[Federal Register Volume 69, Number 33 (Thursday, February 19, 2004)]
[Notices]
[Pages 7810-7817]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3537]



[[Page 7810]]

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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-26352; File No. 812-21279]


The Merger Fund VL, et al.; Notice of Application

February 12, 2004.
AGENCY: Securities and Exchange Commission (``SEC'' or the 
``Commission'').

ACTION: Notice of application for exemption under Section 6(c) of the 
Investment Company Act of 1940, as amended (the ``1940 Act''), for an 
exemption from the provisions of Sections 9(a), 13(a), 15(a) and 15(b) 
of the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15), thereunder.

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Applicants: The Merger Fund VL (``Trust'') and Westchester Capital 
Management, Inc. (``WCM'').

Summary of Application: 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, to the extent 
necessary to permit shares of the Trust and shares of any other 
investment company or portfolio that is designed to fund insurance 
products and for which WCM or any of its affiliates may serve in the 
future as investment adviser, manager, principal underwriter, sponsor, 
or administrator (``Future Trusts'') (the Trust, together with Future 
Trusts, are the ``Trusts'') (WCM and such affiliates, are referred to 
collectively or individually as ``Westchester'') to be sold to and held 
by: (i) separate accounts funding variable annuity and variable life 
insurance contracts (collectively referred to herein as ``Variable 
Contracts'') issued by both affiliated and unaffiliated life insurance 
companies; (ii) qualified pension and retirement plans (``Qualified 
Plans'') outside of the separate account context; (iii) separate 
accounts that are not registered as investment companies under the 1940 
Act pursuant to exemptions from registration under Section 3(c) of the 
1940 Act; (iv) Westchester and (v) any other person permitted to hold 
shares of the Trusts pursuant to Treasury Regulation Sec.  1.817-5 
(``General Accounts''), including the general account of any life 
insurance company, or certain related corporations, whose separate 
account holds, or will hold, shares of the Trusts.

Filing Dates: The application was filed on September 30, 2003, and 
amended on February 12, 2004.

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

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549-
0609. Applicants, William H. Bohnett, Fulbright & Jaworski, LLP., 666 
Fifth Avenue, New York, NY 10103.

FOR FURTHER INFORMATION CONTACT: Harry Eisenstein, Senior Counsel, or 
Zandra Y. Bailes, Branch Chief, Office of Insurance Products, Division 
of Investment Management at (202) 942-0670.

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

Applicant's Representations

    1. The Trust is registered with the Commission as an open-end 
management investment company and is organized as a Delaware statutory 
trust. WCM is registered with the Commission as an investment adviser 
under the Investment Advisers Act of 1940, as amended, and serves as 
the investment adviser to the Trust. The Trust currently consists of 
one investment portfolio that is sold only to separate accounts of 
insurance companies in conjunction with variable life and variable 
annuity contracts: The Merger Fund VL (the ``Fund''). The Trust or any 
Future Trusts may offer one or more additional investment portfolios in 
the future (together with the Fund, ``Funds'').
    2. Shares of the Funds will be offered to separate accounts of 
affiliated and unaffiliated insurance companies (each, a 
``Participating Insurance Company'') to serve as investment vehicles to 
fund Variable Contracts (as hereinafter defined). These separate 
accounts either will be registered as investment companies under the 
1940 Act or will be exempt from such registration pursuant to 
exemptions from registration under Section 3(c) of the 1940 Act 
(individually, a ``Separate Account'' and collectively, the ``Separate 
Accounts''). Shares of the Funds may also be offered to Qualified Plans 
as well as to Westchester and to General Accounts whose separate 
account holds, or will hold, shares of the Trusts.
    3. The Participating Insurance Companies at the time of their 
investment in the Trusts either have or will establish their own 
Separate Accounts and design their own Variable Contracts. Each 
Participating Insurance Company has or will have the legal obligation 
of satisfying all applicable requirements under both State and Federal 
law. Each Participating Insurance Company, on behalf of its Separate 
Accounts, has or will enter into an agreement with the Trusts 
concerning such Participating Insurance Company's participation in the 
Funds. The role of the Trusts under this agreement, insofar as the 
Federal securities laws are applicable, will consist of, among other 
things, offering shares of the Trusts to the participating Separate 
Accounts and complying with any conditions that the Commission may 
impose upon granting the order requested herein.

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, to the extent necessary to permit shares of 
the Trusts and shares of any Future Trusts to be sold to and held by: 
(i) Separate accounts funding Variable Contracts issued by both 
affiliated and unaffiliated life insurance companies; (ii) Qualified 
Plans outside of the separate account context; (iii) separate accounts 
that are not registered as investment companies under the 1940 Act 
pursuant to exemptions from registration under Section 3(c) of the 1940 
Act; (iv) Westchester; and (v) any General Accounts, including the 
general account of any life insurance company whose separate account 
holds, or will hold, shares of the Trusts or certain related 
corporations.

