[Federal Register Volume 64, Number 33 (Friday, February 19, 1999)]
[Notices]
[Pages 8415-8421]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-4120]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23693; File No. 812-11230]


Conseco Series Trust, et. al: Notice of Application

Februry 12, 1999.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

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SUMMARY OF APPLICATION: Applicants seek an order to permit shares of 
any current or future series of Conseco Series Trust and shares of any 
future fund that is designed to fund variable insurance products and 
for which Conseco Capital Management, Inc. (``Conseco''), or any of its 
affiliates, serves, now or in the future, as investment adviser, 
administrator, manager, principal underwriter or sponsor (``Fund'') to 
be offered and sold to and held by: (1) Separate accounts funding 
variable annuity and variable life insurance contracts (``Variable 
Contracts'') issued by both affiliated and unaffiliated life insurance 
companies; and (2) qualified pension and retirement plans outside of 
the separate account context (``Qualified Plans'' or ``Plans'').

APPLICANTS: Conseco Series Trust and Conseco Capital Management, Inc.

FILING DATES: The application was filed on July 28, 1998, and an 
amended and restated application was filed on December 11, 1998.

HEARING OR NOTIFICATION OF HEARING: An order (``Order'') granting the 
application will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the SEC's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the SEC by 5:30 p.m. 
on March 9, 1999, and should be accompanied by proof of service on 
applicants in the form of an affidavit or, for lawyers, a certificate 
of service. Hearing requests should state the nature of the writer's 
interest, the reason for the request, and the issues contested. Persons 
who wish to be notified of a hearing may request notification by 
writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW, Washington, DC 20549. 
Applicants, c/o William P. Latimer, Esq., Senior Counsel, Conseco 
Capital Management, Inc., 11825 North Pennsylvania Street, Carmel, 
Indiana 46032.

FOR FURTHER INFORMATION CONTACT: Laura A Novack, Senior Attorney, or 
Kevin M. Kirchoff, Branch Chief, Office of Insurance Products, Division 
of Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The completer application may be obtained for a fee from 
the SEC's Public Reference Branch, 450 Fifth Street, NW, Washington, DC 
20549 (tel. (202) 942-8090).

Applicants' Representations

    1. Conseco Series Trust was organized as a business trust under the 
laws of the Commonwealth of Massachusetts by

[[Page 8416]]

Declaration of Trust dated November 15, 1982, and commenced operations 
as a registered open-end management investment company on October 19, 
1983. Conseco Series Trust currently consists of five separately 
managed series, each with its own investment objective and policies. 
Additional series could be added in the future.
    2. Conseco is registered as an investment adviser under the 
Investment Advisers Act of 1940, and serves as Conseco Series Trust's 
investment adviser. Conseco is a wholly-owned asset management 
subsidiary of Conseco, Inc., a publicly-owned financial services 
company, whose principal operations are in development, marketing, and 
administration of specialized annuity, life and health insurance 
products.
    3. Conseco Series Trust currently offers its shares to insurance 
companies as the investment vehicle for their separate accounts that 
fund variable annuity contracts. Applicants propose that shares of each 
series be offered to affiliated and unaffiliated insurance companies 
for their separate accounts as the investment vehicle to fund either 
variable annuity or variable life insurance contracts. Separate 
accounts owning shares of the Fund and their insurance company 
depositors are referred to herein as ``Participating Separate 
Accounts'' and ``Participating Insurance Companies,'' respectively.
    4. The Participating Insurance Companies will establish their own 
Participating Separate Accounts and design their own Variable 
Contracts. Each Variable Contract will have certain unique features and 
will probably differ from other Variable Contracts supported by the 
Fund with respect to insurance guarantees, premium structure, charges, 
options' distribution method, marketing techniques, sales literature 
and other aspects. Each Participating Insurance Company will enter into 
a participation agreement with the Fund on behalf of its Participating 
Separate Account, and will have the legal obligation of satisfying all 
applicable requirements under state and federal law. The role of the 
Fund, so far as the federal securities laws are applicable, will be 
limited to that of offering its shares to separate accounts of various 
insurance companies and fulfilling any conditions the Commission may 
impose upon granting the Order requested herein.
    5. Applicants state that shares of each series of the Fund also may 
be offered directly to Qualified Plans outside of the separate account 
context. The Plans will be pension or retirement plans intended to 
qualify under Sections 401(a) and 501(c) of the Internal Revenue Code 
of 1986, as amended (``Code''). Many of the Plans will include a cash 
or deferred arrangement (permitting salary reduction contributions) 
intended to qualify under Section 401(k) of the Code. The Plans also 
will be subject to, and will be designed to comply with, the provisions 
of the Employee Retirement Income Security Act of 1974 (``ERISA'') 
applicable to either defined benefit or to defined contribution profit-
sharing plans, specifically ``Title I--Protection of Employee Benefit 
Rights.'' Applicants assert that the Plans therefore will be subject to 
regulatory provisions under the Code and ERISA regarding, for example, 
reporting and disclosure, participation and vesting, funding, fiduciary 
responsibility and enforcement.
    6. Qualified Plans may choose the Fund (or any series thereof) as 
their sole investment or as one of several investments. Plan 
participants may or may not be given an investment choice depending on 
the Plan itself. Shares of the Fund sold to such Qualified Plans would 
be held by the trustee(s) of the Plans as mandated by Section 403(a) of 
ERISA. Conseco will not act as investment adviser to any of the 
Qualified Plans that will purchase shares of the Fund. There will be no 
pass-through voting to the participants in such Qualified Plans.

