[Federal Register Volume 67, Number 113 (Wednesday, June 12, 2002)]
[Notices]
[Pages 40350-40356]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-14715]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25604 ; File No. 812-11490]


Lord Abbett Series Fund, Inc., et al.; Notice of Application

June 4, 2002.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

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    Summary of Application: Applicants seek an order to permit shares 
of any current or future series of the Lord Abbett Series Fund, Inc. 
(``Fund'') and shares of any other investment company that is designed 
to fund variable insurance products and for which Lord, Abbett & Co. 
(``Adviser''), or any of its affiliates, may serve now or in the 
future, as investment adviser, administrator, manager, principal 
underwriter or sponsor (the Fund together with such other investment 
companies, the ``Insurance Products Funds'') to be sold to, and held by 
(a) separate accounts funding variable annuity and variable life 
insurance contracts issued by both affiliated and unaffiliated life 
insurance companies (``Participating Insurance Companies''); (b) 
qualified pension and retirement plans outside of the separate account 
context (``Qualified Plans'' or ``Plans''); and (c) the Adviser or any 
of its affiliates.
    Applicants: Lord Abbett Series Fund, Inc. and Lord, Abbett & Co.
    Filing Date: The application was filed on February 1, 1999, and 
amendments thereto were filed on August 17, 2001, January 17, 2002, and 
June 3, 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 Secretary of the SEC 
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 
July 1, 2002, and should be accompanied by proof of service on the 
Applicants in the form of an affidavit or, for lawyers, a certificate 
of service. Hearing requests should state the nature of the requester's 
interest, the reason for the request and the issues contested. Persons 
who wish to be notified of a hearing may request notification by 
writing to the Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW, Washington, DC 20549-
0506. Applicants, c/o Blazzard, Grodd & Hasenauer, P.C., 943 Post Road 
East, Westport, CT 06880, Attention: Raymond A. O'Hara III, Esq.

FOR FURTHER INFORMATION CONTACT: Harry Eisenstein, Senior Counsel, or 
William Kotapish, Assistant Director, Office of Insurance Products, 
Division of Investment Management, at (202) 942-0670.

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

Applicants' Representations

    1. The Fund is a Maryland corporation that is registered under the 
1940 Act as an open-end management investment company. The Fund is a 
series fund currently comprised of four portfolios--Bond-Debenture 
Portfolio, Growth and Income Portfolio, International Portfolio and 
Mid-Cap Portfolio. Each Portfolio is a separate series of the Fund with 
one class of shares except the Growth and Income Portfolio, which has 
two classes of shares--Variable Contract Class and Pension Class. The 
Fund may in the future offer additional series and/or classes of 
shares.
    2. The Adviser, a New York partnership, is registered as an 
investment adviser under the Investment Advisers Act of 1940 and serves 
as the investment adviser for the Fund.
    3. Shares of the Fund will be offered to separate accounts of 
Participating Insurance Companies to serve as investment vehicles for 
variable annuity and variable life insurance contracts (including 
single premium, scheduled premium, modified single premium and flexible 
premium contracts) (collectively, ``Variable Contracts''). These 
separate accounts either will be registered as investment companies 
under the 1940 Act or will be exempt from such registration.
    4. The Participating Insurance Companies will establish their own 
separate accounts and design their own Variable Contracts. Each 
Participating Insurance Company will have the legal obligation of 
satisfying all applicable requirements under the federal securities 
laws. The role of the Insurance Products Funds, so far as the federal 
securities laws are applicable, will be limited to that of offering 
their shares to separate accounts of Participating Insurance Companies 
and to Qualified Plans and fulfilling any conditions the Commission may 
impose upon granting the order requested herein. Each Participating 
Insurance Company will enter into a fund participation agreement with 
the Insurance Products Fund in which the Participating Insurance 
Company invests.
    5. Applicants state that shares of the Insurance Products Funds 
also may be offered directly to Qualified Plans outside of the separate 
account context, including without limitation, those trusts, plans, 
accounts, contracts or

