[Federal Register Volume 65, Number 33 (Thursday, February 17, 2000)]
[Notices]
[Pages 8213-8216]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-3812]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-24285; File No. 812-11912]


Conseco Variable Insurance Company, et al.; Notice of Application

February 10, 2000.
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, as amended (the ``1940 Act''), 
granting exemptions from the provisions of Sections 2(a)(32), 22(c), 
and 27(i)(2)(A) of the 1940 Act and Rule 22c-1 thereunder to permit the 
recapture of credits applied to purchase payments made under certain 
variable annuity contracts.

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Summary of Application: Applicants seek an order under Section 6(c) of 
the 1940 Act to the extent necessary to permit the issuance and 
subsequent recapture, upon exercise of the free-look cancellation 
right, of purchase payment credits applied to purchase payments made 
under: (i) certain deferred variable annuity contracts that Conseco 
Variable will issue through Separate Account H (the contracts, 
including certain contract data pages and endorsements and riders, are 
collectively referred to herein as the ``Contracts''), and (ii) 
contracts that Conseco Variable may issue in the future through 
Separate Account H or any Future Accounts that are substantially 
similar in all material respects to the Contracts (``Future 
Contracts''). Applicants also request that the order being sought 
extend to any other National Association of Securities Dealers, Inc. 
(``NASD'' member broker-dealer controlling or controlled by, or under 
common control with, Conseco Variable, whether existing or created in 
the future, that serves as a distributor or principal underwriter of 
the Contracts or any Future Contracts offered through Separate Account 
H or any Future Accounts (collectively ``Conseco Variable Broker-
Dealers'').

APPLICANTS: Conseco Variable Insurance Company (``Conseco Variable''), 
Conseco Variable Annuity Account H (``Separate Account H''), any other 
separate account established in the future by Conseco Variable to 
support certain deferred variable annuity contracts issued by Conseco 
Variable (``Future Accounts''), and Conseco Equity Sales, Inc. 
(``CESI'').

FILING DATE: The application was filed on December 27, 1999.

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 Secretary of the 
Commission and serving 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 6, 2000, 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 Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW, Washington, DC 20549-0609. Applicants, c/o Lynn Korman 
Stone, Esq., Blazzard, Grodd & Hasenauer, P.C., P.O. Box 5108, 
Westport, Connecticut, 06881-5108. Copies to Michael A. Colliflower, 
Conseco Variable Insurance Company, 11825 N. Pennsylvania Street, 
Carmel, Indiana 46032-4572.

FOR FURTHER INFORMATION CONTACT: Michael Pappas, Senior Counsel, or 
Susan Olson, Branch Chief, Office of Insurance Products, Division of 
Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
Application. The complete Application is available for a fee from the 
Public Reference Branch of the Commission, 450 Fifth Street, N.W., 
Washington, D.C. 20549-0102 (tel. (202) 942-8090).

Applicants' Representations

    1. Conseco Variable was originally organized in 1937. Prior to 
October 7, 1998, the company was known as Great American Reserve 
Insurance Company. In certain states, the name Great American Reserve 
Insurance Company may still be used until the name change is approved 
in that state. Conseco Variable is principally engaged in the life 
insurance business in 49 states and the District of Columbia. Conseco 
Variable is a stock company organized under the laws of the State of 
Texas and is an indirect wholly-owned subsidiary of Conseco, Inc. 
Conseco, Inc. is a publicly owned financial services organization 
headquartered in Carmel, Indiana.
    2. Separate Account H is a segregated asset account of Conseco 
Variable established under Texas insurance law on November 1, 1999. 
Separate Account H is registered with the Commission as a unit 
investment trust under the 1940 Act (File No. 811-9693) for the purpose 
of funding the Contracts which invest in underlying funds. Security 
interests under the Contracts have been registered under the Securities 
Act of 1933 (the ``1933 Act'') ( File No. 333-90737).
    3. Separate Account H will fund the variable benefits available 
under the Contracts. Conseco Variable may in the future issue Future 
Contracts through Separate Account H or through Future Accounts. Any 
income, gains or losses, realized or unrealized, from assets allocated 
to Separate Account H are, in accordance with the Contracts, credited 
to or charged against Separate Account H, without regard to other 
income, gains or losses of Conseco Variable.
    4. Conseco Equity Sales, Inc. (``CESI''), an affiliate of Conseco 
Variable, is the principal underwriter of the Contracts. CESI is a 
broker-dealer registered under the Securities and Exchange Act of 1934 
(the ``1934 Act'') and a member of the NASD, Sales of the Contracts 
will be made by registered representatives of unaffiliated broker-
dealers authorized to sell the Contracts who have entered into 
agreements with CESI. All such unaffiliated broker-dealers will be 
registered broker-dealers under the 1934 Act and NASD members. CESI, or 
any successor entity, may act as principal underwriter for any Future 
Accounts and distributor for any Future Contracts issued by Conseco 
Variable.
    5. The Contracts issued through Separate Account H are individual 
deferred variable and fixed annuity contracts. The Contracts may be 
issued under a qualified contract, or as a non-qualified contract. The 
Contracts are designed to provide for the accumulation of assets and 
for income through the investment during an accumulation phase.
    6. Contract Owners may make purchase payments at any time during 
the accumulation phase. The minimum initial purchase payment is $5,000 
for non-qualified contracts and $2,000 for qualified contracts. 
Additional purchase payments of at least $500 can be made for non-
qualified contracts, unless the Contract Owner participates in the 
automatic payment check option under which the minimum subsequent

