[Federal Register Volume 68, Number 203 (Tuesday, October 21, 2003)]
[Notices]
[Pages 60126-60133]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-26447]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26208; File No. 812-12994]


COUNTRY Mutual Funds Trust, et al.

October 15, 2003.
AGENCY: The Securities and Exchange Commission (``SEC'' or 
``Commission'').

ACTION: Notice of Application for an Order of Exemption under Section 
6(c) of the Investment Company Act of 1940, as amended (``1940 Act'') 
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. Applicants: COUNTRY Mutual 
Funds Trust (``Trust'') and COUNTRY Trust Bank (``CTB'') (collectively, 
``Applicants'').

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Summary of Application: Applicants seek an order to permit shares of 
the Trust and shares of any other existing or future investment company 
that is designed to fund insurance products and for which CTB, or any 
of its affiliates, may serve as investment manager, investment adviser, 
subadviser, administrator, manager, principal underwriter or sponsor 
(the Trust and such other investment companies being hereinafter 
referred to, collectively, as ``Insurance Trusts''), or permit shares 
of any current or future series of any Insurance Trust (``Insurance 
Fund''), to be sold to and held by: (1) Separate accounts funding 
variable annuity and variable life insurance contracts issued by both 
affiliated and unaffiliated life insurance companies; (2) qualified 
pension and retirement plans outside of the separate account context 
(``Qualified Plans'' or ``Plans''); and (3) any investment manager to 
an Insurance Trust (``Manager'') and affiliates thereof.

Filing Date: The application was filed on July 30, 2003, and amended 
and restated on October 14, 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 on the application by writing to the 
Secretary of the SEC and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests must be received by the SEC by 
5:30 p.m. on November 14, 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 
writer's interest, the reason for the request, and the issues 
contested. Persons may request notification of the date of the hearing 
by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549-
0690. Applicants, c/o Paul M. Harmon, General Counsel and Secretary, 
COUNTRY Trust Bank, 1705 N. Towanda Avenue, P.O. Box 2020, Bloomington, 
Illinois 61702-2020.

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

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

Applicants' Representations

    1. The Trust is a Delaware business trust organized on August 13, 
2000, and is registered as an open-end management investment company 
under the 1940 Act. The Trust consists of the following nine series: 
COUNTRY Growth Fund (``Growth Fund''), COUNTRY Balanced Fund 
(``Balanced Fund''), COUNTRY Tax Exempt Bond Fund (``Tax Exempt Bond 
Fund''), COUNTRY Short-Term Bond Fund (``Short-Term Bond Fund'') and 
COUNTRY Bond Fund (``Bond Fund''), COUNTRY VP Growth Fund (``VP Growth 
Fund''), COUNTRY VP Balanced Fund (``VP Balanced Fund''), COUNTRY VP 
Short-Term Bond Fund (``VP Short-Term Bond Fund'') and COUNTRY VP Bond 
Fund (``VP Bond Fund''). Additional series and classes of the Fund and 
additional Insurance Funds may be established in the future. Only the 
VP Growth Fund, VP Balanced Fund, VP Short-Term Bond Fund and VP Bond 
Fund constitute Insurance Funds for purposes of this Application.
    2. CTB serves as the Trust's investment manager. CTB is registered 
as an investment adviser with the SEC under the Investment Advisers Act 
of 1940, as amended. Quasar Distributors, LLC (``Quasar''), a broker-
dealer registered with the Commission and a member of the National 
Association of Securities Dealers, Inc., serves as the

[[Page 60127]]

distributor for the following series of the Trust: Growth Fund, 
Balanced Fund, Tax Exempt Bond Fund, Short-Term Bond Fund, and Bond 
Fund. COUNTRY Capital Management Company, a broker-dealer registered 
with the Commission and a member of the National Association of 
Securities Dealers, Inc., serves as the distributor for the following 
series of the Trust: VP Growth Fund, VP Balanced Fund, VP Short-Term 
Bond Fund, and VP Bond Fund.
    3. The Insurance Trusts intend to offer shares of the Insurance 
Funds to (a) registered and unregistered separate accounts of 
affiliated and unaffiliated insurance companies in order to fund 
variable annuity contracts and variable life insurance contracts 
(collectively, ``Separate Accounts''); (b) Qualified Plans; and (c) the 
Manager and its affiliates.
    4. Insurance companies whose Separate Account(s) may now or in the 
future own shares of the Insurance Funds are referred to herein as 
``Participating Insurance Companies.'' The Participating Insurance 
Companies will establish their own Separate Accounts and design their 
own contracts. Each Participating Insurance Company will have the legal 
obligation to satisfy all applicable requirements under both state and 
federal law. It is anticipated that Participating Insurance Companies 
will rely on Rules 6e-2 and 6e-3(T), although some Participating 
Insurance Companies, in connection with variable life insurance 
contracts, may rely on individual exemptive orders as well.
    5. The Insurance Trusts intend to offer shares of the Insurance 
Funds directly to Qualified Plans outside of the separate account 
context. Qualified Plans may choose any of the Insurance Funds that are 
offered as the sole investment under the Plan or as one of several 
investments. Plan participants may or may not be given an investment 
choice depending on the terms of the Plan itself. Shares of any of the 
Insurance Funds sold to such Qualified Plans would be held or deemed to 
be held by the trustee(s) of said Plans. Certain Qualified Plans, 
including Section 403(b)(7) Plans and Section 408(a) Plans, may vest 
voting rights in Plan participants instead of Plan trustees. Exercise 
of voting rights by participants in any such Qualified Plans, as 
opposed to the trustees of such Plans, cannot be mandated by the 
Applicants. Each Plan must be administered in accordance with the terms 
of the Plan and as determined by its trustee or trustees.
    6. Shares of each Insurance Fund also may be offered to the Manager 
and its affiliates, in reliance on regulations issued by the Treasury 
Department (Treas. Reg. 1.817-5) that established diversification 
requirements for variable annuity and variable life insurance contracts 
(``Treasury Regulations''). Treasury Regulation 1.817-5(f)(3)(ii) 
permits such sales as long as the return on shares held by the Manager 
or its affiliates is computed in the same manner as for shares held by 
the Separate Accounts, and the Manager and its affiliates do not intend 
to sell to the public shares of the Insurance Fund that they hold. An 
additional restriction is imposed by the Treasury Regulations on sales 
to the Manager and its affiliates who may hold shares only in 
connection with the creation or management of the Insurance Fund. 
Applicants anticipate that sales in reliance on these provisions of the 
Treasury Regulations generally will be made to Manager and its 
affiliates and generally for the purpose of providing necessary capital 
required by Section 14(a) of the 1940 Act.

