[Federal Register Volume 69, Number 120 (Wednesday, June 23, 2004)]
[Notices]
[Pages 35073-35081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-14139]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26468; File No. 812-13088]


AXP Variable Portfolio Funds, et al., Notice of Application

June 16, 2004.
AGENCY: The 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: AXP Variable Portfolio--Income Series, Inc., AXP Variable 
Portfolio--Investment Series, Inc., AXP Variable Portfolio--Managed 
Series, Inc., AXP Variable Portfolio--Money Market Series, Inc., AXP 
Variable Portfolio--Partners Series, Inc., AXP Variable Portfolio--
Select Series, Inc. (the ``AXP VP Funds'') and American Express 
Financial Corporation (``AEFC'') (collectively, the ``Applicants'').

Summary of Application: Applicants seek an order pursuant to section 
6(c) of the 1940 Act exempting certain life insurance companies and 
their separate accounts that currently invest or may hereafter invest 
in the AXP VP Funds (and, to the extent necessary, any investment 
adviser, principal underwriter and depositor of such an account) 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 AXP VP Funds and shares of any other 
existing or future investment company that is designed to fund 
insurance products and for which AEFC or any of its affiliates may 
serve in the future as investment adviser, investment manager, 
subadviser, principal underwriter, sponsor or administrator (the 
``Future Funds'') (the AXP VP Funds together with the Future Funds 
being hereinafter referred to individually as a ``Fund'' and 
collectively as the ``Funds''), or to permit shares of any existing or 
future series of any Fund (individually, a ``Portfolio'' and 
collectively, the ``Portfolios'') to be sold and held by: (a) Separate 
accounts funding variable annuity and variable life insurance contracts 
(the ``Variable Contracts'') issued by both affiliated and unaffiliated 
life insurance companies; (b) qualified pension and retirement plans 
(the ``Qualified Plans'') outside of the separate account context; (c) 
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; (d) any investment manager to a Portfolio and 
affiliates thereof that is permitted to hold shares of a Portfolio 
consistent with the requirements of regulations issued by the Treasury 
Department (individually, a ``Treasury Regulation'' and collectively, 
the ``Treasury Regulations''), specifically

[[Page 35074]]

Treasury Regulation Sec.  1.817-5 (collectively, the ``Manager'') and 
(e) any other person permitted to hold shares of the Portfolios 
pursuant to Treasury Regulation Sec.  1.817-5 (the ``General 
Accounts'').

Filing Date: The Application was filed on May 17, 2004 and amended and 
restated on June 14, 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 July 8, 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 Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants: Mary Ellyn Minenko, 
Esq., Vice President and Group Counsel, American Express Financial 
Advisors Inc., 50607 AXP Financial Center, Minneapolis, MN 55474 with a 
copy to Michael S. Fischer, Esq., Halleland Lewis Nilan Sipkins & 
Johnson, P.A., Pillsbury Center South Suite 600, 220 South Sixth 
Street, Minneapolis, MN 55402.

FOR FURTHER INFORMATION CONTACT: Mark Cowan, Senior Counsel, or Zandra 
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 (telephone (202) 942-8090).

