[Federal Register Volume 68, Number 244 (Friday, December 19, 2003)]
[Notices]
[Pages 70844-70851]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-31309]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26294; File No. 812-13031]


AEGON/Transamerica Series Fund, Inc., et al.; Notice of 
Application

December 15, 2003.
AGENCY: 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 (``1940 Act'') for an 
exemption from the provisions of Sections 9(a), 13(a), 15(a), and 15(b) 
of the 1940 Act and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder.

-----------------------------------------------------------------------

Applicants: AEGON/Transamerica Series Fund, Inc. (``ATSF'') and AEGON/
Transamerica Fund Advisers, Inc. (``ATFA'') (collectively, 
``Applicants'').

Summary Of Application: Applicants seek an order to permit shares of 
ATSF and shares of any other existing or future investment company that 
is designed to fund insurance products and for which ATFA, or any of 
its affiliates, may serve as investment manager, investment adviser, 
subadviser, administrator, manager, principal underwriter or sponsor 
(ATSF and such other investment companies being hereinafter referred 
to, collectively, as ``Insurance Investment Companies''), or permit 
shares of any current or future series of any Insurance Investment 
Company (``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''); (3) any investment 
manager to an Insurance Fund and affiliates thereof that is permitted 
to hold shares of an Insurance Fund consistent with the requirements of 
Treasury Regulation 1.817-5 (collectively, the ``Manager''); and (4) 
any insurance company that is permitted to hold shares of an Insurance 
Fund consistent with the requirements of Treasury Regulation 1.817-5.

Filing Date: The Application was filed on October 16, 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 January 9, 2004 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 John K. Carter, Esq., Senior Vice President and 
General Counsel, AEGON/Transamerica Fund Advisers, Inc., 570 Carillon 
Parkway, St. Petersburg, Florida 33716.

FOR FURTHER INFORMATION CONTACT: Curtis A. Young, Senior Counsel or 
Lorna J. 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. ATSF is a Maryland corporation organized on August 21, 1985 and 
is registered as an open-end management investment company under the 
1940 Act. ATSF is a series company currently comprising fifty-one (51) 
series (the ``Insurance Funds''). Additional series of ATSF and classes 
of the Funds and additional Insurance Funds may be established in the 
future.
    2. ATFA has served as ATSF's investment adviser since 1997. ATFA is 
directly owned by Western Reserve Life Assurance Co. of Ohio (78 
percent) and AUSA Holding Company (22%), both of which are indirect 
wholly-owned subsidiaries of AEGON N.V., a Netherlands corporation 
which is a publicly traded international insurance group. Pursuant to 
investment subadvisory agreements, ATFA retains a subadviser for many 
Insurance Funds. Each subadviser is registered as an investment adviser 
with the Commission under the Investment Advisers Act of 1940.
    3. ATSF currently offers shares of the Insurance Funds only to 
separate accounts of affiliated insurance companies in order to fund 
benefits under flexible premium variable annuity contracts and variable 
life insurance policies. In the future, the Insurance Investment 
Companies intend to offer shares of the Insurance Funds (a) 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; (c) any 
investment manager to an Insurance Fund and affiliates thereof that is 
permitted to hold shares of an Insurance Fund consistent with the 
requirements of Treasury Regulation 1.817-5 (collectively, the 
``Manager''); and (d) any insurance company that is permitted to hold 
shares of an Insurance Fund consistent with the requirements of 
Treasury Regulation 1.817-5 (``General Accounts'').
    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 have established or will establish their own separate 
accounts and design their own variable contracts. Each Participating 
Insurance Company has or will have the legal obligation to satisfy all 
applicable requirements under both State and Federal law. Participating 
Insurance Companies may 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 Investment Companies intend to offer shares of the 
Insurance Funds directly to Qualified Plans outside of the separate 
account

[[Page 70845]]

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 
or to General Accounts, 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 General Accounts is computed in the same manner 
as for shares held by the Separate Accounts, and the Manager or the 
General Accounts do not intend to sell to the public shares of the 
Insurance Investment Company that they hold. An additional restriction 
is imposed by the Treasury Regulations on sales to the Manager, who may 
hold shares only in connection with the creation or management of the 
Insurance Investment Company. Applicants anticipate that sales in 
reliance on these provisions of the Treasury Regulations generally will 
be made to the Manager for the purpose of providing necessary capital 
required by section 14(a) of the 1940 Act.

