[Federal Register Volume 68, Number 54 (Thursday, March 20, 2003)]
[Notices]
[Pages 13736-13743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-6696]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-25962; File No. 812-11474]


The Timothy Plan, et al.; Notice of Application

March 14, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under section 6(c) of the 
Investment Company Act of 1940 (the ``Act'') granting exemptions from 
the provisions of sections 9(a), 13(a), 15(a)

[[Page 13737]]

and 15(b) of the Act and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) 
thereunder.

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Applicants: The Timothy Plan (``Trust'') and Timothy Partners, Ltd. 
(``TPL'').

Summary of Application: Applicants seek an order pursuant to section 
6(c) of the Act granting exemptions from the provisions of sections 
9(a), 13(a), 15(a) and 15(b) of the Act and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) thereunder, to the extent necessary to permit shares of the 
Trust's series that are designed to fund insurance products (``Variable 
Series'') and the series of any other investment company that is 
designed to fund insurance products and for which TPL or its affiliates 
may serve as investment adviser, investment sub-adviser, administrator, 
principal underwriter or sponsor (``Future Variable Series'') to be 
sold to and held by variable annuity and variable life insurance 
separate accounts when the following other types of investors also hold 
shares of the Variable Series or a Future Variable Series: (1) A 
variable life insurance account (``VLI Account'') of a life insurance 
company that is not an affiliated person of the insurance company 
depositor of any VLI Account, (2) TPL (representing seed money 
investments in the Variable Series or Future Variable Series), (3) a 
life insurance company separate account (``VA Account'') supporting 
variable annuity contracts (``VA Contracts''), whether or not the 
insurance company depositor of any such VA Account is an affiliated 
person of the insurance company depositor of any VLI Account, and/or 
(4) a qualified pension or retirement plan.

Filing Date: The application was filed on January 11, 1999, and amended 
and restated on December 18, 2001, November 14, 2002 and March 7, 2003.

Hearing or Notification of Hearing: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Secretary of the 
Commission and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on April 8, 2003, 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 writer's interest, the reason for the request, and the 
issues contested. Persons may request notification of a hearing by 
writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609. Applicants, c/o Arthur D. Ally, Timothy 
Partners, Ltd., 1304 West Fairbanks Avenue, Winter Park, FL 32789.

FOR FURTHER INFORMATION CONTACT: Joyce M. Pickholz, Senior Counsel, or 
Zandra Y. Bailes, 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 may be obtained for a fee from 
the Public Reference Branch of the Commission, 450 Fifth Street, NW., 
Washington, DC (tel. (202) 942-8090).

Applicants' Representations

    1. The Trust, a Delaware business trust, is registered under the 
Act as an open-end, management investment company (File Nos. 811-08228 
and 33-73248). The Trust currently consists of eleven investment 
portfolios, which include six traditional funds (``Traditional 
Funds''), two asset allocation funds (``Asset Allocation Funds'') and 
three Timothy Plan Variable Series that are designed to fund insurance 
products.
    2. TPL serves as the investment manager to the Trust. TPL is 
registered with the Commission as an investment adviser pursuant to the 
Investment Advisers Act of 1940.
    3. According to the application, the Variable Series will invest 
their assets in the Traditional Funds, which sell shares to the general 
public. A fund that so invests is called a ``fund of funds.'' 
Applicants state that this fund of funds arrangement involving the 
Variable Series is consistent with the diversification requirements of 
section 817(h) of the Code and Regulation 1.817-5 thereunder based on 
recent decisions by the IRS that have ruled favorably on fund of funds 
situations involving first-tier series that sell exclusively to 
separate accounts. In addition, each Variable Series discloses in its 
prospectus that no more than 55% of its assets will be invested in one 
of the Traditional Funds, no more than 70% will be invested in two of 
the Traditional Funds, no more than 80% will be invested in three of 
the Traditional Funds and no more than 90% will be invested in four of 
the Traditional Funds.
    4. The Trust proposes to offer and sell shares of the Variable 
Series to insurance companies (``Participating Insurance Companies'') 
as an investment vehicle for their VLI Accounts and VA Accounts 
(collectively, ``Variable Accounts''). Each Variable Account will be 
established as a segregated asset account by a Participating Insurance 
Company pursuant to the insurance laws of such insurance company's 
state of domicile. As such, the assets of each will be the property of 
the Participating Insurance Company, and that portion of the assets of 
such an account equal to the reserves and other contract liabilities 
with respect to the account will not be chargeable with liabilities 
arising out of any other business that the insurance company may 
conduct. The income, gains and losses, realized and unrealized, from 
such an account's assets will be credited to or charged against the 
account without regard to other income, gains or losses of the 
insurance company. If a VA Account is registered as an investment 
company, it will be a ``separate account'' as defined by Rule 0-1(e) 
(or any successor rule) under the Act and will be registered as a unit 
investment trust (``UIT''). If a VLI Account is registered as an 
investment company, it will be a separate account as described in Rule 
6e-2(a) or Rule 6e-3(T)(a) and will be registered as a UIT. For 
purposes of the Act, the life insurance company that establishes such a 
registered Variable Account is the depositor and sponsor of the account 
as those terms have been interpreted by the Commission with respect to 
variable life insurance and variable annuity separate accounts.
    5. Each Participating Insurance Company will have the legal 
obligation of satisfying all applicable requirements under both state 
and federal law. Each Participating Insurance Company will enter into a 
participation agreement with the Trust on behalf of its Participating 
Separate Account. The role of the Trust under this agreement, insofar 
as the federal securities laws are applicable, will consist of offering 
shares of the Variable Series to the Participating Separate Accounts 
and complying with any conditions that the Commission may impose upon 
granting the order requested in the application.
    6. The use of a common management investment company (or investment 
portfolio thereof) as an investment medium for both VLI Accounts and VA 
Accounts of the same insurance company, or of two or more affiliated 
insurance companies, is referred to herein as ``mixed funding.'' The 
use of a common management investment company (or investment portfolio 
thereof) as an investment medium for VLI Accounts and/or VA Accounts of 
two or more unaffiliated insurance companies is referred to herein as 
``shared funding.''

