Sun Capital Advisers Trust, et. al

[Federal Register Volume 64, Number 62 (Thursday, April 1, 1999)]
[Notices]
[Pages 15846-15852]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-7956]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23763; File No. 81-11464]


Sun Capital Advisers Trust, et. al

March 25, 1999.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order pursuant to section 6(c) of 
the Investment Company Act of 1940 (``1940 Act'') granting exemptive 
relief from sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act and 
rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder.

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SUMMARY OF APPLICATION: Applicants seek an order to permit shares of 
Sun Capital Advisers Trust (``Trust'') and any other similar investment 
companies that Sun Capital Advisers, Inc. (``Sun Advisers'' or 
``Adviser'') may in the future serve or manage as investment adviser, 
administrator, principal underwriter or sponsor (the Trust and these 
similar investment companies; the ``Funds''), to be sold to and held 
by: (1) Separate accounts funding variable annuity and variable life 
insurance contracts issued by both affiliated life insurance companies; 
and (2) qualified pension and retirement plans outside of the separate 
account context for which shares of the Funds would be held by the 
trustees of those plans (``Qualified Plans'' or ``Plans'').

APPLICANTS: Sun Capital Advisers Trust and Sun Capital Advisers, Inc.

FILING DATE: The application was filed on January 11, 1999.

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

[[Page 15847]]

mail. Hearing requests should be received by the Commission by 5:30 
p.m. on April 19, 1999, and should be accompanied by proof of service 
on 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 who wish to be notified of a hearing may request 
notification by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW, Washington, DC 20549-
0609. Applicants, c/o Peter F. Demuth, Esq., Sun Life of Canada, One 
Sun Life Executive Park, Wellesley Hills, Massachusetts 02481.

FOR FURTHER INFORMATION CONTACT: Laura A. Novack, Senior Counsel, or 
Kevin M. Kirchoff, 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 ((202) 942-8090).

Applicants' Representations

    1. The Trust is an open-end management investment company organized 
as a Delaware business trust, registered under the Securities Act of 
1933 and the 1940 Act. The Trust currently consists of three separate 
series of shares (``Series''), each of which has its own investment 
objectives and policies. The Trust may issue additional classes of 
shares in the future.
    2. Sun Advisers is registered as an investment adviser under the 
Investment Advisers Act of 1940, as amended, and is the investment 
adviser for each Series.
    3. The Funds would offer shares of its Series to separate accounts 
registered under the 1940 Act as unit investment trusts (``Separate 
Accounts'') of multiple affiliated and unaffiliated life insurance 
companies to serve as the investment medium for variable contracts 
issued by the life insurance companies. Variable contracts may include 
variable annuity contracts and variable life insurance contracts 
(collectively, ``Variable Contracts''). The Funds may in the future 
offer their shares to other separate accounts that are not registered 
as investment companies under the 1940 Act pursuant to the exceptions 
from registration in sections 3(c)(1) and 3(c)(11) of the 1940 Act. 
Insurance companies whose separate accounts would own shares of the 
Funds are referred to as ``participating insurance companies.''
    4. Each participating insurance company will have the legal 
obligation to satisfy all requirements applicable to it under the 
federal securities laws in connection with any Variable Contract issued 
by such company. The Funds' role under this arrangement, so far as the 
federal securities laws are applicable, will be limited to that of 
offering their shares to separate accounts of participating insurance 
companies and fulfilling any conditions the Commission may impose upon 
granting the order requested herein.
    5. The Funds also may offer shares directly to Qualified Plans 
outside of the separate account context. The Funds propose to offer 
shares to any Qualified Plans that can, consistent with applicable 
federal income tax law, invest in the Funds consistent with the Funds 
serving as investment vehicles for Variable Contracts.
    6. It is anticipated that Qualified Plans may choose a Fund (or any 
one or more series thereof) as the sole investment under the Plan or as 
one of several investments. Plan participants may or may not be given 
an investment choice among available alternatives, depending on the 
Plan itself. Shares of the Funds sold to Qualified Plans would be held 
by the trustee(s) of these Plans as mandated by section 403(a) of the 
Employee Retirement Income Security Act of 1974, as amended 
(``ERISA''). Pass-through voting need not be, but may be, provided to 
the participants in such Qualified Plans pursuant to ERISA.