[[Page 8214]]

payment is $200 each month. The minimum subsequent payment for 
qualified contracts is $50 each month. Unless Conseco Variable agrees 
otherwise, the maximum total purchase payments it accepts are 
$2,000,000.
    7. Purchase payments under the Contracts may be accumulated before 
annuitization, and annuity payments may be received after annuitization 
on a variable basis, a fixed basis, or a combination of both.
    8. Contract Owners can allocate purchase payments under the 
Contracts to sub-accounts of Separate Account H, or to the fixed 
account (``Fixed Account'') of Conseco Variable. The Fixed Account is 
not registered with the Commission. The Fixed Account may not be 
available in certain states. Separate Account H consists of sub-
accounts, each of which will be available under the Separate Account H 
Contracts. The sub-accounts are referred to as ``investment 
portfolios.'' Separate Account H currently consists of 40 investment 
portfolios. Each investment portfolio will invest in shares of a 
corresponding portfolio of certain underlying investment companies 
(``Funds''). The investment portfolios and the Fixed Account will 
comprise the initial investment choices under the Contracts. Currently, 
a Contract Owner can invest in up to 15 investment portfolios at one 
time.
    9. Conseco Variable, at a later date, may determine to create 
additional investment portfolios of Separate Account H to invest in any 
additional Funds, or other such underlying portfolios or other 
investments as may now or in the future be available. Similarly, 
investment portfolio(s) of Separate Account H may be combined or 
eliminated from time to time.
    10. Each time a Contract Owner makes a purchase payment, Conseco 
Variable will allocate to the Contract Owner's Contract Value a 
purchase payment credit (``Purchase Payment Credit'') or 4% of the 
purchase payment. Conseco Variable will allocate Purchase Payment 
Credits among the investment portfolios and the fixed account in the 
same proportion as the corresponding purchase payments are allocated by 
the Contract Owner. Conseco Variable will fund the Purchase Payment 
Credits from its general account assets.
    11. The Contracts provide that a Contract Owner may return the 
Contract within 10 days after receipt (or for a longer period in states 
where required) and Conseco Variable will refund the Contract Value, 
less any Purchase Payment Credit that was credited to the Contract 
(``free-look''). Under certain circumstances, Conseco Variable will 
refund purchase payments. The Purchase Payment Credit may not be 
available in certain states. Conseco Variable reserves the right to 
limit the amount of Purchase Payment Credits in the future.
    12. Conseco Variable will recapture Purchase Payment Credits from a 
Contract Owner only if the Contract Owner returns the Contract to 
Conseco Variable for a refund during the free-look period. Any earnings 
that resulted from the Purchase Payment Credit will not be recaptured. 
After the free-look period ends, the Purchase Payment Credit will vest 
and can be withdrawn at any time. Purchase Payment Credits, and any 
gains or losses attributable to Purchase Payment Credits, will be 
considered earnings under the Contracts for tax purposes.
    13. A Contract Owner has access to the money in his or her Contract 
by making either a partial or complete withdrawal or by electing to 
receive annuity payments. A beneficiary will have access to the money 
in the Contract when a death benefit is paid.
    14. A Contract Owner may elect to receive annuity payments under an 
annuity option. The Contracts also offer a death benefit. Under certain 
circumstances, a Contract Owner may select an optional guaranteed 
minimum death benefit under which the death benefit will have a 
guaranteed minimum value. A Contract Owner can also select an optional 
guaranteed minimum income benefit to be applied to the annuity option 
selected. The optional guaranteed minimum income benefit can only be 
selected with the optional guaranteed minimum death benefit.
    15. The Contracts also provide for transfer privileges among 
investment portfolios, a dollar cost averaging program, a rebalancing 
program, and other features. The following charges are currently 
assessed under the Contracts: (i) An annual asset-based insurance 
charge of 1.40% for the standard contract, 1.70% if the optional 
guaranteed minimum death benefit is selected, or 2.00% if both of the 
benefits are selected; (ii) a contingent deferred sales charge, which 
starts at 8% in the first year and declines to 0% after 10 years, with 
a free withdrawal option under certain specified circumstances; (iii) a 
$30 contract maintenance charge during the accumulation phase; and (iv) 
a transfer fee of $25 for each transfer in excess of one transfer in 
each 30 day period during the accumulation period. Conseco Variable has 
reserved the right to increase certain charges up to a specified 
maximum. The Funds also impose a management and administrative fee 
which varies depending upon which Funds are selected.
    16. Applicants seek exemption pursuant to Section 6(c) of the 1940 
Act from Sections 2(a)(32), 22(c), and 27(i)(2)(A) of the 1940 Act and 
Rule 22c-1 thereunder to the extent deemed necessary to permit Conseco 
Variable to issue the Contracts and Future Contracts that provide for 
Purchase Payment Credits upon the receipt of purchase payments, and to 
recapture the Purchase Payment Credits if the Contract Owner returns 
the Contract for a refund during the free-look period.