[[Page 40351]]

annuities described in Sections 401(a), 403(a), 403(b), 408(a), 408(b), 
414(d), 457(b), 408(k) and 501(c)(18) of the Internal Revenue Code of 
1986, as amended (``Code''), and any other trust, plan, account, 
contract or annuity that is determined to be within the scope of 
Treasury Regulation Section 1.817.5(f)(3)(iii). Shares of the Insurance 
Products Funds sold to Qualified Plans will be held, where applicable, 
by the trustees of such Plans as required by Section 403(a) of the 
Employee Retirement Income Security Act of 1974 (``ERISA'').
    6. Additionally, shares of a Fund may be offered to the Adviser or 
any of its affiliates for purposes of providing necessary capital 
required by Section 14(a) of the 1940 Act or for other investment 
purposes in compliance with Treasury Regulation 1.817-5(f)(3)(ii). The 
return on shares of a Fund purchased by the Adviser or its affiliates 
will be computed in the same manner as for shares held by a separate 
account. Any shares of a Fund purchased by such persons will be 
automatically redeemed if and when their investment advisory agreement 
with a Fund terminates, to the extent required to comply with 
applicable Treasury Regulations.
    7. The Plans may choose one or more Insurance Products Funds as the 
sole investment under the Plan or as one of several investments. Plan 
participants may or may not be given the right to select among 
Insurance Products Funds.

Applicants' Legal Analysis

    1. Applicants request an order pursuant to Section 6(c) of the 1940 
Act providing exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of 
the 1940 Act and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to 
the extent necessary to permit shares of the Insurance Products Funds 
to be offered and sold to, and held by (1) variable annuity and 
variable life insurance separate accounts of the same life insurance 
company or of any affiliated life insurance company (``mixed 
funding''); (2) separate accounts of unaffiliated life insurance 
companies (including both variable annuity and variable life separate 
accounts) (``shared funding''); (3) qualified pension and retirement 
plans outside the separate account context; and (4) the Adviser or any 
of its affiliates.
    2. In connection with the funding of scheduled premium variable 
life insurance contracts issued through a separate account registered 
under the 1940 Act as a unit investment trust, Rule 6e-2(b)(15) 
provides partial exemptions from Section 9(a), 13(a), 15(a) and 15(b) 
of the 1940 Act. These exemptions are available only where all of the 
assets of the separate account consist of the shares of one or more 
registered management investment companies which offer their shares 
exclusively to variable life insurance separate accounts of the life 
insurer or any affiliated life insurance company. Therefore, the relief 
granted by Rule 6e-2(b)(15) is not available if the scheduled premium 
variable life insurance separate account owns shares of a management 
investment company that also offers its shares to a variable annuity 
separate account of the same insurance company or an affiliated 
insurance company (mixed funding).
    3. The relief granted by Rule 6e-2(b)(15) also is not available if 
the scheduled premium variable life insurance separate account owns 
shares of an underlying management investment company that also offers 
its shares to separate accounts funding variable contracts of one or 
more unaffiliated life insurance companies (shared funding). 
Furthermore, because the relief under Rule 6e-2(b)(15) is available 
only where shares of the investment company are offered exclusively to 
separate accounts, exemptive relief is necessary if the shares of the 
