The Securities and Exchange Commission (“SEC” or “Commission”).
Notice of application for an order pursuant to Section 26(c) of the Investment Company Act of 1940, as amended (the “Act”), approving a substitution of securities.
Applicants: Conseco Variable Insurance Company (“Conseco Variable”), Conseco Variable Annuity Account C, Conseco Variable Annuity Account E, Conseco Variable Annuity Account F, Conseco Variable Annuity Account G, Conseco Variable Annuity Account H, and Conseco Variable Annuity I (each an “Account,” together the “Accounts”) (the Accounts together with Conseco Variable, the “Applicants”).
Summary of Application: The Applicants request an order permitting the substitution of securities issued by Strong Opportunity Fund II: Investor Class (the “Substitute Fund”) for securities issued by the Berger IPT-New Generation Fund (the “Replaced Fund”), and held by each Account that supports variable annuity contracts issued by Conseco Variable (the “Contracts”).
Filing Date: The initial application was filed on February 11, 2002. The amended and restated application was filed on March 25, 2002.
Hearing or Notification of Hearing: An order granting the amended and restated application will be issued unless the Commission orders a hearing. Interested person 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 April 25, 2002, 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 may request notification by writing to the Secretary of the SEC.
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. Applicants, c/o Meg Cullem-Fiore, Esq., Conseco Variable Insurance Company, 11815 N. Pennsylvania Street, Carmel, Indiana 46032. Copy to Mary Jane Wilson-Bilik, Esq., Sutherland Asbill & Brennan LLP, 1275 Pennsylvania Ave., NW, Washington, DC 20004-2415.Start Further Info
FOR FURTHER INFORMATION CONTACT:
Curtis A. Young, Senior Counsel, or Lorna J. MacLeod, Branch Chief, Office of Insurance Products, Division of Investment Management at 202-942-0670.End Further Info End Preamble Start Supplemental Information
The following is a summary of the amended and restated application. The complete Start Printed Page 16778amended and restated application may be obtained for a fee from the SEC's Public Reference Branch, 450 5th Street, NW, Washington, DC 20549-0102 (tel. (202) 942-8090).
1. Conseco Variable Insurance Company was originally organized in 1937. Prior to October 7, 1998, Conseco Variable was known as Great American Reserve Company. Conseco Variable is principally engaged in the life insurance and annuity 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., a publicly held financial services holding company.
2. Each Account is a “separate account” as defined by Rule 0-1(e) under the Act. Each Account is registered with the Commission as a unit investment trust (the file number for each Account is provided in the chart below.) Each Account is comprised of 59 subaccounts and each subaccount invests exclusively in shares of a registered open-end, diversified, management investment company established to fund benefits under variable annuity contracts and variable life insurance policies (a “Fund”). Under the insurance law of Texas, the assets of each Account attributable to the Contracts are owned by its depositor, but are held separately from the other assets of the depositor for the benefit of the owners of, and the persons entitled to payment under, those Contracts.
|Separate account||1940 Act File No.||Contract||1933 Act File No.|
|Account C||811-04819||Maxiflex Individual||033-02460|
|Account E||811-08288||Achievement Series and Educator Series||033-74092|
|Account F||811-08483||Conseco Advantage||333-40309|
|Account G||811-07501||Monument Series||333-00373|
|Account H||811-09693||Advantage Plus||333-90737|
|Account I||811-10213||Advantage Strategy||333-53836|
3. The Contracts are flexible premium variable annuity contracts. The variable annuity Contracts provide for the accumulation of values on a variable basis, fixed basis, or both, during the accumulation period, and provide settlement or annuity payment options on a variable or fixed basis, or both. The assets of each Account, other than Variable Annuity Account C, support one variable annuity Contract; interests in the Variable Accounts offered through such Contracts have been registered under the Securities Act of 1933, as amended, (the “1933 Act”) on Form N-4. Under each of the Contracts Conseco Variable reserves the right to substitute shares of one Fund for shares of another, including a Fund of a different trust. The prospectuses for the Contracts and the Accounts contain appropriate disclosure of this right.
