[Federal Register: March 23, 2006 (Volume 71, Number 56)]
[Notices]
[Page 14748-14755]
[DOCID:fr23mr06-78]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-27264; File No. 812-13253]

SBL Fund and Security Management Company, LLC

March 16, 2006.
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: SBL Fund (``SBL'') and Security Management Company, LLC
(``SMC'') (collectively, ``Applicants'').
    Summary of Application: Applicants seek an order to permit shares
of SBL and shares of any other existing or future investment company
that is designed to fund insurance products and for which SMC, or any
of its affiliates, may serve as investment manager, investment adviser,
sub-adviser, administrator, manager, principal underwriter or sponsor
(SBL and such other investment companies being hereinafter referred to,
collectively, as ``Insurance Investment Companies''), or permit shares
of any current or future series of any Insurance Investment Company
(``Insurance Fund''), to be sold to and held by: (1) Separate accounts
funding variable annuity and variable life insurance contracts issued
by both affiliated and unaffiliated life insurance companies; (2)
qualified pension and retirement plans outside of the separate account
context (``Qualified Plans'' or ``Plans''); (3) any investment manager
to an Insurance Fund and affiliates thereof that is permitted to hold
shares of an Insurance Fund consistent with the requirements of
Treasury Regulation 1.817-5 (collectively, the ``Manager''); and (4)
any insurance company general accounts that are permitted to hold
shares of an Insurance Fund consistent with the requirements of
Treasury Regulation 1.817-5.
    Filing Date: The application was filed on December 28, 2005 and
amended and restated on March 1, 2006. Applicants have agreed to file
an amendment during the notice period, the substance of which is
reflected in this notice.
    Hearing or Notification of Hearing: An order granting the
application will be issued unless the Commission orders a hearing.
Interested persons may request a hearing on the application by writing
to the Secretary of the SEC and serving Applicants with a copy of the
request, personally or by mail. Hearing requests must be received by
the SEC by 5:30 p.m. on April 10, 2006 and should be accompanied by
proof of service on the Applicants, in the form of an affidavit or, for
lawyers, a certificate of service. Hearing requests should state the
nature of writer's interest, the reason for the request, and the issues
contested. Persons may request notification of the date of the hearing
by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 100 F Street, NE., Washington, DC 20549-
1090. Applicants, c/o Amy Lee, Associate General Counsel and Vice
President, Security Benefit Corporation, One Security Benefit Place,
Topeka, Kansas 66636-0001.

FOR FURTHER INFORMATION CONTACT: Mark Cowan, Senior Counsel, or Zandra
Bailes, Branch Chief, Office of Insurance Products, Division of
Investment Management at<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application is available for a fee from the
SEC's Public Reference Branch, 100 F Street, NE., Washington, DC 20549-
0102<PHONE_NUMBER>).

Applicants' Representations

    1. SBL is a Kansas corporation organized on May 26, 1977 and is
registered as an open-end management investment company under the 1940
Act. SBL is a series company currently comprising eighteen (18) series
(the ``Insurance Funds''). Additional series of SBL and classes of
additional Insurance Funds may be established in the future.
    2. SMC serves as SBL's investment adviser. SMC is controlled by its
members, Security Benefit Life Insurance Company (``SBLIC'') and
Security Benefit Corporation (``SBC''). SBLIC, a Kansas stock life
insurance company, is controlled by SBC. SBC is wholly-owned by
Security Mutual Holding Company, which is in turn controlled by SBLIC
policyholders. Pursuant to investment subadvisory agreements, SMC
retains a sub-adviser for many Insurance Funds. Each sub-adviser is
registered as an investment adviser with the Commission under the
Investment Advisers Act of 1940.
    3. SBL currently offers shares of the Insurance Funds only to
separate accounts of affiliated insurance companies in order to fund
benefits under flexible premium variable annuity contracts and variable
life insurance policies. In the future, the Insurance Investment
Companies intend to offer shares of the Insurance Funds to (a) separate
accounts of affiliated and unaffiliated insurance companies in order to
fund variable annuity contracts and variable life insurance contracts
(collectively, ``Separate Accounts''); (b) Qualified Plans; (c) any
investment manager to an Insurance Fund and affiliates thereof that is
permitted to hold shares of an Insurance Fund consistent with the
requirements of Treasury Regulation 1.817-5 (collectively, the
``Manager''); and (d) any insurance company general accounts that are
permitted to hold shares of an Insurance Fund consistent with the
requirements of Treasury Regulation 1.817-5 (``General Accounts'').
    4. Insurance companies whose Separate Account(s) may now or in the
future own shares of the Insurance Funds are referred to herein as
``Participating Insurance Companies.'' The Participating Insurance
Companies have established or will establish their own separate
accounts and design their own variable contracts. Each Participating
Insurance Company has or will have the legal obligation to satisfy