Applicants' Legal Analysis

    1. In connection with the funding of scheduled premium variable 
life insurance contracts issued through Separate Accounts, Rule 6e-
2(b)(15) provides partial exemptions from sections 9(a), 13(a), 15(a) 
and 15(b) of the 1940 Act. The exemptions granted by Rule 6e-2(b)(15)--
are available only if the management investment company underlying the 
Separate Account (``underlying fund'') offers its shares ``exclusively 
to variable life insurance separate accounts of the life insurer, or 
any affiliated life insurance company'' (emphasis added). Therefore, 
the relief granted by Rule 6e-2(b)(15) is not available for a scheduled 
premium variable life insurance separate account that owns shares of an 
underlying fund that also offers its shares to a variable annuity or 
flexible premium variable life insurance policy of the same company or 
of any affiliated life insurance company. The use of a common 
management investment company as the underlying investment medium for 
both variable annuity and variable life insurance separate accounts of 
the same life insurance company or of any affiliated life insurance 
company is referred to as ``mixed funding.''
    2. The relief granted by Rule 6e-2(b)(15) also is not available for 
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 medium for variable life insurance 
separate accounts of one insurance company and separate accounts 
funding Variable Contracts of one or more unaffiliated insurance 
companies is referred to as ``shared funding.''
    3. Applicants assert that the relief granted by Rule 6e-2(b)(15) is 
in no way affected by the purchase of shares of the Funds by Qualified 
Plans. However, because the relief under Rule 6e-2(b)(15) is available 
only if shares are offered exclusively to separate accounts, additional 
exemptive relief is necessary if the shares of the Funds are also to be 
sold to Plans.
    4. In connection with the funding of flexible premium variable life 
insurance contracts issued through a Separate Account, Rule 6e-
3(T)(b)(15) provides partial exemptions from sections 9, 13(a), 15(a) 
and 15(b) of the 1940 Act. The exemptions granted by 6e-3(T) are 
available only if the Separate Account's underlying fund offers its 
shares ``exclusively to separate accounts of the life insurer, or of 
any affiliated life insurance company, offering either scheduled 
[premium variable life insurance] contracts or flexible [premium 
variable life insurance] contracts, or both, or which also offer their 
shares to variable annuity separate accounts of the life insurer or of 
an affiliated life insurance company.'' (emphasis added). Thus, Rule 
6e-3(T)(b)(15) permits mixed funding for a flexible premium variable 
life insurance separate account, subject to certain conditions. 
However, Rule 6e-3(T) does not permit shared funding because the relief 
is not available for a flexible premium variable life insurance 
separate account that owns shares of a management investment company 
that also offers its shares to separate accounts (including variable 
annuity and flexible premium and scheduled premium variable life 
insurance separate accounts) of unaffiliated life insurance companies.

[[Page 15848]]