Insurance Products Funds also are to be sold to Qualified Plans.
    4. In connection with the funding of flexible premium variable life 
insurance contracts issued through a separate account registered under 
the 1940 Act as a unit investment trust, Rule 6e-3(T)(b)(15) provides 
partial exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the 
1940 Act. These exemptions are available only where all of the assets 
of the separate account consist of the shares of one or more registered 
management investment companies which offer their shares exclusively to 
separate accounts of the life insurer, or of any affiliated life 
insurance company, offering either scheduled premium variable life 
insurance contracts or flexible premium variable life insurance 
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 
for a flexible premium variable life insurance account under certain 
circumstances, but does not permit shared funding.
    5. In addition, because the relief under Rule 6e-3(T)(b)(15) is 
available only where shares of the investment company are offered 
exclusively to separate accounts, additional exemptive relief is 
necessary if shares of the Insurance Products Funds also are to be sold 
to Qualified Plans.
    6. Applicants state that current tax law permits the Insurance 
Products Funds to increase their asset base through the sale of shares 
to Plans. Section 817(h) of the Code imposes certain diversification 
standards on the underlying assets of variable annuity and variable 
life contracts held by the portfolios of the Insurance Products Funds. 
The Code provides that such contracts shall not be treated as an 
annuity contract or life insurance contract for any period (and any 
subsequent period) during which the investments are not adequately 
diversified in accordance with regulations prescribed by the Treasury 
Department. On March 2, 1989, the Treasury Department issued 
regulations (Treas. Reg. Section 1.817-5), which established 
diversification requirements for the investment portfolios underlying 
variable annuity and variable life contracts. The regulations provide 
that, in order to meet the diversification requirements, all of the 
beneficial interests in an investment company must be held by the 
segregated asset accounts of one or more insurance companies. However, 
the regulations also contain certain exceptions to this requirement, 
one of which permits shares of an investment company to be held by the 
trustee of a ``qualified pension or retirement plan'' as defined by 
Revenue Ruling 94-62, without adversely affecting the ability of shares 
in the same investment company also to be held by the separate accounts 
of insurance companies in connection with their variable annuity and 
variable life contracts (Treas. Reg. Section 1.817.-5(f)(3)(iii)).
    7. Applicants state that the promulgation of Rules 6e-2 and 6e-3(T) 
preceded the issuance of these Treasury regulations, which made it 
possible for shares of an investment company to be held by a Qualified 
Plan without adversely affecting the ability of shares in the same 
investment company also to be held by the separate accounts of 
insurance companies in connection with their Variable Contracts. Thus, 
applicants assert that, given the then current tax law, the sale of 
shares of the same investment company to separate accounts and Plans 
could not have been envisioned at the time of the adoption of Rules 6e-
2(b)(15) and 6e-3(T)(b)(15).
    8. Section 9(a)(3) of the 1940 Act provides that it is unlawful for 
any company to act as investment adviser to or principal underwriter 
for any registered open-end investment company if an affiliated person 
of that company is subject to a disqualification

