to Plan 
participants. Shares of the portfolios sold to Plans would be held by 
the trustees of such Plans as mandated by Section 403(a) of ERISA. 
Section 403(a) also provides that the trustees must have exclusive 
authority and discretion to manage and control the Plan with two 
exceptions: (a) When the Plan expressly provides that the trustees are 
subject to the direction of a named fiduciary who is not a trustee, in 
which case the trustees are subject to proper directions made in 
accordance with the terms of the Plan and not contrary to ERISA; and 
(b) when the authority to manage, acquire or dispose of assets of the 
Plan is delegated to one or more investment managers pursuant to 
Section 402(c)(3) of ERISA. Unless one of the two exceptions stated in 
Section 403(a) applies, the Plan trustees have exclusive authority and 
responsibility for voting proxies.
    11. Applicants state that where a named fiduciary appoints an 
investment manager, the investment manager has the responsibility to 
vote the shares held unless the right to vote such shares is reserved 
to the trustees or the named fiduciary. Accordingly, applicants submit 
that unlike the case with insurance company separate accounts, the 
issue of the resolution of material irreconcilable conflicts with 
respect to voting is not present with respect to Plans since such Plans 
are not entitled to pass-through voting privileges.
    12. Applicants generally expect many Plans to have their trustee(s) 
or other fiduciaries exercise voting rights attributable to investment 
securities held by the Plan in their discretion. Some of the Plans, 
however, may provide for the trustee(s), or investment adviser(s) or 
another named fiduciary to exercise voting rights in accordance with 
instructions from participants. Applicants submit that where a Plan 
does not provide participants with the right to give voting 
instructions, there is no potential for material irreconcilable 
conflicts of interest between or among contract owners and Plan 
investors with respect to voting of the Fund's shares. Applicants 
further submit that where a Plan does provide participants with the 
right to give voting instruction, they see no reason to believe that 
participants in Plans generally, or those in a particular Plan, either 
as a single group or in combination with participants in other Plans, 
would vote in a manner that would disadvantage contract owners. The 
purchase of shares of the Fund by Plans that provide voting rights does 
not present any complications not otherwise occasioned by mixed and 
shared funding.
    13. Applicants submit that even if a Plan were to hold a 
controlling interest in the Fund, such control would not disadvantage 
other investors in the Fund 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 Fund by a 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 of state regulators.
    14. Applicants state that no increased conflicts of interest would 
be presented by the granting of the requested relief. Applicants assert 
that shared funding does not present any issues that do not already 
exist where a single insurance

[[Page 83113]]