    5. Applicants assert that the relief granted by Rule 6e-3(T) is in 
no way affected by the purchase of shares of the Funds by Qualified 
Plans. However, because the relief under Rule 6e-3(T) is available only 
if shares are offered exclusively to separate accounts, additional 
exemptive relief is necessary if the shares of the funds are also to be 
sold to Plans.
    6. Applicants state that section 817(h) of the Internal Revenue 
Code of 1986, as amended (``the Code''), imposes certain 
diversification standards on the underlying assets of the Variable 
Contracts held by series of the Funds. The Code provides that a 
Variable Contract will not be treated as an annuity contract or life 
insurance contract for any period (and any subsequent period) for which 
the investments of the segregated asset account on which the Variable 
Contract is based are not adequately diversified, in accordance with 
regulations prescribed by the Treasury Department. These 
diversification regulations are applied by taking into account the 
assets of an underlying investment company in which the account invests 
if all of the beneficial interests in the regulated investment company 
are held by certain designated persons. On March 2, 1989, the Treasury 
Department published regulations (Treas. Reg. Sec. 1.817-5) which 
adopted in final form diversification requirements for the investments 
underlying Variable Contracts. The regulations provide that, in order 
to meet the diversification requirements, all of the beneficial 
interests in an underlying regulated investment company must be held by 
the segregated asset accounts of one or more insurance companies. 
However, the Regulations also contain certain exceptions to this 
requirement, one of which allows shares in such an investment company 
to be held by the trustee of a Qualified Plan. Thus, a fund that serves 
as an investment vehicle for Variable Contracts may also offer its 
shares to certain Qualified Plans without adversely affecting, for 
purposes of the diversification requirements under section 817(h), the 
ability of shares in the same investment company to also be held by the 
separate accounts of insurance companies in connection with their 
Variable Contracts. Treas. Reg. Sec. 1.817-5(f)(3)(iii).
    7. Applicants state that the promulgation of Rules 6e-2 and 6e-3(T) 
preceded the issuance of the Treasury Regulations which made it 
possible for shares of an investment company to be held by the trustee 
of a Qualified Plan without adversely affecting the ability of shares 
in the same investment company to be held by the separate accounts of 
insurance companies in connection with their Variable Contracts. Thus, 
the sale of shares of the same investment company to separate accounts 
and Qualified Plans could not have been envisioned at the time of the 
adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15), given the then-
current tax law.
    8. Accordingly, Applicants request that the Commission issue an 
order pursuant to section 6(c) of the 1940 Act exempting variable life 
insurance separate accounts of participating insurance companies (and, 
to the extent necessary, any principal underwriter and depositor of 
such an account) and the Funds from section 9(a), 13(a), 15(a), and 
15(b) of the 1940 Act, and sub-paragraph (b)(15) of Rules 6e-2 and 6e-
3(T) thereunder, to the extent necessary to permit shares of the Funds 
to be offered and sold to, and held by: (a) variable annuity and 
variable life insurance separate accounts of the same life insurance 
company or of affiliated or unaffiliated life insurance companies, and 
(b) Qualified Plans.
    9. In general, section 9(a) of the 1940 Act disqualifies any person 
convicted of certain offenses, and any company affiliated with that 
person, from acting or serving in various capacities with respect to a 
registered investment company. More specifically, section 9(a)(3) 
provides that it is unlawful for any company to serve as an investment 
adviser to, or principal underwriter for, any registered open-end 
investment company if an affiliated person of that company is subject 
to disqualification enumerated in sections 9(a)(1) or (2).
    10. Rules 6e-2(b)(15)(i) and (ii) and 6e-3(T)(b)(15)(i) and (ii) 
provide exemptions from section 9(a) under certain circumstances, 
subject to the limitations discussed above on mixed and shared funding. 
These exemptions limit the application of the eligibility restrictions 
to affiliated individuals or companies that directly participate in the 
management of the underlying management company. The relief provided by 
the rules permits a person disqualified under section 9(a) to serve as 
an officer, director, or employee of the life insurer or its 
affiliates, so long as that person does not participate directly in the 
management or administration of the underlying investment company. 
Thus, an insurer shall be eligible to serve as the underlying fund's 
investment adviser or principal underwriter, provided that none of the 
insurer's personnel who are ineligible pursuant to section 9(a) are 
participating in the management of the fund.
    11. Applicants state that the partial relief granted in Rules 6e-2 
and 6e-3(T) from the requirements of section 9 of the 1940 Act limits, 
in effect, the amount of monitoring necessary to ensure compliance with 
Section 9 to that which is appropriate in light of the policy and 
purposes of that section. Applicants state that there is no regulatory 
purpose in extending the companies' monitoring requirements to embrace 
a full application of Section 9(a)'s eligibility restrictions because 
of mixed or shared funding. Those individuals who participate in the 
management or administration of the Funds will remain the same 
regardless of which separate accounts or insurance companies use the 
Funds. Applicants assert that applying the monitoring requirements of 
Section 9(a) because of investment by separate accounts of other 
insurers would be unjustified and would not serve any regulatory 
purpose. Furthermore, Applicants assert that the increased monitoring 
costs would reduce the net rates of return realized by contract owners. 
Applicants further assert that the relief requested will in no way be 
affected by the proposed sale of shares of the Funds to Qualified 
Plans, and that the insulation of the Funds from those individuals who 
are disqualified under the 1940 Act will remain intact even if shares 
of the Funds are sold to Qualified Plans. Since the Qualified Plans are 
not investment companies and will not be deemed to be affiliated 
persons of the participating insurance companies solely by virtue of 
their shareholdings in the Funds, they are not subject to Section 9(a) 
and thus no additional relief is necessary.
    12. Subparagraph (b)(15)(iii) of Rules 6e-2 and 6e-3(T) under the 
1940 Act assumes that contract owners are entitled to pass-through 
voting privileges with respect to investment company shares held by a 
separate account. However, subparagraph (b)(15)(iii) of Rules 6e-2 and 
6e-3(T) provides exemptions from the pass-through voting requirement 
with respect to several significant matters.
    13. Subparagraph (b)(15)(iii) of Rules 6e-2 and 6e-3(T) provides 
that an insurance company may disregard the voting instructions of its 
contract owners with respect to the investments of an underlying fund 
that would result in changes in the subclassification or investment 
objectives of the underlying fund, or with respect to any contract 
between a fund and its investment adviser, when an insurance regulatory 
authority so requires, subject to certain requirements. In addition, an 
insurance company may disregard the voting instructions of its contract 
owners if the

