[Federal Register Volume 66, Number 152 (Tuesday, August 7, 2001)]
[Notices]
[Pages 41274-41281]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19699]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25096; File No. 812-12206]


Nations Separate Account Trust, et al.

July 31, 2001.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order under section 6(c) of the 
Investment Company Act of 1940 (the ``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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Summary of Application

    Applicants seek an order to permit shares of Nations Separate 
Account Trust (the ``Trust'') \1\ and shares of any other investment 
company or portfolio that is designed to fund insurance products and 
for which Banc of America Advisors, LLC (``BA Advisors'') or any of its 
affiliates may serve in the future as investment adviser, manager, 
principal underwriter, sponsor, or administrator (``Future Trusts'') 
(the Trust together with Future Trusts are the ``Trusts'') to be sold 
to and held by: (a) Separate accounts funding variable annuity and 
variable life insurance contracts (collectively referred to herein as 
``Variable Contracts'') issued by both affiliated and unaffiliated life 
insurance companies; (b) qualified pension and retirement plans 
(``Qualified Plans'') outside of the separate account context; (c) 
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; (d) BA Advisors or its affiliates (collectively, 
``BA Advisors''); and (e) the general account of any life insurance 
company, or certain related corporations, whose separate accounts hold, 
or will hold,

[[Page 41275]]

shares of the Trusts (``General Accounts'').
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    \1\ Prior to May 1, 2001, the Trust was known as Nations Annuity 
Trust.
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    Applicants: The Trust and Banc of America Advisors, LLC.
    Filing Date: The application was filed on August 4, 2000 and 
amended on July 30, 2001.
    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 Commission's Secretary and serving Applicants with a copy of the 
request, in person or by mail. Hearing requests must be received by the 
SEC by 5:30 p.m. on August 23, 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 
the writer's interest, the reason for the request, and the issues 
contested. Persons may request notification of the date of a hearing by 
writing to the Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549-0609. Applicants, c/o Robert B. Carroll, Esq., Bank of America 
Corporation, One Bank of America Plaza NC1-002-33-31, 101 South Tryon 
Street, Charlotte, North Carolina 28255.

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

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained 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 registered with the Commission as an open-end 
management investment company and is organized as a Delaware business 
trust. BA Advisors is registered with the Commission as an investment 
adviser under the Investment Advisers Act of 1940, as amended, and 
serves as the investment adviser to the Trust. The Trust currently 
consists of eleven investment portfolios: Nations Value Portfolio, 
Nations Marsico 21st Century Portfolio, Nations Marsico Focused 
Equities Portfolio, Nations Marsico Growth & Income Portfolio, Nations 
Marsico International Opportunities Portfolio, Nations Capital Growth 
Portfolio, Nations Small Company Portfolio, Nations Asset Allocation 
Portfolio, Nations International Value Portfolio, Nations High Yield 
Bond Portfolio and Nations MidCap Growth Portfolio (each, a 
``Portfolio,'' and collectively the ``Portfolios''). The Trust or any 
Future Trusts may offer one or more additional investment portfolios in 
the future (also referred to as ``Portfolios'').
    2. Currently shares of the Portfolios are offered to separate 
accounts funding variable annuity contracts issued by The Hartford Life 
Insurance Company. Shares of the Portfolios will be offered to separate 
accounts of affiliated and unaffiliated insurance companies (each, a 
``Participating Insurance Company'') to serve as investment vehicles to 
fund Variable Contracts. These accounts either will be registered as 
investment companies under the 1940 Act or will be exempt from such 
registration (``Separate Account(s)''). Shares of the Portfolios will 
also be offered to Qualified Plans.
    3. The Participating Insurance Companies at the time of their 
investment in the Trusts either have or will establish their own 
Separate Accounts and design their own Variable Contracts. Each 
Participating Insurance Company has or will have the legal obligation 
of satisfying all applicable requirements under both state and federal 
law. Each participating Insurance Company, on behalf of its Separate 
Accounts, has or will enter into an agreement with the Trusts 
concerning such Participating Insurance Company's participation in the 
Portfolios. The role of the Trusts under this agreement, insofar as the 
federal securities laws are applicable, will consist of, among other 
things, offering shares of the Portfolios to the participating Separate 
Accounts and complying with any conditions that the Commission may 
impose upon granting the order requested herein.
    4. To the extent permitted by the Treasury Department Regulations 
(Treas. Reg. 1.817-5(f)(3)(i), (ii)), shares of each Portfolio may be 
sold to General Accounts and BA Advisors. The Regulations permit such 
sales as long as the return on shares held by the General Accounts or 
BA Advisors is computed in the same manner as for shares held by a 
Separate Account, and the General Accounts or BA Advisors do not intend 
to sell shares of the Portfolio held by it to the public. An additional 
restriction is imposed by the Regulations on sales to advisers, who may 
hold shares only in connection with the creation or management of the 
Portfolio. Applicants anticipate that sales in reliance on these 
provisions of the Regulations generally will be made to BA Advisors and 
generally for purposes of providing necessary capital required by 
section 14(a) of the 1940 Act. Any shares of a Portfolio purchased by 
BA Advisors will be automatically redeemed if and when BA Advisors' 
advisory agreement terminates, to the extent required by applicable 
Treasury Regulations.