[[Page 13738]]

    7. The Trust also proposes to sell shares of the Variable Series 
directly to pension or retirement plans (``Qualified Plans'') intended 
to qualify under sections 401(a) and 501(a) of the Internal Revenue 
Code of 1986, as amended (the ``Code''). Many of the Qualified Plans 
will include a cash or deferred arrangement (permitting salary 
reduction contributions) intended to qualify under section 401(k) of 
the Code. The Qualified Plans also will be subject to, and will be 
designed to comply with, the provisions of the Employee Retirement 
Income Security Act of 1974, as amended (``ERISA''). The Qualified 
Plans therefore will be subject to regulatory provisions under the Code 
and ERISA including, for example, reporting and disclosure, 
participation and vesting, funding, fiduciary responsibility, and 
enforcement provisions.

Applicants' Legal Analysis

    1. Applicants request an order pursuant to section 6(c) of the Act 
exempting them from sections 9(a), 13(a), 15(a), and 15(b) of the Act, 
and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent 
necessary to permit shares of the Variable Series to be offered and 
sold to, and held by: (a) VA Accounts and VLI Accounts of the same 
insurance company or of two or more affiliated insurance companies 
(``mixed funding''); (b) VA Accounts and VLI Accounts of two or more 
unaffiliated insurance companies (``shared funding''); and (c) 
Qualified Plans.
    2. Rule 6e-2(b)(15) under the Act provides partial exemptions from: 
(a) Section 9(a) of the Act, which makes it unlawful for certain 
individuals and companies to act in certain capacities with respect to 
registered investment companies; and (b) sections 13(a), 15(a), and 
15(b) of the Act to the extent that those sections might be deemed to 
require ``pass-through'' voting with respect to the shares of a 
registered management investment company underlying a UIT (an 
``underlying fund'') to VLI Accounts supporting scheduled premium VLI 
Contracts and to their life insurance company depositors, investment 
advisers, and principal underwriters. The exemptions granted by the 
Rule are available, however, only if an underlying fund offers its 
shares exclusively to VLI Accounts of a single Participating Insurance 
Company or an affiliated insurance company, and then, only if scheduled 
premium VLI Contracts are issued through such VLI Accounts. Therefore, 
the relief granted by Rule 6e-2(b)(15) is not available with respect to 
a scheduled premium VLI Account that owns shares of an underlying fund 
that engages in mixed funding by also offering its shares to a VA 
Account or to a flexible premium VLI Account of the same company or of 
any affiliated life insurance company. In addition, the relief granted 
by Rule 6e-2(b)(15) is not available if the underlying fund engages in 
shared funding by offering its shares to VA Accounts or VLI Accounts of 
unaffiliated life insurance companies. Furthermore, Rule 6e-2(b)(15) 
does not contemplate that shares of the underlying fund might also be 
sold to Qualified Plans.
    3. Rule 6e-3(T)(b)(15) under the Act provides partial exemptions 
from sections 9(a), 13(a), 15(a), and 15(b) of the Act to VLI Accounts 
supporting flexible premium variable life insurance contracts and their 
life insurance company depositors, investment advisers and principal 
underwriters. The exemptions granted by the Rule are available, 
however, only where shares of the Variable Series are offered 
exclusively to separate accounts of the Participating Insurance 
Company, or of any affiliated insurance company, offering either 
scheduled premium contracts or flexible premium contracts, or both, or 
which also offer their shares to VA Accounts of the Participating 