Applicants' Legal Analysis and Conditions

    1. Section 6(c) of the 1940 Act authorizes the Commission to exempt 
any person, security or transaction, or any class or classes of 
persons, securities or transactions from the provisions of the 1940 Act 
and the rules promulgated 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 Act. Applicants request 
that the Commission, pursuant to Section 6(c) of the 1940 Act, grant 
the exemptions summarized above with respect to the Contracts and any 
Future Contracts, funded by Separate Account H or any Future Accounts, 
that are issued by Conseco Variable and underwritten or distributed by 
CESI or Conseco Variable Broker-Dealers. Applicants represent that any 
Future Contracts funded by Separate Account H or any Future Accounts 
will be substantially similar in all material respects to the 
Contracts. Applicants believe 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.
    2. Applicants represent that it is not administratively feasible to 
track the Purchase Payment Credit amount in Separate Account H after 
the Purchase Payment Credit is applied. Accordingly, the asset-based 
charges applicable to Separate Account H will be assessed against the 
entire amounts held in Separate Account H, including the Purchase 
Payment Credit amount. As a result, the aggregate asset-based charges 
assessed against Contract Value will be higher than those that would be 
charged if the Contract Owner's Contract Value did not include the 
Purchase Payment Credit.
    3. Subsection (i) of Section 27 of the 1940 Act provides that 
Section 27 does not apply to any registered separate

[[Page 8215]]