[[Page 40352]]

enumerated in Sections 9(a)(1) or (2). Rules 6e-2(b)(15)(i) and (ii), 
and 6e-3(T)(b)(15)(i) and (ii) provide partial exemptions from Section 
9(a) under certain circumstances, subject to the limitations on mixed 
and shared funding. These exemptions limit the application of 
eligibility restrictions to affiliated individuals or companies that 
directly participate in the management or administration of the 
underlying investment company.
    9. Applicants state that the relief from Section 9(a) provided by 
Rules 6e-2(b)(15) and 6e-3(T)(b)(15), in effect, limits the amount of 
monitoring necessary to ensure compliance with Section 9 to that which 
is appropriate in light of the policy and purposes of Section 9. 
Applicants assert that it is not necessary to apply the provisions of 
Section 9(a) of the 1940 Act to the many individuals who do not 
directly participate in the administration or management of the 
Insurance Products Funds, who are employed by the various unaffiliated 
insurance companies (or affiliated companies of Participating Insurance 
Companies) that may utilize the Insurance Products Funds as the funding 
medium for variable annuity and variable life insurance contracts. 
Applicants do not expect the Participating Insurance Companies to play 
any role in the management or administration of the Insurance Products 
Funds. Thus, Applicants state, that applying the restrictions of 
Section 9(a) to individuals employed by Participating Insurance 
Companies serves no regulatory purpose, would increase monitoring costs 
incurred by Participating Insurance Companies, and therefore would 
reduce the net rates of return realized by Variable Contract owners.
    10. Applicants submit that the reasons underlying the Commission's 
grant of relief from Section 9(a) will not be affected in any way by 
the proposed sale of the Insurance Products Funds to Qualified Plans. 
Applicants state that the insulation of the Insurance Products Funds 
from those individuals who are disqualified under the 1940 Act remains 
in place. Applicants further submit that since Qualified Plans are not 
investment companies and will not be deemed affiliated solely by virtue 
of their shareholdings, no additional relief is necessary.
    11. Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) provide 
exemptions from the pass-through voting requirement with respect to 
several significant matters, assuming the limitations on mixed and 
shared funding are satisfied.
    12. 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 in connection with the voting of shares of an 
underlying investment company if such instructions would require such 
shares to be voted to cause an underlying investment company to make, 
or refrain from making, certain investments which would result in 
changes in the subclassification or investment objectives of such 
company, or to approve or disapprove any contract between an investment 
company and its investment adviser when an insurance regulatory 
authority so requires. Rules 6e-2(b)(15)(iii)(B) and 6e-
3(T)(b)(15)(iii)(B) provide that the insurance company may disregard 
contract owners' voting instructions with regard to changes initiated 
by the contract owners in the investment company's investment policies, 
principal underwriter or investment adviser. Under the rules, voting 
instructions with respect to a change in investment policies may be 
disregarded only if the insurance company makes a good faith 
determination that such changes would: (a) Violate state law; (b) 
result in investments that were not consistent with the investment 
objectives of the separate account; or (c) result in investments that 
would vary from the general quality and nature of investments and 
investment techniques used by other separate accounts of the company or 
of an affiliated life insurance company with similar investment 
objectives. Voting instructions with respect to a change in an 
investment adviser may be disregarded only if the insurance company 
makes a good faith determination that: (a) The adviser's fee would 
exceed the maximum rate that may be charged against the separate 
account's assets; (b) the proposed adviser may be expected to employ 
investment techniques that vary from the general techniques used by the 
current adviser; or (c) the proposed adviser may be expected to manage 
the investment company's investments in a manner that would be 
inconsistent with its investment objectives or in a manner that would 
result in investments that vary from certain standards.
    13. As indicated above, shares of the Insurance Products Funds sold 
to Qualified Plans will be held, where applicable, by the trustees of 
such Plans as required by Section 403(a) of ERISA. Section 403(a) also 
provides that the trustees must have exclusive authority and discretion 
to manage and control the assets of the Plan with two exceptions: (a) 
When the Qualified Plan expressly provides that the trustees are 
subject to the direction of a named fiduciary who is not a trustee, in 
which case the trustees are subject to proper directions made in 
accordance with the terms of the Plan and not contrary to ERISA; and 
(b) when the authority to manage, acquire or dispose of assets of the 
Qualified Plan is delegated to one or more investment managers pursuant 
to Section 402(c)(3) of ERISA. Unless one of the two exceptions stated 
in Section 403(a) applies, the Qualified Plan trustees have exclusive 
authority and responsibility for voting proxies. Where a named 
fiduciary appoints an investment manager, the investment manager has 
the responsibility to vote the shares held unless the right to vote 
such shares is reserved to the trustees or the named fiduciary. The 
Qualified Plans may have their trustees 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 Plan participants.
    14. Where a Qualified Plan does not provide participants with the 
right to give voting instructions, Applicants do not see any potential 
for irreconcilable material conflicts of interest between or among 
Variable Contract holders and Plan participants with respect to voting 
of the respective Insurance Products Fund's shares. Accordingly, 
Applicants state that, unlike the case with insurance company separate 
accounts, the issue of the resolution of material irreconcilable 
conflicts with respect to voting is not present with respect to 
Qualified Plans since the Plans are not entitled to pass-through voting 
privileges.
    15. Applicants state that even if a Qualified Plan were to hold a 
controlling interest in an Insurance Products Fund, the Applicants do 
not believe that such control would disadvantage other investors in 
such Insurance Products Fund to any greater extent than is the case 
when any institutional shareholder holds a majority of the voting 
securities of any open-end management investment company. In this 
regard, Applicants submit that investment in an Insurance Products Fund 
by a Qualified Plan will not create any of the voting complications 
occasioned by mixed funding or shared funding.
    16. Where a Plan provides participants with the right to give 
voting instructions, Applicants state that the