Insurance Company or of an affiliated life insurance company. Therefore 
Rule 6e-3(T)(b)(15) permits mixed funding with respect to a flexible 
premium VLI Account, subject to certain conditions. However, Rule 6e-
3(T)(b)(15) does not permit shared funding because the relief granted 
is not available with respect to a VLI Account that owns shares of an 
underlying fund that also offers its shares to separate accounts 
(including VA Accounts and flexible premium and scheduled premium VLI 
Accounts) of unaffiliated Participating Insurance Companies. Also, Rule 
6e-3(T)(b)(15) does not contemplate that shares of the underlying fund 
might also be sold to Qualified Plans.
    4. Applicants state that current tax law permits shares of the 
Variable Series to be sold directly to Qualified Plans. Section 817(h) 
of the Code imposes certain diversification standards on the assets 
underlying Variable Contracts, such as those in the Variable Series. 
The Code provides that Variable Contracts will not be treated as 
annuity contracts or life insurance contracts, as the case may be, for 
any period (or any subsequent period) for which the underlying assets 
fail to be adequately diversified in accordance with regulations issued 
by the Treasury Department. On March 1, 1989, the Treasury Department 
adopted regulations (Treas. Reg. 1.817-5) (the ``Regulations'') that 
established specific diversification requirements for investment 
portfolios underlying Variable Contracts. The Regulations generally 
provide that, in order to meet these diversification requirements, all 
of the beneficial interests in the investment company must be held by 
the segregated asset accounts of one or more life insurance companies. 
Notwithstanding this, the Regulations also contain an exception to this 
requirement that permits trustees of a Qualified Plan to hold shares of 
an investment company, the shares of which are also held by insurance 
company segregated asset accounts, without adversely affecting the 
status of the investment company as an adequately diversified 
underlying investment for Variable Contracts issued through such 
segregated asset accounts (Treas. Reg. 1.817-5(f)(3)(iii)).
    5. As a result, Qualified Plans may select the Variable Series as 
an investment option without endangering the tax status of Variable 
Contracts issued through Participating Separate Accounts as life 
insurance annuities. Variable Series shares sold to the Qualified Plans 
would be held by the Trustees of such Plans as required by section 
403(a) of ERISA. The Trustees or other fiduciaries of the Qualified 
Plans may vote Variable Series shares held by the Qualified Plans in 
their own discretion or, if the applicable Qualified Plan so provides, 
vote such shares in accordance with instructions from participants in 
such Plans. The use of a common management investment company (or 
investment portfolio thereof) as an investment medium for Variable 
Accounts and Qualified Plans is referred to herein as ``extended mixed 
funding.''
    6. Applicants note that the promulgation of Rules 6e-2(b)(15) and 
6e-3(T)(b)(15) under the Act preceded the issuance of the Regulations. 
Thus, the sale of shares of the same investment company to both 
Participating 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), and, therefore, Applicants assert that the restrictions of 
such Rules do not evidence an intent of the Commission to prevent 
extended mixed funding.
    7. Section 9(a)(3) of the Act provides that it is unlawful for any 
company to serve as investment adviser or principal underwriter for any 
registered open-end investment company if an affiliated person of that 
company is subject to a disqualification enumerated in sections 9(a)(1) 
or (2). Rule 6e-2(b)(15) and Rule

[[Page 13739]]