Applicants' Legal Analysis

    1. Applicants request that the Commission issue an order pursuant 
to Section 6(c) of the 1940 Act granting exemptions from the provisions 
of Sections 9(a), 13(a), 15(a), and 15(b) of the 1940 Act and Rules 6e-
2(b)(15) and 6e-3(T)(b)(15) thereunder (including any comparable 
provisions of a permanent rule that replaces Rule 6e-3(T)), to the 
extent necessary to permit shares of each Insurance Fund to be offered 
and sold to, and held by: (a) Separate Accounts funding variable 
annuity contracts and scheduled premium and flexible premium variable 
life insurance contracts issued by both affiliated and unaffiliated 
life insurance companies; (b) Qualified Plans; and (c) any Manager to 
an Insurance Trust and affiliates thereof.
    2. Section 6(c) authorizes the Commission to exempt any person, 
security, or transaction or any class or classes of persons, 
securities, or transactions from any provision or provisions of the 
1940 Act and/or of any rule thereunder if and to the extent that such 
exemption is necessary or appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act.
    3. In connection with the funding of scheduled premium variable 
life insurance contracts issued through a separate account organized as 
a unit investment trust (``Trust Account''), Rule 6e-2(b)(15) provides 
partial exemptions from Sections 9(a), 13(a), 15(a), and 15(b) of the 
1940 Act. The exemptions granted to a separate account by Rule 6e-
2(b)(15) are available only where each registered management investment 
company underlying the Trust Account (``underlying fund'') offers its 
shares ``exclusively to variable life insurance separate accounts of 
the life insurer or of any affiliated life insurance company * * *'' 
(emphasis added). Therefore, the relief granted by Rule 6e-2(b)(15) is 
not available with respect to a scheduled premium variable life 
insurance separate account that owns shares of an underlying fund that 
also offers its shares to a variable annuity separate account of the 
same company or of any affiliated life insurance company. The use of a 
common underlying fund as the underlying investment medium for both 
variable annuity and variable life insurance separate accounts of the 
same life insurance company or of any affiliated life insurance company 
is referred to herein as ``mixed funding.'' In addition, the relief 
granted by Rule 6e-2(b)(15) is not available with respect to a 
scheduled premium variable life insurance separate account that owns 
shares of an underlying fund that also offers its shares to separate 
accounts funding variable contracts of one or more unaffiliated life 
insurance companies. The use of a common underlying fund as the 
underlying investment medium for variable life insurance separate 
accounts of one insurance company and separate accounts funding 
variable contracts of one or more unaffiliated life insurance companies 
is referred to herein as ``shared funding.'' Moreover, because the 
relief under Rule 6e-2(b)(15) is available only where shares are 
offered exclusively to variable life insurance separate accounts, 
additional exemptive relief may be necessary if the shares of the 
Insurance Trusts are also to be sold to Qualified Plans or to the 
Manager and its affiliates.
    4. In connection with the funding of flexible premium variable life 
insurance contracts issued through a Trust Account, Rule 6e-3(T)(b)(15) 
provides partial exemptions from Sections 9(a), 13(a), 15(a) and 15(b) 
of the 1940 Act to the extent that those sections have been deemed by 
the Commission to require ``pass-through'' voting with respect to an 
underlying fund's shares. The exemptions granted to a separate account 
by Rule 6e-3(T)(b)(15) are available only where all of the assets of 
the separate account consist of the

[[Page 60128]]