Applicants' Legal Analysis

    1. Applicants request that the Commission issue an order pursuant 
to Section 6(c) of the 1940 Act exempting scheduled and flexible 
premium variable life insurance separate accounts (and, to the extent 
necessary, any investment adviser, sub-adviser, principal underwriter 
and depositor of such an account) from Sections 9(a), 13(a), 15(a) and 
15(b) of the 1940 Act, and subparagraph (b)(15) of Rules 6e-2 and 6e-
3(T) thereunder, to the extent necessary to permit shares of the Fund 
to be offered and sold to variable annuity and variable life insurance 
separate accounts of both affiliated and unaffiliated life insurance 
companies and to Qualified Plans.
    2. In connection with the funding of scheduled premium variable 
life insurance contracts issued through a separate account registered 
under the 1940 Act as a unit investment trust, 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 a separate account by Rule 
6e-2(b)(15) are available only where all of the assets of the separate 
account consist of the shares of one or more registered management 
investment companies which offer their shares exclusively to variable 
life insurance separate accounts of the life insurer or any affiliated 
life insurance company. 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 investment 
company that also offers its shares to a variable annuity or flexible 
premium variable life insurance account of the same company or of an 
affiliated or unaffiliated insurance company. The use of a common 
management investment company as the underlying investment medium for 
both variable annuity and variable life insurance separate accounts of 
a single insurance company (or of two or more affiliated insurance 
companies) is referred to as ``mixed funding.''
    3. The relief granted by Rule 6e-2(b)(15) also is not available 
with respect to a scheduled premium variable life insurance separate 
account that owns shares of an underlying investment company that also 
offers its shares to separate accounts funding variable contracts of 
one or more unaffiliated life insurance companies. The use of a common 
investment company as the underlying investment medium for variable 
annuity and/or variable life insurance separate accounts of 
unaffiliated insurance companies is referred to as ``shared funding.'' 
Moreover, the relief under Rule 6e-2(b)(15) is not available if the 
scheduled premium variable life insurance separate account owns shares 
of an underlying investment company that also offers its shares to 
Plans. The use of a common investment company as the underlying 
investment medium for variable annuity and variable life separate 
accounts of affiliated and unaffiliated insurance companies and 
qualified Plans is referred to as ``extended mixed and shared 
funding.''
    4. In connection with the funding of flexible premium variable life 
insurance contracts issued through a separate account registered under 
the 1940 Act as a unit investment trust, Rule 6e-3(T)(b)(15) provides 
partial exemptions from Section 9(a), 13(a), 15(a) and 15(b) of the 
1940 Act. These exemptions are available only where all of the assets 
of the separate account consist of the shares of one or more registered 
management investment companies which offer their shares exclusively to 
separate accounts of the life insurer, or of any affiliated life 
insurance company, offering either scheduled or flexible premium 
variable life insurance contracts, or both; or which also offer their 
shares to variable annuity separate accounts of the life insurer or of 
an