[[Page 15849]]

contract owners initiate any change in the underlying fund's investment 
policies, principal underwriter, or investment adviser (provided that 
disregarding such voting instructions is reasonable and complies with 
the other provisions of Rules 6e-2 and 6e-3(T)). Voting instructions 
with respect to a change in investment policies may be disregarded if 
the insurance company makes a good-faith determination that such change 
would: (a) Violate state law; or (b) result in investment that either 
would not be consistent with the investment objectives of the separate 
account, or would vary from the general quality and nature of 
investments and investment techniques used by other separate accounts 
of the company or of an affiliated life insurance company with similar 
investment objectives. Voting instructions with respect to a change in 
an investment adviser or principal underwriter may be disregarded if 
the insurance company makes a good-faith determination that: (a) The 
adviser's fees would exceed the maximum rate that may be charged 
against the separate account's assets; (b) the proposed adviser may be 
expected to employ investment techniques that vary from the general 
techniques used by the current adviser; or (c) the proposed adviser may 
be expected to manage the investments in a manner that would be 
inconsistent with the investment company's investment objectives or in 
a manner that would result in investments that vary from certain 
standards.
    14. Applicants state that Rule 6e-2 recognizes that a variable life 
insurance policy is an insurance contract, has important elements 
unique to insurance contracts and is subject to extensive state 
regulation. Applicants maintain that 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 polices, investment 
advisers or principal underwriters. Applicants also state that the 
Commission 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 insurance company by a change 
approved by contract owners over the insurance company's objection. 
Therefore, the Commission deemed exemptions from pass-through voting 
requirements necessary ``to assure the solvency of the life insurer and 
the 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.'' Applicants assert that in this respect, flexible 
premium variable life insurance contracts are identical to scheduled 
premium variable life insurance contracts; and that therefore the 
corresponding provisions of Rule 6e-3(T) undoubtedly were adopted in 
recognition of the same factors.
    15. Applicants submit that state insurance regulators have much the 
same authority over variable annuity separate accounts as they have 
over variable life insurance separate accounts, and that variable 
annuity contracts pose some of the same kinds of risks to insurers as 
variable life insurance contracts. Applicants submit that while the 
Commission staff has not been called upon to address the general issue 
of state insurance regulators' authority over variable annuity 
contracts, perhaps this is because the Commission has not developed a 
single comprehensive exemptive rule for variable annuity contracts.
    16. Applicants assert that these considerations are no less 
important or necessary in connection with mixed and shared funding. 
Applicants state that mixed and shared funding does not compromise the 
goals of state insurance regulatory authorities or of the Commission. 
Indeed, Applicants assert that by permitting these arrangements, the 
Commission eliminates needless duplication of start-up and 
administrative expenses and facilities the growth of underlying fund 
assets, thereby making effective portfolio management strategies easier 
to implement and promoting other economies of scale. Applicants further 
state that the sale of Fund shares to Plans will not have any impact on 
the relief requested in this regard. As previously noted, shares of the 
Funds will be held by the trustees of the Plans as required by section 
403(a) of ERISA. Section 403(a) also provides that the trustees must 
have exclusive authority and discretion to manage and control the Plan 
investments with two exceptions: (a) When the 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 plan and not 
contrary to ERISA; and (b) when the authority to manage, acquire or 
dispose of assets of the plan is delegated to one or more investment 
managers pursuant to section 402(c)(3) of ERISA. Unless one of the two 
exceptions stated in Section 403(a) applies, Plan trustees have the 
exclusive authority and responsibility for voting proxies. If a named 
fiduciary 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. Where a 
Qualified Plan does not provide participants with the right to give 
voting instructions, Applicants do not see any potential for material 
irreconcilable conflicts between or among contract holders and Plan 
participants with respect to voting of a Fund's shares. Accordingly, 
Applicants assert that unlike the case with insurance company separate 
accounts, the issue of the resolution of material irreconcilable 
conflicts with respect to voting is not present with respect to 
Qualified Plans since the Qualified Plans are not required to pass-
through voting privileges.
    17. Applicants submit that 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 the 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 Plan will not create any of the voting issues occasioned by mixed 
funding or shared funding. Unlike mixed or shared funding, Plan 
participant voting rights cannot be frustrated by veto rights of 
insurers or state regulators. While a Qualified Plan may provide 
participants with the right to give voting instructions, Applicants 
assert that there is no reason to believe that participants in 
Qualified Plans generally, or those in a particular Plan, either as a 
single group or in combination with participants in other Plans, would 
vote in a manner that would disadvantage contract owners. In this 
regard, Applicants submit that the purchase of shares of Funds by 
Qualified Plans that provide voting rights to participants does not 
present any complications not otherwise occasioned by mixed and shared 
funding.
    18. Applicants assert that no increased conflicts of interest would 
be presented by the granting of the requested relief. Applicants assert 
that shared funding by unaffiliated insurance companies should not 
present any issues that do not already exist for a single insurance 
company that is licensed to do business in several or all states. 
Applicants note that where an insurer is licensed to do business in 
several or all states, it is possible that a