Applicants' Legal Analysis

    1. Applicants seek exemptive relief from the provisions of sections 
9(a), 13(a), 15(a), and 15(b) of the 1940 Act and rules 6e-2(b)(15) and 
6e-3(T)(b)(15) thereunder (including any comparable provisions of a 
permanent rule that replaces Rule 6e-3(T)), to the extent necessary to 
permit shares of each Insurance Investment Company to be offered and 
sold to, and held by: (i) 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; (ii) Qualified Plans outside of the separate 
account context; (iii) any Manager to an Insurance Fund; and (iv) 
General Accounts.
    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 an insurance company 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 Investment Companies are also to be sold to General Accounts, 
Qualified Plans or the Manager.
    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 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 Investment Companies by Qualified Plans, the Manager or 
General Accounts. 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 
Investment Companies are also to be sold to Qualified Plans, the 
Manager or General Accounts.
    5. The relief provided by rule 6e-3(T) is not relevant to the 
purchase of shares of the Insurance Investment Companies by Qualified 
Plans, the Manager or General Accounts. However, because the relief 
granted by rule 6e-3(T)(b)(15) is available only where shares of the

[[Page 70846]]

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 Investment Companies are also to be sold to Qualified Plans, 
the Manager or General Accounts. None of the relief provided for in 
rules 6e-2(b)(15) and 6e-3(T)(b)(15) relates to Qualified Plans, the 
Manager or General Accounts, 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 Investment Companies 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, the Manager or General 
Accounts on the other hand, the Participating Insurance Companies, 
Qualified Plans, the Manager and the General Accounts 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 or 
the inclusion of Qualified Plans and General Accounts 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, Manager or General Accounts arose, the Qualified Plans, Manager 
or General Accounts, 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, General Accounts or Qualified 
Plans to invest directly in the Insurance Investment Companies 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, the 
investment company's investment manager or its affiliates or General 
Accounts 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, as amended 
(``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 of 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 Insurance Funds to sell shares to 
General Accounts or the Manager subject to certain conditions (Treas. 
Reg. Sec.  1.817-5(f)(3)(i), (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, the investment company's investment manager or its affiliates or 
General Accounts 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, to the investment company's investment 
manager and its affiliates or General Accounts (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 or 
administration 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 fund. 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 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 in various unaffiliated insurance companies (or affiliated 
companies of Participating Insurance Companies) that may utilize the 
Insurance Funds as the funding medium for variable contracts. There is 
no regulatory purpose in extending the monitoring requirements to 
embrace a full application of section

[[Page 70847]]

9(a)'s eligibility restrictions because of mixed funding or shared 
funding and sales to Qualified Plans, the Manager or General Accounts. 
Those Participating Insurance Companies are not expected to play any 
role in the management or administration of the Insurance Funds. Those 
individuals who participate in the management or administration of the 
Insurance Funds will remain the same regardless of which separate 
accounts, insurance companies, Qualified Plans or General Accounts use 
the Insurance Funds. Therefore, applying the monitoring requirements of 
section 9(a) because of investment by separate accounts of other 
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 Investment Companies to Qualified Plans, the 
Manager or General Accounts. The insulation of the Insurance Investment 
Companies from those individuals who are disqualified under the 1940 
Act remains in place. Because Qualified Plans, the Manager and General 
Accounts 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 Investment Companies' sale of shares to Qualified 
Plans, the Manager or General Accounts 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 General Accounts 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, the Manager or General Accounts.
    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 
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) 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

[[Page 70848]]