4. The Replaced Fund is a series in the Berger Institutional Products Trust (the “Trust”), a series investment company as defined by Rule 18f-2 under the Act that issues separate series of shares of beneficial interest in connection with each of its funds.
5. The Substitute Fund is a management investment company that is not a series company. The shares of the Replaced Fund and the Substitute Fund are registered under the 1933 Act on Form N-1A (Nos. 033-45320 and 033-63493, respectively). Conseco Variable is not affiliated with the Substitute Fund.
6. Conseco Equity Sales, Inc., an affiliate of Conseco Variable, is the principal underwriter and distributor of the Contracts. Conseco Equity Sales is a broker-dealer registered under the Securities Exchange Act of 1934, as amended, and a member of the National Association of Securities Dealers, Inc. Sales of the Contracts are made by registered representatives of Conseco Equity Sales and broker-dealers authorized to sell the Contracts.
7. Strong Capital Management, Inc. (“Strong”) serves as Investment Advisor to the Substitute Fund. Conseco Variable is not affiliated with Strong or with the Substitute Fund.
8.The following chart sets out the investment objectives and certain policies of the Substitute Fund and the Replacement Fund, as stated in their respective prospectuses and statements of additional information.
|Substitute fund||Replacement fund|
|Berger IPT-New Generation Fund||Strong Opportunity Fund II (Investor Class).|
|Investment Objective—To seek capital appreciation.||Investment Objective—To seek capital growth.|
|Investment Policies—The Fund invests primarily in the common stocks of companies with new ideas, technologies or methods of doing business. The Fund generally is weighted toward small capitalization companies and is intended for investors comfortable with above-average risk.||Investment Policies-Under normal circumstances, the Fund invests primarily in stocks of medium-capitalized companies that the fund's manager believes are underpriced, yet have attractive growth prospects.|
9. The following charts show the approximate year-end size (in net assets), expense ratio (ratio of operating expenses as a percentage of average net assets), and annual total returns for each of the past three years (if available) for each of the Funds involved in the proposed substitution. Start Printed Page 16779
|Year||Net assets at year-end (in millions)||Expense ratio (without waivers) (in percent)||Expense ratio (with waivers) (in percent)||Total return (in percent)|
|*For period from inception, May 1, 2000 to December 31, 2000.|
|Year||Net assets at year-end (in millions)||Expense ratio (without waivers) (in percent)||Expense ratio (with waivers) (in percent)||Total return (in percent)|
|Fund||Before reimbursement or fee waiver (in percent)||After reimbursement or fee waiver (in percent)|
10. Applicants believe that for this proposed substitution, the investment objective and policies of the Substitute Fund are sufficiently similar to those of the Replaced Fund that Contract owners will have reasonable continuity in investment expectations. Applicants also believe that the proposed substitution will better serve the interests of Contract owners because, generally, the Substitute Fund has lower fees or expenses, superior performance, and a larger, growing asset base in the Contracts than the Replaced Fund.
11. Recently Conseco Variable was informed by Berger Institutional Products Trust that the latter intends to take steps to close the Berger Institutional Products Trust-New Generation Fund. At a recent meeting, the board of trustees voted to authorize the liquidation of the New Generation Fund on or after April 29, 2002 (the “Liquidation Date”).
12. Applicants propose to have Conseco Variable purchase shares of the Substitute Fund on the Liquidation Date with the proceeds it receives from the liquidation of the Replaced Fund. Applicants represent that the proposed substitution will occur at the relative accumulation unit values of the subaccounts investing in the Replaced Fund and the Substitute Fund on the Liquidation Date in conformity with Section 22(c) of the Act and Rule 22c-1 thereunder, without the imposition of any transfer or similar charge, and with no change in the amount of any Contract owner's account value or death benefit or in the dollar value of his or her investment in any of the Accounts. Contract owners will not incur any fees or charges as a result of the proposed substitution, nor will their rights or Applicants' obligations under the Contracts be altered in any way. All expenses incurred in connection with the proposed substitution, including brokerage commissions, legal, accounting, and other fees and expenses, will be paid by Applicants and will not be borne by Contract owners. In addition, the proposed substitution will not impose any tax liability on Contract owners and will in no way alter the tax benefits to contract owners. The proposed substitution will not cause the Contract fees and charges currently being paid by existing Contract owners to be greater after the proposed substitution than before the proposed substitution. The proposed substitution will in no way alter the insurance benefits to contract owners or the contractual obligations of Conseco Variable.