[[Page 15850]]

particular state insurance regulatory body could require action that is 
inconsistent with the requirements of other states in which the 
insurance company offers its Variable contracts. Applicants submit that 
this possibility is not significantly different or greater than exists 
where different insurers may be domiciled in different states.
    19. Applicants further submit that affiliation does not reduce the 
potential, if any exists, for differences in state regulatory 
requirements. Affiliated insurers may be domiciled in different states 
and be subject to differing state law requirements. In any event, the 
conditions (adapted from the conditions included in rule 6e-
3(T)(b)(15)) discussed 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, the affected insurer will be required to withdraw its 
separate account's investment in the affected Fund. This requirement 
will be provided for in agreements that will be entered into by 
participating insurance companies with respect to their participation 
in the Funds (``participation agreements'').
    20. Applicants also argue 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. 
Potential disagreement is limited by the requirement that disregarding 
voting instructions be reasonable and based on specific good faith 
determinations. However, if an insurer's decision to disregard contract 
owner voting instructions represents a minority position or would 
preclude a majority vote, such insurer may be required, at a Fund's 
election, to withdraw its separate account's investment in the Fund, 
and no charge or penalty will be imposed as a result of such a 
withdrawal. This requirement will be provided for in the Fund's 
participation agreement.
    21. Applicants submit that there is no reason why the investment 
policies of the Funds would or should be materially different from what 
these policies would or should be if the Funds funded only variable 
annuity contracts or variable life insurance contracts, whether 
flexible premium or scheduled premium contracts. Each type of insurance 
product is designed as a long-term investment program. Each Fund will 
be managed to attempt to achieve the Fund's investment objectives, and 
not to favor or disfavor any particular participating insurer or type 
of insurance product. Applicants assert that there is no reason to 
believe that different features of various types of contracts, 
including the ``minimum death benefit'' guarantee under certain 
variable life insurance contracts, will lead to different investment 
policies for different types of Variable Contracts. Applicants state 
that under existing statutes and regulations, an insurance company and 
its affiliates can offer a variety of variable annuity and life 
insurance contracts, some with death benefit guarantees, all funded by 
a single mutual fund.
    22. Applicants also submit that no one investment strategy can be 
identified as appropriate to a particular insurance product. Each pool 
of Variable Contract owners is composed of individuals of diverse 
financial status, ages, insurance needs and investment goals. A Fund 
supporting even one type of insurance product must accommodate these 
diverse factors to attract and retain purchasers. Applicants also 
assert that permitting mixed and shared funding will provide economic 
support for the growth of the Funds and may encourage more insurance 
companies to offer Variable Contracts.
    23. As noted above, section 817(h) of the Code imposes certain 
diversification standards on the assets underlying variable annuity 
contracts and variable life insurance contracts held in the portfolios 
of management investment companies. Treasury Regulation Sec. 1.817-
5(f)(3)(iii), which established diversification requirements for such 
portfolios, specifically permits ``qualified pension or retirement 
plans'' and separate accounts to invest in the same underlying 
management investment company. Therefore, Applicants assert that 
neither the Code, nor the Treasury regulations, nor the revenue rulings 
thereunder, present any inherent conflicts of interest if Qualified 
Plans, variable annuity separate accounts and variable life separate 
accounts all invest in the same management investment company.
    24. Applicants note that while there may be differences in the 
manner in which distributions from variable annuity contracts, variable 
life insurance contracts and Qualified Plans are taxed, the tax 
consequences do not raise any conflicts of interest. When distributions 
are to be made, and the Separate Account or Qualified Plan cannot net 
purchase payments to make the distributions, the Separate Account or 