Applicants' Representations

    1. The AXP VP Funds are all Minnesota corporations and are 
registered as open-end management investment companies under the 1940 
Act. AEFC, a Delaware corporation, is registered with the Commission 
under the Investment Advisers Act of 1940, as amended, (the ``Advisers 
Act'') and has served as the investment adviser to the AXP VP Funds 
since November 1, 2004. Prior to that time, IDS Life Insurance Company, 
a wholly owned subsidiary of AEFC, served as the investment adviser to 
the AXP VP Funds while AEFC served as the subadviser. Pursuant to 
investment subadvisory agreements, AEFC retains both affiliated and 
unaffiliated subadvisers for certain Portfolios under the AXP VP Funds. 
Each subadviser is registered as an investment adviser with the 
Commission under the Advisers Act. The AXP VP Funds currently consist 
of six open-end management investment companies offering shares of 
twenty-three Portfolios. Currently, shares of the AXP VP Funds 
Portfolios are offered solely to separate accounts funding flexible 
premium variable life insurance policies and variable annuity contracts 
issued by insurance company affiliates of AEFC.
    2. Shares of the Portfolios may be offered in the future to 
separate accounts of both affiliated and unaffiliated insurance (each a 
``Participating Insurance Company'' and collectively, the 
``Participating Insurance Companies'') to serve as investment vehicles 
to fund Variable Contracts. These separate accounts either will be 
registered as investment companies under the 1940 Act or will be exempt 
from 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 Portfolios may 
also be offered to Qualified Plans, the Manager and General Accounts, 
including the general account of any life insurance company whose 
separate account holds, or will hold, shares of the Funds.
    3. The Participating Insurance Companies at the time of their 
investment in the Funds 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 
of satisfying all applicable requirements under both State and Federal 
law. Each Participating Insurance Company, on behalf of its Separate 
Accounts, has entered or will enter into an agreement with the Funds 
concerning such Participating Insurance Company's participation in the 
Portfolios. The role of the Funds under this agreement, insofar as the 
Federal securities laws are applicable, will consist of, among other 
things, offering shares of the Portfolios 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 an order pursuant to section 6(c) of the 1940 
Act exempting certain life insurance companies and their separate 
accounts that currently invest or may hereafter invest in the AXP VP 
Funds (and to the extent necessary, any investment adviser, principal 
underwriter and depositor of such an account) 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 AXP VP Funds and shares of any Future Funds to be 
sold to and held by: (a) Separate accounts funding Variable Contracts 
issued by both affiliated and unaffiliated life insurance companies; 
(b) Qualified Plans outside of the separate account context; (c) 
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; (d) the Manager; and (e) any General Accounts, 
including the general account of any life insurance company whose 
separate account holds, or will hold, shares of the Funds.
    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), 15(a) 
and 15(b) of the 1940 Act. The relief provided by Rule 6e-2 is also 
granted to the investment adviser, principal underwriter and depositor 
of the separate account. 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 that 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 a flexible premium variable life 
insurance separate account of the same company or any other affiliated 
insurance company. The use of a common management investment

[[Page 35075]]

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.''
    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; additional 
exemptive relief is necessary if the shares of the Portfolios are also 
to be sold to Qualified Plans or other eligible holders of shares, as 
described above. Applicants note that if shares of the Portfolios are 
sold only to Qualified Plans, exemptive relief under Rule 6e-2 would 
not be necessary. The relief provided by 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. The exemptions 
granted by Rule 6e-3(T)(b)(15) 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.
    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 insurance company or any affiliated life insurance company, and 
additional exemptive relief is necessary if the shares of the 
Portfolios are also to be sold to Qualified Plans or other eligible 
holders of shares as described above. Applicants note that if shares of 
the Portfolios 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 shares to Qualified 
Plans.
    7. Applicants maintain, as discussed below, that there is no policy 
reason for the sale of the Portfolios' shares to Qualified Plans, the 
Manager or 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 Portfolios are also to be sold to Qualified Plans, the Manger 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 Portfolios' shares were to be sold only to Qualified Plans, the 
Manger, General Accounts and/or separate accounts funding variable 
annuity contracts, exemptive relief under Rule 6e-2 and Rule 6e-3(T) 
would be unnecessary. 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 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 the Treasury Regulations 
that made it possible for shares of an investment company portfolio to 
be held by the trustees of a Qualified Plan, the investment company's 
investment manager or its affiliates or a General Account without 
adversely affecting the ability of shares of the same investment 
company portfolio to also be held by the separate accounts of insurance 
companies in connection with their variable insurance contracts. Thus, 
the sale of shares of the same portfolio to separate accounts through 
which variable insurance contracts are issued and to Qualified Plans, 
the investment company's investment manager or its affiliates or 
General Accounts was not contemplated at the time of the adoption of 
Rules 6e-2(b)(15) and 6e-3(T)(b)(15).
    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 (and to the extent 
necessary, investment advisers, principal underwriters, and depositors 
of such accounts) that will invest in the Portfolios.
    10. 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 investment company.
    11. 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 of an 
insurance company'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 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 many individuals in a large 
insurance 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 or administration of