Rules 6e-2(b)(15) and 6e-3(T)(b)(15)

    2. In connection with the funding of scheduled premium variable 
life insurance contracts issued through a separate account registered 
as a unit investment trust (``UIT'') under the 1940 Act, Rule 6e-
2(b)(15) provides partial exemptions from Sections 9(a), 13(a),

[[Page 7811]]

15(a) and 15(b) of the 1940 Act.\1\ Section 9(a)(2) of the 1940 Act 
makes it unlawful for any company to serve as an investment adviser or 
principal underwriter of any UIT, if an affiliated person of that 
company is subject to a disqualification enumerated in Sections 9(a)(1) 
or (2) of the 1940 Act. Sections 13(a), 15(a) and 15(b) of the 1940 Act 
have been deemed by the Commission to require ``pass-through'' voting 
with respect to an underlying investment company's shares. Rule 6e-
2(b)(15) provides these exemptions apply only where all of the assets 
of the UIT are shares of management investment companies ``which offer 
their shares exclusively to variable life insurance separate accounts 
of the life insurer or of any affiliated life insurance company.'' 
Therefore, the relief granted by Rule 6e-2(b)(15) is not available with 
respect to a scheduled premium life insurance separate account that 
owns shares of an underlying fund that also offers its shares to a 
variable annuity separate account or flexible premium variable life 
insurance separate account of the same company or any other affiliated 
insurance company. The use of a common management investment company as 
the underlying investment vehicle for both variable annuity and 
variable life insurance separate accounts of the same life insurance 
company or of any affiliated life insurance company is referred to 
herein as ``mixed funding.''
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    \1\ The relief provided by Rule 6e-2 is also granted to the 
investment adviser, principal underwriter, and depositor of the 
separate account.
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    3. The relief granted by Rule 6e-2(b)(15) also is not available 
with respect to a scheduled premium variable life insurance separate 
account that owns shares of an underlying fund that also offers its 
shares to separate accounts funding Variable Contracts of one or more 
unaffiliated life insurance companies. The use of a common management 
investment company as the underlying investment vehicle for variable 
annuity and/or variable life insurance separate accounts of 
unaffiliated life insurance companies is referred to herein as ``shared 
funding.''
    4. The relief under Rule 6e-2(b)(15) is available only where shares 
are offered exclusively to variable life insurance separate accounts of 
a life insurer or any affiliated life insurance company, for themselves 
and certain life insurance companies and their separate accounts that 
currently invest or may hereafter invest in the Trust (and, to the 
extent necessary, any investment adviser, principal underwriter and 
depositor of such an account). Additional exemptive relief is necessary 
if the shares of the Funds are also to be sold to Qualified Plans or 
other eligible holders of shares, as described above. Applicants note 
that if shares of the Funds are sold only to Qualified Plans, exemptive 
relief under Rule 6e-2 would not be necessary. The relief provided for 
under this section does not relate to Qualified Plans or to a 
registered investment company's ability to sell its shares to Qualified 
Plans. The use of a common management investment company as the 
underlying investment vehicle for variable annuity and variable life 
separate accounts of affiliated and unaffiliated insurance companies, 
and for Qualified Plans, is referred to herein as ``extended mixed and 
shared funding.''
    5. In connection with flexible premium variable life insurance 
contracts issued through a separate account registered under the 1940 
Act as a UIT, Rule 6e-3(T)(b)(15) provides partial exemptions from 
Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act. The exemptions 
granted by Rule 6e-3(T)(b)(15) \2\ are available only where all the 
assets of the separate account consist of the shares of one or more 
registered management investment companies that offer to sell their 
shares ``exclusively to separate accounts of the life insurer, or of 
any affiliated life insurance companies, offering either scheduled 
contracts or flexible contracts, or both; or which also offer their 
shares to variable annuity separate accounts of the life insurer or of 
an affiliated life insurance company or which offer their shares to any 
such life insurance company in consideration solely for advances made 
by the life insurer in connection with the operation of the separate 
account.'' Therefore, Rule 6e-3(T)(b)(15) permits mixed funding but 
does not permit shared funding.
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    \2\ The exemptions are also granted to the investment adviser, 
principal underwriter and depositor of the separate account.
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    6. The relief under Rule 6e-3(T) is available only where shares are 
offered exclusively to variable life insurance separate accounts of a 
life insurer or any affiliated life insurance company, and additional 
exemptive relief is necessary if the shares of the Funds are also to be 
sold to Qualified Plans or other eligible holders of shares as 
described above. Applicants note that if shares of the Funds were sold 
only to Qualified Plans, exemptive relief under Rule 6e-3(T)(b)(15) 
would not be necessary. The relief provided for under this section does 
not relate to Qualified Plans or to a registered investment company's 
ability to sell its shares to Qualified Plans.
    7. Applicants maintain, as discussed below, that there is no policy 
reason for the sale of the Funds' shares to Qualified Plans, to 
Westchester, or to General Accounts to result in a prohibition against, 
or otherwise limit, a Participating Insurance Company from relying on 
the relief provided by Rules 6e-2(b)(15) and 6e-3(T)(b)(15). However, 
because the relief under Rules 6e-2(b)(15) and 6e-3(T)(b)(15) is 
available only when shares are offered exclusively to separate 
accounts, additional exemptive relief may be necessary if the shares of 
the Funds are also to be sold to Qualified Plans, Westchester or 
General Accounts. Applicants therefore request relief in order to have 
the participating insurance companies enjoy the benefits of the relief 
granted in Rules 6e-2(b)(15) and 6e-3(T)(b)(15). Applicants note that 
if the Funds' shares were to be sold only to Qualified Plans, 
Westchester, General Accounts and/or separate accounts funding variable 
annuity contracts, exemptive relief under Rule 6e-2 and Rule 6e-3(T) 
would be unnecessary. The relief provided for under Rules 6e-2(b)(15) 
and 6e-3(T)(b)(15) does not relate to Qualified Plans, Westchester, or 
General Accounts, or to a registered investment company's ability to 
sell its shares to such purchasers.
    8. Applicants also note that the promulgation of Rules 6e-2(b)(15) 
and 6e-3(T)(b)(15) preceded the issuance of regulations by the Treasury 
Department that made it possible for shares of an investment company 
portfolio to be held by the trustee of a Qualified Plan without 
adversely affecting the ability of shares in the same investment 
company portfolio also to be held by the separate accounts of insurance 
companies in connection with their Variable Contracts 
(``Regulations''). Thus, the sale of shares of the same portfolio to 
both separate accounts and Qualified Plans was not contemplated at the 
time of the adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15).

