[Federal Register Volume 67, Number 34 (Wednesday, February 20, 2002)]
[Notices]
[Pages 7720-7727]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-4053]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25421; 812-12760]


DFA Investment Dimensions Group Inc., et al.

February 13, 2002.
AGENCY: Securities and Exchange Commission (``SEC'' or the 
``Commission'').

ACTION: Notice of Application for Exemption under Section 6(c) of the 
Investment Company Act of 1940, as amended (the ``1940 Act''), for an 
exemption 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: DFA Investment Dimensions Group Inc. (the ``Fund'') and 
Dimensional Fund Advisors, Inc. (``DFA'') (the Fund together with DFA, 
are the ``Applicants'').

SUMMARY OF APPLICATION: Applicants and certain life insurance companies 
and their separate accounts that currently invest or may hereafter 
invest in the Fund (and, to the extent necessary, any investment 
adviser, principal underwriter and depositor of such an account) seek 
exemptive relief 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, to the extent necessary to permit shares of the Fund and 
shares of any other investment company or portfolio that is designed to 
fund insurance products and for which DFA or any of its affiliates may 
serve in the future as investment adviser, manager, principal 
underwriter, sponsor, or administrator (``Future Funds'') (the Fund, 
together with Future Funds, are the ``Funds'') to be sold to and held 
by: (i) 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; (ii) qualified pension and retirement plans (``Qualified 
Plans'') outside of the separate account context; (iii) 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; (iv) DFA or certain related corporations (collectively 
``DFA''); and (v) any other person permitted to hold shares of the 
Funds pursuant to Treasury Regulation 1.817-5 (``General Accounts''), 
including the general account of any life insurance company whose 
separate account holds, or will hold, shares of the Funds or certain 
related corporations.

Filing Dates: The application was filed on January 18, 2002.

HEARING OR NOTIFICATION OF HEARING: An order granting the Application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
Applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on March 8, 2002, 
and should be accompanied by proof of service on Applicants, in the 
form of an affidavit or, for lawyers, a certificate of service. Hearing 
requests should state the nature of the writer's interest, the reason 
for the request, and the issues contested. Persons who wish to be 
notified of a hearing may request notification by writing to the 
Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC, 20549-
0609. Applicants, c/o Stradley, Ronon, Stevens & Young, LLP, 2600 One 
Commerce Square, Philadelphia, PA 19103-7098, Attention: Mark A. 
Sheehan, Esq.

FOR FURTHER INFORMATION CONTACT: Patrick Scott, Attorney, or Lorna 
MacLeod, Branch Chief, Office of Insurance Products, Division of 
Investment Management, at (202) 942-0670.

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

Applicants' Representations

    1. The Fund is registered with the Commission as an open-end 
management investment company and is organized as a Maryland 
corporation. DFA 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 Fund. The Fund currently 
consists of thirty-eight investment portfolios, including six 
investment portfolios that are sold only to separate accounts of 
insurance companies in conjunction with variable life and variable 
annuity contracts: VA Small Value Portfolio, VA Large Value Portfolio, 
VA International Value Portfolio, VA International Small Portfolio, VA 
Short-Term Fixed Portfolio and VA Global Bond Portfolio (each, a 
``Portfolio,'' and collectively, the ``Portfolios''). The Fund or any 
Future Funds may offer one or more

[[Page 7721]]

additional investment portfolios in the future (also referred to as 
``Portfolios'').
    2. 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 separate accounts either will be 
registered as investment companies under the 1940 Act or will be exempt 
from such registration pursuant to exemptions from registration under 
Section 3(c) of the 1940 Act (individually, a ``Separate Account'' and 
collectively, the ``Separate Accounts''). Shares of the Portfolios may 
also be offered to Qualified Plans, DFA or certain related corporations 
(collectively ``DFA''), and any other person permitted to hold shares 
of the Funds pursuant to Treasury Regulation 1.817-5 (``General 
Accounts''), including the general account of any life insurance 
company whose separate account holds, or will hold, shares of the Funds 
or certain related corporations.
    3. The Participating Insurance Companies at the time of their 
investment in the Funds 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 Funds concerning 
such Participating Insurance Company's participation in the Portfolios. 
The role of the Funds 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. On November 29, 1994, the Commission issued an order granting 
exemptive relief to permit shares of the Funds to be sold to and held 
by variable annuity and variable life insurance separate accounts of 
both affiliated and unaffiliated life insurance companies (Investment 
Company Act Release No. 20743, File No. 812-9154) (the ``Original 
Order''). The Original Order allows the Fund to offer its shares to 
insurance companies as the investment vehicle for their separate 
accounts supporting Variable Contracts. The Original Order does not 
include the Future Funds as parties, nor expressly address the sale of 
shares of the Funds or any Future Funds to Qualified Plans, 
unregistered separate accounts, DFA or General Accounts. Applicants 
propose that the Future Funds be added as parties to the Original Order 
and the Funds and any Future Funds be permitted to offer and sell their 
shares to Qualified Plans, unregistered separate accounts, DFA and the 
General Accounts.

