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U.S. Securities and Exchange Commission

Investment Company Act of 1940 - Section 15(a) and 2(a)(20)
Mellon Equity Associates, LLP

April 1, 2005

RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MANAGEMENT

Our Ref. No. 20052290
Mellon Equity Associates, LLP
File No. 811-05480

Your letter dated April 1, 2005 requests our assurance that we would not recommend enforcement action to the Commission against Mellon Equity Associates, LLP ("Mellon Equity") under Section 15(a) of the Investment Company Act of 1940 (the "Investment Company Act") if Mellon Equity serves as investment adviser to the TimesSquare VP S&P 500 Index Fund (the "Fund"), a series of the CIGNA Variable Products Group (the "Trust"), pursuant to a written investment advisory agreement that has not been approved by the vote of a majority of the outstanding voting securities of the Fund.

BACKGROUND

You state that the Trust is registered with the Commission as an open-end management investment company. You state that the Fund attempts to replicate the composition and total return, reduced by Fund expenses, of the Standard & Poor's 500 Composite Stock Price Index. You state that the Fund and the other series of the Trust are insurance-dedicated funds that serve as underlying investment options for insurance company separate accounts issuing variable annuity contracts and variable life insurance policies (collectively "variable insurance products").

You state that, in June 2004, CIGNA Investment Advisors, Inc. ("CIGNA Advisors"),1 the Fund's investment adviser, advised the Trust's board of trustees ("Board of Trustees") that it intended, in the near future, to exit the business of serving as investment adviser to registered investment companies. You state that the Board of Trustees commenced a search for a suitable replacement promptly thereafter. You state that CIGNA Advisors, under the supervision of the Board of Trustees, began searching for an appropriate low-cost merger partner for the Fund.2

You state that, on September 30, 2004, the Fund's portfolio manager retired. You represent that, when the portfolio manager retired, CIGNA Advisors was unable to continue serving as investment adviser to the Fund. You state that, accordingly, the Board of Trustees on behalf of the Fund entered into an interim investment advisory agreement with Merrill Lynch Investment Managers, L.P. ("MLIM") to provide for uninterrupted portfolio management of the Fund ("MLIM Interim Agreement").3

You state that, in December 2004, CIGNA Advisors, under the supervision of the Board of Trustees, began discussions with The Dreyfus Corporation ("Dreyfus"), investment adviser and sponsor of the Dreyfus Stock Index Fund, Inc. ("Dreyfus Index Fund"), concerning a proposed merger of the Fund into the Dreyfus Index Fund (the "Merger"). You state that Mellon Equity, an affiliate of Dreyfus, serves as the Dreyfus Index Fund's index fund manager. You state that the Merger discussions were successful. You state that, consequently, the Board of Trustees, including those Trustees who are not "interested persons" (as defined in the Investment Company Act), determined that merging the Fund with the Dreyfus Index Fund was in the best interest of Fund shareholders.4 You represent that the Trust will solicit the approval of Fund shareholders of the Merger with the Dreyfus Index Fund.5 You state that, subject to shareholder approval, CIGNA Advisors and Dreyfus expect to accomplish the Merger no later than April 30, 2005.6

You represent that Fund shareholders will incur no expenses associated with the Merger, and that Dreyfus and CIGNA Advisors have agreed to bear postage, printing, tabulation and proxy solicitation costs relating to the Merger, as well as all of the expenses that are associated with the preparation and filing of the Form N-14.7 You also represent that neither CIGNA Advisors nor any of its affiliates will receive, or has received, directly or indirectly, money or any benefit from the Dreyfus Index Fund, Dreyfus, Mellon Equity, MLIM or any of their affiliates, in connection with any investment advisory agreement with the Fund.

You state that the MLIM Interim Agreement terminated on February 27, 2005. You propose to have Mellon Equity serve as investment adviser pursuant to a written investment advisory agreement ("Mellon Equity Interim Agreement") that will be operative only from February 28, 2005 until the Merger is consummated, which is expected to occur no later than April 30, 2005.8 You represent that Mellon Equity will serve under the Mellon Equity Interim Agreement without any compensation or reimbursement of its costs.9 You represent that the Mellon Equity Interim Agreement will otherwise contain the same general terms and conditions that applied under the MLIM Interim Agreement and the original agreement with CIGNA Advisors. You state that, on February 24, 2005, the Board of Trustees, including those Trustees who are not "interested persons" (as defined in the Investment Company Act), approved the Mellon Equity Interim Agreement at an in-person meeting. You represent that, consequently, the Mellon Equity Interim Agreement was adopted in accordance with the requirements of Section 15 of the Investment Company Act, other than the shareholder vote requirement.