Applicants' Legal Analysis

    1. In connection with the funding of scheduled premium variable 
life insurance contracts issued through a separate account registered 
as a unit investment trust (``UIT'') under the 1940 Act 6e-2(b)(15) 
provides partial exemptions from sections 9(a), 13(a), 15(a) and 15(b) 
of the 1940 Act. Rule 6e-2(b)(15) provides these exemptions only where 
all of the assets of the UIT are shares of management investment 
companies ``which offer their shares exclusively to variable life 
insurance separate accounts of the life insurer or of any affiliated 
life insurance company.'' Therefore, the relief granted by Rule 6e-
2(b)(15) is not available with respect to a scheduled premium variable 
life insurance separate account that owns shares of an underlying fund 
that also offers its shares to a variable annuity separate account or 
flexible premium variable life insurance separate account of the same 
company or any other affiliated insurance company. The use of a common 
management investment company as the underlying investment vehicle 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 as ``mixed funding.''
    2. The relief granted by Rule 6e-2(b)(15) also 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 management 
investment company as the underlying investment vehicle for variable 
annuity and/or variable life insurance separate accounts of 
unaffiliated life insurance companies is referred to as ``shared 
funding.''
    3. Because the relief under Rule 6e-2(b)(15) is available only 
where shares are offered exclusively to variable life insurance 
separate accounts of a life insurer or any affiliated life insurance 
company, additional exemptive relief is necessary if the shares of the 
Portfolios are also to be sold to Qualified Plans or other eligible 
holders of shares, as described above. The use of a common management 
investment company as the underlying investment vehicle for

[[Page 41276]]