shares of one or more underlying funds which offer their shares 
``exclusively to separate accounts of the life insurer, or of any 
affiliated life insurance company, offering either scheduled contracts 
or flexible contracts, or both; or which also offer their shares to 
variable annuity separate accounts of the life insurer or of an 
affiliated life insurance company'' (emphasis added). Therefore, Rule 
6e-3(T) permits mixed funding with respect to a flexible premium 
variable life insurance separate account, subject to certain 
conditions. However, Rule 6e-3(T) does not permit shared funding 
because the relief granted by Rule 6e-3(T)(b)(15) is not available with 
respect to a flexible premium variable life insurance separate account 
that owns shares of an underlying fund that also offers its shares to 
separate accounts (including variable annuity and flexible premium and 
scheduled premium variable life insurance separate accounts) of 
unaffiliated life insurance companies. The relief provided by Rule 6e-
3(T) is not relevant to the purchase of shares of the Insurance Trusts 
by Qualified Plans or by the Manager and its affiliates. However, 
because the relief granted by Rule 6e-3(T)(b)(15) is available only 
where shares of the underlying fund are offered exclusively to separate 
accounts, or to life insurers in connection with the operation of a 
separate account, additional exemptive relief may be necessary if the 
shares of the Insurance Trusts are also to be sold to Qualified Plans 
or to the Manager and its affiliates.
    5. None of the relief provided for in Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) relates to Qualified Plans, the Manager and its affiliates, 
or to an underlying fund's ability to sell its shares to such 
purchasers. It is only because some of the Separate Accounts that may 
invest in the Insurance Trusts may themselves be investment companies 
that rely upon Rules 6e-2 and 6e-3(T) and wish to continue to rely upon 
the relief provided in those Rules, that the Applicants are applying 
for the requested relief. If and when a material irreconcilable 
conflict arises in the context of the Application between the Separate 
Accounts or between Separate Accounts on the one hand and Qualified 
Plans or the Manager and its affiliates on the other hand, the 
Participating Insurance Companies, Qualified Plans and the Manager and 
its affiliates must take whatever steps are necessary to remedy or 
eliminate the conflict, including eliminating the Insurance Funds as 
eligible investment options. Applicants have concluded that investment 
by the Manager and its affiliates or the inclusion of Qualified Plans 
as eligible shareholders should not increase the risk of material 
irreconcilable conflicts among shareholders. However, Applicants 
further assert that even if a material irreconcilable conflict 
involving the Qualified Plans arose, the Qualified Plans, unlike the 
Separate Accounts, can simply redeem their shares and make alternative 
investments. By contrast, insurance companies cannot simply redeem 
their separate accounts out of one fund and invest in another. Time 
consuming, complex transactions must be undertaken to accomplish such 
redemptions and transfers. Applicants thus argue that allowing the 
Manager and its affiliates or Qualified Plans to invest directly in the 
Insurance Trusts should not increase the opportunity for conflicts of 
interest.
    6. Applicants assert that the Treasury Regulations made it possible 
for shares of an investment company to be held by a Qualified Plan or 
the investment company's investment manager or its affiliates without 
adversely affecting the ability of shares in the same investment 
company to also be held by separate accounts of insurance companies in 
connection with their variable life insurance contracts. Section 817(h) 
of the Internal Revenue Code of 1986 (``Code'') imposes certain 
diversification standards on the underlying assets of separate accounts 
funding variable annuity contracts and variable life contracts. In 
particular, 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) for which the separate account investments are 
not, in accordance with regulations prescribed by the Treasury 
Department, adequately diversified. The Treasury Regulations provide 
that, in order to meet the diversification requirements, all of the 
beneficial interests in the investment company must be held by the 
segregated asset accounts of one or more insurance companies. However, 
the Treasury Regulations also contain certain exceptions to this 
requirement, one of which allows shares in an investment company to be 
held by the trustee of a qualified pension or retirement plan without 
adversely affecting the ability of shares in the same investment 
company to also be held by the separate accounts of insurance companies 
in connection with their variable annuity and variable life contracts 
(Treas. Reg. Sec.  1.817-5(f)(3)(iii)).
    7. Applicants also assert that the Treasury Regulations contain 
another exception that permits the investment manager of the investment 
company and certain companies related to the investment manager to hold 
shares of the investment company subject to certain conditions (Treas. 
Reg. Sec.  1.817-5(f)(3)(ii)).
    8. The promulgation of Rules 6e-2(b)(15) and 6e-3(T)(b)(15) 
preceded the issuance of the Treasury Regulations which made it 
possible for shares of an investment company to be held by a Qualified 
Plan or the investment company's investment manager or its affiliates 
without adversely affecting the ability of shares in the same 
investment company to also be held by the separate accounts of 
insurance companies in connection with their variable life insurance 
contracts. Thus, the sale of shares of the same investment company to 
separate accounts through which variable life insurance contracts are 
issued, to Qualified Plans, or to the investment company's investment 
manager and its affiliates (collectively, ``eligible shareholders'') 
could not have been envisioned at the time of the adoption of Rules 6e-
2(b)(15) and 6e-3(T)(b)(15), given the then-current tax law.
    9. Paragraph (3) of Section 9(a) provides, among other things, that 
it is unlawful for any company to serve as investment adviser to or 
principal underwriter for any registered open-end investment company if 
an affiliated person of that company is subject to a disqualification 
enumerated in Sections 9(a)(1) or (a)(2). Rule 6e-2(b)(15)(i) and (ii) 
and Rule 6e-3(T)(b)(15)(i) and (ii) provide exemptions from Section 
9(a) under certain circumstances, subject to the limitations discussed 
above on mixed and shared funding. These exemptions limit the 
application of the eligibility restrictions to affiliated individuals 
or companies that directly participate in the management of the 
underlying management investment company. The relief provided by Rules 
6e-2(b)(15)(i) and 6e-3(T)(b)(15)(i) permits a person disqualified 
under Section 9(a) to serve as an officer, director, or employee of the 
life insurer, or any of its affiliates, so long as that person does not 
participate directly in the management or administration of the 
underlying fund. The relief provided by Rules 6e-2(b)(15)(ii) and 6e-
3(T)(b)(15)(ii) permits the life insurer to serve as the underlying 
fund's investment manager or principal underwriter, provided that none 
of the insurer's personnel who are ineligible pursuant to Section 9(a) 
are participating in the management or administration of the Trust. The 
partial relief granted in Rules 6e-2(b)(15) and 6e-3(T)(b)(15) from the 
requirements of Section 9 limits, in effect, the amount of