Accordingly, you request relief from the requirements of Section 15(a) of the Investment Company Act for Mellon Equity to temporarily serve as investment adviser to the Fund pursuant to a written agreement that has not been approved by the vote of a majority of the outstanding voting securities of the Fund. You note that CIGNA Advisors, the Fund's initial investment adviser, can no longer function as investment adviser to the Fund because its portfolio manager retired, and has decided to exit the business of serving as investment adviser to registered investment companies.

LEGAL ANALYSIS

Section 15(a) of the Investment Company Act states, in relevant part, that it shall be unlawful for any person to serve or act as an investment adviser to a registered investment company, except pursuant to a written contract, which has been approved by the vote of a majority of the outstanding voting securities of such registered investment company. Section 15(a) was adopted to give fund shareholders a voice in approving fund investment advisory contracts and to prevent trafficking in fund advisory contracts.10

You request relief from the requirements of Section 15(a) for Mellon Equity to serve as investment adviser to the Fund pursuant to a written contract that has not been approved by a majority of the Fund's shareholders. You note that Fund shareholders will have a voice in approving the Merger and, as a result, the management of their assets by Mellon Equity.

You claim that shareholder approval of the Mellon Equity Interim Agreement should be unnecessary because: (i) Mellon Equity will serve as investment adviser to the Fund without any compensation or reimbursement of its costs; (ii) Mellon Equity will serve as investment adviser to the Fund under the same general terms and conditions that applied under the MLIM Interim Agreement and the original agreement with CIGNA Advisers (except that no fee will be paid to Mellon Equity); (iii) the Mellon Equity Interim Agreement will be operative only from February 28, 2005 until the Merger is consummated, which is expected to occur on or before April 30, 2005; and (iv) the Board of Trustees, including those Trustees who are not "interested persons" (as defined in the Investment Company Act), has approved the Mellon Equity Interim Agreement.

You also claim that Mellon Equity's role as investment adviser to the Fund pursuant to the Mellon Equity Interim Agreement does not raise the trafficking concerns that Section 15(a) was intended to address. You represent that neither CIGNA Advisors nor any of its affiliates will receive, or has received, directly or indirectly, money or any benefit from the Dreyfus Index Fund, Dreyfus, Mellon Equity, MLIM or any of their affiliates, in connection with any investment advisory agreement with the Fund.

On the basis of the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission against Mellon Equity under Section 15(a) of the Investment Company Act if Mellon Equity serves as investment adviser to the Fund pursuant to the Mellon Equity Interim Agreement, which has not been approved by the vote of a majority of the outstanding voting securities of the Fund.11

This response expresses our views on enforcement action only and does not express any legal conclusions on the questions presented. Because our position is based on the facts and representations in your letter, you should note that any different facts or representations may require a different conclusion.12

Kenneth C. Fang
Senior Counsel


Endnotes


Incoming Letter

April 1, 2005

Douglas J. Scheidt, Esq.
Associate Director and Chief Counsel
Office of the Chief Counsel
Division of Investment Management
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0504

Re: TimesSquare VP S&P 500 Index Fund, a series of CIGNA Variable Products Group

Dear Mr. Scheidt:

We are writing to request that the staff of the Division of Investment Management advise us that it will not recommend that the Securities and Exchange Commission (the "Commission") take any enforcement action under Section 15(a) of the Investment Company Act of 1940, as amended (the "Investment Company Act") against Mellon Equity Associates, LLP ("Mellon Equity") if Mellon Equity serves as investment adviser to the TimesSquare VP S&P 500 Index Fund (the "Fund"), a series of CIGNA Variable Products Group (the "Trust"), pursuant to a written advisory agreement that has not been approved by a vote of a majority of the outstanding voting securities of the Fund.