company is licensed to do business in several states. Applicants note 
that where different Participating Insurance Companies are domiciled in 
different states, it is possible that the state insurance regulatory 
body in a state in which one Participating Insurance company is 
domiciled could require action that is inconsistent with the 
requirements of other insurance regulators in one or more other states 
in which other Participating Insurance Companies are domiciled. 
Applicants submit that this possibility is no different or greater than 
exists where a single insurer and its affiliates offer their insurance 
products in several states.
    15. Applicants further submit that affiliation does not reduce the 
potential for differences in state regulatory requirements. In any 
event, the conditions discussed below are designed to safeguard against 
any adverse effects that these differences may produce. If a particular 
state insurance regulator's decision conflicts with the majority of 
other state regulators, the affected insurer may be required to 
withdraw its Participating Separate Account's investment in the Fund.
    16. Applicants also argue that affiliation does not eliminate the 
potential, if any exists, for divergent judgments as to when a 
Participating Insurance Company could disregard contract owner voting 
instructions. Potential disagreement is limited by the requirement that 
disregarding voting instructions be both reasonable and based on 
specified good faith determinations. However, if a Participating 
Insurance Company's decision to disregard Contract owner voting 
instructions represents a minority position or would preclude a 
majority vote approving a particular change, such Participating 
Insurance Company may be required, at the election of the Fund, to 
withdraw its separate account, investment in the Fund. No change or 
penalty will be imposed as a result of such a withdrawal.
    17. Applicants submit that there is no reason why the investment 
policies of the Fund with mixed funding would, or should, be materially 
different from what those policies would, or should, be if the Fund 
supported only variable annuity or only variable life insurance 
contracts. Hence, Applicants state, there is no reason to believe that 
conflicts of interest would result from mixed funding. Moreover, 
Applicants represent that the Fund will not be managed to favor or 
disfavor any particular insurer or type of contract.
    18. As noted above, Section 817(h) of the Code imposes certain 
diversification standards on the assets underlying the variable 
contracts held in the portfolios of management investment companies. 
Treasury Regulation Section 1.817-5(f)(3)(iii), which establishes 
diversification requirements for such portfolios, specifically permits, 
among other things, ``qualified pension or retirement plans'' and 
separate accounts to share the same underlying management investment 
company. Therefore, Applicants assert that neither the Code, the 
Treasury regulations, nor the revenue rulings thereunder, recognize or 
proscribe any inherent conflicts of interest if qualified plans, 
variable annuity separate accounts, and variable life separate accounts 
all invest in the same management investment company.
    19. Applicants note that while there are differences in the manner 
in which distributions from variable contracts and 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 Plan cannot net purchase payments to make the distributions, the 
Participating Separate Account or Plan will redeem shares of the Fund 
at their net asset value in conformity with Rule 22c-1 under the 1940 
Act to provide proceeds to meet distribution needs. The 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.
    20. Applicants state that the sale of shares to Plans should not 
increase the potential for material irreconcilable conflicts of 
interest between or among different types of investors. Applicants 
submit that there should be very little potential for such conflicts 
beyond that which would otherwise exist between variable annuity and 
variable life insurance contract owners.
    21. Applicants also state that it is possible to provide an 
equitable means of giving voting rights to separate account contract 
owners and to Plans. The transfer agent for the Trusts will inform each 
Participating Insurance company of each Participating Separate 
Account's share ownership in the Trusts, as well as inform the trustees 
of 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 Trusts. 
Shares held by Plans will be voted in accordance with applicable law. 
The voting rights provided to Plans with respect to shares of the 
Trusts would be no different from the voting rights that are provided 
to Plans with respect to shares of funds sold to the general public.
    22. Applicants submit that the ability of the Trusts to sell its 
shares directly to Plans does not create a ``senior security,'' as such 
term is defined under Section 12(g) of the 1940 Act, with respect to 
any contract owner as opposed to a Plans participant. Regardless of the 
rights and benefits of Plan participants or contract owners, the Plans 
and the separate accounts only have rights with respect to their 
respective shares of the Trusts. No shareholder of the Trusts has any 
preference over any other shareholder with respect to distribution of 
assets or payments of dividends.
    23. Applicants state that there are no conflicts between the 
contract owners of Participating Separate Accounts and Plan 
participants with respect to the state insurance commissioners' veto 
powers over investment objectives. The basic premise of shareholder 
voting is that shareholders may not all agree with a particular 
proposal. While interests and opinions of shareholders may differ, 
however, this does not mean that there are any inherent conflicts of 
interest between or among such shareholders. State insurance 
commissioners have been given the veto power in recognition of the fact 
that insurance companies usually cannot simply redeem their separate 
accounts out of one fund and invest in another. Generally, complex and 
time-consuming transactions must be undertaken to accomplish such 
redemptions and transfers. Conversely, trustees of Plans can make the 
decision quickly and redeem their shares of the Trusts 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 a suitable investment. Based on the foregoing, applicants 
represent that even should the interests of contract owners and the 
interests of Plans conflict, the conflicts can be resolved almost 
immediately because the trustees of the Plans can, independently, 
redeem shares out of the Trusts.
    24. Applicants also assert that there does not appear to be any 
greater potential for material irreconcilable conflicts arising between 
the interests of Plan participants and contract owners of Participating 
Insurance Companies from possible future changes in the federal tax 
laws than that which already exists

[[Page 83114]]

between variable annuity and variable life insurance contract owners.
    25. Applicants believe that the summary of the discussion contained 
herein demonstrates that the sale of shares of the Trusts to qualified 
plans and variable contracts does not increase the risk of material 
irreconcilable conflicts of interest. Furthermore, Applicants state 
that the use of the Trusts with respect to Plans is not substantially 
different from the Trusts' current use, in that Plans, like variable 
contracts, are generally long-term retirement vehicles. In addition, 
applicants assert that regardless of the type of shareholder in the 
Trusts, First Trust is or would be contractually or otherwise obligated 
to manage the Trusts solely and exclusively in accordance with the 
portfolio's investment objectives, policies and restrictions as well as 
any guidelines established by a portfolio's Board of Trustees.
    26. Applicants assert that various factors have prevented more 
insurance companies from offering variable annuity and variable life 
insurance contracts than currently do so. These factors include the 
costs of organizing and operating a funding medium, the lack of 
expertise with respect to investment management, and the lack of public 
name recognition as investment professionals. In particular, some 
smaller life insurance companies may not find it economically feasible, 
or within their investment or administrative expertise, to enter the 
variable contract business on their own. Applicants assert that use of 
the Trusts as a common investment medium for variable contracts would 
ameliorate these concerns. Participating Insurance Companies would 
benefit not only from the investment advisory and administrative 
expertise of First Trust and its affiliates, but also from the cost 
efficiencies and investment flexibility afforded by a large pool of 
funds. Applicants submit that therefore, making the Trusts available 
for mixed and shared funding will encourage more insurance companies to 
offer variable contracts. Applicants claim that this should result in 
increased competition with respect to both variable contract design and 
pricing, which can be expected to result in more product variation and 
lower charges. Moreover, the sale of the shares of the portfolios to 
Plans should further increase the amount of assets available for 
investment by the fund. This in turn, should inure to the benefit of 
contract owners by promoting economies of scale, by permitting greater 
safety through greater diversification, and by making the addition of 
new portfolios more feasible.
    27. Applicants assert that there is no significant legal impediment 
to permitting mixed and shared funding and sales of shares to Plans.