[[Page 35076]]

the Funds. Those individuals who participate in the management of the 
Funds will remain the same regardless of which Separate Accounts or 
Qualified Plans invest in the Funds. Therefore, applying the monitoring 
requirements of section 9(a) of the 1940 Act because of investment by 
Separate Accounts of other Participating Insurance Companies or 
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 and Qualified Plan 
participants.
    12. Moreover, the relief requested should not be affected by the 
sale of shares of the Portfolios to Qualified Plans, the Manager or 
General Accounts. Since the Qualified Plans, the Manager 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.
    13. 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) under the 1940 Act 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 fund and its investment adviser, when required to do so by 
an insurance regulatory authority (subject to the provision 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 the voting 
instructions of its contract owners if the contract owners initiate any 
change in an underlying portfolio'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).
    14. 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. The Commission also expressly 
recognized that State insurance regulators have authority to require an 
insurance company to draw from its general account to cover costs 
imposed upon the insurer by a change approved by contract owners over 
the insurance company'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, the corresponding provisions of Rule 
6e-3(T) under the 1940 Act undoubtedly were adopted in recognition of 
the same factors.
    15. Applicants state that the sale of Portfolio shares to Qualified 
Plans, the Manager and General Accounts will not have any impact on the 
relief requested herein. With respect to 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 Qualified Plan assets to certain 
specified persons. Under Section 403(a) of 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 trustees 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 trustees are subject to the direction of a 
named fiduciary who is not a trustee, in which case the trustees are 
subject to proper directions made in accordance with the terms of the 
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, a Qualified Plan trustees have the exclusive 
authority and responsibility for voting proxies.
    16. 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 trustee or the named fiduciary. The Qualified Plans may have 
their trustees or other fiduciaries exercise voting rights attributable 
to investment securities held by the Qualified Plans in their 
discretion. Some of the Qualified Plans, however, may provide for the 
trustees, an investment adviser (or advisers), or another named 
fiduciary to exercise voting rights in accordance with instructions 
from 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 
resolution of material irreconcilable conflicts with respect to voting 
is not present with Qualified Plans, the Manager or General Accounts.
    17. 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 the Manager were to serve in the capacity of trustee or named 
fiduciary with voting responsibilities, the Manager would have a 
fiduciary duty to vote those shares in the best interest of the 
Qualified Plan participants.
    18. In addition, even if a Qualified Plan were to hold a 
controlling interest in a Portfolio, Applicants do not believe that 
such control would disadvantage other investors in such Portfolio 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 Portfolio 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.
    19. 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. The purchase of shares of 
Portfolios by Qualified Plans that provide voting rights does not

[[Page 35077]]

present any complications not otherwise occasioned by mixed or shared 
funding.
    20. 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 first adopted, 
variable annuity separate could invest in mutual funds whose shares 
were also 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. 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.
    21. For reasons unrelated to the 1940 Act, however, Internal 
Revenue Service Revenue Ruling 81-225 (1981-2 C.B. 12) (as clarified in 
Revenue Ruling 82-55, 1982-1 C.B. 12) 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 (the ``Code''), as 
amended, 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 Portfolio, 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 in any Portfolio.
    22. 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.
    23. Shared funding by unaffiliated Participating Insurance 
Companies, in this respect, is no different than the use of the same 
investment company as the funding vehicle for affiliated Participating 
Insurance Companies, which Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under 
the 1940 Act permit under various circumstances. Affiliated 
Participating Insurance Companies may be domiciled in different States 
and be subject to differing State law requirements. Affiliation does 
not reduce the potential, if any exists, for differences in State 
regulatory requirements. In any event, the conditions 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 Participating Insurance Company will be required to 
withdraw its Separate Account investments in the affected Funds. 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 Portfolio.
    24. Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act give an 
insurance company the right to disregard contract owners' voting 
instructions. This right does not raise any issues different from those 
raised by the authority of State insurance administrators over separate 
accounts. Under Rules 6e-2(b)(15) and 6e-3(T)(b)(15), an insurer can 
disregard contract owner voting instructions only with respect to 
certain specified items. 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.
    25. A particular Participating Insurance Company's disregard of 
voting instructions, nevertheless, could conflict with the majority of 
contract owners' voting instructions. The Participating Insurance 
Company's action possibly could be different than the determination of 
all or some of the other Participating Insurance Companies (including 
affiliated insurance companies) 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 
Participating Insurance Company's judgment represents a minority 
position or would preclude a majority vote, then the Participating 
Insurance Company may be required, at the affected Fund's election, to 
withdraw its Separate Account's investment in such Portfolio. 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 Portfolio.
    26. Each Portfolio will be managed to attempt to achieve the 
investment objective or objectives of such Portfolio, and not to favor 
or disfavor any particular Participating Insurance Company or type of 
insurance product. There is no reason to believe that different 
features of various types of contracts, including the ``minimum death 
benefit'' guarantee under certain Variable 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, 
differing insurance charges imposed may well, in effect, adjust any 
such differences and serve to equalize the insurance company's exposure 
in either case.
    27. Applicants do not believe that the sale of the shares of the 
Portfolios to Qualified Plans, the Manager or General Accounts 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.