all applicable requirements under both state and federal law.
Participating Insurance Companies may rely on Rules 6e-2 and 6e-3(T),
although some Participating Insurance Companies, in connection with
variable life insurance contracts, may rely on individual exemptive
orders as well.
    5. The Insurance Investment Companies intend to offer shares of the
Insurance Funds directly to Qualified Plans outside of the separate
account context. Qualified Plans may choose any of the Insurance Funds
that are offered as the sole investment under the Plan or as one of
several investments. Plan participants may or may not be given an
investment choice depending on the terms of the Plan itself. Shares of
any of the Insurance Funds sold to such Qualified Plans would be held
or deemed to be held by the trustee(s) of said Plans. Certain Qualified
Plans, including Section 403(b)(7) Plans and Section 408(a) Plans, may
vest voting rights in Plan participants instead of Plan trustees.
Exercise of voting rights by participants in any such Qualified Plans,
as opposed to the trustees of such Plans, cannot be mandated by the
Applicants. Each Plan must be administered in accordance with the terms
of the Plan and as determined by its trustee or trustees.
    6. Shares of each Insurance Fund also may be offered to the Manager
or to General Accounts, in reliance on regulations issued by the
Treasury Department (Treas. Reg. 1.817-5) that established
diversification requirements for variable annuity and variable life
insurance contracts (``Treasury Regulations''). Treasury Regulation
1.817-5(f)(3)(ii) permits such sales as long as the return on shares
held by the Manager or General Accounts is computed in the same manner
as for shares held by the Separate Accounts, and the Manager or the
General Accounts do not intend to sell to the public shares of the
Insurance Investment Company that they hold. An additional restriction
is imposed by the Treasury Regulations on sales to the Manager, who may
hold shares only in connection with the creation or management of the
Insurance Investment Company. Applicants anticipate that sales in
reliance on these provisions of the Treasury Regulations generally will
be made to the Manager for the purpose of providing necessary capital
required by Section 14(a) of the 1940 Act.