[[Page 40353]]

purchase of shares by such Qualified Plans does not present any 
complications not otherwise occasioned by mixed or shared funding.
    17. Applicants state that there is no contractual or other 
relationship between the Participating Insurance Companies and any 
Qualified Plans which, for example, would affect the solvency of the 
life insurers, affect the performance of the life insurer's contractual 
obligations, or would be expected to increase the risks undertaken by 
the life insurer. Accordingly, Applicants state that, unlike the case 
with insurance company separate accounts, the issue of resolution of 
irreconcilable material conflicts with respect to voting is not present 
with respect to any of the Qualified Plans.
    18. Applicants state that no increased conflict of interest would 
be presented by the granting of the requested relief. Applicants submit 
that shared funding does not present any issues that do not already 
exist where a single insurance company is licensed to do business in 
several states. In this regard, Applicants note that when different 
Participating Insurance Companies are domiciled in different states, it 
is possible that the state insurance regulatory body in a state in 
which one Participating Insurance Company is domiciled could require 
action that is inconsistent with the requirements of other insurance 
regulators in one or more other states in which other Participating 
Insurance Companies are domiciled. Applicants assert, however, that 
this possibility is no different or greater than exists when a single 
insurer and its affiliates offer their insurance products in several 
states, as is currently permitted.
    19. Applicants state that 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 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, the affected insurer may be required to withdraw its 
separate account's investment in the relevant Insurance Products Funds.
    20. Applicants also assert that affiliation does not eliminate the 
potential, if any exists, for divergent judgments as to when a 
Participating Insurance Company could disregard Variable Contract owner 
voting instructions. The potential for disagreement is limited by the 
requirements that disregarding voting instructions be reasonable and 
based on specified good faith determinations. However, if the 
Participating Insurance Company's decision to disregard Variable 
Contract owner voting instructions represents a minority position or 
would preclude a majority vote approving a particular change, such 
Participating Insurance Company may be required, at the election of the 
relevant Insurance Products Fund, to withdraw its separate account's 
investment in that Insurance Products Fund and no charge or penalty 
will be imposed upon the Variable Contract owners as a result of such 
withdrawal.
    21. Applicants submit that there is no reason why the investment 
policies of an Insurance Products Fund with mixed funding would or 
should be materially different from what those policies would or should 
be if such Insurance Products Fund or series thereof funded only 
variable annuity or variable life insurance contracts. The Insurance 
Products Funds will not be managed to favor or disfavor any particular 
insurer or type of insurance product. Regardless of the types of 
Insurance Products Fund shareholders, a Fund's adviser is legally 
obligated to manage the Fund in accordance with the Fund's investment 
objectives, policies and restrictions as well as any guidelines 
established by the Fund's board.
    22. Applicants submit that no one investment strategy can be 
identified as appropriate to a particular insurance product or to a 
Plan. Each pool of variable annuity and variable life insurance 
contract owners is composed of individuals of diverse financial status, 
age, insurance and investment goals. A fund supporting even one type of 
insurance product must accommodate these diverse factors in order to 
attract and retain purchasers. Applicants submit that permitting mixed 
and shared funding will provide economic support for the continuation 
of the Insurance Products Funds. In addition, mixed and shared funding 
also will facilitate the establishment of additional series of 
Insurance Products Funds serving diverse goals.
    23. As noted above, Section 817(h) of the Code imposes certain 
diversification standards on the underlying assets of variable annuity 
and variable life contracts held in the portfolios of management 
investment companies. Treasury Regulation Section 1.817-5(f)(3)(iii), 
which established diversification requirements for such portfolios, 
specifically permits, among other things, ``qualified pension or 
retirement plans'' and insurance company separate accounts to share the 
same underlying investment company. Therefore, Applicants assert that 
neither the Code, nor the Treasury regulations, nor the revenue rulings 
thereunder present any inherent conflicts of interest if the Qualified 
Plans, variable annuity separate accounts and variable life insurance 
separate accounts all invest in the same management investment company.
    24. Applicants do not see any greater potential for irreconcilable 
material conflicts arising between the interests of Plan participants 
under the Qualified Plans and owners of the Variable Contracts issued 
by the separate accounts of Participating Insurance Companies from 
possible future changes in the federal tax laws than that which already 
exists between variable annuity contract owners and variable life 
insurance contract owners. Applicants note that while there are 
differences in the manner in which distributions are taxed for variable 
annuity contracts, variable life insurance contracts and Plans, these 
differences do not raise any conflicts of interest. When distributions 
are to be made, and a separate account of the Participating Insurance 
Company or Qualified Plan is unable to net purchase payments to make 
distributions, the separate account or Qualified Plan will redeem 
shares of the Insurance Products Funds at their respective net asset 
values. The Qualified Plan then will make distributions in accordance 
with the terms of the Plan, and the Participating Insurance Company 
will make distributions in accordance with the terms of the Variable 
Contract.
    25. Applicants submit that the ability of the Insurance Products 
Funds to sell their respective shares directly to Qualified Plans does 
not create a ``senior security,'' as such term is defined under Section 
18(g) of the 1940 Act, with respect to any Variable Contract owner as 
opposed to a participant under a Qualified Plan. ``Senior security'' is 
defined under 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 the Qualified Plans, or Variable Contract owners 
under their Variable Contracts, the Qualified Plans and the separate 
accounts of Participating Insurance Companies have rights only with 
respect to their respective shares of the Insurance Products Funds. 
They only can redeem such shares at their net asset value. No 
shareholder of any of the Insurance Products Funds has any preference 
over any other shareholder with respect to distribution of assets or 
payment of dividends.

[[Page 40354]]