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 Investment Company's election, 
to withdraw its separate account's investment in that Insurance 
Investment Company, 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, the Manager or General Accounts. The transfer agent(s) 
for the Insurance Investment Companies will inform each shareholder, 
including each separate account, each Qualified Plan, the Manager and 
each General Account, of its share ownership, in an Insurance 
Investment Company. Each Participating Insurance Company will then 
solicit voting instructions in accordance with the ``pass-through'' 
voting requirement. Investment by Qualified Plans or General Accounts 
in any Insurance Investment Company 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 or General 
Account choosing to invest in an Insurance Fund. Moreover, even if a 
material irreconcilable conflict involving Qualified Plans or General 
Accounts arises, the Qualified Plans or General Accounts may simply 
redeem their shares and make alternative investments. Votes cast by the 
Qualified Plans or General Accounts, 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 and General Accounts (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. A 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 
Investment Company. In addition, permitting mixed and shared funding 
will facilitate the establishment of additional series 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 Investment Company 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,'' ``the general 
account of a life insurance company,'' ``the manager * * * of an 
investment company'' and separate accounts to share the same underlying 
management investment company. Therefore, neither the Code nor the 
Treasury Regulations nor Revenue Rulings thereunder present any 
inherent conflicts of interest if Qualified Plans, Separate Accounts, 
the Manager and General Accounts all invest in the same underlying 
fund.
    20. Applicants assert that the ability of the Insurance Investment 
Companies to sell their respective shares directly to Qualified Plans, 
the Manager or General Accounts does not create a ``senior security,'' 
as such term is defined under section 18(g) of the 1940 Act, with 
respect to any variable contract, Qualified Plan, Manager or General 
Accounts. As noted above, regardless of the rights and benefits of 
contract owners or Plan participants, the Separate Accounts, Qualified 
Plans, the Manager and the General Accounts have rights only with 
respect to their respective shares of the Insurance Investment 
Companies. They can only redeem such shares at net asset value. No 
shareholder of any of the Insurance Investment Companies has any 
preference over any other shareholder with respect to distribution of 
assets or payment of dividends.
    21. Applicants assert that permitting an Insurance Investment 
Company to sell its shares to the Manager in compliance with Treas. 
Reg. 1.817-5 will enhance Insurance Investment Company management 
without raising significant concerns regarding material irreconcilable 
conflicts. Applicants assert that the Insurance Investment Companies 
may be deemed to lack an insurance company ``promoter'' for purposes of 
rule 14a-2 under the Act. Accordingly, Applicants assert that such 
Insurance Investment Companies will be subject to the requirements of 
section 14(a) of the 1940 Act, which generally requires that an 
investment company

[[Page 70849]]

have a net worth of $100,000 upon making a public offering of its 
shares. ?
    22. Applicants assert that given the conditions of Treas. Reg. 
1.817-5(i)(3) and the harmony of interest between an Insurance 
Investment Company, on the one hand, and its Manager or a Participating 
Insurance Company, 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 will permit the orderly and efficient 
creation and operation of Insurance Investment Companies, and reduce 
the expense and uncertainty of using outside parties at the early 
stages of Insurance Investment Company operations.
    23. 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 Investment 
Companies as a common investment medium for variable contracts, 
Qualified Plans and General Accounts would help alleviate these 
concerns, because Participating Insurance Companies, Qualified Plans 
and General Accounts will benefit not only from the investment and 
administrative expertise of ATFA, 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 Investment Companies available for mixed and shared funding 
and permitting the purchase of Insurance Investment Company shares by 
Qualified Plans and General Accounts 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 Investment Companies. This may benefit 
variable contract owners by promoting economies of scale, by reducing 
risk through greater diversification due to increased money in the 
Insurance Investment Companies, or by making the addition of new 
Insurance Funds more feasible.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. A majority of the Board of Trustees or Board of Directors 
(``Board'') of each Insurance Investment Company shall consist of 
persons who are not ``interested persons'' of the Insurance Investment 
Company, 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 
(``Independent Board Members''), 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: (i) For a period of 90 days if the vacancy or vacancies 
may be filled by the Board; (ii) for a period of 150 days if a vote of 
shareholders is required to fill the vacancy or vacancies; or (iii) for 
such longer period as the Commission may prescribe by order upon 
application or by future rule.
    2. Each Board will monitor the respective Insurance Investment 
Company for the existence of any material irreconcilable conflict among 
and between the interests of the contract owners of all Separate 
Accounts, participants of Qualified Plans, the Manager or General 
Accounts investing in that Insurance Investment Company, and determine 
what action, if any, should be taken in response to such conflicts. A 
material irreconcilable conflict may arise for a variety of reasons, 
including: (i) An action by any state insurance regulatory authority; 
(ii) a change in applicable Federal or State insurance, tax, or 
securities laws or regulations, or a public ruling, private letter 
ruling, no-action or interpretative letter, or any similar action by 
insurance, tax, or securities regulatory authorities; (iii) an 
administrative or judicial decision in any relevant proceeding; (iv) 
the manner in which the investments of any Insurance Fund are being 
managed; (v) a difference in voting instructions given by variable 
annuity contract owners, variable life insurance contract owners, Plan 
trustees, or Plan participants; (vi) a decision by a Participating 
Insurance Company to disregard the voting instructions of contract 
owners; or (vii) if applicable, a decision by a Qualified Plan to 
disregard the voting instructions of Plan participants.
    3. Any Qualified Plan that executes a fund participation agreement 
upon becoming an owner of 10 percent or more of the assets of an 
Insurance Investment Company (``Participating Qualified Plan''), any 
Participating Insurance Company (on their own behalf, as well as by 
virtue of any investment of general account assets in all Insurance 
Investment Companies), and the Manager (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 
Investment Company under their agreements governing participation in 
the Insurance Investment Company, 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 
Investment Company, or a majority of its Independent Board Members, 
that a material irreconcilable conflict exists, the relevant 
Participating Insurance Companies and Participating Qualified Plans 
shall, at their expense or, at the discretion of a Manager to an 
Insurance Investment Company, at that Manager's expense, and to the 
extent reasonably practicable (as determined by a majority of the 
Independent Board Members), take whatever steps are necessary to remedy 
or eliminate the material irreconcilable conflict, up to and including: 
(i) Withdrawing the assets allocable to some or all of the Separate