Applicants' Legal Analysis

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

offered exclusively to separate accounts, or to life insurers in
connection with the operation of a separate account, additional
exemptive relief may be necessary if the shares of the Insurance
Investment Companies are also to be sold to Qualified Plans, the
Manager or General Accounts.
    5. The relief provided by Rule 6e-3(T) is not relevant to the
purchase of shares of the Insurance Investment Companies by Qualified
Plans, the Manager or General Accounts. However, because the relief
granted by Rule 6e-3(T)(b)(15) is available only where shares of the
underlying fund are offered exclusively to separate accounts, or to
life insurers in connection with the operation of a separate account,
additional exemptive relief may be necessary if the shares of the
Insurance Investment Companies are also to be sold to Qualified Plans,
the Manager or General Accounts. None of the relief provided for in
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) relates to Qualified Plans, the
Manager or General Accounts, or to an underlying fund's ability to sell
its shares to such purchasers. It is only because some of the Separate
Accounts that may invest in the Insurance Investment Companies may
themselves be investment companies that rely upon Rules 6e-2 and 6e-
3(T) and wish to continue to rely upon the relief provided in those
Rules, that the Applicants are applying for the requested relief. If
and when a material irreconcilable conflict arises in the context of
the application between the Separate Accounts or between Separate
Accounts on the one hand and Qualified Plans, the Manager or General
Accounts on the other hand, the Participating Insurance Companies,
Qualified Plans, the Manager and the General Accounts must take
whatever steps are necessary to remedy or eliminate the conflict,
including eliminating the Insurance Funds as eligible investment
options. Applicants have concluded that investment by the Manager or
the inclusion of Qualified Plans and General Accounts as eligible
shareholders should not increase the risk of material irreconcilable
conflicts among shareholders. However, Applicants further assert that
even if a material irreconcilable conflict involving the Qualified
Plans, Manager or General Accounts arose, the Qualified Plans, Manager
or General Accounts, unlike the Separate Accounts, can simply redeem
their shares and make alternative investments. By contrast, insurance
companies cannot simply redeem their separate accounts out of one fund
and invest in another. Time consuming, complex transactions must be
undertaken to accomplish such redemptions and transfers. Applicants
thus argue that allowing the Manager, General Accounts or Qualified
Plans to invest directly in the Insurance Investment Companies should
not increase the opportunity for conflicts of interest.
    6. Applicants assert that the Treasury Regulations made it possible
for shares of an investment company to be held by a Qualified Plan, the
investment company's investment manager or its affiliates or General
Accounts without adversely affecting the ability of shares in the same
investment company to also be held by separate accounts of insurance
companies in connection with their variable life insurance contracts.
Section 817(h) of the Internal Revenue Code of 1986, as amended
(``Code''), imposes certain diversification standards on the underlying
assets of separate accounts funding variable annuity contracts and
variable life contracts. In particular, the Code provides that such
contracts shall not be treated as an annuity contract or life insurance
contract for any period (and any subsequent period) for which the
separate account investments are not, in accordance with regulations
prescribed by the Treasury Department, adequately diversified. The
Treasury Regulations provide that, in order to meet the diversification
requirements, all of the beneficial interests in the investment company
must be held by the segregated asset accounts of one or more insurance
companies. However, the Treasury Regulations also contain certain
exceptions to this requirement, one of which allows shares of an
investment company to be held by the trustee of a qualified pension or
retirement plan without adversely affecting the ability of shares in
the same investment company to also be held by the separate accounts of
insurance companies in connection with their variable annuity and
variable life contracts (Treas. Reg. Sec.  1.817-5(f)(3)(iii)).
    7. Applicants also assert that the Treasury Regulations contain
another exception that permits the Insurance Funds to sell shares to
General Accounts or the Manager subject to certain conditions (Treas.
Reg. Sec.  1.817-5(f)(3)(i), (ii)).
    8. The promulgation of Rules 6e-2(b)(15) and 6e-3(T)(b)(15)
preceded the issuance of the Treasury Regulations which made it
possible for shares of an investment company to be held by a Qualified
Plan, the investment company's investment manager or its affiliates or
General Accounts without adversely affecting the ability of shares in
the same investment company to also be held by the separate accounts of
insurance companies in connection with their variable life insurance
contracts. Thus, the sale of shares of the same investment company to
separate accounts through which variable life insurance contracts are
issued, to Qualified Plans, to the investment company's investment
manager and its affiliates or General Accounts (collectively,
``eligible shareholders'') could not have been envisioned at the time
of the adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15), given the
then-current tax law.
    9. Paragraph (3) of Section 9(a) of the 1940 Act provides, among
other things, that it is unlawful for any company to serve as
investment adviser to or principal underwriter for any registered open-
end investment company if an affiliated person of that company is
subject to a disqualification enumerated in Sections 9(a)(1) or (a)(2).
Rule 6e-2(b)(15)(i) and (ii) and Rule 6e-3(T)(b)(15)(i) and (ii)
provide exemptions from Section 9(a) under certain circumstances,
subject to the limitations discussed above on mixed and shared funding.
These exemptions limit the application of the eligibility restrictions
to affiliated individuals or companies that directly participate in the
management or administration of the underlying management investment
company. The relief provided by Rules 6e-2(b)(15)(i) and 6e-
3(T)(b)(15)(i) permits a person disqualified under Section 9(a) to
serve as an officer, director, or employee of the life insurer, or any
of its affiliates, so long as that person does not participate directly
in the management or administration of the underlying fund. The relief
provided by Rules 6e-2(b)(15)(ii) and 6e-3(T)(b)(15)(ii) permits the
life insurer to serve as the underlying fund's investment manager or
principal underwriter, provided that none of the insurer's personnel
who are ineligible pursuant to Section 9(a) are participating in the
management or administration of the fund. The partial relief granted in
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) from the requirements of Section 9
limits, in effect, the amount of monitoring of an insurer's personnel
that would otherwise be necessary to ensure compliance with Section 9
to that which is appropriate in light of the policy and purposes of
Section 9. Those Rules recognize that it is not necessary for the
protection of investors or the purposes fairly intended by the policy
and provisions of the 1940 Act to apply the provisions of Section 9(a)
to the many individuals in an insurance

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

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

    21. Applicants assert that permitting an Insurance Investment
Company to sell its shares to the Manager in compliance with Treas.
Reg. 1.817-5 will enhance Insurance Investment Company management
without raising significant concerns regarding material irreconcilable
conflicts. Applicants assert that the Insurance Investment Companies
may be deemed to lack an insurance company ``promoter'' for purposes of
Rule 14a-2 under the 1940 Act. Accordingly, Applicants assert that such
Insurance Investment Companies will be subject to the requirements of
Section 14(a) of the 1940 Act, which generally requires that an
investment company have a net worth of $100,000 upon making a public
offering of its shares.
    22. Applicants assert that given the conditions of Treas. Reg.
1.817-5(i)(3) and the harmony of interest between an Insurance
Investment Company, on the one hand, and its Manager or a Participating
Insurance Company, on the other, little incentive for overreaching
exists. Applicants assert that such investments should not implicate
the concerns discussed above regarding the creation of material
irreconcilable conflicts. Instead, Applicants assert that permitting
investment by the Manager will permit the orderly and efficient
creation and operation of Insurance Investment Companies, and reduce
the expense and uncertainty of using outside parties at the early
stages of Insurance Investment Company operations.
    23. Applicants assert that various factors have limited the number
of insurance companies that offer variable contracts. These factors
include the costs of organizing and operating a funding medium, the
lack of expertise with respect to investment management (principally
with respect to stock and money market investments) and the lack of
name recognition by the public of certain Participating Insurance
Companies as investment experts. In particular, some smaller life
insurance companies may not find it economically feasible, or within
their investment or administrative expertise, to enter the variable
contract business on their own. Use of the Insurance Investment
Companies as a common investment medium for variable contracts,
Qualified Plans and General Accounts would help alleviate these
concerns, because Participating Insurance Companies, Qualified Plans
and General Accounts will benefit not only from the investment and
administrative expertise of SMC, or any other investment manager to an
Insurance Fund, but also from the cost efficiencies and investment
flexibility afforded by a large pool of funds. Therefore, making the
Insurance Investment Companies available for mixed and shared funding
and permitting the purchase of Insurance Investment Company shares by
Qualified Plans and General Accounts may encourage more insurance
companies to offer variable contracts, and this should result in
increased competition with respect to both variable contract design and
pricing, which can be expected to result in more product variation.
Mixed and shared funding also may benefit variable contract owners by
eliminating a significant portion of the costs of establishing and
administering separate funds. Furthermore, granting the requested
relief should result in an increased amount of assets available for
investment by the Insurance Investment Companies. This may benefit
variable contract owners by promoting economies of scale, by reducing
risk through greater diversification due to increased money in the
Insurance Investment Companies, or by making the addition of new
Insurance Funds more feasible.