account funding variable insurance contracts, or to the sponsoring 
insurance company and principal underwriter of such account, except as 
provided in paragraph (2) of the subsection. Paragraph (2) provides 
that it shall be unlawful for such a separate account or sponsoring 
insurance company to sell a contract funded by the registered separate 
account unless, among other things, such contract is a redeemable 
security. Section 2(a)(32) defines ``redeemable security'' as any 
security, other than short-term paper, under the terms of which the 
holder, upon presentation to the issuer, is entitled to receive 
approximately his proportionate share of the issuer's current net 
assets, or the cash equivalent thereof.
    4. Applicants submit that the recapture of the Purchase Payment 
Credit if a Contract Owner returns the Contract during the free-look 
period would not deprive a Contract Owner of his or her proportionate 
share of the issuer's current net assets. Applicants state that a 
Contract Owner's interest in the amount of the Purchase Payment Credit 
allocated to his or her Contract Value upon receipt of purchase 
payments is not vested until the applicable free-look period has 
expired without return of the Contract. Until or unless the amount of 
any Purchase Payment Credit is vested, Applicants submit that Conseco 
Variable retains the right and interest in the Purchase Payment Credit 
amount, although not in the earnings attributable to that amount. 
Applicants argue that when Conseco Variable recaptures any Purchase 
Payment Credit it is simply retrieving its own assets, and because a 
Contract Owner's interest in the Purchase Payment Credit is not vested, 
the Contract Owner has not been deprived of a proportionate share of 
the applicable Separate Account H's assets, i.e., a share of the 
applicable Separate Account H's assets proportionate to the Contract 
Owner's Contract Value (including the Purchase Payment Credit).
    5. Applicants further state that it would be patently unfair to 
allow a Contract Owner exercising the free-look privilege to retain a 
Purchase Payment Credit amount under a Contract that has been returned 
for a refund after a period of only a few days. Applicants state that 
if Conseco Variable could not recapture the Purchase Payment Credit, 
individuals could purchase a Contract with no intention of retaining 
it, and simply return it for a quick profit.
    6. Applicants represent that the Purchase Payment Credit will be 
attractive to and in the interest of investors because it will permit 
Contract Owners to put up to 104% of their purchase payments to work 
for them in the selected sub-accounts and the fixed account. Also, the 
Contract Owner will retain any earnings attributable to the Purchase 
Payment Credit, and the principal amount of the Purchase Payment Credit 
will be retained under the conditions set forth in the application.
    7. Applicants submit that the provisions for recapture of any 
Purchase Payment Credit under the Contract does not, and any such 
Future Contract provisions will not, violate Sections 2(a)(32) and 
27(i)(2)(A) of the 1940 Act. Nevertheless, to avoid any uncertainties, 
Applicants request an exemption from Sections 2(a)(32) and 27(i)(2)(A), 
to the extent deemed necessary, to permit the recapture of any Purchase 
Payment Credit under the circumstances described herein with respect to 
the Contract and any Future Contracts, without the loss of the relief 
from Section 27 provided by Section 27(i).
    8. Section 22(c) of the 1940 Act authorizes the Commission to make 
rules and regulations applicable to registered investment companies and 
to principal underwriters of, and dealers in, the redeemable securities 
of any registered investment company to accomplish the same purposes as 
contemplated by Section 229(a). Rule 22c-1 thereunder prohibits a 
registered investment company issuing any redeemable security, a person 
designated in such issuer's prospectus as authorized to consummate 
transactions in any such security, and a principal underwriter of, or 
dealer in, such security, from selling, redeeming, or repurchasing any 
such security except at a price based on the current net asset value of 
such security which is next computed after receipt of a tender of such 
security for redemption or of an order to purchase or sell such 
security.
    9. Applicants argue that the recapture does not involve either of 
the evils that Rule 22c-1 was intended to eliminate or reduce, namely: 
(i) the dilution of the value of outstanding redeemable securities of 
registered investment companies through their sale at a price below net 
asset value or their redemption or repurchase at a price above it, and 
(ii) other unfair results, including speculative trading practices.
    10. Applicants assert that the proposed recapture of the Purchase 
Payment Credit poses no such threat of dilution. To effect a recapture 
of a Purchase Payment Credit, Conseco Variable will redeem interests in 
a Contract Owner's Contract at a price determined on the basis of the 
current net asset value of the respective sub-accounts. The amount 
recaptured will equal the amount of the Purchase Payment Credit that 
Conseco Variable paid out of its general account assets. Although 
Contract Owners will be entitled to retain any investment gain 
attributable to the Purchase Payment Credit, the amount of such gain 
will be determined on the basis of the current net asset value of the 
respective sub-accounts. Thus, Applicants argue no dilution will occur 
upon the recapture of the Purchase Payment Credit.
    11. Applicants also submit that the second harm that Rule 22c-1 was 
designed to address, namely, speculatively trading practices calculated 
to take advantage of backward pricing, will not occur as a result of 
the recapture of the Purchase Payment Credit.
    12. Because neither of the harms that Rule 22c-1 was meant to 
address are found in the recapture of the Purchase Payment Credit, 
Applicants state that Rule 22c-1 and Section 22(c) should have no 
application to any Purchase Payment Credit. However, to avoid any 
uncertainty as to full compliance with the 1940 Act, Applicants request 
an exemption from the provisions of Section 22(c) and Rule 22c-1 to the 
extent deemed necessary to permit them to recapture the Purchase 
Payment Credit under the Contracts and Future Contracts.

Conclusion

    Section 6(c) of the 1940 Act provides, in pertinent part, that the 
Commission, by order upon application, may conditionally or 
unconditionally exempt any persons, security or transaction, or any 
class or classes of persons, securities or transactions, from any 
provision or provisions of the 1940 Act, or any rule or regulation 
thereunder, 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.
    Applicants submit that their request for an order is appropriate in 
the public interest. Applicants state that such an order would promote 
competitiveness in the variable annuity market by eliminating the need 
to file redundant exemptive applications, thereby reducing 
administrative expenses and maximizing the efficient use of Applicants' 
resources.
    Applicants assert, based on the grounds summarized above, that 
their exemptive request meets the standards set out in Section 6(c) of 
the 1940 Act, namely, that the exemptions requested

[[Page 8216]]

are 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 and that therefore, the 
Commission should grant the requested order.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-3812 Filed 2-16-00; 8:45 am]
BILLING CODE 8010-01-M