[[Page 35078]]

    28. Applicants considered whether there are any issues raised under 
the Code, or Treasury Regulations or Revenue Rulings thereunder, if 
Qualified Plans, the Manager, General Accounts, variable annuity 
separate accounts and/or 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 annuities and variable life insurance contracts held 
in an underlying mutual fund. The Code provides that a variable 
contract will not be treated as an annuity contract or as life 
insurance, as applicable, for any period (and any subsequent period) 
for which the investments are not, in accordance with Treasury 
Regulations, adequately diversified.
    29. Treasury 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, 
Treasury Regulation Sec.  1.817-5(f)(3) specifically permits, 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. For this reason, Applicants have 
concluded that neither the Code, nor Treasury Regulations or Revenue 
Rulings thereunder, present any inherent conflicts of interest if 
Separate Accounts, Qualified Plans, the Manager and General Accounts 
all invest in the same underlying fund.
    30. 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 Funds. When 
distributions are to be made, and a Separate Account or Qualified Plan 
is unable to net purchase payments to make distributions, the Separate 
Account or Qualified Plan will redeem shares of the relevant Portfolio 
at their respective net asset values 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.
    31. In connection with any meeting of shareholders, the soliciting 
Fund will inform each shareholder, including each Separate Account, 
Qualified Plan, Manager and General Account, of information necessary 
for the meeting, including their respective share of ownership in the 
relevant Portfolio. 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 Portfolio concerning 
participation in the relevant Portfolio. Shares of a Portfolio that are 
held by the Manager and any General Account will be voted in the same 
proportion as all Variable Contract owners having voting rights with 
respect to that Portfolio. However, the Manager and any General Account 
will vote their shares in such a 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 Portfolio 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 Fund, to withdraw its investment in such 
Portfolio, and no charge or penalty will be imposed as a result of such 
withdrawal.
    32. 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, the Manager or a General Account. Applicants concluded 
that the ability of the Funds to sell their Portfolios directly to 
Qualified Plans, the Manager or General Accounts 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, 
Qualified Plans, the Manager, General Accounts and the Separate 
Accounts only have rights with respect to their respective shares of 
the Portfolio. They only can redeem such shares at net asset value. No 
shareholder of a Portfolio has any preference over any other 
shareholder with respect to distribution of assets or payment of 
dividends.
    33. Applicants also considered whether there are any conflicts 
between contract owners of the Separate Accounts and the participants 
under the Qualified Plans, the Manager and the General Accounts with 
respect to the State insurance commissioners' veto powers over 
investment objectives. Although the interests and opinions of 
shareholders may differ, this does not mean that inherent conflicts of 
interest exist between or among such shareholders. State insurance 
commissioners have been given certain veto powers in recognition of the 
fact that insurance companies usually cannot simply redeem their 
separate accounts out of one fund and invest in another. Generally, 
time-consuming, complex transactions must be undertaken to accomplish 
such redemptions or transfers. Conversely, the trustees of Qualified 
Plans or the participants in participant-directed Qualified Plans, the 
Manager and General Accounts can make decisions quickly, redeem their 
interests in the Portfolios and reinvest in another funding vehicle 
without the same regulatory impediments faced by the Separate Accounts 
or, as in the case with most Qualified Plans, even hold cash pending 
suitable investments. Based on the foregoing, issues where the 
interests of contract owners and the interests of Qualified Plans, the 
Manager and General Accounts are in conflict can be almost immediately 
resolved since the trustees (or participants in) the Qualified Plans, 
the Manager and the General Accounts can, on their own, redeem shares 
out of the Portfolios.
    34. Applicants do not see any greater potential for material 
irreconcilable conflicts arising between the interests of participants 
in Qualified Plans, General Accounts and contract owners of the 
Separate Accounts from future changes in the Federal tax laws than that 
which already exists between variable annuity contract owners and 
variable life insurance contract owners.
    35. Applicants assert that permitting a Portfolio to sell its 
shares to the Manager in compliance with Treasury Regulation Sec.  
1.817-5 will enhance Portfolio management without raising significant 
concerns regarding material irreconcilable conflicts. Unlike the 
circumstances of many investment companies that serve as underlying 
investment media for variable insurance products, the Funds may be 
deemed to lack an insurance company ``promoter'' for purposes of Rule 
l4a-2 under the