Background

The Trust and the Fund

The Trust is registered with the Commission as an open-end management investment company. The Trust has three series, all of which are insurance dedicated funds that serve as underlying investment options for insurance company separate accounts issuing variable annuity contracts and variable life insurance policies (collectively, "Variable Products"). As of December 31, 2004, the Fund had net assets of approximately $181 million. As its name indicates, the Fund attempts to replicate the composition and total return, reduced by Fund expenses, of the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500").

The CIGNA Family of Mutual Funds

In June 2004, the Fund's adviser, TimesSquare Capital Management, Inc., an indirect, wholly owned subsidiary of CIGNA Corporation, advised the Trust's board of trustees (the "Board of Trustees") that it intended in the near future to exit the business of serving as investment adviser to registered investment companies. TimesSquare Capital Management, Inc. is now known as CIGNA Investment Advisors, Inc. ("CIGNA Advisors"). Promptly after being notified of that decision, the Board of Trustees commenced a search for suitable replacements of CIGNA Advisors as the investment adviser to the funds in the CIGNA family of mutual funds.1

On September 30, 2004, the Fund's portfolio manager retired from CIGNA Advisors. As a result, CIGNA Advisors was unable to continue serving as investment adviser to the Fund. In order to provide for uninterrupted portfolio management, the Board of Trustees on behalf of the Fund entered into an interim investment advisory agreement, effective October 1, 2004, with Merrill Lynch Investment Managers, L.P. ("MLIM") pursuant to Rule 15a-4(b)(1) under the Investment Company Act.2 The MLIM interim investment advisory agreement terminated on February 27, 2005 (150 days after inception as required by Rule 15a-4(a)(2)(ii)). The Fund paid MLIM a management fee at an annual rate of 0.10% of the Fund's average daily net assets pursuant to the MLIM interim investment advisory agreement.

Following a rigorous search process and evaluation of numerous investment advisory firms, in November 2004 the Board of Trustees selected PIMCO Variable Insurance Trust ("PVIT") as successor to the two other series of the Trust. Specifically, the two other series of the Trust, TimesSquare VP Core Plus Bond Fund and TimesSquare Money Market Fund, will solicit shareholder approval of a merger of those funds into corresponding series of PVIT.3, 4

PVIT does not have a series that follows an investment strategy of replicating the S&P 500. CIGNA Advisors, under the supervision of the Board of Trustees, continued to search for a low cost, insurance dedicated fund that follows an S&P 500 replication strategy and that would agree to a reorganization whereby the Fund would merge into the other fund. In the course of this process, management of CIGNA Advisors, under the direction of the Board of Trustees, held discussions with three large, well-established, investment firms that managed S&P 500 funds that were possible merger candidates for the Fund. Following extended conversations with those firms, those discussions ultimately proved to be unsuccessful.

In December 2004, CIGNA Advisors began discussions with The Dreyfus Corporation ("Dreyfus"), investment adviser to the Dreyfus Stock Index Fund, Inc. ("Dreyfus Stock Fund"), concerning a merger of the Fund into the Dreyfus Stock Fund (the "Merger"). Dreyfus has engaged Mellon Equity as the Dreyfus Stock Fund's index fund manager. Dreyfus expressed considerable interest in the Merger, and the Board of Trustees, including those Trustees who are not "interested persons" (as defined in the Investment Company Act), determined that the Dreyfus Stock Fund was the best available merger candidate and that merging the Fund with the Dreyfus Stock Fund was in the best interests of Fund shareholders.5 The Board of Trustees based its decision on the fact that the Dreyfus Stock Fund, which has been in existence since 1989, is a low cost, insurance dedicated fund with over $4 billion in assets that follows a strategy of replicating the S&P 500, and its performance has closely tracked the S&P 500. The parties then expeditiously proceeded to negotiate an agreement and plan of reorganization to accomplish the Merger.

Dreyfus Stock Fund

The Dreyfus Stock Fund is an insurance dedicated fund that serves as an underlying investment vehicle for Variable Products. The Dreyfus Stock Fund follows an S&P 500 replication strategy. Dreyfus serves as the Dreyfus Stock Fund's manager. Dreyfus has engaged its affiliate, Mellon Equity, to serve as the Dreyfus Stock Fund's index fund manager and provide day-to-day management of the Dreyfus Stock Fund's investments. As of December 31, 2004, the Dreyfus Stock Fund had net assets in excess of $4 billion. It has one of the lowest operating expense ratios among insurance dedicated S&P 500 funds. For the fiscal year ended December 31, 2004, total annual operating expenses for the Initial Class of the Dreyfus Stock Fund were 0.26%.