    26. Applicants submit that there are no conflicts between the 
Variable Contract owners and the Plan participants with respect to 
state insurance commissioners' veto powers over investment objectives. 
Applicants note that the basic premise of shareholder voting is that 
not all shareholders may agree with a particular proposal. State 
insurance commissioners have been given the veto power to prevent, 
among other things, insurance companies indiscriminately redeeming 
their separate accounts out of one fund and into another. Time-
consuming, complex transactions must be undertaken to accomplish such 
redemptions and transfers. On the other hand, trustees of (or Plan 
participants in) Qualified Plans can quickly redeem shares from 
Insurance Products Funds and reinvest in other funding vehicles without 
the same regulatory impediments or, as in the case with most Qualified 
Plans, even hold cash or other liquid assets pending suitable 
alternative investment. Applicants maintain that even if there should 
arise issues where the interests of Variable Contract owners and the 
interests of participants in Qualified Plans conflict, the issues can 
be almost immediately resolved because the trustees of the Plans can, 
on their own, redeem shares out of the Insurance Products Funds.
    27. Applicants state that various factors have hindered insurance 
companies from offering variable annuity and variable life insurance 
contracts. Applicants submit that mixed and shared funding should 
provide several benefits to Variable Contract 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 the Adviser and the 
sub-advisers, but also from the cost efficiencies and investment 
flexibility afforded by a larger pool of assets. Mixed and shared 
funding also would permit a greater amount of assets available for 
investment by the Insurance Products Funds, thereby promoting economies 
of scale, by permitting increased safety through greater 
diversification, and by making the addition of new series more 
feasible. Applicants assert that therefore, making the Insurance 
Products Funds 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 to investors. Applicants further note that 
the sale of shares of the Insurance Products Funds to Plans also can be 
expected to increase the amount of assets available for investment by 
the Insurance Products Funds and thus promote economies of scale and 
greater diversification.
    28. Applicants assert that there is no significant legal impediment 
to permitting mixed and shared funding. Separate accounts organized as 
unit investment trusts historically have been employed to accumulate 
shares of mutual funds which have not been affiliated with the 
depositor or sponsor of the separate account. Applicants do not believe 
that mixed and shared funding, and sales to Qualified Plans, will have 
any adverse federal income tax consequences.

Applicants' Conditions

    Applicants have consented to the following conditions:
    1. A majority of each Insurance Products Fund's Board of Trustees 
or Directors (each, a ``Board'') will consist of persons who are not 
``interested persons'' thereof, 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 
Board member, then the operation of this condition will be suspended: 
(a) For a period of 45 days, if the vacancy or vacancies may be filled 
by the Board; (b) for a period of 60 days, if a vote of shareholders is 
required to fill the vacancy or vacancies; or (c) for such longer 
period as the Commission may prescribe by order upon application.
    2. Each Insurance Products Fund's Board will monitor their 
respective Funds for the existence of any material irreconcilable 
conflict between and among the interests of the Variable Contract 
owners of all separate accounts and of Plan participants and Qualified 
Plans investing in the Insurance Products Funds, and determine what 
action, if any, should be taken in response to such conflicts. A 
material irreconcilable conflict may arise for a variety of reasons, 
including: (a) An action by any state insurance regulatory authority; 
(b) a change in applicable federal or state insurance, tax, or 
securities laws or regulations, or a public ruling, private letter 
ruling, no-action or interpretive letter, or any similar action by 
insurance, tax, or securities regulatory authorities; (c) an 
administrative or judicial decision in any relevant proceeding; (d) the 
manner in which the investments of the funds are being managed; (e) a 
difference in voting instructions given by variable annuity contract 
owners, variable life insurance contract owners or trustees of the 
Plans; (f) a decision by a Participating Insurance Company to disregard 
the voting instructions of Variable Contract owners; or (g) if 
applicable, a decision by a Qualified Plan to disregard the voting 
instructions of Plan participants.
    3. Any Participating Insurance Company and any Qualified Plan that 
executes a fund participation agreement upon becoming an owner of 10% 
of more of the assets of an Insurance Products Fund (collectively, 
``Participants'') and the Adviser (or any other investment adviser of 
an Insurance Products Fund) will report any potential or existing 
conflicts to the Board of any relevant Insurance Products Fund. The 
Adviser (or any other investment advisers of an Insurance Products 
Fund) and the Participants will be obligated to assist the appropriate 
Board in carrying out its 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 it has determined to disregard 
Variable Contract owner voting instructions and, if pass-through voting 
is applicable, an obligation by each Qualified Plan to inform the Board 
whenever it has determined to disregard Plan participant voting 
instructions. The responsibility to report such information and 
conflicts and to assist the Boards will be contractual obligations of 
all Participating Insurance Companies and Qualified Plans investing in 
the Insurance Products Funds under their respective agreements 
governing participation in the Insurance Products Funds, and such 
agreements shall provide that these responsibilities will be carried 
out with a view only to the interests of Variable Contract owners and, 
if applicable, Plan participants.
    4. If a majority of an Insurance Products Fund's Board members, or 
a majority of the disinterested Board members, determine that a 
material irreconcilable conflict exists, the relevant Participating 
Insurance Companies and Qualified Plans, at their expense and to the 
extent reasonably practicable (as determined by a majority of the 
disinterested Board members), will take whatever steps are necessary to 
remedy or eliminate the material irreconcilable conflict, including: 
(a)