[[Page 60129]]

monitoring of an insurer's personnel that would otherwise be necessary 
to ensure compliance with Section 9 to that which is appropriate in 
light of the policy and purposes of Section 9. Those Rules recognize 
that it is not necessary for the protection of investors or the 
purposes fairly intended by the policy and provisions of the 1940 Act 
to apply the provisions of Section 9(a) to the many individuals in an 
insurance company complex, most of whom typically will have no 
involvement in matters pertaining to investment companies in that 
organization. Applicants assert that it is also unnecessary to apply 
Section 9(a) of the 1940 Act to the many individuals employed by 
Participating Insurance Companies (or affiliated companies of 
Participating Insurance Companies) who do not directly participate in 
the administration or management of the Insurance Trusts. There is no 
regulatory purpose in extending the monitoring requirements to embrace 
a full application of Section 9(a)'s eligibility restrictions because 
of mixed funding or shared funding and sales to Qualified Plans. Those 
Participating Insurance Companies are not expected to play any role in 
the management or administration of the Insurance Trusts. Those 
individuals who participate in the management or administration of the 
Insurance Trusts will remain the same regardless of which separate 
accounts, insurance companies or Qualified Plans use the Insurance 
Trusts. Therefore, applying the monitoring requirements of Section 9(a) 
to the thousands of individuals employed by Participating Insurance 
Companies would not serve any regulatory purpose. Furthermore, the 
increased monitoring costs would reduce the net rates of return 
realized by contract owners and Plan participants. Moreover, the relief 
requested should not be affected by the sale of shares of the Insurance 
Funds to Qualified Plans or the Manager and its affiliates. The 
insulation of the Insurance Trusts from those individuals who are 
disqualified under the 1940 Act remains in place. Because Qualified 
Plans and the Manager and its affiliates are not investment companies 
and will not be deemed affiliates solely by virtue of their 
shareholdings, no additional relief is necessary.
    10. Sections 13(a), 15(a), and 15(b) of the 1940 Act have been 
deemed by the Commission to require ``pass-through'' voting with 
respect to underlying fund shares held by a separate account. Rules 6e-
2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) under the 1940 Act provide 
partial exemptions from those sections to permit the insurance company 
to disregard the voting instructions of its contract owners in certain 
limited circumstances. Rules 6e-2(b)(15)(iii)(A) and 6e-
3(T)(b)(15)(iii)(A)(1) under the 1940 Act provide that the insurance 
company may disregard the voting instructions of its contract owners in 
connection with the voting of shares of an underlying fund if such 
instructions would require such shares to be voted to cause such 
underlying funds to make (or refrain from making) certain investments 
that would result in changes in the subclassification or investment 
objectives of such underlying funds or to approve or disapprove any 
contract between an underlying fund and its investment manager, 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 such Rules). 
Rules 6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2) under the 1940 
Act provide that the insurance company may disregard contract owners' 
voting instructions if the contract owners initiate any change in such 
underlying fund's investment policies, principal underwriter, or any 
investment manager (provided that disregarding such voting instructions 
is reasonable and subject to the other provisions of paragraphs 
(b)(5)(ii) and (b)(7)(ii)(B) and (C) of Rules 6e-2 and 6e-3(T)).
    11. Rule 6e-2 recognizes that a variable life insurance contract is 
an insurance contract; it has important elements unique to insurance 
contracts; and it is subject to extensive state regulation of 
insurance. In adopting Rule 6e-2(b)(15)(iii), the Commission expressly 
recognized that state insurance regulators have authority, pursuant to 
state insurance laws or regulations, to disapprove or require changes 
in investment policies, investment advisers, or principal underwriters. 
The Commission also expressly recognized that state insurance 
regulators have authority to require an insurer to draw from its 
general account to cover costs imposed upon the insurer by a change 
approved by contract owners over the insurer's objection. The 
Commission therefore deemed such exemptions necessary ``to assure the 
solvency of the life insurer and performance of its contractual 
obligations by enabling an insurance regulatory authority or the life 
insurer to act when certain proposals reasonably could be expected to 
increase the risks undertaken by the life insurer.'' In this respect, 
flexible premium variable life insurance contracts are identical to 
scheduled premium variable life insurance contracts; therefore, Rule 
6e-3(T)'s corresponding provisions presumably were adopted in 
recognition of the same factors. State insurance regulators have much 
the same authority with respect to variable annuity separate accounts 
as they have with respect to variable life insurance separate accounts. 
Insurers generally assume both mortality and expense risks under 
variable annuity contracts. Therefore, variable annuity contracts pose 
some of the same kinds of risks to insurers as variable life insurance 
contracts. The Commission staff has not addressed the general issue of 
state insurance regulators' authority in the context of variable 
annuity contracts, and has not developed a single comprehensive 
exemptive rule for variable annuity contracts.
    12. The Insurance Trusts' sale of shares of Insurance Funds to 
Qualified Plans or the Manager and its affiliates will not have any 
impact on the relief requested herein in this regard. Shares of the 
Insurance Funds sold to Qualified Plans would be held by the trustees 
of such Plans. The exercise of voting rights by Qualified Plans, 
whether by the trustees, by participants, by beneficiaries, or by 
investment managers engaged by the Plans, does not present the type of 
issues respecting the disregard of voting rights that are presented by 
variable life separate accounts. With respect to the Qualified Plans, 
which are not registered as investment companies under the 1940 Act, 
there is no requirement to pass through voting rights to Plan 
participants. Similarly, the Manager and its affiliates are not subject 
to any pass-through voting requirements. Accordingly, 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 Qualified Plans or the Manager and its affiliates.
    13. Applicants assert that shared funding by unaffiliated insurance 
companies does not present any issues that do not already exist where a 
single insurance company is licensed to do business in several or all 
states. A particular state insurance regulatory body could require 
action that is inconsistent with the requirements of other states in 
which the insurance company offers its policies. The fact that 
different Participating Insurance Companies may be domiciled in 
different states does not create a significantly different or enlarged 
problem.
    14. Applicants further assert that shared funding by unaffiliated