Applicants' Conditions

    Applicants consent to the following conditions:
    1. A majority of the Board of Trustees or Board of Directors
(``Board'') of each Insurance Investment Company shall consist of
persons who are not ``interested persons'' of the Insurance Investment
Company, as defined by Section 2(a)(19) of the 1940 Act and the rules
thereunder and as modified by any applicable orders of the Commission
(``Independent Board Members''), except that if this condition is not
met by reason of the death, disqualification, or bona fide resignation
of any trustee or director, then the operation of this condition shall
be suspended: (i) For a period of 90 days if the vacancy or vacancies
may be filled by the Board; (ii) for a period of 150 days if a vote of
shareholders is required to fill the vacancy or vacancies; or (iii) for
such longer period as the Commission may prescribe by order upon
application or by future rule.
    2. Each Board will monitor the respective Insurance Investment
Company for the existence of any material irreconcilable conflict among
and between the interests of the contract owners of all Separate
Accounts, participants of Qualified Plans, the Manager or General
Accounts investing in that Insurance Investment Company, and determine
what action, if any, should be taken in response to such conflicts. A
material irreconcilable conflict may arise for a variety of reasons,
including: (i) An action by any state insurance regulatory authority;
(ii) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (iii) an
administrative or judicial decision in any relevant proceeding; (iv)
the manner in which the investments of any Insurance Fund are being
managed; (v) a difference in voting instructions given by variable
annuity contract owners, variable life insurance contract owners, Plan
trustees, or Plan participants; (vi) a decision by a Participating
Insurance Company to disregard the voting instructions of contract
owners; or (vii) if applicable, a decision by a Qualified Plan to
disregard the voting instructions of Plan participants.
    3. Any Qualified Plan that executes a fund participation agreement
upon becoming an owner of 10% or more of the assets of an Insurance
Investment Company (``Participating Qualified Plan''), any
Participating Insurance Company (on their own behalf, as well as by
virtue of any investment of general account assets in all Insurance
Investment Companies), and the Manager (collectively, ``Participants'')
will report any potential or existing conflicts to the Board. Each of
the Participants will be responsible for assisting the Board in
carrying out the Board's responsibilities under these conditions by
providing the Board with all information reasonably necessary for the
Board to consider any issues raised. This includes, but is not limited
to, an obligation by each Participating Insurance Company to inform the
Board whenever contract owner voting instructions are disregarded and,
if pass-through voting is applicable, an obligation by each Qualified
Plan that is a Participant to inform the Board whenever it has
determined to disregard Plan participant voting instructions. The
responsibility to report such information and conflicts and to assist
the Board will be a contractual obligation of all Participating
Insurance Companies and Qualified Plans investing in an Insurance
Investment Company under their agreements governing participation in
the Insurance Investment Company, and such agreements shall provide
that such responsibilities will be carried out with a view only to the
interests of the contract owners or, if applicable, Plan participants.
    4. If it is determined by a majority of the Board of an Insurance
Investment