Applicants' Legal Analysis

    1. Applicants and certain life insurance companies and their 
Separate Accounts that currently invest or may hereafter invest in the 
Fund (and, to the extent necessary, any investment adviser, principal 
underwriter and depositor of such an account) seek exemptive relief 
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, to the 
extent necessary to permit shares of the Portfolios and shares of any 
Future Funds to be sold to and held by: (i) separate accounts funding 
Variable Contracts issued by both affiliated and unaffiliated life 
insurance companies; (ii) Qualified Plans outside of the separate 
account context; (iii) 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; (iv) DFA or certain 
related corporations (collectively ``DFA''); and (v) any General 
Accounts, including the general account of any life insurance company 
whose separate account holds, or will hold, shares of the Funds or 
certain related corporations.
    2. 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, Rule 6e-
2(b)(15) provides partial exemptions from Sections 9(a), 13(a), 15(a) 
and 15(b) of the 1940 Act. The relief provided by Rule 6e-2 is also 
granted to the investment adviser, principal underwriter, and depositor 
of the separate account. Section 9(a)(2) of the 1940 Act makes it 
unlawful for any company to serve as an investment adviser or principal 
underwriter of any UIT, if an affiliated person of that company is 
subject to a disqualification enumerated in Sections 9(a)(1) or (2) of 
the 1940 Act. Sections 13(a), 15(a) and 15(b) of the 1940 Act have been 
deemed by the Commission to require ``pass-through'' voting with 
respect to an underlying investment company's shares. Rule 6e-2(b)(15) 
provides these exemptions apply 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 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 herein as ``mixed 
funding.''
    3. 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 herein as ``shared 
funding.''
    4. 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. Applicants note that if shares of the Portfolios are 
sold only to Qualified Plans, exemptive relief under Rule 6e-2 would 
not be necessary. The relief provided for under this section does not 
relate to Qualified Plans or to a registered investment company's 
ability to sell its shares to Qualified Plans. The use of a common 
management investment company as the underlying investment vehicle for 
variable annuity and variable life separate accounts of affiliated and 
unaffiliated insurance companies, and for Qualified Plans, is referred 
to herein as ``extended mixed and shared funding.''
    5. 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-

[[Page 7722]]

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 that 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 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 but does not 
permit shared funding. The exemptions are also granted to the 
investment adviser, principal underwriter and depositor of the separate 
account.
    6. 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 company, and 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. Applicants note that if shares of the Portfolios were 
sold only to Qualified Plans, exemptive relief under Rule 6e-
3(T)(b)(15) would not be necessary. The relief provided for under this 
section does not relate to Qualified Plans or to a registered 
investment company's ability to sell its shares to Qualified Plans.
    7. Applicants maintain, as discussed below, that there is no policy 
reason for the sale of the Portfolios' shares to Qualified Plans, to 
DFA, or General Accounts 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-3(T)(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, DFA or General 
Accounts. Applicants therefore request relief in order to have the 
participating insurance companies enjoy the benefits of the relief 
granted in Rules 6e-2(b)(15) and 6e-3(T)(b)(15). Applicants note that 
if the Portfolios' shares were to be sold only to Qualified Plans, DFA, 
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 Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) does not relate to Qualified Plans, DFA, or General 
Accounts, or to a registered investment company's ability to sell its 
shares to such purchasers.
    8. Applicants also note that the promulgation of Rules 6e-2(b)(15) 
and 6e-3(T)(b)(15) preceded the issuance of the regulations issued by 
the Treasury Department (``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).
    9. Consistent with the Commission's authority under Section 6(c) of 
the 1940 Act to grant exemptive orders to a class or classes of persons 
and transactions, this Application requests relief for the class 
consisting of insurers and Separate Accounts that will invest in the 
Portfolios, and to the extent necessary, Qualified Plans, other 
eligible holders of shares and investment advisers, principal 
underwriters and depositors of such accounts.
    10. 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.
    11. 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 Funds. Those individuals who 
participate in the management of the Funds will remain the same 
regardless of which Separate Accounts or Qualified Plans invests in the 
Funds. 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.
    12. Moreover, since the Qualified Plans, DFA and General 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.
    13. 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).
    14. 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

