[Federal Register Volume 59, Number 40 (Tuesday, March 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4581]


[[Page Unknown]]

[Federal Register: March 1, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20094; No. 812-8772]

 

Great American Reserve Insurance Co., et al; Application for 
Order

February 23, 1994.
AGENCY: Securities and Exchange Commission (``Commission'' or ``SEC'').

ACTION: Notice of application for an order under the Investment Company 
Act of 1940 (the ``1940 Act'').

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APPLICANTS: Great American Reserve Insurance Company (``GARCO''), Great 
American Reserve Variable Annuity Account E (``Account E''), and Garco 
Equity Sales, Inc. (``GARCO Sales'') collectively, (``Applicants'').

RELEVANT 1940 ACT SECTIONS: Order requested under section 6(c) of the 
Investment Company Act of 1940 (``1940 Act'') granting exemptions from 
the provisions of sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act.

SUMMARY OF APPLICATION: Applicants seek an order permitting the 
deduction from the assets of Account E of mortality and expense risk 
charges in connection with the offer and sale of certain flexible 
purchase payment group and individual variable annuity contracts.

FILING DATE: The application was filed on January 13, 1994.

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 by writing to the Commission's Secretary 
and serving the Applicants with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on March 21, 1994, and should be accompanied by proof of service 
on Applicants in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons may request notification of a hearing by writing to 
the Commission's Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549. 
Applicants, c/o William R. Radez, Jr., Esq., Great American Reserve 
Insurance Company, 11815 N. Pennsylvania Street, Carmel, Indiana 46032; 
and c/o Michael Berenson, Esq., or Ann B. Furman, Esq., Jorden, Burt, 
Berenson & Klingensmith, suite 400-East, 1025 Thomas Jefferson Street, 
NW., Washington, DC 20007.

FOR FURTHER INFORMATION CONTACT:
Yvonne Hunold, Senior Counsel (202) 272-2676, or Michael Wible, Special 
Counsel (202) 272-2060, Office of Insurance Products (Division of 
Investment Management).

SUPPLEMENTARY INFORMATION: Following is a summary of the application; 
the complete application is available for a fee from the Commission's 
Public Reference Branch.

Applicants' Representations

    1. GARCO is a stock life insurance company and an indirect wholly 
owned subsidiary of CCP Insurance, Inc. (``CCP''). CCP is an affiliate 
of, and controlled by, Conseco, Inc. (``Conseco''), a publicly owned 
financial services holding company. GARCO offers life insurance and 
variable and fixed rate annuities.
    2. Account E is a separate account of GARCO. On January 13, 1994, 
Account E filed on Form N-8A a notification of registration as a unit 
investment trust under the 1940 Act (File No. 811-8288) and a 
registration statement on Form N-4 under the Securities Act of 1933 
(File No. 33-74092) in connection with certain Flexible Purchase 
Payment Group and Individual Deferred Variable Annuity Contracts 
(``Contracts''). Account E is used by GARCO to fund the Contracts.
    Account E currently is divided into subaccounts which invest in 
corresponding portfolios of the Conseco Series Trust (``Conseco 
Trust''). In the future, Account E may establish other sub-accounts 
which will invest in other portfolios of the Conseco Trust or other 
investment companies registered under the 1940 Act. Account E also may 
be used to fund other variable annuity contracts offered by GARCO.
    3. GARCO Sales, a wholly owned subsidiary of GARCO, is the 
principal underwriter of the Contracts. GARCO Sales is a broker-dealer 
registered under the Securities Exchange Act of 1934 and a member of 
the National Association of Securities Dealers, Inc.
    4. The Conseco Trust is an open-end diversified management 
investment company registered under the 1940 Act. Shares of the Conseco 
Trust are registered under the Securities Act of 1933. The Trust is a 
series fund currently consisting of five separate investment 
portfolios: Money Market, Government Securities, Common Stock, Asset 
Allocation and Corporate Bond Portfolios.
    Conseco Capital Management, Inc. (``CCM'') a registered investment 
adviser under the Investment Advisers Act of 1940, provides investment 
advisory services to the Trust. For its services, CCM is paid a fee 
based upon each Portfolio's average monthly net asset value at the 
following annual rates: .25% for the Money Market Portfolio; .50% for 
the Government Securities Portfolio and the Corporate Bond Portfolio; 
and .55% for the Asset Allocation Portfolio.
    5. The Contracts require certain minimum initial payments and 
permit certain additional payments. Contractowners may, after 
deductions for applicable charges, direct allocation of payments made 
under the Contracts among the subaccounts of Account E. Contractowners 
may make withdrawals of account value, subject to certain restrictions. 
A Guaranteed Death Benefit will be payable.
    The account value under the Contracts increases or decreases 
depending upon the investment performance of the subaccounts of Account 
E to which value has been allocated. The Contracts provide either fixed 
or variable annuity payments which are determined on the basis of 
annuity tables specified in the Contracts, the annuity option selected 
and, in the case of variable annuities, the investment performance of 
Account E.
    6. Various fees and expenses are deducted under the Contracts, 
including, among others, up to 3.5% for state premium taxes, if 
assessed, which will be deducted from the Contracts' account value 
either at annuitization or when the tax becomes due. Additionally, an 
administrative fee of $30 will be charged annually and upon surrender 
of the Contract for its full value. The $30 fee will be deducted pro 
rata according to the account values in each sub-account of Account E 
and the fixed account under the Contracts. An administrative charge 
equal to .15% of the subaccount assets on an annualized basis will also 
be deducted. The administrative fees are intended to reimburse GARCO 
for expenses relating to maintenance of the Contracts and for the 
operation of Account E and GARCO in connection with the Contracts. 
Applicants represent that these fees are based upon GARCO's current 
estimates of the administrative costs for such services over the 
lifetime of the Contracts. These fees are guaranteed never to be 
increased during the term of the Contracts, and are not designed or 
expected to generate a profit. Applicants rely on Rule 26a-1 under the 
1940 Act to assess such fees.
    7. While no sales charges are deducted from premium payments, the 
Contracts are subject to a contingent deferred sales charge (``CDSC'') 
in the event of a withdrawal or surrender, subject to certain 
conditions. After the first Contract year, Contractowners may withdraw 
without a withdrawal charge (``Free Withdrawal Amount'') the greater of 
up to 10% of Contract Value, or the Contract Value divided by the 
owner's life expectancy, or any purchase payments that have been in the 
Contract more than six Contract Years. Withdrawals in excess of the 
Free Withdrawal Amount will be subject to the following deferred sales 
charges over a six year period:

------------------------------------------------------------------------
                      Contract year                        CDSC(percent)
------------------------------------------------------------------------
1........................................................             9 
2........................................................             9 
3........................................................             8 
4........................................................             7 
5........................................................             5 
6........................................................             3 
Thereafter...............................................             0 
------------------------------------------------------------------------

    Withdrawal charges may also be imposed when certain annuity options 
are selected. No withdrawal charge is made from annuity payments under 
a selected option involving life time payments or from amounts paid due 
to the death of a participant. In no event, however, will cumulative 
deductions exceed 8.5% of cumulative purchase payments made under the 
Contracts. Under certain circumstances, the CDSC, administrative and 
other expense charges may be reduced or eliminated. Applicants rely on 
Rule 6c-8 under the 1940 Act to impose the withdrawal charge.
    8. Each subaccount also will be assessed a charge each valuation 
period for mortality and expense risks assumed by GARCO at an effective 
annual rate of 1.25%, consisting of .75% for mortality risks and .50% 
for expense risks assumed by GARCO. These charges are designed to 
compensate GARCO reasonably for the assumption of mortality and expense 
risks assumed under the Contracts.
    9. The mortality risk assumed by GARCO under the Contracts arises 
from its contractual obligation to make periodic payments in accordance 
with annuity rates and other contract provisions set forth in the 
Contracts regardless of how long all Annuitants or any one Annuitant 
may live. GARCO thus assumes the risk that Annuitants, as a class, may 
live longer than has been estimated by its actuaries, and 
Contractowners are assured that neither longevity nor an improvement in 
life expectancy, generally, will have an adverse effect on annuity 
payments. GARCO also incurs a mortality risk in connection with the 
Guaranteed Death Benefit.
    10. The expense risk assumed by GARCO is the risk that its actual 
expenses of administering the Contracts and Account E will exceed the 
proceeds of the administrative charges assessed under the Contracts.

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act authorizes the Commission, by order 
upon application, to conditionally or unconditionally grant an 
exemption from any provision, rule or regulation of the 1940 Act to the 
extent that the 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.
    2. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act, in relevant 
part, prohibit a registered unit investment trust, its depositor or 
principal underwriter, from selling periodic payment plan certificates 
unless the proceeds of all payments, other than sales loads, are 
deposited with a qualified bank and held under arrangements which 
prohibit any payment to the depositor or principal underwriter except a 
reasonable fee, as the Commission may prescribe, for performing 
bookkeeping and other administrative duties normally performed by the 
bank itself.
    3. Applicants request exemptions under section 6(c) from sections 
26(a)(2)(C) and 27(c)(2) of the 1940 Act to the extent necessary to 
permit the deduction from the assets of Account E of the 1.25% charge 
for the assumption of mortality and expense risks. Applicants represent 
that the 1.25% per annum mortality and expense risk charge is within 
the range of industry practice for comparable variable annuity 
contracts. This representation is based upon an analysis of publicly 
available information about similar industry products, taking into 
consideration such factors as the current charge levels, death benefit 
guarantees, guaranteed annuity rates, and other contract charges and 
options. Based upon this review, Applicants have concluded that the 
mortality and expenses risk charges are within the range of charges 
determined by industry practice. Applicants will maintain at GARCO's 
principal executive office, available to the Commission, a memorandum 
setting forth in detail the products analyzed and the methodology and 
results of GARCO's comparative review.
    4. Applicants acknowledge that the withdrawal charges under the 
Contracts may be insufficient to cover all costs relating to 
distribution of the Contracts. In such circumstances, the charge for 
mortality and expense risks may be a source of profit which would be 
available to pay GARCO's distribution expenses not reimbursed by 
applicable withdrawal charges. GARCO has concluded that there is a 
reasonable likelihood that the proposed distribution financing 
arrangements will benefit Account E and the Contractowners. The basis 
for that conclusion will be set forth in a memorandum which will be 
maintained by GARCO at its principal administrative office and made 
available to the Commission upon request.
    5. Account E will invest only in underlying funds which undertake, 
in the event they should adopt a plan under Rule 12b-1 to finance 
distribution expenses, to have a board of directors or trustees, a 
majority of whom are not ``interested persons,'' as defined under 
section 2(a)(19) of the 1940 Act, formulate and approve any such plan.

Conclusion

    For the reasons set forth above, Applicants represent that the 
exemptions requested are necessary and 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. 
Accordingly, Applicants request exemptions under section 6(c) of the 
1940 Act from the provisions of sections 26(a)(2)(C) and 27(c)(2) of 
the 1940 Act to the extent necessary to permit the assessment of the 
mortality and expense risk charges with respect to the Contracts.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-4581 Filed 2-28-94; 8:45 am]
BILLING CODE 8010-01-M