Company, or a majority of its Independent Board Members, that a
material irreconcilable conflict exists, the relevant Participating
Insurance Companies and Participating Qualified Plans shall, at their
expense or, at the discretion of a Manager to an Insurance Investment
Company, at that Manager's expense, and to the extent reasonably
practicable (as determined by a majority of the Independent Board
Members), take whatever steps are necessary to remedy or eliminate the
material irreconcilable conflict, up to and including: (i) Withdrawing
the assets allocable to some or all of the Separate Accounts from the
relevant Insurance Investment Company or any series therein and
reinvesting such assets in a different investment medium (including
another Insurance Fund, if any); (ii) in the case of Participating
Insurance Companies, submitting the question of whether such
segregation should be implemented to a vote of all affected contract
owners and, as appropriate, segregating the assets of any appropriate
group (i.e., variable annuity contract owners or variable life
insurance contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the
affected contract owners the option of making such a change; (iii)
withdrawing the assets allocable to some or all of the Qualified Plans
from the affected Insurance Investment Company or any Insurance Fund
and reinvesting those assets in a different investment medium; and (iv)
establishing a new registered management investment company or managed
separate account. If a material irreconcilable conflict arises because
of a Participating Insurance Company's decision to disregard contract
owner voting instructions and that decision represents a minority
position or would preclude a majority vote, the Participating Insurance
Company may be required, at the Insurance Investment Company's
election, to withdraw its Separate Account's investment in the
Insurance Investment Company, and no charge or penalty will be imposed
as a result of such withdrawal. If a material irreconcilable conflict
arises because of a Qualified Plan's decision to disregard Plan
participant voting instructions, if applicable, and that decision
represents a minority position or would preclude a majority vote, the
Qualified Plan may be required, at the election of the Insurance
Investment Company, to withdraw its investment in the Insurance
Investment Company, and no charge or penalty will be imposed as a
result of such withdrawal. The responsibility to take remedial action
in the event of a Board determination of a material irreconcilable
conflict and to bear the cost of such remedial action shall be a
contractual obligation of all Participating Insurance Companies and
Qualified Plans under their agreements governing participation in the
Insurance Investment Company, and these responsibilities will be
carried out with a view only to the interests of the contract owners
or, as applicable, Plan participants.
    For the purposes of this Condition (4), a majority of the
Independent Board Members shall determine whether or not any proposed
action adequately remedies any material irreconcilable conflict, but in
no event will the Insurance Investment Company or its Manager be
required to establish a new funding medium for any variable contract.
No Participating Insurance Company shall be required by this Condition
(4) to establish a new funding medium for any variable contract if an
offer to do so has been declined by vote of a majority of contract
owners materially adversely affected by the material irreconcilable
conflict. No Qualified Plan shall be required by this Condition (4) to
establish a new funding medium for such Qualified Plan if (i) a
majority of Plan participants materially and adversely affected by the
material irreconcilable conflict vote to decline such offer or (ii)
pursuant to governing Plan documents and applicable law, the Plan makes
such decision without Plan participant vote.
    5. The Board's determination of the existence of a material
irreconcilable conflict and its implications shall be made known
promptly in writing to all Participants.
    6. Participating Insurance Companies will provide pass-through
voting privileges to all variable contract owners whose contracts are
funded through a registered Separate Account for so long as the
Commission continues to interpret the 1940 Act as requiring pass-
through voting privileges for variable contract owners. Accordingly,
such Participating Insurance Companies will vote shares of each
Insurance Fund held in their registered Separate Accounts in a manner
consistent with voting instructions timely received from such contract
owners. Each Participating Insurance Company will vote shares of each
Insurance Fund held in its registered Separate Accounts for which no
timely voting instructions are received, as well as shares held by its
General Accounts, in the same proportion as those shares for which
voting instructions are received. Participating Insurance Companies
shall be responsible for assuring that each of their registered
Separate Accounts investing in an Insurance Investment Company
calculates voting privileges in a manner consistent with all other
Participating Insurance Companies. The obligation to vote an Insurance
Investment Company's shares and to calculate voting privileges in a
manner consistent with all other registered Separate Accounts investing
in an Insurance Investment Company shall be a contractual obligation of
all Participating Insurance Companies under their agreements governing
participation in the Insurance Investment Company. Each Plan will vote
as required by applicable law and governing Plan documents.
    7. An Insurance Fund will make its shares available under a
variable contract and/or Qualified Plans at or about the same time it
accepts any seed capital from any Manager or any General Account of a
Participating Insurance Company.
    8. An Insurance Investment Company will notify all Participating
Insurance Companies and Qualified Plans that disclosure regarding
potential risks of mixed and shared funding may be appropriate in
prospectuses for any of the Separate Accounts and in Plan documents.
Each Insurance Investment Company will disclose in its prospectus that:
(i) Shares of the Insurance Investment Company are offered to insurance
company Separate Accounts that fund both variable annuity and variable
life insurance contracts, and to Qualified Plans and General Accounts;
(ii) due to differences of tax treatment or other considerations, the
interests of various contract owners participating in the Insurance
Investment Company and the interests of Qualified Plans or General
Accounts investing in the Insurance Investment Company might at some
time be in conflict; and (iii) the Board will monitor the Insurance
Investment Company for any material conflicts and determine what
action, if any, should be taken.
    9. All reports received by the Board of potential or existing
conflicts, and all Board action with regard to determining the
existence of a conflict, notifying Participants of a conflict, and
determining whether any proposed action adequately remedies a conflict,
will be properly recorded in the minutes of the Board or other
appropriate records, and such minutes or other records shall be made
available to the Commission upon request.
    10. If and to the extent Rule 6e-2 and Rule 6e-3(T) under the 1940
Act are amended, or Rule 6e-3 is adopted, to provide exemptive relief
from any