[[Page 8417]]

affiliated life insurance company. Thus, Rule 6e-3(T) permits mixed 
funding, but precludes shared funding or selling shares to Plans.
    5. Applicants state that the current tax law permits the Fund to 
increase its asset base through the sale of shares to Plans. Section 
817(h) of the Code imposes certain diversification standards on the 
underlying assets of the separate accounts funding the Variable 
Contracts. The Code provides that the Variable Contracts will not be 
treated as annuity contracts or life insurance contracts for any period 
in which the underlying assets are not adequately diversified in 
accordance with regulations issued by the Treasury Department. The 
regulations generally provide that to meet the diversification 
requirements, all of the beneficial interests in the underlying 
investment company must be held by the segregated asset accounts of one 
or more insurance companies. The regulations do, however, contain 
certain exceptions to this requirement, one of which permits shares of 
an investment company to be held by trustees of a Qualified Plan 
without adversely affecting the ability of shares in the same 
investment company also to be held by the separate accounts of 
insurance companies in connection with their Variable Contracts. Treas. 
Reg. Sec. 1.817-5(f)(3)(iii). As a result, applicants assert that 
Qualified Plans may select the Fund as an investment option without 
endangering the tax status of Variable Contracts issued through 
Participating Insurance Companies.
    6. Applicants state that the promulgation of Rules 6e-2(b)(15) and 
6e-3(T)(b)(15) preceded the issuance of these Treasury regulations. 
Applicants assert that the sale of shares of the same underlying 
investment company to both separate accounts and Plans could not have 
been envisioned at the time of the adoption of Rules 6e-2(b)(15) and 
6e-3(T)(b)(15).
    7. Section 9(a)(3) of the 1940 Act provides that it is unlawful for 
any company to serve as an investment adviser to, or principal 
underwriter for, any registered open-end investment company if an 
affiliated person of that company is subject to a disqualification 
enumerated in Section 9(a)(1) or (2). Rules 6e-2(b)(15)(i) and (ii) and 
6e-3(T)(b)(15)(i) and (ii) provide partial 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 investment company.
    8. Applicants state that the partial relief from Section 9(a) found 
in sub-paragraph (b)(15) of Rules 6e-2 and 6e-3(T), in effect, limits 
the amount of monitoring necessary to ensure compliance with Section 9 
to that which is appropriate in light of the policy and purposes of 
that section. Applicants state that the exemptions recognize that it is 
not necessary to apply the provisions of Section 9(a) to the many 
individuals who may be involved in a large insurance company, but who 
have no connection with the investment company, or any series thereof, 
funding the separate accounts. Applicants note that the Participating 
Insurance Companies will not be involved in the management or 
administration of the Fund. Therefore, applicants assert that applying 
the restrictions of Section 9(a) serves no regulatory purpose. 
Applicants state that applying such restrictions would increase the 
monitoring costs incurred by the Participating Insurance Companies and 
therefore, would reduce the net rates of return realized by Variable 
Contract owners. Moreover, applicants state that the appropriateness of 
the relief requested will not be affected by the proposed sale of 
shares of the Fund to Qualified Plans, because the insulation of the 
Fund from those individuals who are disqualified under the 1940 Act 
remains in place. Applicants submit that applying the requirements of 
Section 9(a) because of investment by Qualified Plans would be 
unjustified and would not serve any regulatory purpose. Moreover, since 
the Plans are not investment companies and will not be deemed 
affiliated solely by virtue of their shareholdings, no additional 
relief is necessary.
    9. Subparagraph (b)(15)(iii) of rules 6e-2 and 6e-3(T) under the 
1940 Act assumes that contract owners are entitled to pass-through 
voting privileges with respect to investment company shares held by a 
related separate account. Applicants state that pass-through voting 
privileges will be provided for Variable Contract owners as long as the 
Commission interprets the 1940 Act to require such privileges to be 
provided.
    10. Subparagraph (b)(15)(iii) of Rules 6e-2 and 6e-3(T) provides 
exemptions from the pass-through voting requirements in limited 
situations. Subparagraph (b)(15)(iii) of Rules 6e-2 and 6e-3(T) 
provides that an insurance company may disregard the voting 
instructions of its contract owners with respect to the investment of 
an underlying investment company or any contract between an investment 
company and its investment adviser, when an insurance regulatory 
authority so requires. In addition, an insurance company may disregard 
the voting instructions of its contract owners if the contract owners 
initiate certain changes in the investment company's investment 
policies, principal underwriter, or investment adviser. Voting 
instructions with respect to a change in investment policies may be 
disregarded only if the insurance company makes a good faith 
determination that such change would: (a) violate state law; (b) result 
in investments that were not consistent with the investment objectives 
of the separate account; or (c) result in investments that would vary 
from the general quality and nature of investments and investment 
techniques used by other separate accounts of the company or of an 
affiliated life insurance company with similar investment objectives. 
Voting instructions with respect to a change in the principal 
underwriter may be disapproved if such disapproval is reasonable. 
Voting instructions with respect to a change in an investment adviser 
may be disregarded only if the insurance company makes a good faith 
determination that: (a) the adviser's fee would exceed the maximum rate 
that may be charged against the separate account's assets; (b) the 
proposed adviser may be expected to employ investment techniques that 
vary from the general techniques used by the current adviser; or (c) 
the proposed adviser may be expected to manage the investment company's 
investments in a manner that would be inconsistent with its investment 
objectives or in a manner that would result in investments that vary 
from certain standards.
    11. Applicants state that Rule 6e-2 recognizes that variable life 
insurance contracts have important elements unique to insurance 
contracts and are subject to extensive state regulation of insurance. 
Applicants maintain, therefore, that in adopting Rule 6e-2, the 
Commission 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. Applicants also state that the Commission 
expressly recognized that state insurance regulators have authority to 
require an insurance company to draw from its general account to cover 
costs imposed upon the insurance company by a change approved by 
contract owners over the insurance company's objections.