6e-3(T)(b)(15) limit the application of the eligibility restrictions of 
section 9(a) to affiliated persons of a life insurance company that 
directly participate in the management of the underlying registered 
management investment company under certain circumstances, subject to 
limitations on mixed and shared funding. The relief provided by Rule 
6e-2(b)(15)(i) and 6e-3(T)(b)(15)(i) permits persons who are affiliated 
persons of a life insurance company or its affiliates who otherwise 
would be disqualified under section 9(a) to serve as an officer, 
director or employee of an underlying fund, so long as any such person 
does not participate directly in the management or administration of 
such underlying fund. In addition, Rule 6e-2(b)(15)(ii) and Rule 6e-
3(T)(b)(15)(ii) permit a Participating Insurance Company to serve as 
the underlying fund's investment adviser or principal underwriter, 
provided that none of that insurance company's personnel who are 
ineligible pursuant to section 9(a) of the Act participate in the 
management or administration of the underlying fund.
    8. Applicants assert that the partial relief provided by Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) under the Act from the requirements of 
section 9 of the Act limits the amount of monitoring of a Participating 
Insurance Company's personnel that is necessary to ensure compliance 
with section 9 to that which is appropriate in light of the policy and 
purposes of section 9. Applicants state that Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) recognize that applying the provisions of section 9 to the 
many individuals in a large insurance company complex, most of whom 
typically will have no involvement in matters pertaining to investment 
companies funding the Participating Separate Accounts, is not necessary 
or appropriate in the public interest nor is it necessary for the 
protection of investors or the purposes fairly intended by the policy 
and provisions of the Act. Moreover, Applicants assert that disallowing 
the relief permitted by Rule 6e-2(b)(15) and Rule 6e-3(T)(b)(15) 
because shares of the Variable Series are sold to Qualified Plans would 
serve no regulatory purpose. Applicants assert that the sale of shares 
of an underlying fund to Qualified Plans does not change the fact that 
the purposes of the Act are not advanced by applying the prohibitions 
of section 9(a) to individuals who may be involved in a life insurance 
complex but have no involvement in the underlying fund.
    9. Rule 6e-2(b)(15) and Rule 6e-3(T)(b)(15)(iii) under the Act 
provide partial exemptions from sections 13(a), 15(a), and 15(b) of the 
Act to the extent that those sections might be deemed to require 
``pass-through'' voting with respect to the shares of an underlying 
fund, by allowing an insurance company to disregard the voting 
instructions of contract owners 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) permit a 
Participating Insurance Company to disregard the voting instructions of 
its contract owners if such instructions would require an underlying 
fund's shares to be voted to cause such underlying fund to make (or to 
refrain from making) certain investments which would result in changes 
in the sub-classification or investment objectives of such underlying 
fund or to approve or disapprove any contract between such underlying 
fund and an 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 the Rules). Rules 6e-2(b)(15)(iii)(B) and 6e-
3(T)(b)(15)(iii)(A)(2) permit a Participating Insurance Company to 
disregard contract owners' voting instructions if the contract owners 
initiate any change in the underlying fund's investment objectives, 
principal underwriter or any investment adviser (provided that 
disregarding such voting instructions is reasonable and subject to the 
other provisions of paragraph (b)(5)(ii) and (b)(7)(ii)(B) and (C) of 
the Rules). Applicants assert that these rights do not raise any issues 
different from those raised by the authority of state insurance 
administrators over separate accounts.
    10. Applicants submit that the reason the Commission did not grant 
more extensive relief in the area of mixed and shared funding when it 
adopted Rule 6e-3(T) under the Act is because of the Commission's 
uncertainty in this area with respect to such issues as conflicts of 
interest. Applicants believe that the Commission's concern is not 
warranted in the context of permitting shared funding or permitting 
Qualified Plans to invest in the Variable Series and that the addition 
of owners of Variable Contracts supported by separate accounts of 
unaffiliated life insurance companies and Qualified Plans as eligible 
shareholders will not increase the risk of material irreconcilable 
conflicts amongst shareholders.
    11. Voting rights of shares sold to Qualified Plans are expressly 
reserved to certain specified persons and are not required to be passed 
through to Qualified Plan participants. Under section 403(a) of ERISA, 
shares of an underlying fund sold to a Qualified Plan must be held by 
the trustee(s) of the Qualified Plan, and such trustee(s) must have 
exclusive authority and discretion to manage and control the Qualified 
Plan with two exceptions: (a) When the Qualified Plan expressly 
provides that the trustee(s) are subject to the direction of a named 
fiduciary who is not a trustee, in which case the trustee(s) are 
subject to proper directions made in accordance with the terms of the 
Qualified Plan and not contrary to ERISA, and (b) when the authority to 
manage, acquire or dispose of assets of the Qualified Plan is delegated 
to one or more investment managers pursuant to section 402(c)(3) of 
ERISA. Unless one of the above two exceptions stated in section 403(a) 
applies, the exclusive authority and responsibility for voting shares 
of an underlying fund is vested in the plan trustees. 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.
    12. If a named fiduciary to a Qualified Plan appoints an investment 
manager, the investment manager has the responsibility to vote the 
shares held unless the right to vote such shares is reserved to the 
trustees or the named fiduciary. 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.
    13. If a Qualified Plan does not provide participants with the 
right to give voting instructions, the Applicants submit that there is 
no potential for material irreconcilable conflicts of interest between 
or among owners of Variable Contracts and participants in Qualified 
Plans with respect to voting of an underlying fund's shares. 
Accordingly, unlike the case with Participating Separate Accounts, the 
issue of the resolution of material irreconcilable conflicts with 
respect to voting is not present with respect to such Qualified Plans 
because the Qualified Plans are not entitled to pass-through voting 
privileges.
    14. Applicants further note that there is no reason to believe that 
participants in Qualified Plans which provide participants with the 
right to give voting instructions generally, or those in a particular 
Plan, either as a single group