variable annuity and variable life separate of affiliated and 
unaffiliated insurance companies, and for Qualified Plans, is referred 
to as ``extended mixed and shared funding.''
    4. In connection with flexible premium variable life insurance 
contracts issued through a separate account registered under the 1940 
Act as a UIT, Rule 6e-3(T)(b)(15) provides partial exemptions from 
sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act. The exemptions 
granted by Rule 6e-3(T)(b)(15) are available only where all the assets 
of the separate account consist of the shares of one or more registered 
management investment companies which offer to sell their shares 
``exclusively to separate accounts of the life insurer, or of any 
affiliated life insurance companies, offering either scheduled 
contracts or flexible contracts, or both; or which also offer their 
shares to variable annuity separate accounts of the life insurer or of 
an affiliated life insurance company.'' Therefore, Rule 6e-3(T)(b)(15) 
permits mixed funding but does not permit shared funding.
    5. The relief under Rule 6e-3(T) is available only where shares are 
offered exclusively to variable life insurance separate accounts of a 
life insurer or any affiliated life insurance companies. Additional 
exemptive relief is necessary if the shares of the Portfolios are also 
to be sold to Qualified Plans or other eligible holders of shares, as 
described above.
    6. Applicants maintain that there is no policy reason for the sale 
of the Portfolios' shares to Qualified Plans to result in a prohibition 
against, or otherwise limit a Participating Insurance Company from 
relying on the relief provided by Rules 6e-2(b)(15) and 6e-3(T)(b)(15). 
However, because the relief under Rules 6e-2(b)(15) and 6e-3T(b)(15) is 
available only when shares are offered exclusively to separate 
accounts, additional exemptive relief may be necessary if the shares of 
the Portfolios are also to be sold to Qualified Plans, BA Advisors or 
General Accounts. Applicants note that if the Portfolios' shares were 
to be sold only to Qualified Plans, BA Advisors, General Accounts and/
or separate accounts funding variable annuity contracts, exemptive 
relief under Rule 6e-2 and Rule 6e-3(T) would be unnecessary. The 
relief provided for under Rule 6e-2(b)(15) and 6e-3(T)(b)(15) does not 
relate to Qualified Plans, BA Advisors, or General Accounts, or to a 
registered investment company's ability to sell its shares to such 
purchasers.
    7. Applicants note that the promulgation of Rules 6e-2(b)(15) and 
6e-3(T)(b)(15) preceded the issuance of the Regulations that made it 
possible for shares of an investment company portfolio to be held by 
the trustee of a Qualified Plan without adversely affecting the ability 
of shares in the same investment company portfolio also to be held by 
the separate accounts of insurance companies in connection with their 
Variable Contracts. Thus, the sale of shares of the same portfolio to 
both separate accounts and Qualified Plans was not contemplated at the 
time of the adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15).
    8. 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, the Applicants request relief for the class 
consisting of insurers and Separate Accounts that will invest in the 
Portfolios and to the extend necessary, Qualified Plans, other eligible 
holders of shares and investment advisers, principal underwriters and 
depositors of such accounts.
    9. Section 9(a)(3) of the 1940 Act provides that it is unlawful for 
any company to serve as investment adviser or principal underwriter of 
any registered open-end investment company if an affiliated person of 
that company is subject to a disqualification enumerated in sections 
9(a) (1) or (2). Rules 6e-2(b)(15) (i) and (ii) and Rules 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 management of the underlying 
management company.
    10. Applicants submit 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, 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. Those 
1940 Act 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 individuals 
in a large insurance company complex, most of whom will have no 
involvement in matters pertaining to investment companies in that 
organization. The Participating Insurance Companies and Qualified Plans 
are not expected to play any role in the management of the Trusts. 
Those individuals who participate in the management of the Trusts will 
remain the same regardless of which Separate Accounts or Qualified 
Plans invests in the Trusts. Applying the monitoring requirements of 
section 9(a) of the 1940 Act because of investment by separate accounts 
of other insurers or Qualified Plans would be unjustified and would not 
serve any regulatory purpose. Furthermore, the increased monitoring 
costs could reduce the net rates of return realized by contract owners.
    11. Applicants state that since Qualified Plans, BA Advisors and 
General Accounts, unlike the Separate Accounts, are not themselves 
investment companies and, therefore, are not subject to section 9 of 
the 1940 Act and will not be deemed affiliates solely by virtue of 
their shareholdings, no additional relief is necessary.
    12. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) under the 1940 
Act provide exemptions from the pass-through voting requirement with 
respect to several significant matters assuming the limitations on 
mixed and shared funding are observed. Rules 6e-2(b)(15)(iii)(A) and 
6e-3(T)(b)(15)(iii)(A) provide that the insurance company may disregard 
the voting instructions of its contract owners with respect to the 
investments of an underlying fund, or any contract between such a fund 
and its investment adviser, when required to do so by an insurance 
regulatory authority (subject to the provisions of paragraphs (b)(5)(i) 
and (b)(7)(ii)(A) of Rules 6e-2 and 6e-3(T), respectively, under the 
1940 Act). Rules 6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2) 
provide that the insurance company may disregard the voting 
instructions of its contract owners if the contract owners initiate any 
change in an underlying fund's investment policies, principal 
underwriter, or any investment adviser (provided that disregarding such 
voting instructions is reasonable and subject to the other provisions 
of paragraphs (b)(5)(ii), (b)(7)(ii)(B), and (b)(7)(ii)(C), 
respectively, of Rules 6e-2 and 6e-3(T) under the 1940 Act).
    13. Applicants assert that Rule 6e-2 under the 1940 Act recognizes 
that a variable life insurance contract, as an insurance contract, has 
important elements unique to insurance contracts and is subject to 
extensive state regulation of insurance. In adopting Rule 6e-
2(b)(15)(iii), 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,

[[Page 41277]]