Authority Under Section 6(c)

    9. Consistent with the Commission's authority under Section 6(c) of 
the 1940 Act to grant exemptive orders to a class or classes of persons 
and transactions, the application requests relief for the class 
consisting of insurers and Separate Accounts that will invest in the 
Funds, and to the extent necessary, Qualified Plans, other eligible 
holders of shares and investment advisers, principal underwriters and 
depositors of such accounts. Applicants assert that there is ample 
precedent, in a variety of

[[Page 7812]]

contexts, for granting exemptive relief not only to Applicants in a 
given case, but also to members of the class not currently identified 
that may be similarly situated in the future.
    10. Section 6(c) of the 1940 Act 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. Applicants 
submit 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.

Relief From Section 9(a)

    11. Section 9(a)(3) of the 1940 Act provides that it is unlawful 
for any company to serve as investment adviser or principal underwriter 
of any registered open-end investment company if an affiliated person 
of that company is subject to a disqualification enumerated in Sections 
9(a)(1) or (2). Rules 6e-2(b)(15)(i) and (ii) and Rules 6e-
3(T)(b)(15)(i) and (ii) under the 1940 Act provide exemptions from 
Section 9(a) under certain circumstances, subject to the limitations 
discussed above on mixed and shared funding. These exemptions limit the 
application of the eligibility restrictions to affiliated individuals 
or companies that directly participate in management of the underlying 
management company.
    12. The partial relief granted in Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) under the 1940 Act from the requirements of Section 9 of 
the 1940 Act, in effect, limits the amount of monitoring necessary to 
ensure compliance with Section 9 to that which is appropriate in light 
of the policy and purposes of Section 9. Those 1940 Act rules recognize 
that it is not necessary for the protection of investors or the 
purposes fairly intended by the policy and provisions of the 1940 Act 
to apply the provisions of Section 9(a) to individuals in a large 
insurance company complex, most of whom will have no involvement in 
matters pertaining to investment companies in that organization. The 
Participating Insurance Companies and Qualified Plans are not expected 
to play any role in the management of the Trusts. Those individuals who 
participate in the management of the Trusts will remain the same 
regardless of which Separate Accounts or Qualified Plans invests in the 
Trusts. Applicants assert that applying the monitoring requirements of 
Section 9(a) of the 1940 Act because of investment by separate accounts 
funding variable annuities, by separate accounts of other insurers or 
by Qualified Plans would be unjustified and would not serve any 
regulatory purpose. Furthermore, the increased monitoring costs could 
reduce the net rates of return realized by contract owners.
    13. Moreover, according to Applicants, since the Qualified Plans, 
Westchester and General Accounts are not themselves investment 
companies, and therefore are not subject to Section 9 of the 1940 Act 
and will not be deemed affiliates solely by virtue of their 
shareholdings, no additional relief is necessary.

Voting Conflicts

    14. Applicants state that Rules 6e-2(b)(15)(iii) and 6e-
3(T)(b)(15)(iii) under the 1940 Act provide exemptions from the pass-
through voting requirement with respect to several significant matters, 
assuming the limitations on mixed and shared funding are observed. 
Rules 6e-2(b)(15)(iii)(A) and 6e-3(T)(b)(15)(iii)(A) provide that the 
insurance company may disregard the voting instructions of its contract 
owners with respect to the investments of an underlying fund, or any 
contract between such a fund and its investment adviser, when required 
to do so by an insurance regulatory authority (subject to the 
provisions of paragraphs (b)(5)(i) and (b)(7)(ii)(A) of Rules 6e-2 and 
6e-3(T), respectively, under the 1940 Act). Rules 6e-2(b)(15)(iii)(B) 
and 6e-3 (T)(b)(15)(iii)(A)(2) provide that the insurance company may 
disregard the voting instructions of its contract owners if the 
contract owners initiate any change in an underlying fund's investment 
policies, principal underwriter, or any investment adviser (provided 
that disregarding such voting instructions is reasonable and subject to 
the other provisions of paragraphs (b)(5)(ii), (b)(7)(ii)(B), and 
(b)(7)(ii)(C), respectively, of Rules 6e-2 and 6e-3(T) under the 1940 
Act).
    15. Applicants contend that Rule 6e-2 under the 1940 Act recognizes 
that a variable life insurance contract, as an insurance contract, has 
important elements unique to insurance contracts and is subject to 
extensive 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.\3\ 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.\4\ 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.'' \5\ In this respect, flexible premium variable life 
insurance contracts are identical to scheduled premium variable life 
insurance contracts. Therefore, according to Applicants, the 
corresponding provisions of Rule 6e-3(T) under the 1940 Act undoubtedly 
were adopted in recognition of the same factors.
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    \3\ Investment Company Act Release No. 9482 (Oct. 18, 1976) 
(adopting Rule 6e-2 under the 1940 Act).
    \4\ Investment Company Release No. 8000 (Sept. 20, 1973) 
(proposing to amend Rule 3c-4, predecessor to Rule 6e-2, under the 
1940 Act).
    \5\ Investment Company Act Release No. 9104 (Dec. 30, 1975) 
(proposing Rule 6e-2 under the 1940 Act). The Commission referred to 
the same rationale in granting an application for exemption. See 
Equitable Variable Life Insurance Company, Investment Company Act 
Release No. 8992 (Oct. 16, 1975) (order), Investment Company Act 
Release No. 8888 (Aug. 13, 1975) (notice).
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    16. Applicants assert that the sale of Fund shares to Qualified 
Plans, Westchester and General Accounts will not have any impact on the 
relief requested herein. With respect to the Qualified Plans, which are 
not registered as investment companies under the 1940 Act, there is no 
requirement to pass through voting rights to Qualified Plan 
participants. Indeed, to the contrary, applicable law expressly 
reserves voting rights associated with certain Qualified Plan assets to 
certain specified persons. Under Section 403(a) of the Employment 
Retirement Income Security Act of 1974, as amended (``ERISA''), shares 
of a portfolio of a fund sold to a Qualified Plan must be held by the 
trustees of the Qualified Plan. Section 403(a) also provides that the 
trustee(s) must have exclusive authority and discretion to manage and 
control the Qualified Plan with two exceptions: (a) When the Qualified 
Plan expressly provides that the trustee(s) are subject to the 
direction of a named fiduciary who is not a trustee, in which case the 
trustees are subject to proper directions made in accordance with the