[[Page 13740]]

or in combination with participants in other Qualified Plans, would 
vote in a manner that would disadvantage Variable Contract owners. 
Applicants, therefore, submit that the purchase of shares of the 
Variable Series by Qualified Plans that provide voting rights does not 
present any complications not otherwise occasioned by mixed or shared 
funding.
    15. Applicants state that the presence of both VLI Accounts and VA 
Accounts as shareowners of an underlying fund will not lead to a 
greater probability of material irreconcilable conflicts than if the 
underlying fund did not engage in mixed funding. Similarly, shared 
funding does not present any issues that do not already exist where an 
underlying fund sells its shares to a single insurance company which 
sells contracts in several states. A state insurance regulatory body in 
one state could require action that is inconsistent with the 
requirements of other states in which the insurance company offers its 
policies. The fact that unaffiliated insurers may be domiciled in 
different states does not create a significantly different or enlarged 
problem.
    16. Applicants assert that shared funding by unaffiliated insurers, 
in this respect, is no different than the use of the same investment 
company as the funding vehicle for affiliated insurers, which Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) under the Act permit under various 
circumstances. Affiliated insurers may be domiciled in different states 
and be subject to differing state law requirements. Affiliation does 
not reduce the potential for differences in state regulatory 
requirements. Applicants state that the conditions summarized below are 
designed to safeguard against, and provide procedures for resolving, 
any adverse effects that differences among state regulatory 
requirements may produce. For instance, if a particular state insurance 
regulator's decision conflicts with the majority of other state 
regulators, then the affected insurer may be required to withdraw its 
Participating Separate Account's investment in the Variable Series. 
This requirement will be provided for in agreements that will be 
entered into by Participating Insurance Companies with respect to their 
participation in the Variable Series.
    17. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the Act give the 
insurance company the right to disregard the voting instructions of the 
contract owners. Applicants assert that this right does not raise any 
issues different from those raised by the authority of state insurance 
administrators over separate accounts. Under Rules 6e-2(b)(15) and 6e-
3(T)(B)(15), an insurer can disregard contract owner voting 
instructions only with respect to certain specified items and under 
certain specified conditions. Requiring that only affiliated insurance 
companies invest in the Variable Series does not eliminate the 
potential, if any exists, for divergent judgements as to the 
advisability or legality of a change in investment policies, principal 
underwriter, or investment adviser initiated by contract owners. 
Moreover, the potential for disagreement is limited by the requirements 
in Rules 6e-2 and 6e-3(T) that an insurance company's voting 
instructions be reasonable and based on specific good faith 
determinations.
    18. A particular Participating Insurance Company'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 
Participating Insurance Companies (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 judgement represents a minority 
position or would preclude a majority vote, then the insurer may be 
required, at the election of the Variable Series, to withdraw its 
Participating Separate Account's investment in such Variable Series, 
and no change 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 the Variable Series.
    19. Furthermore, Applicants assert that no one investment strategy 
can be identified as appropriate to a particular insurance product. 
Each pool of VA and VLI Contract owners is composed of individuals of 
diverse financial status, age, insurance, and investment goals. 
Variable Series supporting even one type of insurance product must 
accommodate these diverse factors in order to attract and retain 
purchasers. Permitting mixed and shared funding as well as permitting 
sales to Qualified Plans will provide benefits to the Variable Series 
shareholders. Among other things, Participating Insurance Companies and 
Variable Contract owners will benefit from a greater variety of 
investment options with lower costs.
    20. Applicants do not believe that the sale of the shares of the 
Variable Series to Qualified Plans will increase the potential for 
material irreconcilable conflicts of interest between or among 
different types of investors. Applicants assert that there are either 
no conflicts of interest or that there exists the ability by the 
affected parties to resolve the issues without harm to the contract 
owners in the Participating Separate Accounts or to the participants 
under the Qualified Plans.
    21. As noted above, section 817(h) of the Code imposes certain 
diversification standards on the underlying assets of variable annuity 
contracts and variable life insurance contracts held in the portfolios 
of management investment companies. 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 the Regulations, adequately 
diversified.
    22. The Regulations 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. The Regulations, however, 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 Plan 
without adversely affecting the ability of shares in the underlying 
fund 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 
Plans and separate accounts to invest in the same portfolio of an 
underlying fund. For this reason, Applicants assert that neither the 
Code, nor the Regulations, nor the Revenue Rulings thereunder, present 
any inherent conflicts of interest.
    23. Applicants note that while there are differences in the manner 
in which distributions from Variable Contracts and Qualified Plans are 
taxed, the different tax consequences do not raise any conflicts of 
interest. If the Participating Separate Account or the Qualified Plan 
cannot net purchase payments to make the distributions, the 
Participating Separate Account or the Qualified Plan will redeem shares 
of the Variable Series at their net asset value. The Qualified Plan 
then will make distributions in accordance with the terms of the 
Qualified Plan and the Participating Insurance Company will make 
distributions in accordance with the terms of the Variable Contract. 
Therefore, distributions and dividends