The Dreyfus Stock Fund issues two classes of common stock. The Initial Class of shares has lower operating expenses than the other class of shares issued by the Dreyfus Stock Fund, and is not subject to a Rule 12b-1 plan. Initial Class shares are subject to a shareholder services plan pursuant to which the Dreyfus Stock Fund reimburses its distributor an amount not to exceed 0.25% of the value of the Initial Class' average daily net assets. For the fiscal year ended December 31, 2004, the Dreyfus Stock Fund paid less than 0.01% of the value of the Initial Class' average daily net assets pursuant to the shareholder services plan.

The Merger

Under the terms of the Merger, the Dreyfus Stock Fund would acquire substantially all the assets and the stated liabilities of the Fund in exchange for Initial Class shares of the Dreyfus Stock Fund. If Fund shareholders approve the Merger, Variable Products that previously were funded by shares of the Fund will be funded by shares of the Dreyfus Stock Fund.6

On February 18, 2005, the Dreyfus Stock Fund filed with the Commission a combination proxy statement and registration statement on Form N-14 under the Securities Act of 1933 in connection with the solicitation of Fund shareholder approval of the Merger.

Fund shareholders will incur no expenses associated with the Merger. Dreyfus and CIGNA Advisors have agreed to bear postage, printing, tabulation and proxy solicitation costs relating to the Merger, as well as all expenses associated with the preparation and filing of the Form N-14.7

Neither CIGNA Advisors nor any of its affiliates will receive or has received, directly or indirectly, money or any benefit from the Dreyfus Stock Fund, Dreyfus, Mellon Equity, MLIM or any of their affiliates in connection with any investment advisory agreement with the Fund. Further, neither CIGNA Advisors nor any of its affiliates will receive or has received, directly or indirectly, money or any benefit from the Merger, either in the form of compensation at the closing of the Merger or afterwards in the form of any trail payments from the Dreyfus Stock Fund, Dreyfus, Mellon Equity, or any of their affiliates. MLIM has not and will not receive, directly or indirectly, money or any benefit from the investment advisory agreement between the Fund and Mellon Equity.

Interim Advisory Agreement with Mellon Equity

As noted above, the interim investment advisory agreement between the Fund and MLIM expired on February 27, 2005. The parties do not expect that they will receive shareholder approval of the Merger until late in April 2005, approximately sixty days after expiration of the interim advisory agreement with MLIM. Mellon Equity has agreed to serve as adviser to the Fund under an interim investment advisory agreement ("Mellon Equity Interim Agreement") from February 28, 2005 until the Merger is consummated, which, as noted above, is expected to occur no later than April 30, 2005. On February 24, 2005, the Board of Trustees, including those Trustees who are not "interested persons" (as defined in the Investment Company Act), approved the Mellon Equity Interim Agreement at an in-person meeting. Consequently, the Mellon Equity Interim Agreement was adopted in accordance with the requirements of Section 15 of the investment Company Act, other than the shareholder vote requirements. The Mellon Equity Interim Agreement contains the same general terms and conditions as the interim investment advisory agreement between the Fund and MLIM, as well as the advisory agreement between the Fund and CIGNA Advisors. CIGNA Advisors will continue to provide administrative services to the Fund pursuant to the Administrative Services Agreement between CIGNA Advisors and the Trust, on behalf of the Fund, for the duration of the Mellon Equity Interim Agreement.

Mellon Equity has agreed to serve as interim adviser to the Fund pursuant to the Mellon Equity Interim Agreement without any compensation or reimbursement of its costs. Also, CIGNA Advisors had, when it served as investment adviser to the Fund, entered into an expense limitation agreement pursuant to which it agreed to reimburse the Fund if and to the extent Fund operating expenses (exclusive of items such as brokerage commissions and any extraordinary items) exceeded 0.25% of average daily Fund net assets. In order to insure that Fund shareholders do not incur increased Fund operating expenses during the term of the Mellon Equity Interim Agreement, CIGNA Advisors has agreed to extend its expense limitation agreement for the duration of the Mellon Equity Interim Agreement.

