[Federal Register Volume 59, Number 40 (Tuesday, March 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4581]
[[Page Unknown]]
[Federal Register: March 1, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20094; No. 812-8772]
Great American Reserve Insurance Co., et al; Application for
Order
February 23, 1994.
AGENCY: Securities and Exchange Commission (``Commission'' or ``SEC'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (the ``1940 Act'').
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APPLICANTS: Great American Reserve Insurance Company (``GARCO''), Great
American Reserve Variable Annuity Account E (``Account E''), and Garco
Equity Sales, Inc. (``GARCO Sales'') collectively, (``Applicants'').
RELEVANT 1940 ACT SECTIONS: Order requested under section 6(c) of the
Investment Company Act of 1940 (``1940 Act'') granting exemptions from
the provisions of sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act.
SUMMARY OF APPLICATION: Applicants seek an order permitting the
deduction from the assets of Account E of mortality and expense risk
charges in connection with the offer and sale of certain flexible
purchase payment group and individual variable annuity contracts.
FILING DATE: The application was filed on January 13, 1994.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Commission's Secretary
and serving the Applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on March 21, 1994, and should be accompanied by proof of service
on Applicants in the form of an affidavit or, for lawyers, a
certificate of service. Hearing requests should state the nature of the
writer's interest, the reason for the request, and the issues
contested. Persons may request notification of a hearing by writing to
the Commission's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549.
Applicants, c/o William R. Radez, Jr., Esq., Great American Reserve
Insurance Company, 11815 N. Pennsylvania Street, Carmel, Indiana 46032;
and c/o Michael Berenson, Esq., or Ann B. Furman, Esq., Jorden, Burt,
Berenson & Klingensmith, suite 400-East, 1025 Thomas Jefferson Street,
NW., Washington, DC 20007.
FOR FURTHER INFORMATION CONTACT:
Yvonne Hunold, Senior Counsel (202) 272-2676, or Michael Wible, Special
Counsel (202) 272-2060, Office of Insurance Products (Division of
Investment Management).
SUPPLEMENTARY INFORMATION: Following is a summary of the application;
the complete application is available for a fee from the Commission's
Public Reference Branch.
Applicants' Representations
1. GARCO is a stock life insurance company and an indirect wholly
owned subsidiary of CCP Insurance, Inc. (``CCP''). CCP is an affiliate
of, and controlled by, Conseco, Inc. (``Conseco''), a publicly owned
financial services holding company. GARCO offers life insurance and
variable and fixed rate annuities.
2. Account E is a separate account of GARCO. On January 13, 1994,
Account E filed on Form N-8A a notification of registration as a unit
investment trust under the 1940 Act (File No. 811-8288) and a
registration statement on Form N-4 under the Securities Act of 1933
(File No. 33-74092) in connection with certain Flexible Purchase
Payment Group and Individual Deferred Variable Annuity Contracts
(``Contracts''). Account E is used by GARCO to fund the Contracts.
Account E currently is divided into subaccounts which invest in
corresponding portfolios of the Conseco Series Trust (``Conseco
Trust''). In the future, Account E may establish other sub-accounts
which will invest in other portfolios of the Conseco Trust or other
investment companies registered under the 1940 Act. Account E also may
be used to fund other variable annuity contracts offered by GARCO.
3. GARCO Sales, a wholly owned subsidiary of GARCO, is the
principal underwriter of the Contracts. GARCO Sales is a broker-dealer
registered under the Securities Exchange Act of 1934 and a member of
the National Association of Securities Dealers, Inc.
4. The Conseco Trust is an open-end diversified management
investment company registered under the 1940 Act. Shares of the Conseco
Trust are registered under the Securities Act of 1933. The Trust is a
series fund currently consisting of five separate investment
portfolios: Money Market, Government Securities, Common Stock, Asset
Allocation and Corporate Bond Portfolios.
Conseco Capital Management, Inc. (``CCM'') a registered investment
adviser under the Investment Advisers Act of 1940, provides investment
advisory services to the Trust. For its services, CCM is paid a fee
based upon each Portfolio's average monthly net asset value at the
following annual rates: .25% for the Money Market Portfolio; .50% for
the Government Securities Portfolio and the Corporate Bond Portfolio;
and .55% for the Asset Allocation Portfolio.
5. The Contracts require certain minimum initial payments and
permit certain additional payments. Contractowners may, after
deductions for applicable charges, direct allocation of payments made
under the Contracts among the subaccounts of Account E. Contractowners
may make withdrawals of account value, subject to certain restrictions.
A Guaranteed Death Benefit will be payable.
The account value under the Contracts increases or decreases
depending upon the investment performance of the subaccounts of Account
E to which value has been allocated. The Contracts provide either fixed
or variable annuity payments which are determined on the basis of
annuity tables specified in the Contracts, the annuity option selected
and, in the case of variable annuities, the investment performance of
Account E.
6. Various fees and expenses are deducted under the Contracts,
including, among others, up to 3.5% for state premium taxes, if
assessed, which will be deducted from the Contracts' account value
either at annuitization or when the tax becomes due. Additionally, an
administrative fee of $30 will be charged annually and upon surrender
of the Contract for its full value. The $30 fee will be deducted pro
rata according to the account values in each sub-account of Account E
and the fixed account under the Contracts. An administrative charge
equal to .15% of the subaccount assets on an annualized basis will also
be deducted. The administrative fees are intended to reimburse GARCO
for expenses relating to maintenance of the Contracts and for the
operation of Account E and GARCO in connection with the Contracts.