[[Page 7723]]

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, 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, Applicants state, 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.
    15. Applicants state that the sale of Portfolio shares to Qualified 
Plans, DFA and General Accounts will not have any impact on the relief 
requested herein. 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 the Employee Retirement 
Income Security Act, as amended (``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: (i) 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 (ii) 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.
    16. Where a named fiduciary to a Qualified Plan appoints an 
investment manager, the investment manager has the responsibility to 
vote the shares held unless the right to vote such shares is reserved 
to the trustees or the named fiduciary. 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. Similarly, DFA 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, DFA or General Accounts.
    17. 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 DFA or an affiliate of DFA were to serve in the capacity of trustee 
or named fiduciary with voting responsibilities, DFA or the affiliates 
would have a fiduciary duty to vote those shares in the best interest 
of the Qualified Plan participants.
    18. In addition, even if a Qualified Plan were to hold a 
controlling interest in a Portfolio, Applicants do not believe that 
such control would disadvantage other investors in such Portfolio 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 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.
    19. 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. Thus, Applicants submit, 
the purchase of shares of Portfolios by Qualified Plans that provide 
voting rights does not present any complications not otherwise 
occasioned by mixed or shared funding.
    20. 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 
and to affect the investment decisions of public shareholders.
    21. For reasons unrelated to the 1940 Act, however, Internal 
Revenue Service Revenue Ruling 81-225 (Sept. 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 Internal Revenue Code of 1986, as 
amended (the ``Code''), in effect requires that the investments made by 
variable annuity and variable life insurance separate accounts be 
``adequately diversified'' if a separate account is 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

[[Page 7724]]

the public. Consequently, there will be no public shareholders of any 
Portfolio.
    22. 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 different states does not create a significantly 
different or enlarged problem.
    23. 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 procedures 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 Fund. 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.
    24. 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. 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.
    25. A particular insurer's disregard of voting instructions, 
nevertheless, could conflict with the majority of contract owners' 
voting instructions. The insurer's action possibly could be different 
than the determination of all or some of the other insurers (including 
affiliated insurers) that the voting instructions of contract owners 
should prevail, and either could preclude a majority vote approving the 
change or could represent a minority view. If the insurer's judgment 
represents a minority position or would preclude a majority vote, then 
the insurer may be required, at the affected Fund'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 agreements entered into with 
respect to participation by the Participating Insurance Companies in 
each Portfolio.
    26. Each Portfolio will be managed to attempt to achieve the 
investment objective or objectives 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 contracts, 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 different insurance charges imposed, in effect, adjust 
any such differences and equalize the insurers' exposure in either 
case.
    27. 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 which would otherwise exist between 
variable annuity and variable life insurance contract owners. Moreover, 
in considering the appropriateness of the requested relief, Applicants 
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.
    28. Applicants considered whether there are any issues raised under 
the Code, regulations issued by the Treasury Department 
(``Regulations''), or Internal Revenue Service 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.
    29. Regulations issued under Section 817(h) of the Code 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 asset 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 Internal Revenue Service Revenue Rulings thereunder, 
present any inherent conflicts of interest if the Qualified Plans and 
Separate Accounts all invest in the same Portfolio.
    30. 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 Funds. When 
distributions are to be made, and a Separate Account or Qualified Plan 
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 
distributions in

[[Page 7725]]