[[Page 60130]]

Participating Insurance Companies is, in this respect, no different 
than the use of the same investment company as the funding vehicle for 
affiliated Participating Insurance Companies, which Rules 6e-2(b)(15) 
and 6e-3(T)(b)(15) under the 1940 Act permit under various 
circumstances. Affiliated Participating Insurance Companies may be 
domiciled in different states and be subject to differing state law 
requirements. Affiliation does not reduce the potential, if any exists, 
for differences in state regulatory requirements. In any event, the 
conditions discussed below are designed to safeguard against and 
provide procedures for resolving any adverse effects that differences 
among state regulatory requirements may produce.
    15. Applicants assert that the right under Rules 6e-2(b)(15) and 
6e-3(T)(b)(15) of an insurance company to disregard contract owners' 
voting instructions 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. 
Affiliation does not eliminate the potential, if any exists, for 
divergent judgments as to the advisability or legality of a change in 
investment policies, principal underwriter, or investment adviser 
initiated by contract owners. The potential for disagreement is limited 
by the requirements in Rules 6e-2 and 6e-3(T) that the insurance 
company's disregard of voting instructions be reasonable and based on 
specific good faith determinations. However, a particular Participating 
Insurance Company's disregard of voting instructions, nevertheless, 
could conflict with the majority of contract owner voting instructions. 
The Participating Insurance Company's action could arguably be 
different than the determination of all or some of the other 
Participating Insurance Companies (including affiliated insurers) that 
the contract owners' voting instructions should prevail, and could 
either preclude a majority vote approving the change or could represent 
a minority view. If the Participating Insurance Company's judgment 
represents a minority position or would preclude a majority vote, the 
Participating Insurance Company may be required, at an Insurance 
Trust's election, to withdraw its separate account's investment in that 
Insurance Trust, and no charge or penalty would be imposed as a result 
of such withdrawal.
    16. With respect to voting rights, it is possible to provide an 
equitable means of giving such voting rights to contract owners and to 
Qualified Plans and the Manager and its affiliates. The transfer 
agent(s) for the Insurance Funds will inform each shareholder, 
including each Separate Account, each Qualified Plan, and the Manager 
and its affiliates, of its share ownership, in an Insurance Fund. Each 
Participating Insurance Company will then solicit voting instructions 
in accordance with the ``pass-through'' voting requirement. Investment 
by Qualified Plans in any Insurance Fund will similarly present no 
conflict. The likelihood that voting instructions of insurance company 
contract owners will ever be disregarded or the possible withdrawal 
referred to immediately above is extremely remote and this possibility 
will be known, through prospectus disclosure, to any Qualified Plan 
choosing to invest in an Insurance Fund. Moreover, even if a material 
irreconcilable conflict involving Qualified Plans arises, the Qualified 
Plans may simply redeem their shares and make alternative investments. 
Votes cast by the Qualified Plans, of course, cannot be disregarded but 
must be counted and given effect.
    17. Applicants assert that there is no reason why the investment 
policies of an Insurance Fund would or should be materially different 
from what they would or should be if such Insurance Fund funded only 
variable annuity contracts or variable life insurance policies, whether 
flexible premium or scheduled premium policies. Each type of insurance 
product is designed as a long-term investment program. Similarly, the 
investment strategy of Qualified Plans (i.e., long-term investment) 
coincides with that of variable contracts and should not increase the 
potential for conflicts. Each of the Insurance Funds will be managed to 
attempt to achieve its investment objective, and not to favor or 
disfavor any particular Participating Insurance Company or type of 
insurance product or other investor. There is no reason to believe that 
different features of various types of contracts will lead to different 
investment policies for different types of variable contracts. The sale 
and ultimate success of all variable insurance products depends, at 
least in part, on satisfactory investment performance, which provides 
an incentive for the Participating Insurance Company to seek optimal 
investment performance.
    18. Furthermore, Applicants assert that no one investment strategy 
can be identified as appropriate to a particular insurance product. 
Each pool of variable annuity and variable life insurance contract 
owners is composed of individuals of diverse financial status, age, 
insurance and investment goals. An underlying fund supporting even one 
type of insurance product must accommodate these diverse factors in 
order to attract and retain purchasers. Permitting mixed and shared 
funding will provide economic justification for the growth of the 
Insurance Funds. In addition, permitting mixed and shared funding will 
facilitate the establishment of additional Insurance Funds serving 
diverse goals. The broader base of contract owners and shareholders can 
also be expected to provide economic justification for the creation of 
additional series of each Insurance Trust with a greater variety of 
investment objectives and policies.
    19. Applicants note that Section 817(h) of the Code is the only 
section in the Code where separate accounts are discussed. Section 
817(h) imposes certain diversification standards on the underlying 
assets of variable annuity contracts and variable life contracts held 
in the portfolios of management investment companies. Treasury 
Regulation 1.817-5, which established diversification requirements for 
such portfolios, specifically permits, in paragraph (f)(3), among other 
things, ``qualified pension or retirement plans'' and separate accounts 
to share the same underlying management investment company. Therefore, 
neither the Code nor the Treasury Regulations thereunder present any 
inherent conflicts of interest if Qualified Plans, Separate Accounts 
and the Manager and its affiliates all invest in the same underlying 
fund.
    20. Applicants assert that the ability of the Insurance Trusts to 
sell the respective shares of their Insurance Funds directly to 
Qualified Plans or the Manager and its affiliates does not create a 
``senior security,'' as such term is defined under Section 18(g) of the 
1940 Act, with respect to any contract owner as opposed to a 
participant under a Qualified Plan or the Manager and its affiliates. 
As noted above, regardless of the rights and benefits of contract 
owners or Plan participants, the Separate Accounts, Qualified Plans and 
the Manager and its affiliates have rights only with respect to their 
respective shares of the Insurance Funds. They can only redeem such 
shares at net asset value. No shareholder of any of the Insurance Funds 
has any preference over any other shareholder with respect to 
distribution of assets or payment of dividends.