Applicant's conditions

    Applicant consents to the following conditions if the application 
is granted:
    1. A majority of the Board of Trustees or Board of Directors 
(``Board'') of each Trust will consist of persons who are not 
``interested persons'' of such 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, disqualification, or bona fide 
resignation of any trustee or director, then the operation of this 
condition shall be suspended: (a) For a period of 45 days if the 
vacancy or vacancies may be filled by the Board; (b) for a period of 60 
days if a vote of shareholders is required to fill the vacancy or 
vacancies; or (c) for such longer period as the Commission may 
prescribe by rule or order upon application.
    2. Each Board will monitor its respective Trust for the existence 
of any material irreconcilable conflict among the interests of the 
contract owners of all separate accounts, participants of all Plans, 
and First Trust or any of its affiliates 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 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 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 
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 voting instructions of Plan 
participants.
    3. Participating Insurance Companies, First Trust or an affiliate, 
and any Plan that executes a participation agreement upon becoming an 
owner of 10% or more of the assets of any portfolio (collectively, 
``Participants'') will report any potential or existing conflicts to 
the relevant Board. Participants will be responsible for assisting the 
relevant Board in carrying out the Board's responsibilities under these 
conditions by providing the Board with 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 relevant Board whenever contract owner voting 
instructions are disregarded, and, if pass-through voting is 
applicable, an obligation of each Plan to inform the Board whenever it 
has determined to disregard Plan participant voting instructions. The 
responsibility to report such information and conflicts, and to assist 
the Board, will be a contractual obligation of all Participating 
Insurance Companies under their participation agreements with the 
Trusts, and these responsibilities will be carried out with a view only 
to the interests of the contract owners. The responsibility to report 
such information and conflicts, and to assist the Board, also will be 
contractual obligations of all Plans with participation agreements, and 
such agreements shall provide that these responsibilities will be 
carried out with a view only to the interests of Plan participants.
    4. If it is determined by a majority of the Board, or a majority of 
its disinterested trustees or directors of such Board, that a material 
irreconcilable conflict exists, then the Participant will, at its own 
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 and including: (a) withdrawing the assets allocable to 
some or all of the separate accounts from the relevant portfolio and 
reinvesting such assets in a different investment, including another 
portfolio of the Trusts, or in the case of insurance company 
participants submitting the question as to whether such segregation 
should be implemented to a vote of all affected contract owners and, as 
appropriate, segregating the assets of any appropriate group (i.e., 
annuity contract owners or life insurance contract owners of one or 
more Participating Insurance Companies) that votes in favor of such 
segregation, or offering to the affected contract owners the option of 
making such a change; and (b) establishing a new registered management 
investment company or managed separate account. If a material 
irreconcilable conflict arises because of a decision by a Participating 
Insurance

[[Page 83115]]