Applicants represent that these fees are based upon GARCO's current
estimates of the administrative costs for such services over the
lifetime of the Contracts. These fees are guaranteed never to be
increased during the term of the Contracts, and are not designed or
expected to generate a profit. Applicants rely on Rule 26a-1 under the
1940 Act to assess such fees.
7. While no sales charges are deducted from premium payments, the
Contracts are subject to a contingent deferred sales charge (``CDSC'')
in the event of a withdrawal or surrender, subject to certain
conditions. After the first Contract year, Contractowners may withdraw
without a withdrawal charge (``Free Withdrawal Amount'') the greater of
up to 10% of Contract Value, or the Contract Value divided by the
owner's life expectancy, or any purchase payments that have been in the
Contract more than six Contract Years. Withdrawals in excess of the
Free Withdrawal Amount will be subject to the following deferred sales
charges over a six year period:
------------------------------------------------------------------------
Contract year CDSC(percent)
------------------------------------------------------------------------
1........................................................ 9
2........................................................ 9
3........................................................ 8
4........................................................ 7
5........................................................ 5
6........................................................ 3
Thereafter............................................... 0
------------------------------------------------------------------------
Withdrawal charges may also be imposed when certain annuity options
are selected. No withdrawal charge is made from annuity payments under
a selected option involving life time payments or from amounts paid due
to the death of a participant. In no event, however, will cumulative
deductions exceed 8.5% of cumulative purchase payments made under the
Contracts. Under certain circumstances, the CDSC, administrative and
other expense charges may be reduced or eliminated. Applicants rely on
Rule 6c-8 under the 1940 Act to impose the withdrawal charge.
8. Each subaccount also will be assessed a charge each valuation
period for mortality and expense risks assumed by GARCO at an effective
annual rate of 1.25%, consisting of .75% for mortality risks and .50%
for expense risks assumed by GARCO. These charges are designed to
compensate GARCO reasonably for the assumption of mortality and expense
risks assumed under the Contracts.
9. The mortality risk assumed by GARCO under the Contracts arises
from its contractual obligation to make periodic payments in accordance
with annuity rates and other contract provisions set forth in the
Contracts regardless of how long all Annuitants or any one Annuitant
may live. GARCO thus assumes the risk that Annuitants, as a class, may
live longer than has been estimated by its actuaries, and
Contractowners are assured that neither longevity nor an improvement in
life expectancy, generally, will have an adverse effect on annuity
payments. GARCO also incurs a mortality risk in connection with the
Guaranteed Death Benefit.
10. The expense risk assumed by GARCO is the risk that its actual
expenses of administering the Contracts and Account E will exceed the
proceeds of the administrative charges assessed under the Contracts.
Applicants' Legal Analysis
1. Section 6(c) of the 1940 Act authorizes the Commission, by order
upon application, to conditionally or unconditionally grant an
exemption from any provision, rule or regulation of the 1940 Act to the
extent that the exemption is necessary or appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940 Act.
2. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act, in relevant
part, prohibit a registered unit investment trust, its depositor or
principal underwriter, from selling periodic payment plan certificates
unless the proceeds of all payments, other than sales loads, are
deposited with a qualified bank and held under arrangements which
prohibit any payment to the depositor or principal underwriter except a
reasonable fee, as the Commission may prescribe, for performing
bookkeeping and other administrative duties normally performed by the
bank itself.
3. Applicants request exemptions under section 6(c) from sections
26(a)(2)(C) and 27(c)(2) of the 1940 Act to the extent necessary to
permit the deduction from the assets of Account E of the 1.25% charge
for the assumption of mortality and expense risks. Applicants represent
that the 1.25% per annum mortality and expense risk charge is within
the range of industry practice for comparable variable annuity
contracts. This representation is based upon an analysis of publicly
available information about similar industry products, taking into
consideration such factors as the current charge levels, death benefit
guarantees, guaranteed annuity rates, and other contract charges and
options. Based upon this review, Applicants have concluded that the
mortality and expenses risk charges are within the range of charges
determined by industry practice. Applicants will maintain at GARCO's
principal executive office, available to the Commission, a memorandum
setting forth in detail the products analyzed and the methodology and
results of GARCO's comparative review.
4. Applicants acknowledge that the withdrawal charges under the
Contracts may be insufficient to cover all costs relating to
distribution of the Contracts. In such circumstances, the charge for
mortality and expense risks may be a source of profit which would be
available to pay GARCO's distribution expenses not reimbursed by
applicable withdrawal charges. GARCO has concluded that there is a
reasonable likelihood that the proposed distribution financing
arrangements will benefit Account E and the Contractowners. The basis
for that conclusion will be set forth in a memorandum which will be
maintained by GARCO at its principal administrative office and made
available to the Commission upon request.
5. Account E will invest only in underlying funds which undertake,
in the event they should adopt a plan under Rule 12b-1 to finance
distribution expenses, to have a board of directors or trustees, a
majority of whom are not ``interested persons,'' as defined under
section 2(a)(19) of the 1940 Act, formulate and approve any such plan.
Conclusion
For the reasons set forth above, Applicants represent that the
exemptions requested are necessary and appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940 Act.
Accordingly, Applicants request exemptions under section 6(c) of the
1940 Act from the provisions of sections 26(a)(2)(C) and 27(c)(2) of
the 1940 Act to the extent necessary to permit the assessment of the
mortality and expense risk charges with respect to the Contracts.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-4581 Filed 2-28-94; 8:45 am]
BILLING CODE 8010-01-M