[[Page 8418]]

Therefore, the Commission deemed exemptions from pass-through voting 
requirements necessary ``to assure the solvency of the life insurer and 
the performance of its contractual obligations by enabling an insurance 
regulatory authority or the life insurer to act when certain proposals 
reasonably could be expected to increase the risks undertaken by the 
life insurer.'' Flexible premium variable life insurance contracts and 
variable annuity contracts are subject to substantially the same state 
insurance regulatory authority, and therefore, the corresponding 
provisions of Rule 6e-3(T) (which apply to flexible premium insurance 
contracts and which permit mixed funding) presumably were adopted in 
recognition of the same considerations the Commission applied in 
adopting Rule 6e-2. Applicants submit that these considerations are no 
less important or necessary when an insurance company funds its 
separate accounts in connection with mixed and shared funding, and that 
such funding does not compromise the goals of the insurance regulatory 
authorities or of the Commission.
    12. Applicants further state that the Fund's sale of shares to 
Qualified Plans will not have any impact on the relief requested in 
this regard. As previously noted, shares of the Fund will be held by 
the trustees of the Plans as required by Section 403(a) of ERISA. 
Section 403(a) provides that the trustees must have exclusive authority 
and discretion to manage and control a Plan with two exceptions: (a) 
When the Plan expressly provides that the trustees are subject to the 
direction of a named fiduciary who is not a trustee, in which case the 
trustees are subject to proper directions made in accordance with the 
terms of the Plan and not contrary to ERISA; and (b) when the authority 
to manage, acquire or dispose of assets of the Qualified Plan is 
delegated to one or more investment managers pursuant to Section 
402(c)(3) of ERISA. Unless one of the two exceptions stated in Section 
403(a) applies, Plan trustees have the exclusive authority and 
responsibility for voting proxies. Where a named fiduciary appoints an 
investment manager, the investment manager has the responsibility to 
vote the shares held unless the right to vote such shares is reserved 
to the trustees or the named fiduciary. Accordingly, applicants submit 
that unlike the case with insurance company separate accounts, the 
issue of the resolution of material irreconcilable conflicts with 
respect to voting is not present with respect to Qualified Plans since 
such Plans are not entitled to pass-through voting privileges.
    13. Applicants submit that even if a Qualified Plan were to hold a 
controlling interest in the fund, such control would not disadvantage 
other investors in the Fund to any greater extent than is the case when 
any institutional shareholder holds a majority of the voting securities 
of any open-end management investment company. In this regard, 
applicants submit that investment in the Fund by a Qualified Plan will 
not create any of the voting complications occasioned by mixed and 
shared funding. Unlike mixed or shared funding, Plan investor voting 
rights cannot be trusted by veto rights of insurers or state 
regulators.
    14. Applicants generally expect many Qualified Plans to have their 
trustee(s) or other fiduciaries exercise voting rights attributable to 
investment securities held by the Qualified Plan in their discretion. 
Some of the Qualified Plans, however, may provide for the trustee(s), 
an investment adviser(s) or another named fiduciary to exercise voting 
rights in accordance with instructions from participants. Applicants 
submit that where a Qualified Plan does not provide participants with 
the right to give voting instructions, there is no potential for 
material irreconcilable conflicts of interest between or among contract 
owners and Plan investors with respect to voting of the Fund's shares. 
Applicants further submit that where a Plan does provide participants 
with the right to give voting instructions, they see no reason to 
believe that participants in Qualified Plans generally, or those in a 
particular Plan, either as a single group or in combination with 
participants in other Qualified Plans, would vote in a manner that 
would disadvantage contract owners. The purchase of shares of the Fund 
by Qualified Plans that provide voting rights does not present any 
complications not otherwise occasioned by mixed and shared funding.
    15. Applicants state that no increased conflicts of interest would 
be presented by the granting of the request relief. Applicants assert 
that shared funding does not present any issues that do not already 
exist where a single insurance company is licensed to do business in 
several states. Applicants note that where different Participating 
Insurance Companies are domiciled in different states, it is possible 
that the state insurance regulatory body in a state in which one 
Participating Insurance Company is domiciled could require action that 
is inconsistent with the requirements of other insurance regulators in 
one or more other states in which other Participating Insurance 
Companies are domiciled. Applicants submit that this possibility is no 
different or greater than exists where a single insurer and its 
affiliates offer their insurance products in several states.
    16. Applicants further submit that affiliation does not reduce the 
potential for differences in state regulatory requirements. In any 
event, the conditions (adapted from the conditions included in Rule 6e-
3(T)(b)(15)) discussed below are designed to safeguard against any 
adverse effects that these differences may produce. If a particular 
state insurance regulator's decision conflicts with the majority of 
other state regulators, the affected insurer may be required to 
withdraw its Participating Separate Account's investment in the Fund.
    17. Applicants also argue that affiliation does not eliminate the 
potential, if any exists, for divergent judgments as to when a 
Participating Insurance Company could disregard contract owner voting 
instructions. Potential disagreement is limited by the requirement that 
disregarding voting instructions be both reasonable and based on 
specified good faith determinations. However, if a Participating 
Insurance Company's decision to disregard Contract owner voting 
instructions represents a minority position or would preclude a 
majority vote approving a particular change, such Participating 
Insurance Company may be required, at the election of the Fund, to 
withdraw its separate account's investment in the Fund. No charge or 
penalty will be imposed as a result of such a withdrawal.
    18. Applicants submit that there is no reason why the investment 
policies of the Fund with mixed funding would, or should, be materially 
different from what those policies would, or should, be if the Fund 
supported only variable annuity or only variable life insurance 
contracts. Hence, applicants state, there is no reason to believe that 
conflicts of interest would result from mixed funding. Moreover, 
applicants represent that the Fund will not be managed to favor or 
disfavor any particular insurer or type of contract.
    19. As noted above, Section 817(h) of the Code imposes certain 
diversification standards on the assets underlying the Variable 
Contracts held in the portfolios of management investment companies. 
Treasury Regulation Sec. 1.817-5(f)(3)(iii), which establishes 
diversification requirements for such portfolios, specifically permits, 
among other