[[Page 13741]]

will be declared and paid by the Variable Series without regard to the 
character of the shareholder.
    24. Applicants state that it is possible to provide an equitable 
means of giving voting rights to Variable Contract owners and to the 
trustees of Qualified Plans. The transfer agent for the Variable Series 
will inform each Participating Insurance Company of its share ownership 
in each Participating Separate Account, as well as inform the trustees 
of Qualified Plans of their holdings. Each Participating Insurance 
Company then will solicit voting instructions in accordance with Rules 
6e-2 and 6e-3(T) under the Act, as applicable, and its participation 
agreement with the Trust. 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 the Variable Series will be 
no different from the voting rights that are provided to Qualified 
Plans with respect to shares of funds sold to the general public.
    25. Applicants submit that the ability of the Variable Series to 
sell shares directly to Qualified Plans does not create a ``senior 
security,'' as such term is defined under section 18(g) of the Act, 
with respect to any contract owner as opposed to a participant under a 
Qualified Plan. Regardless of the rights and benefits of Variable 
Contract owners or participants under the Qualified Plans, the 
Qualified Plans and the Participating Separate Accounts have rights 
only with respect to their respective shares of the Variable Series. 
They can redeem such shares at their net asset value. No shareholder of 
the Variable Series will have any preference over any other shareholder 
with respect to distribution of assets or payment of dividends.
    26. Applicants also assert that the veto power of state insurance 
commissioners over an underlying fund's investment objectives does not 
create any inherent conflicts of interest between the contract owners 
of the Participating Separate Accounts and Qualified Plan participants. 
Applicants note that the basic premise of corporate democracy and 
shareholder voting is that not all the shareholders may agree with a 
particular proposal. Although the interests and opinions of 
shareholders may differ, this does not mean that inherent conflicts of 
interest exist between or among such shareholders. State insurance 
commissioners have been given the veto power in recognition of the fact 
that insurance companies usually cannot simply redeem their separate 
accounts out of one fund and invest in another. Generally, time-
consuming, complex transactions must be undertaken to accomplish such 
redemptions and transfers.
    27. In contrast, the trustees of Qualified Plans or the 
participants in participant-directed Qualified Plans can make the 
decision quickly and redeem their interest in the Variable Series and 
reinvest in another funding vehicle without the same regulatory 
impediments faced by separate accounts or, as is the case with most 
Qualified Plans, even hold cash pending suitable investment.
    28. Applicants state that various factors have kept more insurance 
companies from offering variable annuity and variable life insurance 
contracts than currently offer such contracts. These factors include 
the costs of organizing and operating a funding medium, the lack of 
expertise with respect to investment management (principally with 
respect to stock and money market investments), and the lack of name 
recognition by the public of certain insurers as investment experts 
with whom the public feels comfortable entrusting their investment 
dollars. The use of a Variable Series as a common investment medium for 
variable contracts would reduce or eliminate these concerns. Mixed and 
shared funding also should provide several benefits to Variable 
Contract owners by eliminating a significant portion of these costs of 
establishing and administering separate funds. Participating Insurance 
Companies will benefit not only from the investment and administrative 
expertise of TPL, but also from the cost efficiencies and investment 
flexibility afforded by a large pool of funds. Mixed and shared funding 
also would permit a greater amount of assets available for investment 
by a Variable Series, thereby promoting economics of scale, by 
permitting increased safety through greater diversification, or by 
making the addition of new Variable Series more feasible. Applicants 
assert that the sale of shares of the Variable Series to Qualified 
Plans in addition to the Separate Accounts will result in an increased 
amount of assets available for investment by such Variable Series. This 
may benefit variable contract owners by promoting economies of scale, 
by permitting increased safety of investments through greater 
diversification, and by making the addition of new Variable Series more 
feasible.
    29. Applicants also submit that the investment of seed capital in 
the Variable Series presents no potential for irreconcilable conflicts 
of interest. Seed capital for the Variable Series will be provided by 
TPL. Applicants note that Rule 14a-2(b) under the Act provides an 
exemption from the seed capital requirement for investment companies 
that are sponsored by an insurance company. The Commission has granted 
this exemption to mutual funds organized by insurance companies, but 
because TPL is not an insurance company, the exemption is not available 
to the Variable Series.
    30. Applicants assert that granting the exemptions requested by 
Applicants will not compromise the regulatory purposes of sections 
9(a), 13(a), 15(a) and 15(b) of the Act or Rules 6e-2(b)(15) or 6e-
3(T)(b)(15) thereunder.