provision of the 1940 Act or the rules thereunder with respect to mixed
or shared funding on terms and conditions materially different from any
exemptions granted in the order requested in the application, then each
Insurance Investment Company and/or the Participating Insurance
Companies, as appropriate, shall take such steps as may be necessary to
comply with Rule 6e-2 and Rule 6e-3(T), as amended, and Rule 6e-3, as
adopted, to the extent such rules are applicable.
    11. Each Insurance Investment Company will comply with all
provisions of the 1940 Act requiring voting by shareholders (which, for
these purposes, shall be the persons having a voting interest in the
shares of that Insurance Investment Company), and in particular each
Insurance Investment Company will either provide for annual 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 SBL is not one of the trusts described in Section
16(c) of the 1940 Act) as well as with Section 16(a) of the 1940 Act
and, if and when applicable, Section 16(b) of the 1940 Act. Further,
each Insurance Investment Company will act in accordance with the
Commission's interpretation of the requirements of Section 16(a) of the
1940 Act with respect to periodic elections of directors (or trustees)
and with whatever rules the Commission may promulgate with respect
thereto.
    12. As long as the Commission continues to interpret the 1940 Act
as requiring pass-through voting privileges for variable contract
owners, the Managers will vote their shares in the same proportion as
all contract owners having voting rights with respect to the relevant
Insurance Investment Company; provided, however, that the Manager or
any General Account shall vote their shares in such other manner as may
be required by the Commission or its staff.
    13. The Participants shall at least annually submit to the Board of
an Insurance Investment Company such reports, materials or data as the
Board may reasonably request so that it may fully carry out the
obligations imposed upon it by the conditions contained in the
application and said reports, materials and data shall be submitted
more frequently, if deemed appropriate, by the Board. The obligations
of Participating Insurance Companies and Participating Qualified Plans
to provide these reports, materials and data to the Board of the
Insurance Investment Company when it so reasonably requests, shall be a
contractual obligation of the Participating Insurance Companies and
Participating Qualified Plans under their agreements governing
participation in each Insurance Investment Company.
    14. If a Qualified Plan should become an owner of 10% or more of
the assets of an Insurance Investment Company, the Insurance Investment
Company shall require such Plan to execute a participation agreement
with such Insurance Investment Company which includes the conditions
set forth herein to the extent applicable. A Qualified Plan will
execute an application containing an acknowledgment of this condition
upon such Plan's initial purchase of the shares of any Insurance
Investment Company.

Conclusion

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

    For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E6-4187 Filed 3-22-06; 8:45 am]

BILLING CODE 8010-01-P


[Federal Register Volume 79, Number 186 (Thursday, September 25, 2014)]
[Proposed Rules]
[Page 57489]
[FR Doc No: 2014-22902]

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DEPARTMENT OF TRANSPORTATION

Office of the Secretary

14 CFR Parts 234, 244, 250, 255, 256, 257, 259, and 399

[Docket No. DOT-OST-2014-0056]
RIN 2105-AE11

Transparency of Airline Ancillary Fees and Other Consumer
Protection Issues

AGENCY: Office of the Secretary (OST), Department of Transportation
(DOT).

ACTION: Proposed rule; reopening of comment period.

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

SUMMARY: This action reopens the comment period for a Notice of
Proposed Rulemaking (NPRM) on transparency of airline ancillary fees
and other consumer protection issues that was published in the Federal
Register on May 23, 2014. We are extending the end of the comment
period from September 22, 2014, to September 29, 2014. Open Allies for
Airfare Transparency and the Travel Technology Association (Travel
Tech) have noted the delay in posting the summary of a meeting attended
by DOT staff with representatives of Airlines for America (A4A), the
Regional Airline Association (RAA), and several of their member
airlines on August 7, 2014. The reopening of the comment period is
intended to provide all interested parties sufficient time prior to the
close of the comment period for this rulemaking to review the summary
of the August 7 meeting that DOT posted in the rulemaking docket.

DATES: The comment period for the proposed rule published on May 23,
2014 (79 FR 29970), is reopened. Comments must be received by September
29, 2014. Comments received after this date will be considered to the
extent practicable.