[[Page 8419]]

things, ``qualified pension or retirement plans'' and separate accounts 
to share the same underlying management investment company. Therefore, 
applicants assert that neither the Code, the Treasury regulations, nor 
the revenue rulings thereunder, recognize or proscribe any inherent 
conflict of interest if Qualified Plans, variable annuity separate 
accounts, and variable life separate accounts all invest in the same 
management investment company.
    20. Applicants note that while there are differences in the manner 
in which distributions from Variable Contracts and Qualified Plans are 
taxed, the tax consequences do not raise any conflicts of interest. 
When distributions are to be made, and the Participating Separate 
Account or a Qualified Plan cannot net purchase payments to make the 
distributions, the Participating Separate Account or Plan will redeem 
shares of the Fund at their net asset value in conformity with Rule 
22c-1 under the 1940 Act to provide proceeds to meet distribution 
needs. The Qualified Plan will then make distributions in accordance 
with the terms of the Plan. The life insurance company will surrender 
values from the Separate Account into the general account to make 
distributions in accordance with the terms of the Variable Contract.
    21. Applicants state that the sale of shares to Plans should not 
increase the potential for material irreconcilable conflicts of 
interest between or among different types of investors. Applicants 
submit that there should be very little potential for such conflicts 
beyond that which would otherwise exist between variable annuity and 
variable life insurance contract owners.
    22. Applicants also state that it is possible to provide an 
equitable means of giving voting rights to Participating Separate 
Account contract owners and to Qualified Plans. The transfer agent for 
the Fund will inform each Participating Insurance Company of each 
Participating Separate Account's share ownership in the Fund, as well 
as inform the trustees of Qualified Plans of their holdings. The 
Participating Insurance Company then will solicit voting instructions 
in accordance with Rules 6e-2 and 6e-3(T), as applicable, and its 
participation agreement with the Fund. Shares held by Qualified Plans 
will be voted in accordance with applicable law. The voting rights 
provided to Qualified Plans with respect to shares of the Fund would be 
no different from the voting rights that are provided to Qualified 
Plans with respect to shares of funds sold to the general public.
    23. Applicants submit that the ability of the Fund to sell its 
shares directly to Qualified Plans does not create a ``senior 
security,'' as such term is defined under Section 18(g) of the 1940 
Act, with respect to any contract owner as opposed to a Qualified Plan 
participant. Regardless of the rights and benefits of Qualified Plan 
participants or contract owners, the Qualified Plans and the 
Participating Separate Accounts only have rights with respect to their 
respective shares of the Fund. No shareholder of any of the Fund has 
any preference over any other shareholder with respect to distribution 
of assets or payments of dividends.
    24. Applicants state that there are no conflicts between the 
contract owners of Participating Separate Accounts and Qualified Plan 
participants with respect to the state insurance commissioners' veto 
powers over investment objectives. The basic premise of shareholder 
voting is that shareholders may not all agree with a particular 
proposal. While interests and opinions of shareholders may differ, 
however, this does not mean that there are any inherent conflicts of 
interest between or among such shareholders. State insurance 
commissioners have been given the veto power in recognition of the fact 