[[Page 7813]]

terms of the Qualified Plan and not contrary to ERISA, and (b) when the 
authority to manage, acquire, or dispose of assets of the Qualified 
Plan is delegated to one or more investment managers pursuant to 
Section 402(c)(3) of ERISA. Unless one of the above two exceptions 
stated in Section 403(a) applies, Qualified Plan trustees have the 
exclusive authority and responsibility for voting proxies.
    17. Where a named fiduciary to a Qualified Plan appoints an 
investment manager, the investment manager has the responsibility to 
vote the shares held unless the right to vote such shares is reserved 
to the trustees or the named fiduciary. The Qualified Plans may have 
their trustee(s) or other fiduciaries exercise voting rights 
attributable to investment securities held by the Qualified Plans in 
their discretion. Some of the Qualified Plans, however, may provide for 
the trustee(s), an investment adviser (or advisers), or another named 
fiduciary to exercise voting rights in accordance with instructions 
from participants. Similarly, Westchester and General Accounts are not 
subject to any pass-through voting requirements. Applicants assert 
that, unlike the case with insurance company separate accounts, the 
issue of resolution of material irreconcilable conflicts with respect 
to voting is therefore not present with those Qualified Plans, 
Westchester or General Accounts.
    18. Where a Qualified Plan does not provide participants with the 
right to give voting instructions, the trustee or named fiduciary has 
responsibility to vote the shares held by the Qualified Plan. In this 
circumstance, the trustee has a fiduciary duty to vote the shares in 
the best interest of the Qualified Plan participants. Accordingly, even 
if Westchester were to serve in the capacity of trustee or named 
fiduciary with voting responsibilities, Westchester would have a 
fiduciary duty to vote those shares in the best interest of the 
Qualified Plan participants.
    19. In addition, even if a Qualified Plan were to hold a 
controlling interest in a Fund, Applicants do not believe that such 
control would disadvantage other investors in such Fund to any greater 
extent than is the case when any institutional shareholder holds a 
majority of the voting securities of any open-end management investment 
company. In this regard, Applicants submit that investment in a Fund by 
a Qualified Plan will not create any of the voting complications 
occasioned by mixed funding or shared funding. Unlike mixed funding or 
shared funding, Qualified Plan investor voting rights cannot be 
frustrated by veto rights of insurers or state regulators.
    20. Where a Qualified Plan provides participants with the right to 
give voting instructions, Applicants see no reason to believe that 
participants in Qualified Plans generally or those in a particular 
Qualified Plan, either as a single group or in combination with 
participants in other Qualified Plans, would vote in a manner that 
would disadvantage Variable Contract holders. Applicants contend that 
the purchase of shares of Funds by Qualified Plans that provide voting 
rights does not present any complications not otherwise occasioned by 
mixed or shared funding.
    21. According to Applicants, the prohibitions on mixed and shared 
funding might reflect concern regarding possible different investment 
motivations among investors. When Rule 6e-2 under the 1940 Act was 
adopted, variable annuity separate accounts could invest in mutual 
funds whose shares also were offered to the general public. Therefore, 
the Commission staff contemplated underlying funds with public 
shareholders, as well as with variable life insurance separate account 
shareholders. Applicants state that the Commission staff may have been 
concerned with the potentially different investment motivations of 
public shareholders and variable life insurance contract owners. There 
also may have been some concern with respect to the problems of 
permitting a state insurance regulatory authority to affect the 
operations of a publicly available mutual fund and to affect the 
investment decisions of public shareholders.
    22. Applicants note that, for reasons unrelated to the 1940 Act, 
however, Internal Revenue Service Revenue Ruling 81-225 (Sept. 25, 
1981) effectively deprived variable annuities funded by publicly 
available mutual funds of their tax-benefited status. The Tax Reform 
Act of 1984 codified the prohibition against the use of publicly 
available mutual funds as an investment vehicle for Variable Contracts 
(including variable life contracts). Section 817(h) of the Internal 
Revenue Code of 1986, as amended (``Code'') in effect requires that the 
investments made by variable annuity and variable life insurance 
separate accounts be `` - - adequately diversified.'' If a separate 
account is organized as a UIT that invests in a single fund or series, 
the diversification test will be applied at the underlying fund level, 
rather than at the separate account level, but only if ``all of the 
beneficial interests'' in the underlying fund ``are held by one or more 
insurance companies (or affiliated companies) in their general account 
or in segregated asset accounts * * *'' Accordingly, a UIT separate 
account that invests solely in a publicly available mutual fund will 
not be adequately diversified. In addition, any underlying mutual fund, 
including any Fund, that sells shares to separate accounts, in effect, 
would be precluded from also selling its shares to the public. 
Consequently, there will be no public shareholders of any Fund.
    23. Applicants submit 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. According to 
Applicants, the fact that different insurers may be domiciled in 
different states does not create a significantly different or enlarged 
problem.
    24. Applicants contend that shared funding by unaffiliated 
insurers, in this respect, is no different than the use of the same 
investment company as the funding vehicle for affiliated insurers, 
which Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act permit. 
Affiliated insurers may be domiciled in different states and be subject 
to differing state law requirements. Applicants assert that affiliation 
does not reduce the potential, if any exists, for differences in state 
regulatory requirements. Applicants state that, in any event, the 
conditions set forth below are designed to safeguard against, and 
provide procedures for resolving, any adverse effects that differences 
among state regulatory requirements may produce. If a particular state 
insurance regulator's decision conflicts with the majority of other 
state regulators, then the affected insurer will be required to 
withdraw its Separate Account's investment in the affected Trust. This 
requirement will be provided for in agreements that will be entered 
into by Participating Insurance Companies with respect to their 
participation in the relevant Fund.
    25. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act give 
the insurance company the right to disregard the voting instructions of 
the contract owners. According to Applicants, this right does not raise 
any issues different from those raised by the authority of state 
insurance administrators over separate accounts. Under Rules 6e-
2(b)(15) and 6e-3(T)(b)(15), an insurer can disregard