ADDRESSES: You may file comments identified by the docket number DOT-
OST-2014-0056 by any of the following methods:
     Federal eRulemaking Portal: go to http://www.regulations.gov and follow the online instructions for submitting
comments.
     Mail: Docket Management Facility, U.S. Department of
Transportation, 1200 New Jersey Ave. SE., Room Wl2-140, Washington, DC
20590-0001.
     Hand Delivery or Courier: West Building Ground Floor, Room
W12-140, 1200 New Jersey Ave. SE., between 9:00 a.m. and 5:00 p.m. ET,
Monday through Friday, except Federal Holidays.
     Fax:<PHONE_NUMBER>.
    Instructions: You must include the agency name and docket number
DOT-OST-2014-0056 or the Regulatory Identification Number, RIN No.
2105-AE11, for the rulemaking at the beginning of your comment. All
comments received will be posted without change to http://www.regulations.gov, including any personal information provided.
    Privacy Act: Anyone is able to search the electronic form of all
comments received in any of our dockets by the name of the individual
submitting the comment (or signing the comment if submitted on behalf
of an association, a business, a labor union, etc.). You may review
DOT's complete Privacy Act statement in the Federal Register published
on April 11, 2000 (65 FR 19477-78), or you may visit http://Docketslnfo.dot.gov.
    Docket: For access to the docket to read background documents or
comments received, go to http://www.regulations.gov or to the street
address listed above. Follow the online instructions for accessing the
docket.

FOR FURTHER INFORMATION CONTACT: Blane A. Workie, Office of the
Assistant General Counsel for Aviation Enforcement and Proceedings,
U.S. Department of Transportation, 1200 New Jersey Ave. SE.,
Washington, DC 20590,<PHONE_NUMBER> (phone),<PHONE_NUMBER> (fax),
<EMAIL_ADDRESS>(email).

SUPPLEMENTARY INFORMATION: On May 23, 2014, the Department published a
Notice of Proposed Rulemaking (NPRM) on transparency of airline
ancillary fees and other consumer protection issues which sought
comment on a number of proposals to enhance protections for air
travelers and improve the air travel environment. Comments on the
matters proposed were to be received 90 days after publication of the
NPRM, or by August 21, 2014. On July 31, 2014, the Department extended
the comment period to September 22, 2014 as it was persuaded that more
time was needed because of the complexity of the proposals. With this
document, the Department is further extending the comment period to
September 29, 2014 to provide all interested parties two full weeks to
review the summary of an August 7 meeting that DOT posted in the
rulemaking docket on September 15, 2014, affording commenters the
opportunity, if necessary, to revise their comments prior to
submission, or to supplement any previously filed comments. We do not
anticipate any further extension of the comment period for this
rulemaking, but we will consider comments filed after the close of the
comment period to the extent possible.

    Issued this 19th day of September, 2014, in Washington, DC.
Kathryn B. Thomson,
General Counsel, U.S. Department of Transportation.
[FR Doc. 2014-22902 Filed 9-24-14; 8:45 am]
BILLING CODE 4910-9X-P


 EPA Waiver Hearing on CARB Tier III Regulations June 29, 2006 William M. Guerry, Jr.

Partner at the Law Firm Kelley Drye Collier Shannon ( 202) 342 8858 wguerry@ kelleydrye. com John Dunlap Dunlap, Van Vleck & Brown, LLC Governmental Relations &

Communications 925 L Street, Suite 850 Sacramento, CA 95814 Overview of Outdoor Power Equipment Industry Who is OPEI ?

The Outdoor Power Equipment Institute ( OPEI)

is the international trade association composed of equipment manufacturers, engine manufacturers, including manufacturers of catalysts and exhaust systems

OPEI facilitates the development of ANSI safety standards for the outdoor power equipment industry Wide Variety of Equipment Types and Uses Small SI Engine / Equipment Industry Approx. 15 Engine Suppliers Approx. 10,000 End Prod. / Models 1000 Basic Engine Models 5000 Custom Engine Specs 1500 OEM's Over 2000 different applications 10,000 Mass Merchandisers 12,000 Rental Centers 1000 +

Industrial Service Distributors 25,000 L& G Service Dealers 50 +

Central Distributors 70,000,000 Consumers 25,000 Specialty Retailers / Catalogers Catalogers 1000' s of Commercial Customers Small OEMs

There are several hundred small equipment manufacturers that display lawn and garden equipment at the annual OPEI EXPO

Many of these small OEMs may lack the engineering resources or experience to fully appreciate and respond to the complex challenges of catalyzed exhaust systems OPEI's Constructive Actions and Proposed Solutions OPEI Leadership Role on Safety

Manufacturers need guidance and procedures to fully understand and evaluate catalyzed exhaust systems

OPEI has commenced developing ANSI B71.11 Standard for Heat Related Hazard Mitigation from Catalytic Exhaust Systems and is committed to its timely completion

Lead time is crucial in the design and testing in the field of outdoor power equipment OPEI's Constructive Role in Regulatory Development

OPEI and its members worked constructively with CARB to develop the framework for the technology forcing Tier III evaporative and exhaust regulations

OPEI members continue to make extraordinary investments to develop Tier II and new Tier IIIcompliant exhaust and evaporative systems