that insurance companies usually cannot simply redeem their separate 
accounts out of one fund and invest in another. Generally, complex and 
time-consuming transactions must be undertaken to accomplish such 
redemptions and transfers. Conversely, trustees of Qualified Plans can 
make the decision quickly and redeem their shares of the Fund and 
reinvest in another funding vehicle without the same regulatory 
impediments faced by separate accounts, or, as is the case with most 
Plans, even hold cash pending a suitable investment. Based on the 
foregoing, applicants represent that even should the interests of 
contract owners and the interests of qualified Plans conflict, the 
conflicts can be resolved almost immediately because the trustees of 
the Qualified Plans can, independently, redeem shares out of the Fund.
    25. Applicants also assert that there does not appear to be any 
greater potential for material irreconcilable conflicts arising between 
the interests of Qualified Plan participants and contract owners of 
Participating Insurance Companies from possible future changes in the 
federal tax laws than that which already exists between variable 
annuity and variable life insurance contract owners.
    26. Applicants believe that the discussion contained herein 
demonstrates that the sale of shares of the Fund to Qualified Plans and 
Variable Contracts does not increase the risk of material 
irreconcilable conflicts of interest. Furthermore, applicants state 
that the use of the Fund with respect to variable life insurance 
contracts and Qualified Plans is not substantially different from the 
Fund's current use, in that variable insurance contracts and Qualified 
Plans, like variable annuity contracts, are generally long-term 
retirement vehicles. In addition, applicants assert that regardless of 
the type of shareholder in the Fund, Conseco is or would be 
contractually or otherwise obligated to manage each series of the Fund 
solely and exclusively in accordance with that series' investment 
objectives, policies and restrictions as well as any guidelines 
established by the Fund's Board for Trustees.
    27. Applicants assert that various factors have prevented more 
insurance companies from offering variable annuity and variable life 
insurance contracts than currently do so. These factors include the 
costs of organizing and operating a funding medium, the lack of 
expertise with respect to investment management, and the lack of public 
name recognition as investment professionals. 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. Applicants assert that use of 
the Fund as a common investment medium for Variable Contracts would 
ameliorate these concerns. Participating Insurance Companies would 
benefit not only from the investment advisory and administrative 
expertise of Conseco and its affiliates, but also from the cost 
efficiencies and investment flexibility afforded by a large pool of 
funds. Applicants submit that therefore, making the Fund available for 
mixed and shared funding will encourage more insurance companies to 
offer Variable Contracts. Applicants claim that this should result in 
increased competition with respect to both Variable Contract design and 
pricing, which can be expected to result in more product variation and 
lower charges. Moreover, the sale of the shares of the Fund to 
Qualified Plans should further increase the amount of assets available 
for investment by the Fund. This in turn, should inure to the benefit 
of contract owners by promoting economies of scale, by permitting 
greater safety through greater diversification, and by making the 
addition of new portfolios to the Fund more feasible.

[[Page 8420]]

    28. Applicants assert that there is no significant legal impediment 
to permitting mixed and shared funding and sales of Fund shares to 
Qualified Plans.