investment advisers, or principal underwriters. 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. 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. In this respect, flexible premium variable life insurance 
contracts are identical to scheduled premium variable life insurance 
contracts. Therefore, the corresponding provisions of Rule 6e-3(T) 
under the 1940 Act undoubtedly were adopted in recognition of the same 
factors.
    14. Applicants state that with respect to the Qualified Plans, 
which are not registered as investment companies under the 1940 Act, 
there is no requirement to pass through voting rights to Qualified Plan 
participants. Indeed, to the contrary, applicable law expressly 
reserves voting rights associated with Qualified Plan assets to certain 
specified persons. Under Section 403(a) of ERISA, shares of a portfolio 
of a fund sold to a Qualified Plan must be held by the trustees of the 
Qualified Plan. Section 403(a) also provides that the trustee(s) must 
have exclusive authority and discretion to manage and control the 
Qualified Plan with two exceptions: (a) when the Qualified Plan 
expressly provides that the trustee(s) are subject to the direction of 
a named fiduciary who is not a trustee, in which case the trustees are 
subject to proper directions made in accordance with the terms of the 
Qualified Plan and not contrary to ERISA, and (b) when the authority to 
manage, acquire, or dispose of assets of the Qualified 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, Qualified Plan trustees have the exclusive 
authority and responsibility for voting proxies. Similarly, BA Advisors 
and General Accounts are not subject to any pass-through voting 
requirements. Accordingly, unlike the case with insurance company 
separate accounts, the issue of resolution of material irreconcilable 
conflicts with respect to voting is not present with Qualified Plans, 
BA Advisors or General Accounts.
    15. Where a named fiduciary to a Qualified Plan appoints an 
investment manager, the investment manager has the responsibility to 
vote the shared held unless the right to vote such shares is reserved 
to the trustees or the named fiduciary. 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. Some of the Qualified Plans, however, may provide for 
the trustee(s), an investment adviser (or advisers), or another named 
fiduciary to exercise voting rights in accordance with instructions 
from participants.
    16. Where a Qualified Plan does not provide participants with the 
right to give voting instructions, the trustee or named fiduciary has 
responsibility to vote the shares held by the Qualified Plan. In this 
circumstance, the trustee has a fiduciary duty to vote the shares in 
the best interest of the Qualified Plan participants. Accordingly, even 
if BA Advisors were to serve in the capacity of trustee or named 
fiduciary with voting responsibilities, BA Advisors would have a 
fiduciary duty to vote those shares in the best interest of the 
Qualified Plan participants.
    17. In addition, even if a Qualified Plan were to hold a 
controlling interest in a Portfolio, Applications do not believe that 
such control would disadvantage other investors in such Portfolio to 
any greater extent that 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 a Portfolio by a Qualified Plan will not create any of the voting 
complications occasioned by mixed funding or shared funding. Unlike 
mixed funding or shared funding, Qualified Plan investor voting rights 
cannot be frustrated by veto rights of insurers or state regulators.
    18. Where a Qualified Plan provides participants with the right to 
give voting instructions, Applicants see no reason to believe that 
participants in Qualified Plans generally or those in a particular 
Qualified 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 holders. The purchase of shares 
Portfolios by Qualified Plans that provide voting rights does not 
present any complications not otherwise occasioned by mixed or shared 
funding.
    19. Applicants submit that the prohibitions on mixed and shared 
funding might reflect concern regarding possible different investment 
motivations among investors. When Rule 6e-2 under the 1940 Act was 
adopted, variable annuity separate accounts could invest in mutual 
funds whose shares also were offered to the general public. Therefore, 
the Commission staff contemplated underlying funds with public 
shareholders, as well as with variable life insurance separate account 
shareholders. The Commission staff may have been concerned with the 
potentially different investment motivations of public shareholders and 
variable life insurance contract owners. There also may have been some 
concern with respect to the problems of permitting a state insurance 
regulatory authority to affect the operations of a publicly available 
mutual fund to affect the investment decisions of public shareholders.
    20. For reasons unrelated to the 1940 Act, however, Internal 
Revenue Service Revenue Rule 81-225 (Sep. 25, 1981) effectively 
deprived variable annuities funded by publicly available mutual funds 
of their tax-benefited status. The Tax Reform Act of 1984 codified the 
prohibition against the use of publicly available mutual funds as an 
investment vehicle for Variable Contracts (including variable life 
contracts). Section 817(h) of the Code in effect requires that the 
investment made by variable annuity and variable life insurance 
separate accounts by ``adequately diversified.'' If a separate account 
is organized as a UIT that invests in a single fund or series, the 
diversification test will be applied at the underlying fund level, 
rather than at the separate account level, but only if ``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. Accordingly, a UIT separate account 
that invests solely in a publicly available mutual fund will not be 
adequately diversified. In addition, any underlying mutual fund, 
including any Portfolio, that sells shares to separate accounts, in 
effect, would be precluded from also selling its shares to the public. 
Consequently, there will be no public shareholders of any Portfolio.
    21. Applicants assert 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. 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. The fact that 
different insurers may be domiciled in