[[Page 60131]]

    21. Applicants have considered whether there are any conflicts 
between the contract owners of separate accounts and the participants 
under Qualified Plans, the Manager or its affiliates with respect to 
the state insurance commissioners' veto powers (direct with respect to 
variable life and indirect with respect to variable annuities) over 
investment objectives. The basic premise of shareholder voting is that 
not all shareholders agree with a particular proposal. This does not 
mean that there are any inherent conflicts of interest between 
shareholders. The state insurance commissioners have been given the 
veto power in recognition of the fact that insurance companies cannot 
simply redeem their separate accounts out of one fund and invest in 
another. Time-consuming, complex transactions must be undertaken to 
accomplish such redemptions and transfers. On the other hand, the 
trustees of Qualified Plans can quickly make the decision to redeem and 
then implement the redemption of their Plans' shares from the Insurance 
Funds and reinvest in another funding vehicle without the same 
regulatory impediments, or, as is the case with most Qualified Plans, 
even hold cash pending suitable investment. Based on the foregoing, 
Applicants have concluded that, even if there should arise issues where 
the interests of contract owners and Qualified Plans are in conflict, 
these issues can be resolved almost immediately in that the trustees of 
the Qualified Plans can, on their own, redeem shares out of the 
Insurance Funds. The Manager and its affiliates can similarly redeem 
their shares out of the Insurance Funds and make alternative 
investments at any time.
    22. Applicants considered whether there is a potential for future 
conflicts of interests between Separate Accounts and Qualified Plans 
created by future changes in the tax laws. Applicants do not see any 
greater potential for material irreconcilable conflicts arising between 
the interest of participants under Qualified Plans and contract owners 
of Separate Accounts 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.
    23. Applicants assert that permitting an Insurance Trust to sell 
shares of its Insurance Funds to the Manager and its affiliates in 
compliance with Treas. Reg. 1.817-5 will enhance Insurance Trust 
management without raising significant concerns regarding material 
irreconcilable conflicts. Applicants assert that, unlike the 
circumstances of many investment companies that serve as underlying 
investment media for variable insurance products, the Insurance Trusts 
may be deemed to lack an insurance company ``promoter'' for purposes of 
Rule 14a-2 under the Act. It is anticipated that many other Insurance 
Trusts may lack an insurance company promoter. Accordingly, Applicants 
assert that such Insurance Trusts will be subject to the requirements 
of Section 14(a) of the 1940 Act, which generally requires that an 
investment company have a net worth of $100,000 upon making a public 
offering of its shares.
    24. Applicants assert that given the conditions of Treas. Reg. 
1.817-5(i)(3) and the harmony of interest between an Insurance Fund, on 
the one hand, and its Manager(s) and its affiliates, on the other, 
little incentive for overreaching exists. Applicants assert that such 
investments should not implicate the concerns discussed above regarding 
the creation of material irreconcilable conflicts. Instead, Applicants 
assert that permitting investment by the Manager and its affiliates 
will permit the orderly and efficient creation and operation of an 
Insurance Fund, and reduce the expense and uncertainty of using outside 
parties at the early stages of Insurance Fund operations.
    25. Applicants assert that various factors have limited the number 
of insurance companies that offer variable 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 Participating Insurance 
Companies as investment experts. In particular, some smaller life 
insurance companies may not find it economically feasible, or within 
their investment or administrative expertise, to enter the variable 
contract business on their own. Use of the Insurance Funds as a common 
investment medium for variable contracts and Qualified Plans would help 
alleviate these concerns, because Participating Insurance Companies and 
Qualified Plans will benefit not only from the investment and 
administrative expertise of CTB, or any other investment manager to an 
Insurance Fund, but also from the cost efficiencies and investment 
flexibility afforded by a large pool of funds. Therefore, making the 
Insurance Funds available for mixed and shared funding and permitting 
the purchase of Insurance Fund shares by Qualified Plans may 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. Mixed and shared funding also may benefit variable contract 
owners by eliminating a significant portion of the costs of 
establishing and administering separate funds. Furthermore, granting 
the requested relief should result in an increased amount of assets 
available for investment by the Insurance Funds. This may benefit 
variable contract owners by promoting economies of scale, by reducing 
risk through greater diversification due to increased money in the 
Insurance Trusts, or by making the addition of new Insurance Funds more 
feasible.
    26. Applicants submit that, regardless of the type of shareholder 
in any of the Insurance Funds, the investment advisers and subadvisers 
are or will be contractually obligated to manage each Insurance Fund 
solely and exclusively in accordance with that Insurance Fund's 
investment objectives and restrictions as well as with any guidelines 
established by the Board of Trustees of the Trust, or by the board of 
directors or trustees of any future Insurance Fund that is not a series 
of the Trust, as the case may be. With respect to each Insurance Fund, 
the investment advisers and subadvisers work with a pool of money and 
do not take into account the identity of the shareholders. Thus, any 
current or future Insurance Fund will be managed in the same manner as 
any other mutual fund.