Qualified Plan will redeem shares of the Funds as their net asset 
value. The Qualified Plan will then make distributions in accordance 
with the terms of the Plan, and the life insurance company will make 
distributions in accordance with the terms of the Variable Contract. 
Distributions and dividends will be declared and paid by the Funds 
without regard to the character of the shareholder.
    25. Applicants also state that it is possible to provide an 
equitable means of giving voting rights to Separate Account Contract 
owners and to the trustees of Qualified Plans. Each Fund or its agent 
will inform each participating insurance company of each Separate 
Account's ownership of Fund shares, as well as inform the trustees of 
Qualified Plans of their holdings. Each participating insurance company 
will then solicit voting instructions in accordance with Rules 6e-2 and 
6e-3(T). Qualified Plans and Separate Accounts will each have the 
opportunity to exercise voting rights with respect to their Fund 
shares, although only the Separate Accounts are required to pass 
through their voting rights to contract owners.
    26. Applicants submit that the ability of the Funds to sell their 
respective shares directly to Qualified Plans does not create a 
``senior security,'' as this term is defined under Section 18(g) of the 
1940 Act, with respect to any Variable Contract owner as opposed to a 
participant in a Qualified Plan. Regardless of the rights and benefits 
of participants in the Qualified Plans, or Variable Contract owners, 
the Qualified Plans and the Separate Accounts have rights only with 
respect to their respective shares of the Funds. They can only redeem 
such shares at their net asset value. No shareholder of any of the 
Funds will have any preference over any other shareholder with respect 
to distribution of assets or payments of dividends.
    27. Applicants state that there are no conflicts between the 
contract owners of the Separate Accounts and participants in the 
Qualified Plans with respect to the state insurance commissioners' veto 
power over investment objectives. The state insurance commissioners 
have been given the veto power in recognition of the fact that 
insurance companies usually cannot simply redeem their separate 
accounts out of one fund and invest in another. Time-consuming, complex 
transactions must be undertaken to accomplish these redemptions and 
transfer. On the other hand, trustees of Qualified Plans can make the 
decision quickly and implement the redemption of their shares from the 
Funds and reinvest in

[[Page 15851]]

another investment vehicle without the same regulatory impediments or, 
as is the case with most Qualified Plans, even hold cash pending a 
suitable investment. Based on the foregoing, Applicants represent that 
even if conflicts of interest arise between Variable Contract owners 
and Qualified plans, the issue can be almost immediately resolved 
because the trustees of the Qualified Plans can, on their own 
initiative, redeem their Fund shares.
    28. Applicants assert that various factors have limited the number 
of insurance companies that offer variable annuities and variable life 
insurance policies. Applicants state that these factors include the 
costs of organizing and operating investment vehicles, 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. 
Applicants assert that use of the Funds as common investment medium for 
Variable Contracts would help alleviate these concerns, because 
participating insurance companies will benefit not only from the 
investment and administrative expertise of the Adviser, but also from 
the cost efficiencies and investment flexibility afforded by pooling 
assets for multiple Variable Contracts and insurance companies in a 
single underlying Fund. Therefore, Applicants assert, making the Funds 
available 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.
    29. Applicants also submit that mixed and shared funding should 
provide benefits to Variable Contract owners by eliminating a 
significant portion of the costs of establishing and administering 
separate underlying funds. Furthermore, the sale of shares of the Funds 
to Qualified Plans 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 permitting 
increased safety through greater diversification, or by making the 
addition of new series more feasible. Applicants further believe that 
the sale of the Funds to Qualified Plans does not increase the risk of 
material irreconcilable conflicts to the Funds or the participating 
Separate Accounts.
    30. Applicants assert that they believe that mixed and shared 
funding will have no adverse federal income tax consequences.