[[Page 41278]]

different states does not create a significantly different or enlarged 
problem.
    22. Applicants argue that shared funding by unaffiliated insurers, 
in this respect, is no different than the use of the same investment 
company as the funding vehicle for affiliated insurers, which Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act permit. Affiliated 
insurers may be domiciled in different states and be subject to 
differing state law requirements. Affiliation does not reduce the 
potential, if any exists, for differences in state regulatory 
requirements. In any event, the conditions set forth below are designed 
to safeguard against, and provide procedure for resolving, any adverse 
effects that differences among state regulatory requirements may 
produce. If a particular state insurance regulator's decision conflicts 
with the majority of other state regulators, then the affected insurer 
will be required to withdraw its Separate Account's investment in the 
affected Trust. This requirement will be provided for in agreements 
that will be entered into by Participating Insurance Companies with 
respect to their participation in the relevant Portfolio.
    23. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act give 
the insurance company the right to disregard the voting instructions of 
the contract owners. Applicants submit that this right does not raise 
any issues different from those raised by the authority of state 
insurance administrators over separate accounts. Under Rules 6e-
2(b)(15) and 6e-3(T)(b)(15), an insurer can disregard contract owner 
voting instructions only with respect to certain specified items. 
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. The potential for disagreement is limited 
by the requirements in Rules 6e-2 and 6e-3(T) under the 1940 Act that 
the insurance company's disregard of voting instructions be reasonable 
and based on specific good-faith determinations. However, if the 
insurer's judgment represents a minority position or would preclude a 
majority vote, then the insurer may be required, at the affected 
Trust's election, to withdraw its Separate Account's investment in such 
Portfolio. No charge or penalty will be imposed as a result of such 
withdrawal. This requirement will be provided for in the agreement 
entered into with respect to participation by the Participating 
Insurance Companies in each Portfolio.
    24. Applicants represent that each Portfolio will be managed to 
attempt to achieve the investment objective or objective of such 
Portfolio, and not to favor or disfavor any particular Participating 
Insurance Company or type of insurance product. There is no reason to 
believe that different features of various types of contract, including 
the ``minimum death benefit'' guarantee under certain variable life 
insurance contracts, will lead to different investment policies for 
different types of Variable Contracts. To the extent that the degree of 
risk may differ as between variable annuity contracts and variable life 
insurance policies, the differing insurance charges imposed, in effect, 
adjust any such differences and equalize the insurers' exposure in 
either case.
    25. Applicants do not believe that the sale of the shares of the 
Portfolios to Qualified Plans will increase the potential for material 
irreconcilable conflicts of interest between or among different types 
of investors. In particular, Applicants see very little potential for 
such conflicts beyond those that would otherwise exist between variable 
annuity and variable life insurance contract owners. Moreover, in 
considering the appropriateness of the requested relief, Applicants 
state that they have analyzed the following issues to assure themselves 
that there were either no conflicts of interest or that there existed 
the ability by the affected parties to resolve the issues without harm 
to the contract owners in the Separate Accounts or to the participants 
under the Qualified Plans.
    26. Applicants considered whether there are any issues raised under 
the Code, Regulations, or Revenue Rulings thereunder, if Qualified 
Plans, variable annuity separate accounts, and variable life insurance 
separate accounts all invest in the same underlying fund. As noted 
above, section 817(h) of the Code imposes certain diversification 
standards on the underlying assets of Variable Contracts held in an 
underlying mutual fund. The Code provides that a Variable Contract 
shall not be treated as an annuity contract or life insurance, as 
applicable, for any period (and any subsequent period) for which the 
investments are not, in accordance with regulations prescribed by the 
Treasury Department, adequately diversified.
    27. Regulations issued under section 817(h) provide that, in order 
to meet the statutory diversification requirements, all of the 
beneficial interests in the investment company must be held by the 
segregated assets accounts of one or more insurance companies. However, 
the Regulations contain certain exceptions to this requirement, one of 
which allows shares in an underlying mutual fund to be held by the 
trustees of a qualified pension or retirement plan without adversely 
affecting the ability of such shares also to be held by separate 
accounts of insurance companies in connection with their Variable 
Contracts. (Treas. Reg. 1.817-5(f)(3)(iii)). Thus, the Regulations 
specifically permit ``qualified pension or retirement plans'' and 
separate accounts to invest in the same underlying fund. For this 
reason, Applicants have concluded that neither the Code, nor 
Regulations, nor Revenue Rulings thereunder, present any inherent 
conflicts of interest if the Qualified Plans and Separate Accounts all 
invest in the same Portfolio.
    28. Applicants note that while there are differences in the manner 
in which distributions from Variable Contracts and Qualified Plans are 
taxed, these differences will have no impact on the Trusts. When 
distributions are to be made, and a Separate Account or Qualified Plans 
is unable to net purchase payments to make the distributions, the 
Separate Account and Qualified Plan will redeem shares of the relevant 
Portfolio at their respective net asset value in conformity with Rule 
22c-1 under the 1940 Act (without the imposition of any sales charge) 
to provide proceeds to meet distribution needs. A Participating 
Insurance Company then will make distributions in accordance with the 
terms of its Variable Contract, and a Qualified Plan then will make 
distribution in accordance with the terms of the Qualified Plan.
    29. Applicants represent that, in connection with any meeting of 
shareholders, the soliciting Trust will inform each shareholder, 
including each Separate Account and Qualified Plan, BA Advisors and 
General Account, of information necessary for the meeting, including 
their respective share of ownership in the relevant Portfolio. Each 
Participating Insurance Company then will solicit voting instructions 
in accordance with Rules 6e-2 and 6e-3(T), as applicable, and its 
agreement with the Trusts concerning participation in the relevant 
Portfolio. Shares of a Portfolio that are held by BA Advisors and any 
General Account will be voted as set forth below in the Applicants' 
Conditions. Shares held by Qualified Plans will be voted in accordance 
with applicable law. The voting rights provided to Qualified Plans with 
respect to shares of a Portfolio would be no different from the voting 
rights that are