[[Page 7814]]

contract owner voting instructions only with respect to certain 
specified items. Applicants assert that affiliation does not eliminate 
the potential, if any exists, for divergent judgments as to the 
advisability or legality of a change in investment policies, principal 
underwriter, or investment adviser initiated by contract owners. The 
potential for disagreement is limited by the requirements in Rules 6e-2 
and 6e-3(T) under the 1940 Act that the insurance company's disregard 
of voting instructions be reasonable and based on specific good-faith 
determinations.
    26. A particular insurer's disregard of voting instructions, 
nevertheless, could conflict with the majority of contract owners' 
voting instructions. The insurer's action possibly could be different 
than the determination of all or some of the other insurers (including 
affiliated insurers) that the voting instructions of contract owners 
should prevail, and either could preclude a majority vote approving the 
change or could represent a minority view. If the insurer's judgment 
represents a minority position or would preclude a majority vote, then 
the insurer may be required, at the affected Trust's election, to 
withdraw its Separate Account's investment in such Fund. No charge or 
penalty will be imposed as a result of such withdrawal. This 
requirement will be provided for in the agreements entered into with 
respect to participation by the Participating Insurance Companies in 
each Fund.
    27. Applicants state that each Fund will be managed to attempt to 
achieve the investment objective or objectives of such Fund, and not to 
favor or disfavor any particular Participating Insurance Company or 
type of insurance product. Applicants believe that there is no reason 
to believe that different features of various types of contracts, 
including the ``minimum death benefit'' guaranteed under certain 
variable life insurance contracts, will lead to different investment 
policies for different types of Variable Contracts. To the extent that 
the degree of risk may differ as between variable annuity contracts and 
variable life insurance policies, Applicants assert that the different 
insurance charges imposed, in effect, adjust any such differences and 
equalize the insurers' exposure in either case.
    28. Applicants do not believe that the sale of the shares of the 
Funds to Qualified Plans will increase the potential for material 
irreconcilable conflicts of interest between or among different types 
of investors. In particular, Applicants see very little potential for 
such conflicts beyond those that would otherwise exist between variable 
annuity and variable life insurance contract owners. Moreover, in 
considering the appropriateness of the requested relief, Applicants 
have analyzed the following issues to assure themselves that there were 
either no conflicts of interest or that there existed the ability by 
the affected parties to resolve the issues without harm to the contract 
owners in the Separate Accounts or to the participants under the 
Qualified Plans.
    29. Applicants considered whether there are any issues raised under 
the Code, Regulations, or Revenue Rulings thereunder, if Qualified 
Plans, variable annuity separate accounts, and variable life insurance 
separate accounts all invest in the same underlying fund. As noted 
above, Section 817(h) of the Code imposes certain diversification 
standards on the underlying assets of Variable Contracts held in an 
underlying mutual fund. The Code provides that a Variable Contract 
shall not be treated as an annuity contract or life insurance, as 
applicable, for any period (and any subsequent period) for which the 
investments are not, in accordance with regulations prescribed by the 
Treasury Department, adequately diversified.
    30. Regulations issued under Section 817(h) provide that, in order 
to meet the statutory diversification requirements, all of the 
beneficial interests in the investment company must be held by the 
segregated asset accounts of one or more insurance companies. However, 
the Regulations contain certain exceptions to this requirement, one of 
which allows shares in an underlying mutual fund to be held by the 
trustees of a qualified pension or retirement plan without adversely 
affecting the ability of such shares also to be held by separate 
accounts of insurance companies in connection with their Variable 
Contracts. (Treas. Reg. Sec.  1.817-5(f)(3)(iii)). Thus, the 
Regulations specifically permit ``qualified pension or retirement 
plans'' and separate accounts to invest in the same underlying fund. 
For this reason, Applicants have concluded that neither the Code, nor 
Regulations, nor Revenue Rulings thereunder, present any inherent 
conflicts of interest if the Qualified Plans and Separate Accounts all 
invest in the same Fund.
    31. Applicants note that while there are differences in the manner 
in which distributions from Variable Contracts and Qualified Plans are 
taxed, these differences will have no impact on the Trusts and do not 
raise any conflicts of interest. When distributions are to be made, and 
a Separate Account or Qualified Plan cannot net purchase payments to 
make the distributions, the Separate Account and Qualified Plan will 
redeem shares of the relevant Fund at their respective net asset value 
in conformity with Rule 22c-1 under the 1940 Act (without the 
imposition of any sales charge) to provide proceeds to meet 
distribution needs. A Participating Insurance Company then will make 
distributions in accordance with the terms of its Variable Contract, 
and a Qualified Plan then will make distributions in accordance with 
the terms of the Qualified Plan.
    32. Applicants claim there is analogous precedent for a situation 
in which the same funding vehicle was used for contract owners subject 
to different tax rules, without any apparent conflicts. Prior to the 
Tax Reform Act of 1984, a number of insurance companies offered 
variable annuity contracts on both a qualified and non-qualified basis 
through the same separate account. Underlying reserves of both 
qualified and non-qualified contracts therefore were commingled in the 
same separate account. However, long-term capital gains incurred in 
such separate accounts were taxed on a different basis than short-term 
gains and other income with respect to the reserves underlying non-
qualified contracts. A tax reserve at the estimated tax rate was 
established in the separate account affecting only the non-qualified 
reserves. To the best of Applicants' knowledge, that practice was never 
found to have violated any fiduciary standards. Accordingly, Applicants 
have concluded that the tax consequences of distributions with respect 
to Participating Insurance Companies and Qualified Plans do not raise 
any conflicts of interest with respect to the use of the Funds.
    33. Applicants considered whether it is possible to provide an 
equitable means of giving voting rights to contract owners in the 
Separate Accounts and to Qualified Plans, and determined it is possible 
to do so. In connection with any meeting of shareholders, the 
soliciting Trust will inform each shareholder, including each Separate 
Account, Qualified Plan, Westchester and General Account, of 
information necessary for the meeting, including their respective share 
of ownership in the relevant Fund. Each Participating Insurance Company 
then will solicit voting instructions in accordance with Rules 6e-2 and 
6e-3(T), as applicable, and its agreement with the Funds concerning 
participation in the relevant Fund. Shares of a Fund that are held by 
Westchester and any General Account will be voted in the same 
proportion as all variable contract owners having

[[Page 7815]]