[[Page 40355]]

Withdrawing the assets allocable to some or all of the separate 
accounts from the Insurance Products Fund or any of its series and 
reinvesting such assets in a different investment medium, which may 
include another series of the Insurance Products Fund or another 
Insurance Products Fund; (b) in the case of Participating Insurance 
Companies, submitting the question as to whether such segregation 
should be implemented to a vote of all affected Variable Contract 
owners and, as appropriate, segregating the assets of any appropriate 
group (i.e., variable annuity or variable life insurance contract 
owners of one or more Participating Insurance Companies) that votes in 
favor of such segregation, or offering to the affected Variable 
Contract owners the option of making such a change; (c) withdrawing the 
assets allocable to some or all of the participating Qualified Plans 
from the relevant Insurance Products Fund and reinvesting those assets 
in a different investment medium; and (d) 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 Variable Contract owner 
voting instructions, and this decision represents a minority position 
or would preclude a majority vote, the Participating Insurance Company 
may be required, at the election of the Insurance Products Fund, to 
withdraw its separate account's investment in such 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 Plan participant voting instructions, if 
applicable, and that decision represents a minority position or would 
preclude a majority vote, the Qualified Plan may be required, at the 
election of the Insurance Products Fund, to withdraw its investment in 
such Fund, and no charge or penalty will be imposed as a result of such 
withdrawal. To the extent permitted by applicable law, the 
responsibility to take remedial action in the event of a Board 
determination of a material irreconcilable conflict and to bear the 
cost of such remedial action will be a contractual obligation of all 
Participating Insurance Companies and Qualified Plans under their 
agreements governing participation in the Insurance Products Funds and 
these responsibilities will be carried out with a view only to the 
interests of the Variable Contract owners and, as applicable, Plan 
participants.
    5. For purposes of Condition 4, a majority of the disinterested 
members of the applicable Board shall determine whether or not any 
proposed action adequately remedies any material irreconcilable 
conflict, but in no event will an Insurance Products Fund or the 
Adviser (or any other investment adviser of the Insurance Products 
Funds) be required to establish a new funding medium for any Variable 
Contract. No Participating Insurance Company shall be required by 
Condition 4 to establish a new funding medium for any Variable Contract 
if a majority of Variable Contract owners materially and adversely 
affected by the material irreconcilable conflict, vote to decline such 
offer. No Qualified Plan shall be required by Condition 4 to establish 
a new funding medium for such Qualified Plan if: (a) A majority of Plan 
participants materially and adversely affected by the material 
irreconcilable conflict vote to decline such offer; or (b) pursuant to 
governing plan documents and applicable law, the Plan makes such 
decision without Plan participant vote.
    6. The Adviser, all Participating Insurance Companies and the 
Qualified Plans will be informed promptly in writing of a Board's 
determination of the existence of an irreconcilable material conflict 
and its implications.
    7. As to contracts issued by separate accounts registered under the 
Act, Participating Insurance Companies will provide pass-through voting 
privileges to all Variable Contract owners so long as the Commission 
continues to interpret the 1940 Act as requiring pass-through voting 
privileges for Variable Contract owners. However, as to Variable 
Contracts issued by unregistered separate accounts, pass-through voting 
privileges will be extended to Variable Contract owners to the extent 
granted by the Participating Insurance Company. Accordingly, such 
Participating Insurance Companies, where applicable, will vote shares 
of the Insurance Products Fund held in their separate accounts in a 
manner consistent with voting instructions timely received from 
Variable Contract owners. In addition, each Participating Insurance 
Company will vote shares of the Insurance Products Fund held in its 
separate accounts for which it has not received timely voting 
instructions from contract owners, as well as shares it owns, in the 
same proportion as those shares for which it has received voting 
instructions. Participating Insurance Companies will be responsible for 
assuring that each of their separate accounts investing in an Insurance 
Products Fund calculates voting privileges in a manner consistent with 
all other Participating Insurance Companies. The obligation to vote an 
Insurance Products Fund's shares and calculate voting privileges in a 
manner consistent with all other separate accounts investing in the 
Insurance Products Fund will be a contractual obligation of all 
Participating Insurance Companies under the agreements governing 
participation in the Insurance Products Fund. Each Plan will vote as 
required by applicable law and governing Plan documents.
    8. As long as the Commission continues to interpret the 1940 Act as 
requiring pass-through voting privileges for Variable Contract owners 
whose Contracts are funded through a registered separate account, the 
Adviser (or any of its affiliates) will vote its shares of any 
Insurance Products Fund, or any series thereof, in the same proportion 
as all Variable Contract owners having voting rights with respect to 
that Fund or series thereof; provided, however, that the Adviser (or 
any of its affiliates) shall vote its shares in such other manner as 
may be required by the Commission or its staff.
    9. All reports of potential or existing conflicts of interest 
received by a Board, and all Board action with regard to: (a) 
Determining the existence of a conflict; (b) notifying the Adviser, 
Participating Insurance Companies, and the Qualified Plans of a 
conflict; and (c) determining whether any proposed action adequately 
remedies a conflict, will be properly recorded in the minutes of 
meetings of the appropriate Board or other appropriate records. Such 
minutes or other records shall be made available to the Commission upon 
request.
    10. Each Insurance Products Fund will notify all Participating 
Insurance Companies and Qualified Plans that disclosure in separate 
account prospectuses or any Qualified Plan prospectuses or other plan 
disclosure documents regarding potential risks of mixed and shared 
funding may be appropriate. Each Insurance Products Fund will disclose 
in its prospectus that: (a) Its shares may be offered to insurance 
company separate accounts that fund both variable annuity and variable 
life insurance contracts, and to Qualified Plans; (b) differences in 
tax treatment or other considerations may cause the interests of 
various Variable Contract owners participating in the Insurance 
Products Fund and the interests of Qualified Plans investing in the 
Insurance Products Fund to conflict; and (c) the Board will monitor 
events in order to identify the existence of any material conflicts of 
interest, and to determine what action, if any, should be taken in 
response to any such conflict.