[[Page 41279]]

provided to Qualified Plans with respect to shares of funds sold to the 
general public. Furthermore, if a material irreconcilable conflict 
arises because of a Qualified Plan's decision to disregard Qualified 
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 affected Trust, 
to withdraw its investment in such Portfolio, and no charge or penalty 
will be imposed as a result of such withdrawal.
    30. Applicants reviewed whether a ``senior security,'' as such term 
is defined under Section 18(g) of the 1940 Act, is created with respect 
to any Variable Contract owner as opposed to a participant under a 
Qualified Plan, BA Advisors or a General Account. Applicants concluded 
that the ability of the Trusts to sell shares of their Portfolios 
directly to Qualified Plans, BA Advisors or a General Account does not 
create a senior security. Senior security is defined under section 
18(g) of the 1940 Act to include ``any stock of a class having priority 
over any other class as to distribution of assets or payment of 
dividends.'' As noted above, regardless of the rights and benefits of 
participants under Qualified Plans, or contract owners under Variable 
Contracts, the Qualified Plans, BA Advisors, General Accounts and the 
Separate Account only have rights with respect to their respective 
shares of the Portfolio. They only can redeem such shares at net asset 
value. No shareholder of a Portfolio has any preference over any other 
shareholder with respect to distribution of assets or payment of 
dividends.
    31. Applicants assert that permitting a Portfolio to sell its 
shares to BA Advisors or to the General Account of a participating 
insurance company in compliance with Treas. Reg. 1.817-5 will enhance 
Portfolio management without raising significant concerns regarding 
material irreconcilable conflicts. Unlike the circumstances of many 
investment companies that serve as underlying investment media for 
variable insurance products, the Trust may be deemed to lack an 
insurance company ``promoter'' for purposes of Rule 14-2 under the 1940 
Act. Applicants state that they anticipate that other Portfolios that 
are established as new registrants 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. Portfolios also will require more limited 
amounts of initial capital in connection with the creating of new 
series and the voting of initial shares of such series on matters 
requiring the approval of shareholders. A potential source of requisite 
initial capital is a Portfolio's adviser or participating insurance 
company.
    32. Applicants assert that given the conditions of Treas. Reg. 
1.817-5(f)(3) and the harmony of interest between the Portfolio and BA 
Advisors or a Participating Insurance Company, little incentive for 
overreaching exists. Applicant also argue that such investment should 
not implicate the concerns discussed above regarding the creation of 
material irreconcilable conflicts. Instead, permitting investment by BA 
Advisors or Participating Insurance Companies' General Accounts will 
permit the orderly and efficient creation and operation of the Trusts 
or series thereof, and reduce the expense and uncertainty of using 
outside parties at the early stages of Portfolio operations.
    33. Applicants submit that various factors have kept more insurance 
companies from offering variable annuity and variable life insurance 
contracts than currently offer such contracts. These factors include 
the costs of organizing and operating a funding vehicle, the lack of 
expertise with respect to investment management, and the lack of name 
recognition by the public of certain insurers as investment experts 
with whom the public feels comfortable entrusting their investment 
dollars. 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. Use of 
a Portfolio as a common investment vehicle for Variable Contracts would 
reduce or eliminate these concerns. Mixed and shared funding also 
should provide several benefits to Variable Contact owners by 
eliminating a significant portion of the costs of establishing and 
administering separate funds. Participating Insurance Companies will 
benefit not only from the investment and administrative expertise of BA 
Advisors, but also from the potential cost efficiencies and investment 
flexibility afforded by a larger pool of funds. Mixed and shared 
funding also would permit a greater amount of assets available for 
investment by a Portfolio, thereby promoting economies of scale, by 
permitting increased safety through greater diversification, or by 
making the addition of new Portfolios more feasible. Therefore, making 
the Portfolios available for mixed and shared funding will 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 and lower charges. Applicants also assert that the sale of 
shares of the Portfolios to Qualified Plans, in addition to the 
Separate Accounts, will result in an increased amount of assets 
available for investment by such Portfolios. This may benefit Variable 
Contract owners by promoting economies of scale, by permitting 
increased safety of investments through greater diversification, and by 
making the addition of new Portfolios more feasible.
    34. Applicants state that, regardless of the type of shareholder in 
a Portfolio, BA Advisors is or would be contractually and otherwise 
obligated to manage the Portfolio solely and exclusively in accordance 
with that Portfolio's investment objectives, policies and restrictions 
as well as any guidelines established by the Board of Trustees of the 
particular Trust. BA Advisors will work with the commingled pool of 
assets of each Portfolio and will not take into account the identity of 
the shareholders. Thus, each Portfolio will be managed in the same 
manner as any other mutual fund.
    35. Applicants state that they see no significant legal impediment 
to permitting mixed and shared funding. Separate accounts organized as 
UITs historically have been employed to accumulate shares of mutual 
funds that are not affiliated with the depositor or sponsor of the 
separate account. Applicants assert that mixed and shared funding and 
sales of Portfolio shares to Qualified Plans, BA Advisors and General 
Accounts to the extent described above will not have any adverse 
Federal income tax consequences.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions (these conditions will also 
apply to any Future Trust that relies on the order):
    1. A majority of the Board of Trustees (the ``Board'') of the Trust 
will consist of persons who are not ``interested persons'' of the 
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 trustees, 
then the operation of this condition will be suspended: (a) For a 
period of 45

