[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