Applicants' Conditions

    Appliants have consented to the following conditions:
    1. A majority of the Board of Trustees of the Fund (``Board'') will 
consist of persons who are not ``interested persons'' of the Fund, as 
defined by Section 2(a)(19) of the 1940 Act and the rules thereunder 
and as modified by any applicable orders of the Commission, except that 
if this condition is not met by reason of the death, disqualification, 
or bona fide resignation of any Trustee or Trustees, then the operation 
of this condition shall be suspended: (a) for a period of 45 days, if 
the vacancy or vacancies may be filled by the Board; (b) for a period 
of 60 days, if a vote of shareholders is required to fill the vacancy 
or vacancies; or (c) for such longer period as the Commission may 
prescribe by order upon application.
    2. The Board will monitor the Fund for the existence of any 
material irreconcilable conflict between the interests of the contract 
owners of all Participating Separate Accounts and of the participants 
in Qualified Plans investing in the Fund and determine what action, if 
any, should be taken in response to such conflicts. A material 
irreconcilable conflict may arise for a variety of reasons, including: 
(a) an action by any state insurance regulatory authority; (b) a change 
in applicable federal or state insurance, tax, or securities laws or 
regulations, or a public ruling, private letter ruling, no-action or 
interpretive letter, or any similar action by insurance, tax, or 
securities regulatory authorities; (c) an administrative or judicial 
decision in any relevant proceeding; (d) the manner in which the 
investments of the Fund are being managed; (e) a difference in voting 
instructions given by variable annuity contract owners and variable 
life insurance contract owners and trustees of the Qualified Plans; (f) 
a decision by a Participating Insurance Company to disregard the voting 
instructions of contract owners; or (g) if applicable, a decision by a 
Plan to disregard the voting instructions of its participants.
    3. Participating Insurance Companies, Conseco, or any other 
investment adviser of the Fund, and any Qualified Plans that execute a 
fund participation agreement upon becoming an owner of 10% or more of 
the Fund's assets (``Participants'') will report any potential or 
existing conflicts to the Board. Participants will be responsible for 
assisting the Board in carrying out its responsibilities under these 
conditions by providing the Board with all information reasonably 
necessary for the Board to consider any issues raised. This 
responsibility includes, but is not limited to, an obligation of each 
Participating Insurance Company to inform the Board whenever it has 
determined to disregard contract owner voting instructions and, when 
pass-through voting is applicable, an obligation of each Plan to inform 
the Board whenever it has determined to disregard voting instructions 
from Plan participants. The responsibilities to report such information 
and conflicts and to assist the Board will be contractual obligations 
of all Participating Insurance Companies and Plans under their 
agreements governing participation in the Fund, and such agreements 
shall provide, in the case of Participating Insurance Companies, that 
these responsibilities will be carried out with a view only to the 
interests of contract owners, and in the case of Qualified Plans, that 
these responsibilities will be carried out with a view only to the 
interests of Plan participants.
    4. If it is determined by a majority of the Board, or by a majority 
of its disinterested Trustees, that a material irreconcilable conflict 
exists, the relevant Participating Insurance Companies and Plans will, 
at their expense and to the extent reasonably practicable (as 
determined by a majority of the disinterested Trustees), take whatever 
steps are necessary to remedy or eliminate the material irreconcilable 
conflict, which steps could include: (a) Withdrawing the assets 
allocable to some or all of the Participating Separate Accounts from 
the Fund or any series thereof, and reinvesting such assets in a 
different investment medium, which may include another series of the 
Fund, or submitting the question of whether such reinvestment should be 
implemented to a vote of all affected contract owners and, as 
appropriate, segregating the assets of any appropriate group (i.e., 
variable annuity contract owners or variable life insurance contract 
owners of one or more Participating Insurance Companies) that votes in 
favor of such segregation, or offering to the affected contract owners 
the option of making such a change; and (b) 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 owners' voting 
instruction, and that decision represents a minority position or would 
preclude a majority vote, then that insurer may be required, at the 
Fund's election, to withdraw its separate account's investment in the 
Fund, and no charge or penalty will be imposed as a result of such 
withdrawal. If a material irreconcilable conflict arises because of a 
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 Plan may be required, at the Fund's 
election, to withdraw its investment in the Fund, and no charge or 
penalty will be imposed as a result of such withdrawal. To the extent 
permitted by applicable law, the responsibility of taking remedial 
action in the event of a Board determination of material irreconcilable 
conflict and bearing the cost of such remedial action will be a 
contractual obligation of all Participating Insurance Companies and 
Qualified Plans under their agreements governing participation in the 
Fund and these responsibilities will be carried out with a view only to 
the interests of contract owners and Plan participants, respectively.
    5. For purposes of Condition 4, a majority of the disinterested 
Trustees will determine whether or not any proposed action adequately 
remedies any material irreconcilable conflict, but in no event will the 
Fund or Conseco be required to establish a new funding medium for any 
Variable Contract. No Participating Insurance Company shall be required 
by 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 and adversely affected by the material 
irreconcilable conflict. Further, no Qualified Plan will be required by 
Condition 4 to establish a new funding medium for the Plan if: (a) an 
offer to do so has been declined by vote of a majority of Plan 
participants materially and adversely affected by the material 
irreconcilable conflict; or (b) pursuant to governing Plan documents 
and applicable law, the Plan makes such decision without a vote of its 
participants.
    6. Any Board's determination of the existence of a material 
irreconcilable conflict and its implications will be made known 
promptly and in writing to all Participants.
    7. Participating Insurance Companies will provide pass-through 
voting privileges to contract owners who invest in Participating 
Separate Accounts so long as the Commission interprets the 1940 Act to 
require pass-through voting