[[Page 35079]]

1940 Act. Accordingly the Funds and any Portfolios thereunder that are 
established as new registrants may be subject to the requirements of 
section 14(a) of the 1940 Act, which generally requires that an 
investment company have a net worth of $100,000 upon making a public 
offering of its shares. A potential source of the requisite initial 
capital is a Portfolio's Manager or a Participating Insurance Company. 
Given the conditions of Treasury Regulation Sec.  1.817-5(f)(3) and the 
harmony of interest between a Portfolio, on the one hand, and its 
Manager or a Participating Insurance Company on the other, Applicants 
assert that little incentive for overreaching exists. Furthermore, 
permitting investments by the Manager or Participating Insurance 
Companies' General Accounts will permit the orderly and efficient 
creation and operation of the Funds or Portfolios thereof, and reduce 
the expense and uncertainty of using outside parties at the early 
stages of Portfolio operations.
    36. Various factors have limited the number of insurance companies 
that offer variable annuity and variable life insurance contracts. Use 
of a Portfolio as a common investment vehicle for Variable Contracts, 
Qualified Plans and General Accounts would help reduce or eliminate 
these factors because Participating Insurance Companies, Qualified 
Plans and General Accounts will benefit not only from the investment 
and administrative expertise of AEFC, or any other investment manager 
to a Portfolio, but also from the cost efficiencies and investment 
flexibility afforded by a large pool of funds. Therefore, making the 
Funds available for mixed and shared funding and permitting the 
purchase of Portfolio shares by Qualified Plans and General Accounts 
may encourage more insurance companies to offer variable contracts. 
This should result in increased competition with respect to both 
variable contract design and pricing, which can be expected to result 
in more product variation and lower charges. 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 Funds. This 
may benefit Variable Contract owners by promoting economies of scale, 
by reducing risk through greater diversification due to increased money 
in the Fund, or by making the addition of new Portfolios more feasible.

Applicant's Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions, which will apply to the AXP VP 
Funds as well as any Future Fund that relies on the requested order:
    1. A majority of the Board of Trustees or Board of Directors (the 
``Board'') of each Fund will consist of persons who are not 
``interested persons'' of the Fund, 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 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 (c) for such longer 
period as the Commission may prescribe by order upon application or by 
future rule.
    2. Each Board will monitor each Fund for the existence of any 
material irreconcilable conflict among and between the interests of the 
contract owners of all Separate Accounts and participants of all 
Qualified Plans investing in such Fund, and determine what action, if 
any, should be taken in response to such conflicts. A material 
irreconcilable conflict may arise for a variety of reasons, including: 
(a) An action by any State insurance regulatory authority; (b) a change 
in applicable Federal or State insurance, tax, or securities laws or 
regulations, or a public ruling, private letter ruling, no-action or 
interpretive letter, or any similar action by insurance, tax or 
securities regulatory authorities; (c) an administrative or judicial 
decision in any relevant proceeding; (d) the manner in which the 
investments of any Portfolio 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 
Portfolio), the Manager and any Qualified Plan that executes a 
participation agreement upon becoming an owner of 10 percent or more of 
the assets of any Portfolio (collectively, the ``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 
Funds, and these responsibilities will be carried out with a view only 
to the interests of the contract owners. The responsibility to report 
such information and conflicts, and to assist the Board, also will be 
contractual obligations of all Qualified Plans with participation 
agreements, and such agreements will provide that these 
responsibilities will be carried out with a view only to the interests 
of Qualified Plan participants.
    4. If it is determined by a majority of the Board, or a majority of 
the Independent Board Members, 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 
Independent Board Members), 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 Portfolio and reinvesting such assets in a 
different investment vehicle including another Portfolio, if any 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., variable annuity contract 
owners or variable life insurance contract owners of one or more 
Participating Insurance Companies) that votes in favor of such 
segregation, or offering to the affected contract owners the option of 
making such a change; and