[[Page 70850]]

Accounts from the relevant Insurance Investment Company or any series 
therein and reinvesting such assets in a different investment medium 
(including another Insurance Fund, if any); (ii) 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; (iii) 
withdrawing the assets allocable to some or all of the Qualified Plans 
from the affected Insurance Investment Company or any Insurance Fund 
and reinvesting those assets in a different investment medium; and (iv) 
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 Investment Company's 
election, to withdraw its Separate Account's investment in the 
Insurance Investment Company, 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 
Investment Company, to withdraw its investment in the Insurance 
Investment Company, 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 Investment Company, 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 
Independent Board Members shall determine whether or not any proposed 
action adequately remedies any material irreconcilable conflict, but in 
no event will the Insurance Investment Company or its Manager 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 (i) a 
majority of Plan participants materially and adversely affected by the 
material irreconcilable conflict vote to decline such offer or (ii) 
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. 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 its 
General Accounts, 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 registered 
Separate Accounts investing in an Insurance Investment Company 
calculates voting privileges in a manner consistent with all other 
Participating Insurance Companies. The obligation to vote an Insurance 
Investment Company's shares and to calculate voting privileges in a 
manner consistent with all other registered Separate Accounts investing 
in an Insurance Investment Company shall be a contractual obligation of 
all Participating Insurance Companies under their agreements governing 
participation in the Insurance Investment Company. Each Plan will vote 
as required by applicable law and governing Plan documents.
    7. An Insurance Investment Company 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 Investment Company will disclose in its prospectus that: 
(i) Shares of the Insurance Investment Company are offered to insurance 
company Separate Accounts that fund both variable annuity and variable 
life insurance contracts, and to Qualified Plans and General Accounts; 
(ii) due to differences of tax treatment or other considerations, the 
interests of various contract owners participating in the Insurance 
Investment Company and the interests of Qualified Plans or General 
Accounts investing in the Insurance Investment Company might at some 
time be in conflict; and (iii) the Board will monitor the Insurance 
Investment Company 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 proposed rule 6e-3 is adopted under the 1940 Act, 
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 Investment 
Company 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 Investment Company 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 Investment Company), and in particular each 
Insurance Investment Company will either provide for annual

[[Page 70851]]

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 ATSF 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 Investment Company 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 Managers will vote their shares in the same proportion as 
all contract owners having voting rights with respect to the relevant 
Insurance Investment Company; provided, however, that the Manager or 
any General Account 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 Investment Company 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 this 
Application and said reports, materials and data shall be submitted 
more frequently, if deemed appropriate, by the Board. The obligations 
of Participating Insurance Companies and Participating Qualified Plans 
to provide these reports, materials and data to the Board of the 
Insurance Investment Company when it so reasonably requests, shall be a 
contractual obligation of the Participating Insurance Companies and 
Participating Qualified Plans under their agreements governing 
participation in each Insurance Investment Company.
    13. If a Qualified Plan should become an owner of 10 percent or 
more of the assets of an Insurance Investment Company, the Insurance 
Investment Company shall require such Plan to execute a participation 
agreement with such Insurance Investment Company 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 Investment Company.

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. 03-31309 Filed 12-18-03; 8:45 am]
BILLING CODE 8010-01-P