Applicants' Conditions for Relief

    If the requested order is granted, Applicants consent to the 
following conditions:
    1. A majority of the Board of Trustees of the Trust (``Board'') 
will consist of persons who are not ``interested persons'' of the 
Trust, as defined by section 2(a)(19) of the Act, and the Rules 
thereunder, as modified by any applicable orders of the Commission, 
except that if this condition is not met by reason of death, 
disqualification, or bona-fide resignation of any Trustee, then the 
operation of this condition will be suspended: (a) For a period of 90 
days if the vacancy may be filled by the Board; (b) for a period of 150 
days if a vote of the shareholders is required to fill the vacancy; or 
(c) for such longer period as the Commission may prescribe by order 
upon application or by future rule.
    2. The Board will monitor each Variable Series for the existence of 
any material irreconcilable conflict between and among the interests of 
contract holders of all Participating Separate Accounts and 
participants of Qualified Plans investing in any such Variable Series 
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 such Variable Series are being 
managed; (e) a difference in voting instructions given by VA Contract 
owners, VLI Contract owners, and the trustees of Qualified Plans; (f) a 
decision by a Participating Insurance Company to

[[Page 13742]]

disregard the voting instructions of contract owners; or (g) if 
applicable a decision by a Qualified Plan to disregard voting 
instructions of its participants.
    3. TPL (or any investment adviser to a Variable Series), and any 
Participating Insurance Company and Qualified Plan that executes a 
participation agreement, upon becoming an owner of 10 percent or more 
of the assets of any Variable Series (collectively, ``Participants'') 
will report any potential or existing conflicts to the Board. Such 
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 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 Plan 
participant voting instructions. The responsibility to report such 
information and conflicts, and to assist the Board, will be contractual 
obligations of all Participating Insurance Companies under their 
participation agreements with the Trust, and these responsibilities 
will be carried out with a view only to the interests of the contract 
owners. The responsibility to report such information and conflicts, 
and to assist the Board, also will be contractual obligations of all 
Qualified Plans with participation agreements, and such agreements will 
provide that these responsibilities will be carried out with a view 
only to the interests of the Qualified Plan participants.
    4. If it is determined by a majority of the Board, or a majority of 
the disinterested Trustees, that a material irreconcilable conflict 
exists, then the relevant Participating Insurance Company or Qualified 
Plan will, at its expense and to the extent reasonably practicable (as 
determined by a majority of the disinterested Trustees), take whatever 
steps are necessary to remedy or eliminate the material irreconcilable 
conflict, including: (a) Withdrawing the assets allocable to some or 
all of the Participating Separate Accounts from the relevant Variable 
Series and reinvesting such assets in a different investment medium, 
which may include another such Variable Series, (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 contract owners and, as appropriate, segregating the assets of 
any appropriate group (i.e., VA Contract owners or VLI Contract holders 
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 (c) establishing a new registered 
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 Participating Insurance Company may be 
required, at the election of the Trust, to withdraw such Participating 
Insurance Company's separate account's investment in the relevant 
Variable Series, 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 participant voting 
instructions, if applicable, and that decision represents a minority 
position or would preclude a majority vote, the Qualified Plan may be 
required, at the election of the Trust, to withdraw its investment in 
the relevant Variable Series, 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 Variable Series and this 
responsibility, in the case of Participating Insurance Companies, will 
be carried out with a view only to the interests of contract owners and 
in the case of Qualified Plans, will be carried out with a view only to 
the interests of Qualified Plan participants.
    For purposes of this Condition 4, a majority of the disinterested 
Trustees will determine whether or not any proposed action adequately 
remedies any material irreconcilable conflict, but, in no event, will 
the Trust or TPL be required to establish a new funding medium for any 
VA Contract or VLI Contract. No Participating Insurance Company will be 
required by this Condition 4 to establish a new funding medium for any 
VA Contract or VLI Contract if an offer to do so has been declined by 
the vote of a majority of 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 
medium for the Qualified Plan if (a) a majority of the Qualified Plan's 
participants materially and adversely affected by the irreconcilable 
conflict vote to decline such offer, or (b) pursuant to documents 
governing the Qualified Plan, the Qualified Plan makes each decision 
without a participant vote.
    5. A Board's determination of the existence of material 
irreconcilable conflict and its implications will be made known in 
writing promptly to all Participants.
    6. Participating Insurance Companies will provide pass-through 
voting privileges to all VA Contract and VLI Contract owners whose 
contracts are funded through a registered separate account so long as 
the Commission continues to interpret the Act as requiring such pass-
through voting privileges. Accordingly, such Participating Insurance 
Companies, where applicable, will vote shares of the applicable 
Variable Series held in its Participating Separate Accounts in a manner 
consistent with voting instructions timely received from contract 
owners. Participating Insurance Companies will be responsible for 
assuring that each Participating Separate Account investing in a 
Variable Series calculates voting privileges in a manner consistent 
with other Participating Insurance Companies. The obligation to vote a 
Variable Series' shares and calculate voting privileges in a manner 
consistent with all other Participating Separate Accounts in a Variable 
Series will be a contractual obligation of all Participating Insurance 
Companies under their agreements governing their participation in such 
Variable Series. Each Participating Insurance Company will vote shares 
for which it has not received timely voting instructions, as well as 
shares attributable to it in the same proportion as it votes those 
shares for which it has received voting instructions. Each Qualified 
Plan will vote as required by applicable law and its governing 
documents.
    7. As long as the Commission continues to interpret the Act as 
requiring pass-through voting privileges to be provided to VA Contract 
and VLI Contract owners, TPL and any of its affiliates will vote its 
shares of any Variable Series in the same proportion as all VA Contract 
and VLI Contract owners having voting rights with respect to the 
relevant Variable Series.
    8. The Trust will comply with all provisions of the Act requiring 
voting by shareholders (including persons who have a voting interest in 
shares of the Variable Series), and, in particular, each such Variable 
Series will either provide