[[Page 41280]]

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 prescribed by order upon application.
    2. The Board will monitor the Trust for the existence of any 
material irreconcilable conflict between the interests of the contract 
owners of all Separate Accounts and participants of all Qualified Plans 
investing in such Trust, and determine what action, if any should be 
taken in response to such conflicts. A material irreconcilable conflict 
may arise for a variety of reasons, including: (a) An action by any 
state insurance regulatory authority; (b) a change in applicable 
Federal or state insurance, tax, or securities laws or regulations, or 
a public ruling, private letter ruling, no-action or 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, variable life insurance 
contract owners, and trustees of the Qualified Plans; (f) a decision by 
a Participating Insurance Company to disregard the voting instructions 
of contract owners; or (g) if applicable, a decision by a Qualified 
Plan to disregard the voting instructions of Qualified Plan 
participants.
    3. Participating Insurance Companies (on their own behalf as well 
as by virtue of any investment of general account assets in a 
Portfolio), BA Advisors, and any Qualified Plan that executes a 
participation agreement upon becoming an owner of 10 percent or more of 
the assets of any Portfolio (collectively, the ``Participants'') will 
report any potential or existing conflicts to the Board. Participants 
will be responsible for assisting the 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 responsibility 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 
to inform the Board whenever it has determined to disregard Qualified 
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 Trust, 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 Qualified Plans with participation agreements, and 
such agreements will provide that these responsibilities will be 
carried out with a view only to the interests of Qualified Plan 
participants.
    4. If it is determined by a majority of the Board, or a majority of 
the disinterested trustees of the Board, that a material irreconcilable 
conflict exists, then the relevant Participant will, at its expense and 
to the extent reasonably practicable (as determined by a majority of 
the disinterested trustees), take whatever steps are necessary to 
remedy or eliminate the material irreconcilable conflict, 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 vehicle including another Portfolio, 
or in the case of Participating 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 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 
Trust, to withdraw such insurer's Separate Account's investment in the 
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 Qualified 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 Trust, to withdraw its 
investment in the 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 bear the cost of such remedial action will be a 
contractual obligation of all Participants under their agreements 
governing participation in the Trust, and these responsibilities will 
be carried out with a view only to the interests of contract owners and 
Qualified Plan participants.
    For purposes of this Condition 4, a majority of the disinterested 
members of the Board will determine whether or not any proposed action 
adequately remedies any material irreconcilable conflict, but in no 
event will the Trust or BA Advisors, as relevant, be required to 
establish a new funding vehicle for any Variable Contract. No 
Participating Insurance Company will be required by this Condition 4 to 
establish a new funding vehicle for any Variable Contract if any offer 
to do so has been declined by vote of a majority of the contract owners 
materially and adversely affected by the material irreconcilable 
conflict. Further no Qualified Plan will be required by this Condition 
4 to establish a new funding vehicle for the Qualified Plan if (a) a 
majority of the Qualified Plan participants materially and adversely 
affected by the irreconcilable material conflict vote to decline such 
offer, or (b) pursuant to documents governing the Qualified Plan, the 
Qualified Plan makes such decision without a Qualified Plan participant 
vote.
    5. The Board's determination of the existence of a material 
irreconcilable conflict and its implications will be made known in 
writing promptly to all Participants.
    6. As to Variable Contracts issued by Separate Accounts registered 
under the 1940 Act, Participating Insurance Companies will provide 
pass-through voting privileges to all Variable Contract owners as 
required by the 1940 Act as interpreted by the Commission. However, as 
to Variable Contracts issued by unregistered Separate Accounts, pass-
through voting privileges will be extended to contract owners to the 
extent granted by the issuing insurance company. Accordingly, such 
Participants, where applicable, will vote shares of the applicable 
Portfolio held in their Separate Accounts in a manner consistent with 
voting instructions timely received from Variable Contract owners. 
Participating Insurance Companies will be responsible for assuring that 
each Separate Account investing in a Portfolio calculates voting