Applicants' Conditions

    Applicants have consented to the following conditions:
    1. A majority of the board of trustees (each a ``Board'') of each 
of the Funds will consist of persons who are not ``interested persons'' 
of the Funds, 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. However, if this condition is not met by reason of the 
death, disqualification, or bona fide resignation of any trustee(s), 
then the operation of this condition shall be suspended: (a) For a 
period of 45 days, if the vacancy or vacancies may be filed by the 
Board; (b) for a period of 60 days, if a vote of shareholders is 
required to fill the vacancy or vacancies; or (c) for such longer 
period as the Commission may prescribe by order upon application.
    2. The Board will monitor the Funds for the existence of any 
material irreconcilable conflict between the interests of the contract 
owners of all Separate Accounts investing in the Funds and all other 
persons investing in the Funds, including Qualified Plans, and 
determine what action, if any, should be taken in response to these 
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 series of the Funds are being 
managed; (e) a difference in voting instructions given by variable 
annuity contract owners, variable life insurance contract owners and 
Plan trustees; (f) a decision by an insurer to disregard the voting 
instructions of contract owners; or (g) if applicable, a decision by a 
Qualified Plan to disregard voting instructions of Plan participants.
    3. Participating insurance companies and any Qualified Plan that 
executes a participation agreement with a Fund (collectively, 
``Participating Parties'') and the Adviser will report any potential or 
existing conflicts of which it becomes aware to the Board of the 
relevant Fund. Participating Parties and the Adviser will be 
responsible for assisting the Board in carrying out its 
responsibilities under these conditions, by providing the Board with 
all information reasonably necessary for the Board to consider any 
issues raised. This includes, but is not limited to, an obligation by 
each participating insurance company to inform the Board whenever 
contract owner voting instructions are disregarded and, if pass-through 
voting is applicable, an obligation by each Qualified Plan that is a 
Participating Party to inform the Board whenever it has determined to 
disregard Plan participant voting instructions. The responsibility to 
report such information and conflicts and to assist the Board will be a 
contractual obligation of all Participating Parties under their 
participating agreements and these agreements will be carried out with 
a view only to the interests of the contract owners and Qualified Plan 
participants.
    4. If it is determined by a majority of the Board of a Fund, or a 
majority of its disinterested trustees, that a material irreconcilable 
conflict exists, the relevant Participating Parties will, at their 
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. 
These steps may include: (a) Withdrawing the assets allocable to some 
or all of the Separate Accounts of the participating insurance 
companies from the affected Fund or any series thereof and reinvesting 
these assets in a different investment medium (including another 
series, if any, of such Fund) or submitting the question of whether 
such segregation should be implemented to a vote of all affected 
contract owners and, as appropriate, segregating the assets of any 
appropriate group (i.e., annuity contract owners, life insurance 
contract owners, or variable 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; (b) withdrawing the assets allocable to some or 
all of the participating Qualified Plans from the relevant Fund and 
reinvesting those assets in a different investment medium; and (c) 
establishing a new registered management investment company or managed 
separate account. If a material irreconcilable conflict arises because 
of an insurer's decision to disregard contract owner voting 
instructions and that decision represents a minority position or would 
preclude a majority vote, the insurer may be required, at the Fund's 
election, to withdraw its Separate Account's investment in the Fund, 
and no charge or penalty will be imposed as a result of the withdrawal.

[[Page 15852]]