13. Conseco Variable represents that it does not currently receive, and will not receive for three years, any amounts from the Substitute Fund or its adviser (or the adviser's affiliates) at a higher rate than it had received from the Replaced Fund and/or its adviser/affiliates, including without limitation 12b-1, shareholder service, administration, or other service fees, revenue sharing or other arrangement, either with specific reference to the Substitute Fund or as part of an overall business arrangement.
14. Applicants represent that in the event that the Substitute Fund has operating expenses (taking into account expense waivers and reimbursements) for any fiscal period (not to exceed a fiscal quarter) during the 12 months following the date of the proposed substitution, equal on an annualized basis to an amount greater than 1.15%, Conseco Variable will make adjustments to the expenses for the subaccounts that invest in the Substitute Fund for those owners who were owners on the date of the substitution. These adjustments will limit those owners' expenses so that the amount of the Substitute Fund's operating expenses together with the corresponding subaccount's asset-based expenses paid during such period on an annualized basis will be no greater than the sum of the Replaced Fund's expenses after waivers and reimbursements (1.15%) together with the corresponding subaccount's asset-based expenses during the fiscal year preceding the proposed substitution.
15. In addition, for those owners who were owners on the date of the substitution, Conseco Variable will not Start Printed Page 16780increase contract charges for a period of 12 months following the date of the substitution, except to the extent of any increase in premium taxes charged by one or more states. The non-asset-based expenses include the Contract Maintenance Charge and Surrender Charges.
16. Applicants represent that the proposed substitution will not be treated as a transfer for the purpose of assessing transfer charges or for determining the number of remaining permissible transfers in a Contract quarter or year. Except where Conseco Variable may impose restrictions to prevent or restrict “market timing” activities by Contract owners or their agents, Applicants will not exercise any right they may have under the Contracts to impose additional restrictions on transfers under any of the Contracts for a period of at least 30 days following the substitution. Similarly, Applicants will permit Contract owners to make one transfer of Contract value out of a subaccount to be affected by the proposed substitution to another subaccount without the transfer being treated as one of a limited number of permitted transfers or a limited number of transfers permitted without a transfer charge
17. By supplements to the various May 1, 2001 prospectuses for the Contracts and the Accounts, Applicants will notify owners of the Contracts of their intention to take the necessary actions, including seeking the order requested by this amended and restated application to substitute shares of Substitute Fund as described herein (“Pre-Substitution Notice”).
18. The supplements about the proposed substitution will advise Contract owners that from the date of the supplement until the date of the proposed substitution, Applicants will not (except where Applicant may impose restrictions to prevent or restrict “market timing” activities by Contract owners or their agents) exercise any rights reserved under any Contract to impose additional restrictions on transfers until at least 30 days after the proposed substitution. Similarly, the supplements will disclose that, from the date of the supplement until the date of the substitution, Applicants will permit Contract owners to make one transfer of Contract value out of a subaccount to be affected by the proposed substitution to another subaccount without the transfer being treated as one of a limited number of permitted transfers or a limited number of transfers permitted without a transfer charge. The supplements also will advise Contract owners that if the proposed substitution is carried out, then each Contract owner affected by a substitution will be sent a written notice (“Post-Substitution Notice”) informing them of the fact and details of the substitution.
19. In addition, within five days after the proposed substitution, any Contract owners who are affected by a substitution will be sent a written confirmation of the transaction in accordance with Rule 10b-10 under the Securities Exchange Act of 1934, as amended, informing them that the substitution was carried out. The confirmation notice also will reiterate the facts that Applicants: (a) will not exercise any rights reserved by it under any of the Contracts to impose additional restrictions on transfers, and (b) will permit such Contract owners to make one transfer of Contract value out of an affected subaccount to another subaccount for 30 days after the substitution without the transfer being treated as one of a limited number of permitted transfers or a limited number of transfers permitted without a transfer charge. A current prospectus for the Substitute Fund will be sent to Contract owners on or about the time the confirmation notices are sent.