voting rights with respect to that Fund. However, Westchester and any 
General Account will vote their shares in such other manner as the 
Commission may require. Shares held by Qualified Plans will be voted in 
accordance with applicable law. The voting rights provided to Qualified 
Plans with respect to shares of a Fund would be no different from the 
voting rights that are provided to Qualified Plans with respect to 
shares of funds sold to the general public. Furthermore, if a material 
irreconcilable conflict arises because of a Qualified Plan's decision 
to disregard Qualified Plan participant voting instructions, if 
applicable, and that decision represents a minority position or would 
preclude a majority vote, the Qualified Plan may be required, at the 
election of the affected Trust, to withdraw its investment in such 
Fund, and no charge or penalty will be imposed as a result of such 
withdrawal.
    34. Applicants reviewed whether a ``senior security,'' as such term 
is defined under Section 18(g) of the 1940 Act, is created with respect 
to any Variable Contract owner as opposed to a participant under a 
Qualified Plan, Westchester or a General Account. Applicants concluded 
that the ability of the Trusts to sell shares of the Funds directly to 
Qualified Plans, Westchester or a General Account does not create a 
senior security. ``Senior security'' is defined under Section 18(g) of 
the 1940 Act to include ``any stock of a class having priority over any 
other class as to distribution of assets or payment of dividends.'' As 
noted above, regardless of the rights and benefits of participants 
under Qualified Plans, or contract owners under Variable Contracts, the 
Qualified Plans, Westchester, General Accounts and the Separate 
Accounts only have rights with respect to their respective shares of 
the Fund. They only can redeem such shares at net asset value. No 
shareholder of a Fund has any preference over any other shareholder 
with respect to distribution of assets or payment of dividends.
    35. Applicants maintain that various factors have kept more 
insurance companies from offering variable annuity and variable life 
insurance contracts than currently offer such contracts. These factors 
include the costs of organizing and operating a funding medium, the 
lack of expertise with respect to investment management (principally 
with respect to stock and money market investments), and the lack of 
name recognition by the public of certain insurers as investment 
experts with whom the public feels comfortable entrusting their 
investment dollars. For example, 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. Applicants believe that use of a common investment medium 
such as a Fund for variable contracts, as well as for Qualified Plans, 
would reduce or eliminate these concerns. Applicants also believe that 
mixed and shared funding should provide several benefits to variable 
contract owners by eliminating a significant portion of the costs of 
establishing and administering separate funds. Applicants assert that 
Participating Insurance Companies and Qualified Plans will benefit not 
only from the investment and administrative expertise of the 
responsible advisors and their affiliates, but also from the cost 
efficiencies and investment flexibility afforded by a large pool of 
funds. According to Applicants, mixed and shared funding, including the 
sale of shares of a Fund to Qualified Plans, also would permit a 
greater amount of assets available for investment by such Fund, thereby 
promoting economies of scale, by permitting increased safety through 
greater diversification, and by making the addition of new Funds more 
feasible.
    36. Applicants submit that, regardless of the type of shareholder 
in a Fund, Westchester is or would be contractually and otherwise 
obligated to manage the Fund's investments solely and exclusively in 
accordance with that Fund's investment objectives and restrictions as 
well as with any guidelines established by the board of trustees or 
directors, as applicable, of the particular Trust. Applicants state 
that Westchester will work with the commingled pool of assets of each 
Fund and will not take into account the identity of the shareholders.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions, which will also apply to Future 
Trusts:
    1. A majority of the Board of Trustees (the ``Board'') of the Trust 
will consist of persons who are not ``interested persons'' of the 
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 Trustees, 
then the operation of this condition will 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 (e) for such longer 
period as the Commission may prescribe by order upon application.
    2. The Board will monitor the Trust for the existence of any 
material irreconcilable conflict between the interests of the contract 
owners of all Separate Accounts and participants of all Qualified Plans 
investing in such 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 
such Trust are being managed; (e) a difference in voting instructions 
given by variable annuity contract owners, variable life insurance 
contract owners, and trustees of the Qualified Plans; (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 Qualified Plan 
participants.
    3. Participating Insurance Companies (on their own behalf, as well 
as by virtue of any investment of general account assets in a Fund), 
Westchester, and any Qualified Plan that executes a participation 
agreement upon becoming an owner of 10 percent or more of the assets of 
any Fund (collectively, ``Participants'') will report any potential or 
existing conflicts to the Board. 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 
responsibility includes, but is not limited to, an obligation by each 
Participating Insurance Company to inform the Board whenever contract 
owner voting instructions are disregarded, and, if pass-through voting 
is applicable, an obligation by each Qualified Plan to inform the Board 
whenever it has determined to disregard Qualified Plan participant 
voting instructions. The responsibility to report such information and 
conflicts, and to assist the Board, will be a contractual obligation of 
all Participating Insurance Companies under their participation 
agreements with the Trust, and these

[[Page 7816]]