[[Page 41281]]

privileges in a manner consistent with other Participants.
    The obligation to calculate voting privileges in a manner 
consistent with other Participants will be a contractual obligation of 
all Participating Insurance Companies under their agreement with the 
Trusts governing participation in a Portfolio. Each Participating 
Insurance Company will vote shares for which it has not received timely 
voting instructions, as well as shares held in its General Account or 
otherwise attributed to it, in the same proportion as it votes those 
shares for which it has received voting instructions. Each Qualified 
Plan will vote as required by applicable law and governing Qualified 
Plan documents.
    7. As long as the 1940 Act requires pass-through voting privileges 
to be provided to variable contract owners, BA Advisors will vote its 
shares of any Portfolio in the same proportion as all variable contract 
owners having voting rights with respect to that Portfolio; provided, 
however, that BA Advisors or any insurance company General Account 
shall vote its shares in such other manner as may be required by the 
Commission or its staff.
    8. The 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, and, in particular, the 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 Trust is not one of the 
trusts of the type described in the 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, the 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 Trust will notify all Participants that Separate Account 
prospectus disclosure or Qualified Plan prospectuses or other Qualified 
Plan disclosure documents regarding potential risks of mixed and shared 
funding may be appropriate. The Trust will disclose in its prospectus 
that (a) shares of the Trust may be offered to Separate Accounts of 
both variable annuity and variable life insurance contracts and, if 
applicable, to Qualified Plans, (b) due to differences in tax treatment 
and other considerations, the interests of various contract owners 
participating in the Trust and the interests of Qualified Plans 
investing in the Trust, if applicable, may conflict, and (c) the 
Trust's Board will monitor events in order to identify the existence of 
any material irreconcilable conflicts and to determine what action, if 
any, should be taken in response to any such conflict.
    10. If and to the extent that 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 
in this Application, then the Trust and/or Participating Insurance 
Companies, as appropriate, shall take such steps as may be necessary to 
comply with Rules 6e-2 and 6e-3(T), or Rule 6e-3, as such rules are 
applicable.
    11. The Participants, at least annually, will submit to the Board 
such reports, materials, or data as a Board reasonably may request so 
that the trustees of the Board may fully carry out the obligations 
imposed upon the Board by the conditions contained in this Application. 
Such reports, materials, and data will be submitted more frequently if 
deemed appropriate by the Board. The obligations of the Participants to 
provide these reports, materials, and data to the Board, when it so 
reasonably requests, will be a contractual obligation of all 
Participants under their agreements governing participation in the 
Portfolios.
    12. All reports of potential or existing conflicts received by the 
Board, and all Board action with regard to determining the existence of 
a conflict, notifying Participants of a conflict, and determining 
whether any proposed action adequately remedies a conflict, will be 
properly recorded in the minutes of the Board or other appropriate 
records, and such minutes or other records shall be made available to 
the Commission upon request.
    13. The Trust will not accept a purchase order from a Qualified 
Plan if such purchase would make the Qualified Plan shareholder an 
owner of 10 percent or more of the assets of such Portfolio unless such 
Qualified Plan executes an agreement with the Trust governing 
participation in such Portfolio that includes the conditions set forth 
herein to the extent applicable. A Qualified Plan or Qualified Plan 
participant will execute an application containing an acknowledgment of 
this condition at this time of its initial purchase of shares of any 
Portfolio.

Conclusion

    For the reasons summarized above, Applicants assert that the 
requested exemptions are necessary and appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the 1940 Act.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-19699 Filed 8-6-01; 8:45 am]
BILLING CODE 8010-01-M