Applicants' Legal Analysis
1. Section 26(c) of the Act requires the depositor of a registered unit investment trust holding the securities of a single issuer to receive Commission approval before substituting the securities held by the trust.
2. Section 26(c) was intended to specifically address substitution by unit investment trusts that previously had been scrutinized under Section 11 of the Act. Section 26(c) allows Commission scrutiny of proposed substitutions which could, in effect, force investors dissatisfied with the substitute security to redeem their shares, thereby possibly incurring a loss of the sales load deducted from initial purchase payments, an additional sales load upon reinvestment of the proceeds of redemption, or both. The section was designed to forestall the ability of a depositor to present holders of interest in a unit investment trust with situations in which an investor's only choice would be to continue an investment in an unsuitable underlying security, or to elect a costly and, in effect, forced redemption.
3. The Applicants submit that the substitution is not the type of substitution that Section 26(c) was designed to prevent. Unlike traditional unit investment trusts where a depositor could only substitute an investment security in a manner which permanently affected all the investors in the trust, the Contracts provide each Contract owner with the right to exercise his or her own judgment and transfer Contract values into other subaccounts.
4. Also, the proposed substitution is unlike the type of substitution that Section 26(c) was designed to prevent in that by purchasing a Contract, Contract owners select much more than a particular investment company in which to invest their Contract values. They also select the specific type of insurance coverage offered by Conseco Variable under their Contract as well as numerous other rights and privileges set forth in the Contract. Contract owners may also have considered the size, financial condition, type, and reputation for service of the Applicant from whom they purchased their Contract. These factors will not change because of the proposed substitution.
5. Applicants maintain that Contract owners will be well served by the proposed substitution. The proposed substitution is an appropriate one given the Funds available under the Contracts. For the proposed substitution, Applicants believe that the Substitute Fund is substantially the same or more conservative in its investment objective(s) or strategies than the Replaced Fund. Likewise, Applicants believe that the Substitute Fund has a lower investment risk profile than the Replaced Fund.
6. Apart from the replacement of the underlying investment vehicle, the rights of the Contract owners and the obligations of Conseco Variable under the Contracts would not be altered by the substitution except, of course, that Contract owners will not have the right to allocate contract value to subaccounts that invest in the Substitute Fund.
7. The Applicants note that, in accordance with the terms of each of the Contracts, no sales charges or surrender charges will apply to transfers in connection with the substitution, and Conseco Variable represents that no such charge shall be imposed. In addition, Contract owners who were affected by the substitution will be sent a Post-Substitution Notice informing them that the substitution was carried out and advising them of their transfer rights. The Applicants assert that the procedures to be implemented are sufficient to assure that each Contract owner's cash values immediately after the substitution shall be equal to the cash value immediately before the substitution.
For purposes of the approval sought pursuant to Section 26(c) of the Act, the Start Printed Page 16781substitution described in the amended and restated application will not be completed, unless all of the following conditions are met.
1. The Commission shall have issued an order approving the substitution under Section 26(c) of the 1940 Act.
2. Each Contract owner will have been sent (a) a copy of the effective prospectus relating to the Replacement Fund and any necessary amendments to the prospectuses relating to the Contracts, (b) prior to the Liquidation Date, a Pre-Substitution Notice describing the terms of the substitution and the rights of the Contract owners in connection with the substitution, and (c) if affected by the substitution, a Post-Substitution Notice informing them that the substitution was carried out and advising them of their transfer rights.
Applicants assert, for the reasons stated above, that the proposed substitution is consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act and the requested Order approving the substitution should be granted.Start Signature
For the Commission, by the Division of Investment Management, under delegated authority.
Margaret H. McFarland,
[FR Doc. 02-8365 Filed 4-5-02; 8:45 am]
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