responsibilities will be carried out with a view only to the interests 
of the contract owners. The responsibility to report such information 
and conflicts, and to assist the Board, also will be contractual 
obligations of all Qualified Plans with participation agreements, and 
such agreements will provide that these responsibilities will be 
carried out with a view only to the interests of Qualified Plan 
participants.
    4. If it is determined by a majority of the Board, or a majority of 
the disinterested Trustees of the Board, that a material irreconcilable 
conflict exists, then the relevant Participant will, at its expense and 
to the extent reasonably practicable (as determined by a majority of 
the disinterested Trustees), 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 Fund and reinvesting such assets in 
a different investment vehicle including another Fund or, in the case 
of Participating Insurance Company Participants, submitting the 
question as to whether such segregation should be implemented to a vote 
of all affected contract owners and, as appropriate, segregating the 
assets of any appropriate group (i.e., annuity contract owners or life 
insurance contract owners of one or more Participating Insurance 
Companies) that votes in favor of such segregation, or offering to the 
affected contract owners the option of making such a change; and (b) 
establishing a new registered management investment company or managed 
separate account. If a material irreconcilable conflict arises because 
of a decision by a Participating Insurance Company to disregard 
contract owner voting instructions, and that decision represents a 
minority position or would preclude a majority vote, then the insurer 
may be required, at the election of the Trust, to withdraw such 
insurer's Separate Account's investment in the 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 Qualified Plan participant voting instructions, if 
applicable, and that decision represents a minority position or would 
preclude a majority vote, the Qualified Plan may be required, at the 
election of the Fund, to withdraw its investment in the Fund, and no 
charge or penalty will be imposed as a result of such withdrawal. The 
responsibility to take remedial action in the event of a Board 
determination of a material irreconcilable conflict and to bear the 
cost of such remedial action will be a contractual obligation of all 
Participants under their agreements governing participation in the 
Trust, and these responsibilities will be carried out with a view only 
to the interests of contract owners and Qualified Plan participants.
    For purposes of this Condition 4, a majority of the disinterested 
members of the Board will determine whether or not any proposed action 
adequately remedies any material irreconcilable conflict, but, in no 
event will the Trust, Westchester or an affiliate of Westchester, as 
relevant, be required to establish a new funding vehicle for any 
Variable Contract. No Participating Insurance Company will be required 
by this Condition 4 to establish a new funding vehicle for any Variable 
Contract if any offer to do so has been declined by vote of a majority 
of the contract owners materially and adversely affected by the 
material irreconcilable conflict. Further, no Qualified Plan will be 
required by this Condition 4 to establish a new funding vehicle for the 
Qualified Plan if: (a) A majority of the Qualified Plan participants 
materially and adversely affected by the irreconcilable material 
conflict vote to decline such offer, or (b) pursuant to documents 
governing the Qualified Plan, the Qualified Plan makes such decision 
without a Qualified Plan participant vote.
    5. The Board's determination of the existence of a material 
irreconcilable conflict and its implications will be made known in 
writing promptly to all Participants.
    6. As to Variable Contracts issued by Separate Accounts registered 
under the 1940 Act, Participating Insurance Companies will provide 
pass-through voting privileges to all Variable Contract owners as 
required by the 1940 Act as interpreted by the Commission. However, as 
to Variable Contracts issued by unregistered Separate Accounts, pass-
through voting privileges will be extended to contract owners to the 
extent granted by the issuing insurance company. Accordingly, each of 
such Participants, where applicable, will vote shares of the applicable 
Fund held in their Separate Accounts in a manner consistent with voting 
instructions timely received from Variable Contract owners. 
Participating Insurance Companies will be responsible for assuring that 
each Separate Account investing in a Fund calculates voting privileges 
in a manner consistent with other Participants.
    The obligation to calculate voting privileges will be a contractual 
obligation of all Participating Insurance Companies under their 
agreement with the Trusts governing participation in a Fund. Each 
Participating Insurance Company will vote shares for which it has not 