The responsibility of taking 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 
Participating Parties under their participation agreements and these 
responsibilities will be carried out with a view only to the interests 
of the contract owners and participants in Qualified Plans, as 
applicable.
    5. For the purposes of condition 4, a majority of the disinterested 
members of the Board of the affected Fund will determine whether or not 
any proposed action adequately remedies any material irreconcilable 
conflict, but in no event will the Fund or the Advisor be required to 
establish a new funding medium for any Variable Contract or Qualified 
Plan. No participating insurance company will be required by condition 
4 to establish a new funding medium if an offer to do so has been 
declined by a vote of a majority of contract owners materially 
adversely affected by the material irreconcilable conflict. No 
Qualified Plan will be required by condition 4 to establish a new 
funding medium for the Plan if: (a) a majority of Plan participants 
materially and adversely affected by the material irreconcilable 
conflict vote to decline the offer; or (b) pursuant to governing Plan 
documents and applicable law, the Plan makes the decision without a 
vote of Plan participants.
    6. A Board's determination of the existence of a material 
irreconcilable conflict and its implications will be made known 
promptly in writing to the Adviser and all Participating Parties.
    7. As to Variable Contracts issued by Separate Accounts, 
participating insurance companies will provide pass-through voting 
privileges to all contract owners so long as and to the extent that the 
Commission continues to interpret the 1940 Act to require pass-through 
voting privileges for Variable Contract owners. As to Variable 
Contracts issued by unregistered separate accounts, pass-through voting 
privileges will be extended to participants to the extent granted by 
the issuing insurance company. Participating insurance companies will 
be responsible for assuring that each of their registered Separate 
Accounts participating in a Fund calculate voting privileges as 
instructed by a Fund with the objective that each such participating 
insurance company calculate voting privileges in a manner consistent 
with other participating insurance companies. The obligation to 
calculate voting privileges in a manner consistent with all other 
Separate Accounts investing in a Fund will be a contractual obligation 
of all participating insurance companies under their participating 
agreements. Each participating insurance company will vote Fund shares 
held by Separate Accounts for which it has not received voting 
instructions, as well as shares attributable to it, in the same 
proportion as it votes shares for which it has received voting 
instructions. Each Qualified Plan will vote as required by applicable 
law and governing Plan documents.
    8. Each Fund 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 Fund's shares). In 
particular each Fund will either provide for annual meetings (except 
insofar as the Commission may interpret section 16 not to require such 
meetings) or, if annual meetings are not held, comply with section 
16(c) of the 1940 Act (although the Trust is not, and the Funds may not 
be, one of the trusts described in section 16(c) of the 1940 Act), as 
well as sections 16(a) and, if and when applicable, 16(b). Further, the 
Funds 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 Funds will notify all participating insurance companies that 
prospectus disclosure regarding potential risks of mixed and shared 
funding may be appropriate. A Fund will disclose in its prospectus 
that: (a) Shares of the Fund are offered to insurance company separate 
accounts offered by various participating insurance companies which 
fund both annuity and life insurance contracts and to Qualified Plans; 
(b) due to differences in tax treatment or other considerations, the 
interests of various contract owners participating in the Fund and the 
interests of Qualified Plans investing in the Fund might at some time 
conflict; and (c) the Board will monitor for any material conflicts and 
determine what action, if any, should be taken.
    10. No less than annually, the Participating Parties and/or the 
Adviser will submit to the Boards such reports, materials or data as 
each Board may reasonably request so that the Boards may carry out 
fully the obligations imposed upon them by the conditions contained in 
the Application. These reports, materials and data shall be submitted 
more frequently if deemed appropriate by the Boards. The obligations of 
the Participating Parties to provide these reports, materials and data 
to the Boards will be a contractual obligation of all Participating 
Parties under the participation agreements.
    11. All reports received by a Board of potential or existing 
conflicts, and all Board action with regard to determining the 
existence of a conflict, notifying the Adviser or Participating Parties 
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 these minutes or other records 
will be made available to the Commission upon request.
    12. If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or 
Rule 6e-3 is adopted, to provide exemptive relief from any provision of 
the 1940 Act or the rules thereunder with respect to mixed or shared 
funding on terms and conditions materially different from those of any 
exemptions granted in the order requested in the Application, then the 
Funds and/or the Participating Parties, as appropriate, shall take such 
steps as may be necessary to comply with Rule 6e-2 and Rule 6e-3(T), as 
amended, and Rule 6e-3, as adopted, to the extent these rules are 
applicable.
    13. In the event that a Qualified Plan should ever become an owner 
of 10% or more of the assets of a Fund, such Qualified Plan will 
execute a participation agreement with the Fund. A Qualified Plan will 
execute a certification containing an acknowledgment of this condition 
at the time of its initial purchase of shares of each Fund.

Conclusion

    For the reasons summarized above, Applicants assert that the 
requested exemptions are appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-7956 Filed 3-31-99; 8:45 am]
BILLING CODE 8010-01-M