[[Page 8421]]

for contract owners. Accordingly, the Participating Insurance Companies 
will vote shares of the Fund held in their Participating Separate 
Accounts in a manner consistent with voting instructions timely 
received from contract owners. Participating Insurance Companies will 
be responsible for assuring that each of their Participating Separate 
Accounts calculates voting privileges in a manner consistent with all 
other Participating Insurance Companies. The obligation to calculate 
voting privileges in a manner consistent with all other Participating 
Separate Accounts will be a contractual obligation of all Participating 
Insurance Companies under the agreements governing participation in the 
Fund. Each Participating Insurance Company will vote shares for which 
it has not received timely voting instructions, as well as shares 
attributable to it, in the same proportion as it votes shares for which 
it has received instructions.
    8. Each Qualified Plan will vote as required by applicable law and 
governing Plan documents.
    9. All reports of potential or existing conflicts received by a 
Board, and all Board action with regard to: (a) Determining the 
existence of a conflict; (b) notifying Participants of a conflict; and 
(c) determining whether any proposed action adequately remedies a 
conflict, will be properly recorded in the minutes of the Board or 
other appropriate records. Such minutes or other records shall be made 
available to the Commission upon request.
    10. The Fund will notify all Participants that disclosure in 
separate account prospectuses or any Qualified Plan prospectuses or 
other Plan disclosure documents regarding potential risks of mixed and 
shared funding may be appropriate. The Fund will disclose in its 
prospectus that: (a) The Fund is intended to be a funding vehicle for 
variable annuity and variable life insurance contracts offered by 
various insurance companies and for Plans; (b) due to differences of 
tax treatment and other considerations, the interests of various 
contract owners participaing in the Fund and the interest of Qualified 
Plans investing in the Fund may conflict; and (c) the Board will 
nomitor for the existence of any material conflicts and determine what 
action, if any, should be taken.
    11. The Fund 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 shares of the Fund), and, in 
particular, the Fund will either provide for annual meetings (except to 
the extent that the Commission may interpret Section 16 of the 1940 Act 
not to require such meetings) or comply with Section 16(a), and, if 
applicable, Section 16(b) of the 1940 Act. Further, the Fund will act 
in accordance with the Commission's interpretation of the requirements 
of Section 16(a) with respect to periodic elections of directors (or 
trustees) and with whatever rules the Commission may promulgate with 
respect thereto.
    12. If and to the extent that Rules 6e-2 and 6e-3(T) are amended 
(or if rule 6e-3 under the 1940 Act 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 grated in the order requested 
by Applicants, then the fund and/or Participating Insurance Companies, 
as appropriate, shall take such steps as may be necessary to comply 
with Rules 6e-2 and 6e-3(T), as amended, or Rule 6e-3, as adopted, to 
the extent applicable.
    13. No less than annually, the Participants shall submit to the 
Board such reports, materials or data as the Board may reasonably 
request so that the Board may carry out fully the obligations imposed 
upon it by the conditions contained in the Application. Such reports, 
materials and data shall be submitted more frequently if deemed 
appropriate by the Board. The obligations of the Participants to 
provide these reports, materials and data to the Board when it so 
reasonably requests shall be a contractual obligation of all 
Participants under the agreements governing their participation in the 
Fund.
    14. In the event that a Qualified Plan should ever become an owner 
of 10% or more of the assets of the Fund, such Qualified Plan will 
execute a participation agreement with the Fund which includes the 
conditions set forth herein, to the extent applicable. A qualified plan 
will execute an application containing an acknowledgment of this 
condition at the time of its initial purchase of shares of the Fund.

Conclusion

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

    For the Commisison, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-4120 Filed 2-18-99; 8:45 am]
BILLING CODE 8010-01-M