received timely voting instructions, as well as shares held in its 
General Account or otherwise attributable to it, in the same proportion 
as it votes those shares for which it has received voting instructions, 
and such obligations shall be a contractual obligation of all 
Participating Insurance Companies. Each Qualified Plan will vote as 
required by applicable law and governing Qualified Plan documents.
    7. As long as the 1940 Act requires pass-through voting privileges 
to be provided to variable contract owners, Westchester will vote its 
shares of any Fund in the same proportion of all variable contract 
owners having voting rights with respect to that Fund; provided, 
however, that Westchester shall vote its shares in such other manner as 
may be required by the Commission or its staff. Such voting obligation 
shall be a contractual obligation of Westchester.
    8. The 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 the respective 
Fund, and, in particular, the Trust will either provide for annual 
meetings (except to the extent that the Commission may interpret 
Section 16 of the 1940 Act not to require such meetings) or comply with 
Section 16(c) of the 1940 Act (although the Trust is not one of the 
funds of the type described in the Section 16(c) of the 1940 Act), as 
well as with Section 16(a) of the 1940 Act and, if and when applicable, 
Section 16(b) of the 1940 Act. Further, the Trust will act in 
accordance with the Commission's interpretation of the requirements of 
Section 16(a) with respect to periodic elections of trustees and with 
whatever rules the Commission may promulgate with respect thereto.
    9. The Trust will notify all Participants that Separate Account 
prospectus disclosure or Qualified Plan prospectuses or other Qualified 
Plan disclosure documents regarding potential risks of mixed and shared 
funding may be appropriate. The Trust will disclose in its prospectus 
that (a) shares of the Trust may be offered to Separate Accounts of 
Variable Contracts and, if applicable, to Qualified Plans; (b) due to 
differences in tax treatment and other considerations, the interests of 
various contract owners participating in the Trust and the interests of 
Qualified Plans investing in the Trust, if applicable, may conflict; 
and (c) the

[[Page 7817]]

Trust's Board will monitor events in order to identify the existence of 
any material irreconcilable conflicts and to determine what action, if 
any, should be taken in response to any such conflict.
    10. If and to the extent that Rule 6e-2 and Rule 6e-3(T) under the 
1940 Act are amended, or proposed Rule 6e-3 under the 1940 Act is 
adopted, to provide exemptive relief from any provision of the 1940 
Act, or the rules promulgated thereunder, with respect to mixed or 
shared funding, on terms and conditions materially different from any 
exemptions granted in the order requested in the application, then the 
Trust and/or Participating Insurance Companies, as appropriate, shall 
take such steps as may be necessary to comply with Rules 6e2 and 6e-
3(T), or Rule 6e-3, as such rules are applicable.
    11. The Participants, at least annually, will submit to the Board 
such reports, materials, or data as the Board reasonably may request so 
that the trustees of the Board may fully carry out the obligations 
imposed upon the Board by the conditions contained in the application. 
Such reports, materials, and data will be submitted more frequently if 
deemed appropriate by the Board. The obligations of the Participants to 
provide these reports, materials, and data to the Board, when it so 
reasonably requests, will be a contractual obligation of all 
Participants under their agreements governing participation in the 
Funds.
    12. All reports of potential or existing conflicts received by the 
Board, and all Board action with regard to determining the existence of 
a conflict, notifying Participants of a conflict, and determining 
whether any proposed action adequately remedies a conflict, will be 
properly recorded in the minutes of the Board or other appropriate 
records, and such minutes or other records shall be made available to 
the Commission upon request.
    13. The Trust will not accept a purchase order from a Qualified 
Plan if such purchase would make the Qualified Plan shareholder an 
owner of 10 percent or more of the assets of a Fund unless such 
Qualified Plan executes an agreement with the Trust governing 
participation in such Fund that includes the conditions set forth 
herein to the extent applicable. A Qualified Plan or Qualified Plan 
participant will execute an application containing an acknowledgment of 
this condition at the time of its initial purchase of shares of any 
Fund.

Conclusion

    Applicants submit, based on the grounds summarized above, that the 
exemptions requested are 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.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-3537 Filed 2-18-04; 8:45 am]
BILLING CODE 8010-01-P