Since 1990, the small engine / equipment industry has reduced smog forming emissions over 74% Total Contributions to Man made Smog 61% 25% 11% 3%

0 10 20 30 40 50 60 70 80 90 100 Power Plants,

Paint, Solvents,

Waste Disposal Cars & Trucks Off road Vehicles 4 cycle Small Gasoline Engines Based on 2006 EPA Emissions Data OPEI's Suggestions to Improve the Waiver Process Suggested Improvements to EPA Waiver Process

Manufacturers often certify products with CARB prior to EPA issuance of waiver

OPEI members certified their low permeation fuel lines with CARB for their 2006 model year products

There needs to be significant lead time between EPA's final waiver decision and the effective date of CARB's regulations

Otherwise, the waiver process creates regulatory uncertainty/ loopholes favoring non compliant products over compliant products Suggested Improvements to EPA Waiver Process

Under Section 209( e), EPA is supposed to ensure that the " California standards and accompanying enforcement procedures are consistent with the federal Clean Air Act"

In implementing this requirement, EPA should work with CARB to:

Harmonize test procedures so that manufacturers do not have to retest 50 state products under different conflicting CARB and EPA requirements

Accept under a reciprocal agreement a CARB or EPA certification so that manufacturers only have to submit one certification for 50 state products Safety and Lead time Waiver Criteria  CARB and EPA should evaluate safety and the lead time needed by engine manufacturers, OEMs and their separate exhaust system suppliers to develop safe and emissions compliant products  This evaluation should consider the real operating conditions under which the equipment is used OPEI Conditional Support for the Tier III Program for the California Market All Evaporative and Class I Exhaust Regulations

OPEI generally supports expedited EPA approval of:

All the Tier III evaporative requirements

The Tier III exhaust standards for Class I engines ( walk behind mowers)

OPEI plans to conditionally support Class II exhaust standards ( riding mowers) based on the phase in flexibilities being discussed with CARB

OEMs will need to rely on 2007 model year Tier II certified engines in their 2008 equipment model year products

Assuming the needed phase in flexibility is provided by CARB, OPEI plans to support the Class II engine exhaust standards for the California market Improved Compliance Flexibility for Non integrated OEMs Needed Lead Time for Nonintegrated OEMs

There are roughly 1,000 different exhaust systems for Class II engines, which may need to be substantially redesigned to accommodate catalysts

Despite the fact the CARB Tier III standards apply to engines manufactured in the 2008 engine model year, non integrated OEMs still have not received catalyzed engines

For non integrated systems, OEMs will need 600 days after they receive catalyzed Class II engines to build the first prototypes, evaluate in the field, and start production of catalyzed equipment Installing Catalysts on Class II Engines

Iterative development process with OEM, catalyst supplier, engine supplier, and exhaust system supplier Engine Mfr develops engine for multiple applications / specs Engine Mfr supplies test engine samples to OEM OEM product design,

eng/ exh integration and safety and endurance testing Exhaust Mfr develops and supplies OEM specific exh system Catalyst supplier Formulates CAT for Engine & OEM appl.

Engine Mfr provides prod. ready engine OEM tests and approves production engine and exh. systems Engine Mfr ships to OEM Exhaust Mfr ships to OEM Exhaust Mfr provides prod. ready exhaust If OEM rejects engine samples, process above restarts If OEM approves engine samples, process continues as follows Promoting a Full Understanding of Heat Related Hazards EPA Development of Phase III Federal Regulations

OPEI looks forward to working with EPA to develop appropriate federal Phase III regulations that fully respond to heat hazards and fuel leak risks

The EPA safety study confirms that there are more heat related challenges and redesigns than CARB assumed several years ago

Designing measures to respond to these heatrelated challenges will increase costs and leadtimes for national production Catalyst Safety Studies

EPA did not fully evaluate certain problematic designs like V twin engines during misfires and other real world off nominal conditions

EPA evaluated the external surfaces of the outermost guards, rather than the internal exhaust gas or muffler skin temperatures

The International Consortium for Fire Safety,

Health and the Environment will evaluate:

The temperatures of exhaust gases and muffler surfaces from

Catalyzed equipment, including V twins, under all the real world and off nominal operating conditions

OPEI appreciates EPA's participation in study Further Testing and Evaluations

How will catalyzed V twin engines and other challenging designs respond under all the expected real world and off nominal conditions?

What practical safeguards and devices can most effectively mitigate and address the increased heat without creating additional new hazards?

What performance based standards and procedures can OEMs apply to test and evaluate the heat related risks from their catalyzedexhaust systems and related safeguards? OPEI Will Work Constructively

With CARB to improve the OEM flexibilities and to ensure a streamlined and efficient certification process

With stakeholders to improve the understanding of heat related risks through the International Consortium study

With stakeholders to develop through an ANSI process the needed heat related guidance and procedures

With EPA, SBA and OMB on all phases of the Phase III regulatory development process