Applicants' Conditions

    1. A majority of the Board of Trustees or Board of Directors 
(``Board'') of each Insurance Trust shall consist of persons who are 
not ``interested persons'' of the Insurance Trust, as defined by 
Section 2(a)(19) of the 1940 Act and the rules thereunder and as 
modified by any applicable orders of the Commission, except that if 
this condition is not met by reason of the death, disqualification, or 
bona fide resignation of any trustee or director, then the operation of 
this condition shall be suspended: (a) For a period of 90 days if the 
vacancy or vacancies may be filled by the Board; (b) for a period of 
150 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 Board will monitor the respective Insurance Trust for the 
existence of any material irreconcilable conflict among and between the 
interests of the contract owners of all Separate Accounts, and of the 
Plan participants, Qualified Plans, and the

[[Page 60132]]

Manager or its affiliates investing in that Insurance Trust, and 
determine what action, if any, should be taken in response to such 
conflicts. A material irreconcilable conflict may arise for a variety 
of reasons, including: (a) An action by any state insurance regulatory 
authority; (b) a change in applicable federal or state insurance, tax, 
or securities laws or regulations, or a public ruling, private letter 
ruling, no-action or interpretative letter, or any similar action by 
insurance, tax, or securities regulatory authorities; (c) an 
administrative or judicial decision in any relevant proceeding; (d) the 
manner in which the investments of any Insurance Fund are being 
managed; (e) a difference in voting instructions given by variable 
annuity contract owners, variable life insurance contract owners, Plan 
trustees, or Plan participants; (f) a decision by a Participating 
Insurance Company to disregard the voting instructions of contract 
owners; or (g) if applicable, a decision by a Qualified Plan to 
disregard the voting instructions of Plan participants.
    3. Any Qualified Plan that executes a fund participation agreement 
upon becoming an owner of 10% or more of the assets of an Insurance 
Trust, any Participating Insurance Company, and the Manager and its 
affiliates (collectively, ``Participants'') will report any potential 
or existing conflicts to the Board. Each of the 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 that is a 
Participant to inform the Board whenever it has determined to disregard 
Plan participant voting instructions. The responsibility to report such 
information and conflicts and to assist the Board will be a contractual 
obligation of all Participating Insurance Companies and Qualified Plans 
investing in an Insurance Trust under their agreements governing 
participation in the Insurance Trust, and such agreements shall provide 
that such responsibilities will be carried out with a view only to the 
interests of the contract owners or, if applicable, Plan participants.
    4. If it is determined by a majority of the Board of an Insurance 
Trust, or a majority of its disinterested trustees or directors, that a 
material irreconcilable conflict exists, the relevant Participating 
Insurance Companies and Qualified Plans shall, at their expense or, at 
the discretion of a Manager to an Insurance Trust, at that Manager's 
expense, and to the extent reasonably practicable (as determined by a 
majority of the disinterested trustees or directors), take whatever 
steps are necessary to remedy or eliminate the material irreconcilable 
conflict, up to and including: (a) Withdrawing the assets allocable to 
some or all of the Separate Accounts from the relevant Insurance Trust 
or any series therein and reinvesting such assets in a different 
investment medium (including another Insurance Fund, if any); (b) in 
the case of Participating Insurance Companies, submitting the question 
of 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., variable annuity contract owners 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 contract owners the option of making such a 
change; and (c) establishing a new registered management investment 
company or managed separate account. If a material irreconcilable 
conflict arises because of a Participating Insurance Company's decision 
to disregard contract owner voting instructions and that decision 
represents a minority position or would preclude a majority vote, the 
Participating Insurance Company may be required, at the Insurance 
Trust's election, to withdraw its Separate Account's investment in the 
Insurance Trust, and no charge or penalty will be imposed as a result 
of such withdrawal. If a material irreconcilable conflict arises 
because of a Qualified Plan's decision to disregard 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 Trust, to withdraw 
its investment in the Insurance Trust, and no charge or penalty will be 
imposed as a result of such withdrawal. The responsibility to take 
remedial action in the event of a Board determination of a material 
irreconcilable conflict and to bear the cost of such remedial action 
shall be a contractual obligation of all Participating Insurance 
Companies and Qualified Plans under their agreements governing 
participation in the Insurance Trust, and these responsibilities will 
be carried out with a view only to the interests of the contract owners 
or, as applicable, Plan participants.
    For the purposes of this Condition (4), a majority of the 
disinterested members of the Board shall determine whether or not any 
proposed action adequately remedies any material irreconcilable 
conflict, but in no event will the Insurance Trust or its Manager(s) be 
required to establish a new funding medium for any variable contract. 
No Participating Insurance Company shall be required by this Condition 
(4) to establish a new funding medium for any variable contract if an 
offer to do so has been declined by vote of a majority of contract 
owners materially adversely affected by the material irreconcilable 
conflict. No Qualified Plan shall be required by this 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.
    5. The Board's determination of the existence of a material 
irreconcilable conflict and its implications shall be made known 
promptly in writing to all Participants.
    6. Participating insurance companies will provide pass-through 
voting privileges to all variable contract owners whose contracts are 
funded through a registered separate account for 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 contract owners to the 
extent granted by the issuing insurance company. Accordingly, such 
Participating Insurance Companies will vote shares of each Insurance 
Fund held in their registered separate accounts in a manner consistent 
with voting instructions timely received from such contract owners. 
Each Participating Insurance Company will vote shares of each Insurance 
Fund held in its registered Separate Accounts for which no timely 
voting instructions are received, as well as shares held by any such 
registered Separate Account, in the same proportion as those shares for 
which voting instructions are received. Participating insurance 
companies shall be responsible for assuring that each of their Separate 
Accounts investing in an Insurance Trust calculates voting privileges 
in a manner consistent with all other Participating Insurance