accordance with the terms of the Qualified Plan.
    31. Applicants state that, there is analogous precedent for a 
situation in which the same funding vehicle was used for contract 
owners subject to different tax rules, without any apparent conflicts. 
Prior to the Tax Reform Act of 1984, a number of insurance companies 
offered variable annuity contracts on both a qualified and non-
qualified basis through the same separate account. Underlying reserves 
of both qualified and non-qualified contracts therefore were commingled 
in the same separate account. However, long-term capital gains incurred 
in such separate accounts were taxed on a different basis than short-
term gains and other income with respect to the reserves underlying 
non-qualified contracts. A tax reserve at the estimated tax rate was 
established in the separate account affecting only the non-qualified 
reserves. To the best of Applicants' knowledge, that practice was never 
found to have violated any fiduciary standards. Accordingly, Applicants 
have concluded that the tax consequences of distributions with respect 
to Participating Insurance Companies and Qualified Plans do not raise 
any conflicts of interest with respect to the use of the Portfolios.
    32. In connection with any meeting of shareholders, the soliciting 
Fund will inform each shareholder, including each Separate Account, 
Qualified Plan, DFA 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 Funds concerning 
participation in the relevant Portfolio. Shares of a Portfolio that are 
held by DFA and any General Account will be voted in the same 
proportion as all variable contract owners having voting rights with 
respect to that Portfolio. However, DFA and any General Account will 
vote their shares in such other manner as the Commission may require. 
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 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 Fund, to withdraw its investment in such 
Portfolio, and no charge or penalty will be imposed as a result of such 
withdrawal.
    33. 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, DFA or a General Account. Applicants concluded that the 
ability of the Funds to sell shares of their Portfolios directly to 
Qualified Plans, DFA 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, DFA, General Accounts and the Separate Accounts 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.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. A majority of the Board of Directors (the ``Board'') of the Fund 
will consist of persons who are not ``interested persons'' of the Fund, 
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 Director or 
Directors, then the operation of this condition will be suspended: (i) 
for a period of 45 days if the vacancy or vacancies may be filled by 
the Board; (ii) for a period of 60 days if a vote of shareholders is 
required to fill the vacancy or vacancies; or (iii) for such longer 
period as the Commission may prescribe by order upon application.
    2. The Board will monitor the Fund 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 Fund, 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: (i) an action by any 
state insurance regulatory authority; (ii) 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; (iii) an administrative or judicial decision in 
any relevant proceeding; (iv) the manner in which the investments of 
such Fund are being managed; (v) a difference in voting instructions 
given by variable annuity contract owners, variable life insurance 
contract owners, and trustees of the Qualified Plans; (vi) a decision 
by a Participating Insurance Company to disregard the voting 
instructions of contract owners; or (vii) 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), DFA, 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, ``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 Fund, 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

[[Page 7726]]

disinterested Directors 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 Directors), take whatever steps are necessary to 
remedy or eliminate the material irreconcilable conflict, up to and 
including: (i) 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 (ii) 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 
Fund, to withdraw such insurer's Separate Account's investment in the 
Fund, 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 Fund, to withdraw its 
investment in the Fund, and no charge or penalty will be imposed as a 
result of such withdrawal. The responsibility to take remedial action 
in the event of a Board determination of a material irreconcilable 
conflict and to bear the cost of such remedial action will be a 
contractual obligation of all Participants under their agreements 
governing participation in the Fund, 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 Fund, DFA or an affiliate of DFA, 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: (i) A 
majority of the Qualified Plan participants materially and adversely 
affected by the irreconcilable material conflict vote to decline such 
offer, or (ii) 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 
privileges in a manner consistent with other Participants.
    The obligation to calculate voting privileges as provided in this 
Application will be a contractual obligation of all Participating 
Insurance Companies under their agreement with the Funds 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 it owns through its Separate Accounts, 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, DFA or any of its 
affiliates, and any General Account will vote its shares of any 
Portfolio in the same proportion of all variable contract owners having 
voting rights with respect to that Portfolio; provided, however, that 
DFA, any of its affiliates 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 Fund 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 Fund will either provide for annual 
meetings (except to the extent that the Commission may interpret 
Section 16 of the 1940 Act not to require such meetings) or comply with 
Section 16(c) of the 1940 Act (although the Fund is not one of the 
funds of the type described in Section 16(c) of the 1940 Act), as well 
as with Section 16(a) of the 1940 Act and, if and when applicable, 
Section 16(b) of the 1940 Act. Further, the Fund will act in accordance 
with the Commission's interpretation of the requirements of Section 
16(a) of the 1940 Act with respect to periodic elections of trustees 
and with whatever rules the Commission may promulgate with respect 
thereto.
    9. The Fund 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 Fund will disclose in its prospectus 
that (i) shares of the Fund may be offered to Separate Accounts of 
Variable Contracts and, if applicable, to Qualified Plans; (ii) due to 
differences in tax treatment and other considerations, the interests of 
various contract owners participating in the Fund and the interests of 
Qualified Plans investing in the Fund, if applicable, may conflict; and 
(iii) the Fund'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

[[Page 7727]]

conditions materially different from any exemptions granted in the 
order requested in this Application, then the Fund 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 Fund 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 Fund 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 the time of its initial purchase of shares of any 
Portfolio.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-4053 Filed 2-19-02; 8:45 am]
BILLING CODE 8010-01-P