[[Page 40356]]

    11. Each Insurance Products Fund will comply with all provisions of 
the 1940 Act requiring voting by shareholders (for these purposes, the 
persons having a voting interest in the shares of the Insurance 
Products Funds). In particular, each such Insurance Products Fund 
either will provide for annual shareholder meetings (except insofar as 
the Commission may interpret Section 16 of the 1940 Act not to require 
such meetings) or comply with Section 16(c) of the 1940 Act (although 
none of the Insurance Products Funds shall be one of the trusts 
described in Section 16(c) of the 1940 Act), as well as with Section 
16(a) of the 1940 Act and, if and when applicable, Section 16(b) of the 
1940 Act. Further, each Insurance Products Fund will act in accordance 
with the Commission's interpretation of the requirements of Section 
16(a) with respect to periodic elections of Board members and with 
whatever rules the Commission may promulgate with respect thereto.
    12. If and to the extent that Rules 6e-2 or 6e-3(T) under the 1940 
Act is amended, or 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 and shared funding, on 
terms and conditions materially different from any exemptions granted 
in the order requested in the application, then the Insurance Products 
Funds, the Participating Insurance Companies and Qualified Plans, as 
appropriate, shall take such steps as may be necessary to comply with 
Rule 6e-2 and Rule 6e-3(T), as amended, or proposed Rule 6e-3 as 
adopted, to the extent such Rules are applicable.
    13. The Adviser (or any other investment adviser of an Insurance 
Products Fund), the Participating Insurance Companies and the Qualified 
Plans, at least annually, shall submit to each Board such reports, 
materials or data as each Board may reasonably request so that such 
Boards may fully carry out the obligations imposed upon them by the 
conditions stated in the application. Such reports, materials and data 
shall be submitted more frequently if deemed appropriate by the Boards. 
The obligations of the Adviser (or any other investment adviser of an 
Insurance Products Fund), the Participating Insurance Companies and 
Qualified Plans to provide these reports, materials and data upon 
reasonable request of a Board shall be a contractual obligation of the 
Adviser (or any other investment adviser of an Insurance Products 
Fund), the Participating Insurance Companies and the Qualified Plans 
under the agreements governing their participation in the Insurance 
Products Funds.
    14. If a Qualified Plan or Plan participant shareholder should 
become an owner of 10% or more of the issued and outstanding shares of 
an Insurance Products Fund, such Plan will execute a participation 
agreement with such Fund, which includes the conditions set forth 
herein to the extent applicable. A Qualified Plan or Plan participant 
will execute an application containing an acknowledgment of this 
condition upon such Plan's initial purchase of the shares of any 
Insurance Products Fund.

Conclusion

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

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-14715 Filed 6-11-02; 8:45 am]
BILLING CODE 8010-01-P