Reasons for Seeking No-Action Relief

The Fund has commenced soliciting shareholder approval of the Merger. In the absence of the relief requested, the Fund would also have had to solicit shareholder approval of the Mellon Equity Interim Agreement.8 The Fund seeks the requested relief in order to avoid the inefficiency and potential shareholder confusion that would accompany two shareholder solicitations in close proximity to each other, as well as the costs the Fund would incur in connection with soliciting shareholder approval of the Mellon Equity Interim Agreement.

Legal Analysis

Section 15(a) of the Investment Company Act prohibits a person from serving as an investment adviser to a fund except under a written advisory contract that the fund's shareholders have approved.9 To prevent funds from being harmed as a result of the loss of advisory services for a period of time, the Commission adopted Rule 15a-4, which provides a temporary exemption from the requirement that a fund's shareholders approve its advisory contract.10

The Commission staff has also taken the position that an adviser may temporarily provide services to a fund at the lower of the cost to the adviser of providing the services or the compensation the adviser would have received under the previous contract. See, e.g., The Clarence M. Whipple Fund (November 6, 1975) ("Whipple"), NGP Growth Fund, Inc. (July 6, 1975) ("NGP Growth Fund"). See also, Temporary Exemption for Certain Investment Advisers, Investment Company Act Release No. 23325 (July 22, 1998) ("Proposing Release") at n. 35.

Unlike the situations presented in Whipple and NGP Growth Fund, the Fund previously approved an interim investment advisory agreement with MLIM pursuant to Rule 15a-4. However, the fact that the Fund has already availed itself of the relief afforded under Rule 15a-4 should not deprive it of the principle set forth in Whipple and NGP Growth Fund, and affirmed in the Proposing Release, that an adviser may temporarily (in this case, pending shareholder approval and consummation of the Merger) provide services to a fund at the lower of the cost to the adviser of providing the services or the compensation the adviser would have received under the previous contract (in this case, Mellon Equity has agreed to serve without any compensation or reimbursement of its costs pursuant to the Mellon Equity Interim Agreement). Further, the requested relief will avoid the inefficiencies and shareholder expense associated with soliciting shareholder approval of the Mellon Equity Interim Agreement followed shortly by a solicitation seeking approval of the Merger. Fund shareholders will have an opportunity to vote on the Merger and, as a result, the management of their assets by Mellon Equity.

Mellon Equity's agreement to serve without any compensation or reimbursement of expenses under the Mellon Equity Interim Agreement, and CIGNA Advisors' agreement to extend its expense limitation agreement during the term of the Mellon Equity Interim Agreement, will insure that Fund shareholders do not incur any additional expense due to the Mellon Equity Interim Agreement. In addition, because the Fund follows a strategy of replicating the S&P 500, and Mellon Equity will maintain that strategy while serving as interim adviser, the Fund's investment strategy will not be affected as a result of Mellon Equity serving as investment adviser to the Fund.

Mellon Equity's role as interim adviser to the Fund pursuant to the Mellon Equity Interim Agreement does not raise the trafficking concerns that Section 15(a) was intended to address. Neither CIGNA Advisors nor any of its affiliates will receive, or has received, directly or indirectly, money or any benefit from the Dreyfus Stock Fund, Dreyfus, Mellon Equity, MLIM or any of their affiliates in connection with any investment advisory agreement with the Fund.

Conclusion

For all the reasons set forth above, we respectfully request that the Staff of the Division of Investment Management advise us that it will not recommend that the Commission take enforcement action under Section 15(a) of the Investment Company Act against Mellon Equity if Mellon Equity serves as investment adviser to the Fund pursuant to a written advisory agreement that has not been approved by a vote of a majority of the outstanding voting securities of the Fund. In the event we do not obtain shareholder approval of the Merger I will contact you immediately to discuss obtaining additional no-action assurances.

We appreciate your attention to this matter. If you have any questions or need any additional information concerning the foregoing, please do not hesitate to contact me at (860) 757.7276.

Sincerely,

Jeffrey S. Winer

cc:

Jeff Prusnofsky, Esq.
Geoffrey R.T. Kenyon, Esq.
David Stephens, Esq.


Endnotes


http://www.sec.gov/divisions/investment/noaction/mellon040105.htm


Modified: 04/04/2002