Company to disregard contract owner voting instructions, and that 
decision represents a minority position or would preclude a majority 
vote, then the insurer may be required, at the election of the relevant 
Trust, to withdraw such insurer's separate account's investment in the 
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 
election of the relevant Trust, 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 to take remedial action in the event of a Board 
determination of a material irreconcilable conflict and bear the cost 
of such remedial action shall be a contractual obligation of all 
Participating Insurance Companies and Plans under their agreements 
governing participation in the Fund and these responsibilities will be 
carried out with a view only to the interests of the contract owners 
and Plan participants, as appropriate.
    For purposes of Condition 4, a majority of the disinterested 
members of a Board will determine whether or not any proposed action 
adequately remedies any material irreconcilable conflict, but, in no 
event will any Trust, First Trust, or First Trust's affiliates, as 
relevant, be required to establish a new funding medium for any 
variable contract. No Participating Insurance Company will be required 
by Condition 4 to establish a new funding medium for any variable 
contract if an offer to do so has been declined by a vote of the 
majority of contract owners materially and adversely affected by the 
material irreconcilable conflict. Further, no Plan will be required by 
Condition 4 to establish a new funding medium for such Plan if: (a) A 
majority of the Plan participants materially and adversely affected by 
the irreconcilable material conflict vote to decline such offer or (b) 
pursuant to documents governing the Plan and applicable law, the Plan 
makes such decision without a Plan participant vote.
    5. Participants will be informed promptly in writing of the Board's 
determination of the existence of a material irreconcilable conflict 
and its implications.
    6. Participating Insurance Companies will be required to provide 
pass-through voting privileges to all contract owners so long as the 
Commission interprets the 1940 Act to require pass-through voting 
privileges for contract owners. Accordingly, the Participating 
Insurance Companies will vote shares of the applicable portfolios held 
in their separate accounts in a manner consistent with voting 
instructions timely received from contract owners. Participating 
Insurance Companies shall be responsible for assuring that each of 
their 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 separate accounts investing in the portfolio will be a 
contractual obligation of all participating Insurance Companies under 
the agreements governing participation in a portfolio. Each 
Participating Insurance Company will be required to vote shares for 
which it has not received voting instructions as well as shares 
attributable to it in the same proportion as it votes shares for which 
it has received instructions. Each Plan will vote as required by 
applicable law and governing Plan documents.
    7. As long as the 1940 Act requires pass-through voting privileges 
to be provided to variable contract owners, First Trust or any of its 
affiliates will vote its shares of any portfolio in the same proportion 
of all variable contract owners having voting rights with respect to 
the portfolio; provided, however, that First Trust or any of its 
affiliates shall vote its shares in such other manner as may be 
required by the Commission or its staff.
    8. Each Trust will comply with all provisions of the 1940 Act 
requiring voting by shareholders (which, for these purposes, shall be 
the persons having a voting interest in the shares of the respective 
portfolio). In particular, each Trust will either provide for annual 
meetings (except to the extent that the Commission may interpret 
Section 16 of the 1940 Act not to require such meetings) or comply with 
Section 16(c) of the 1940 Act (although the Trusts are not one of the 
trusts described in Section 16(c) of the Act), as well as with Section 
16(a) and, if and when applicable, Section 16(b) of the 1940 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 trustees and with whatever rules the Commission 
may promulgate with respect thereto.
    9. The Trusts will notify all Participants that separate account 
prospectuses or Plan prospectuses or other Plan document disclosure 
regarding potential risks of mixed and shared funding may be 
appropriate. Each Trust will disclose in its prospectus that: (a) 
Shares of such Trust may be offered to insurance company separate 
accounts of both annuity and life insurance contracts and, if 
applicable, to Plans; (b) due to differences in tax treatment and other 
considerations, the interests of various contract owners participating 
in each Trust and the interest of Plans investing in each Trust, if 
applicable, may conflict; and (c) the Board will monitor events in 
order to identify the existence of any material conflicts and determine 
what action, if any, should be taken in response to any such conflict.
    10. If and to the extent Rule 6e-2 and Rule 6e-3(T) under the 1940 
Act are amended, or proposed Rule 6e-3 under the 1940 Act is adopted, 
to provide exemptive relief from any provision of the 1940 Act, or the 
rules promulgated 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 Trust and/or 
Participating Insurance Companies as appropriate, shall take steps as 
may be necessary to comply with Rules 6e-2 or 6e-3(T), as amended, or 
Rule 6e-3, as adopted, as such rules are applicable.
    11. The Participants, at least annually, will submit to the Board 
of each Trust such reports, materials or data as the Board reasonably 
may request so that the trustees of the Board may fully carry out the 
obligations imposed upon a Board by the conditions contained in this 
Application. Such reports, materials and data will be submitted more 
frequently if deemed appropriate by a Board. The obligations of the 
Participants to provide these reports, materials, and data to the 
Board, when it so reasonably requests, will be a contractual obligation 
of all Participants under their agreements governing participation in 
the portfolios.
    12. All reports of potential or existing conflicts of interest 
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 relevant Board or other 
appropriate records, and such minutes or other records shall be made 
available to the Commission upon request.
    13. The Trust will not accept a purchase order from a Plan if such 
purchase would make the Plan participant shareholder an owner of 10% or 
more of the assets of such

[[Page 83116]]

portfolio unless such Plan executes an agreement with the relevant 
Trust governing participation in such portfolio that includes the 
conditions set forth to the extent applicable. A Plan or Plan 
participant will execute an application containing an acknowledgment of 
this condition at the time of its initial purchase of shares of any 
portfolio.
    14. Any shares of a portfolio purchased by First Trust or its 
affiliates will be automatically redeemed if and when First Trust's 
advisory agreement terminates, to the extent required by applicable 
Treasury regulations. Neither First Trust nor its affiliates will sell 
such shares of the portfolios to the public.

Conclusion

    For the reasons stated above, Applicants believe that the requested 
exemptions, in accordance with the standards of Section 6(c) of the 
1940 Act, are appropriate in the public interest and consistent with 
the protection of investors and the purposes fairly intended by the 
policy and provisions of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-33262 Filed 12-28-00 8:45 am]
BILLING CODE 8010-01-M