[[Page 35080]]

(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 
Participating Insurance Company may be required, at the election of a 
Fund, to withdraw such Participating Insurance Company's Separate 
Account's investment in the Fund, and no charge or penalty will be 
imposed as a result of such withdrawal. If a material irreconcilable 
conflict arises because of a Qualified Plan's decision to disregard 
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 a 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 Funds, and these 
responsibilities will be carried out, with a view only to the interests 
of contract owners and, as applicable, Qualified Plan participants.
    For purposes of this Condition 4, a majority of the Independent 
Board Members will determine whether or not any proposed action 
adequately remedies any material irreconcilable conflict, but, in no 
event, will a Fund or the Manager, 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 or 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, such 
Participants, where applicable, will vote shares of the applicable 
Portfolio 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 Portfolio calculates voting 
privileges in a manner consistent with other Participants.
    The obligation to calculate voting privileges as provided in the 
Application will be a contractual obligation of all Participating 
Insurance Companies under their agreements with the Funds governing 
participation in a Portfolio. Each Participating Insurance Company will 
vote shares for which it has not received timely voting instructions, 
as well as shares it owns through its Separate Accounts, in the same 
proportion as it votes those shares for which it has received voting 
instructions. Each Qualified Plan will vote as required by applicable 
law and governing Qualified Plan documents.
    7. As long as the 1940 Act requires pass-through voting privileges 
be provided to Variable Contract owners, the Manager and any General 
Account will vote its shares of any Portfolio in the same proportion as 
all Variable Contract owners having voting rights with respect to that 
Portfolio; provided, however, that the Manager or any insurance company 
General Account will vote its shares in such other manner as may be 
required by the Commission or its staff.
    8. The Funds will comply with all provisions of the 1940 Act 
requiring voting by shareholders, which for these purposes, will be the 
persons having a voting interest in the shares of the respective 
Portfolios, and, in particular the Funds will either provide for annual 
meetings (except insofar as the Commission may interpret Section 16 of 
the 1940 Act not to require such meetings) or comply with section 16(c) 
of the 1940 Act (although the AXP VP Funds are not the type of funds 
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, the Portfolios 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.
    9. A Portfolio will make its shares available to the Separate 
Accounts and Qualified Plans at or about the same time it accepts any 
seed capital from the Manager or General Account of a Participating 
Insurance Company.
    10. The Funds 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 Funds will disclose in their 
prospectuses that: (a) Shares of the Portfolios 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 Funds and the interests of Qualified Plans investing in the 
Funds, if applicable, may conflict; and (c) the Board will monitor 
events in order to identify the existence of any material 
irreconcilable conflicts and determine what action, if any, should be 
taken in response to any such conflict.
    11. 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 
Funds and/or Participating Insurance Companies, as appropriate, will 
take such steps as may be necessary to comply with Rules 6e-2 and Rule 
6e-3(T) or Rule 6e-3, as such rules are applicable.
    12. The Participants, at least annually, will submit to the Board 
such reports, materials, or data as the Board reasonably may request so 
that the directors or 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

[[Page 35081]]

data to the Board, when it so reasonably requests, will be a 
contractual obligation of all Participants under their agreements 
governing participation in the Portfolios.
    13. 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 will be made available to 
the Commission upon request.
    14. A Fund will not accept a purchase order from a Qualified Plan 
if such purchase would make the Qualified Plan shareholder an owner of 
10 percent or more of the assets of such Portfolio unless the Qualified 
Plan executes an agreement with the Fund governing participation in 
such Portfolio that includes the conditions set forth herein to the 
extent applicable. A Qualified Plan or Qualified Plan Participant will 
execute an application containing an acknowledgement of this condition 
at the time of its initial purchase of shares of any Portfolio.

Conclusion

    Applicants submit, based on the grounds summarized above, that the 
requested exemptions, in accordance with the standards of section 6(c), 
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.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-14139 Filed 6-22-04; 8:45 am]
BILLING CODE 8010-01-P