[[Page 13743]]

for annual meetings (except to the extent that the Commission may 
interpret section 16 of the Act not to require such meetings) or comply 
with section 16(c) of the Act (although the Trust is not, or will not 
be, the type of Trust described therein), as well as, with section 
16(a) of the Act and, if and when applicable, section 16(b) of the Act. 
Further, the Trust will act in accordance with the Commission's 
interpretation of the requirements of section 16(a) with respect to 
periodic elections of trustees and with whatever rules the Commission 
may promulgate with respect thereto.
    9. The Trust will notify all Participating Insurance Companies and 
all Qualified Plans that disclosure in separate account prospectuses or 
any Qualified Plan prospectuses or other Qualified Plan disclosure 
documents regarding potential risks of mixed funding may be 
appropriate. Each Variable Series will disclose in its prospectus that: 
(a) Shares of such Variable Series may be offered to insurance company 
separate accounts of both variable annuity and variable life insurance 
contracts and to Qualified Plans; (b) due to differences in tax 
treatment and other considerations, the interests of various contract 
owners participating in such Variable Series and the interests of 
Qualified Plans investing in such Variable Series may conflict, and (c) 
the Trust's Board of Trustees 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 conflict.
    10. If and to the extent that Rule 6e-2 or Rule 6e-3(T) under the 
Act is amended or proposed Rule 6e-3 under the Act is adopted to 
provide exemptive relief from any provision of the Act, or rules 
promulgated thereunder, with respect to mixed or shared funding on 
terms and conditions materially different from any exemptions granted 
in the order requested in this amended and restated Application, then 
the Trust and/or the Participants, as appropriate, shall take such 
steps as may be necessary to comply with Rules 6e-2 or 6e-3(T), as 
amended, or Rule 6e-3, as adopted, as such rules are applicable.
    11. The Participants, at least annually, will submit to the Board 
such reports, materials, or data as the Board may reasonably request so 
that the Trustees of the Trust may fully carry out the obligations 
imposed upon them by the conditions contained in this amended and 
restated Application, and said 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 each Variable Series.
    12. All reports of potential or existing conflicts received by the 
Board of Trustees of the Trust, and all Board action with regard to (a) 
determining the existence of a conflict, (b) notifying Participants of 
the existence of a conflict, and (c) determining whether any proposed 
action adequately remedies a conflict, will be properly recorded in the 
board meeting minutes of the Trust or other appropriate records, and 
such minutes or other records shall be made available to the Commission 
upon request.
    13. A Variable Series 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 
Variable Series unless the Qualified Plan executes an agreement with 
the Trust governing participation in such Variable Series that includes 
the conditions set forth herein to the extent applicable. A Qualified 
Plan will execute an application containing an acknowledgement of this 
condition at the time of its initial purchase of shares of any Variable 
Series.

Conclusion

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

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-6696 Filed 3-19-03; 8:45 am]
BILLING CODE 8010-01-P