[[Page 60133]]

Companies. The obligation to vote an Insurance Trust's shares and to 
calculate voting privileges in a manner consistent with all other 
registered Separate Accounts investing in an Insurance Trust shall be a 
contractual obligation of all Participating Insurance Companies under 
their agreements governing participation in the Insurance Trust. Each 
Plan will vote as required by applicable law and governing Plan 
documents.
    7. An Insurance Trust will notify all Participating Insurance 
Companies and Qualified Plans that disclosure regarding potential risks 
of mixed and shared funding may be appropriate in prospectuses for any 
of the Separate Accounts and in Plan documents. Each Insurance Trust 
shall disclose in its prospectus that: (a) Shares of the Insurance 
Trust are offered to insurance company separate accounts which fund 
both variable annuity and variable life insurance contracts, and to 
Qualified Plans; (b) due to differences of tax treatment or other 
considerations, the interests of various contract owners participating 
in the Insurance Trust and the interests of Qualified Plans investing 
in the Insurance Trust might at some time be in conflict; and (c) the 
Board will monitor the Insurance Trust for any material conflicts and 
determine what action, if any, should be taken.
    8. All reports received by the Board of potential or existing 
conflicts, and all Board action with regard to determining the 
existence of a conflict, notifying Participants of a conflict, and 
determining whether any proposed action adequately remedies a conflict, 
will be properly recorded in the minutes of the Board or other 
appropriate records, and such minutes or other records shall be made 
available to the Commission upon request.
    9. If and to the extent Rule 6e-2 and Rule 6e-3(T) under the 1940 
Act are amended, or Rule 6e-3 is adopted, to provide exemptive relief 
from any provision of the 1940 Act or the rules thereunder with respect 
to mixed or shared funding on terms and conditions materially different 
from any exemptions granted in the order requested in this Application, 
then each Insurance Trust and/or the Participating Insurance Companies, 
as appropriate, shall take such steps as may be necessary to comply 
with Rule 6e-2 and Rule 6e-3(T), as amended, and Rule 6e-3, as adopted, 
to the extent such rules are applicable.
    10. Each Insurance Trust will comply with all provisions of the 
1940 Act requiring voting by shareholders (which, for these purposes, 
shall be the persons having a voting interest in the shares of that 
Insurance Trust), and in particular each Insurance Trust will either 
provide for annual 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 the Trust is not 
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 Trust will act 
in accordance with the Commission's interpretation of the requirements 
of Section 16(a) of the 1940 Act with respect to periodic elections of 
directors (or trustees) and with whatever rules the Commission may 
promulgate with respect thereto.
    11. As long as the Commission continues to interpret the 1940 Act 
as requiring pass-through voting privileges for variable contract 
owners, the Manager and its affiliates will vote its shares in the same 
proportion as all contract owners having voting rights with respect to 
the relevant Insurance Trust; provided, however, that the Manager and 
its affiliates shall vote their shares in such other manner as may be 
required by the Commission or its staff.
    12. The Participants shall at least annually submit to the Board of 
an Insurance Trust such reports, materials or data as the Board may 
reasonably request so that it may fully carry out the obligations 
imposed upon it by the conditions contained in the Application and said 
reports, materials and data shall be submitted more frequently, if 
deemed appropriate, by the Board. The obligations of a Participant to 
provide these reports, materials and data to the Board of the Insurance 
Trust when it so reasonably requests, shall be a contractual obligation 
of all Participating Insurance Companies and Qualified Plans under 
their agreements governing participation in each Insurance Trust.
    13. If a Qualified Plan should become an owner of 10% or more of 
the assets of an Insurance Fund, the Insurance Trust shall require such 
Plan to execute a participation agreement with such Insurance Trust 
which includes the conditions set forth herein to the extent 
applicable. A Qualified Plan will execute an application containing an 
acknowledgment of this condition upon such Plan's initial purchase of 
the shares of any Insurance Fund.
    14. Any shares of an Insurance Fund purchased by the Manager or its 
affiliates will be automatically redeemed if and when the Manager's 
investment management agreement terminates, and to the extent required 
by the applicable Treasury Regulations. Neither the Manager nor its 
affiliates will sell such shares of the Insurance Fund to the public.
    15. A Participating Insurance Company, or any affiliate, will 
maintain at its home office, available to the Commission: (a) A list of 
its officers, directors and employees who participate directly in the 
management or administration of the Insurance Trusts or any variable 
annuity or variable life insurance separate account, organized as a 
unit investment trust, that invests in the Insurance Trusts and/or (b) 
a list of its agents who, as registered representatives, offer and sell 
the variable annuity and variable life contracts funded through such a 
Separate Account. These individuals will continue to be subject to the 
automatic disqualification provisions of Section 9(a).

Conclusion

    For the reasons and upon the facts summarized above, Applicants 
assert 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. 03-26447 Filed 10-20-03; 8:45 am]
BILLING CODE 8010-01-P