[Federal Register Volume 62, Number 21 (Friday, January 31, 1997)]
[Notices]
[Pages 4821-4824]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2358]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel. No IC-22479; File No. 812-10390]
Nationwide Life Insurance Company, et al.
January 24, 1997.
AGENCY: The Securities and Exchange Commission (the ``Commission'').
ACTION: Notice of application for an order pursuant to the Investment
Company Act of 1940 (``1940 Act'').
-----------------------------------------------------------------------
APPLICANTS: Nationwide Life Insurance Company (the ``Company''),
Nationwide Fidelity Advisor Variable Account (``Separate Account'') and
Fidelity Investments Institutional Services Company, Inc.
RELEVANT 1940 ACT SECTIONS: Order requested pursuant to Section 26(b).
SUMMARY OF THE APPLICATION: Applicants seek an order approving the
proposed substitution of shares of certain portfolios of the Variable
Insurance Products Funds (``VIP'') and the Variable Insurance Products
Funds II (``VIP II'') for shares of certain funds of the Fidelity
Advisor Annuity Fund (``FAA'') currently held by the Separate Account.
FILING DATES: The application was filed on October 10, 1996, and
amended on January 17, 1997.
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 February 18, 1997, 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 requestor's interest, the reason for the request, and the
issues contested. Persons may request notification of a hearing by
writing to the Secretary of the Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Applicants, c/o Steven Savini,
Druen, Rath & Dietrich, One Nationwide Plaza, 1-09-V8, Columbus, Ohio
43216.
FOR FURTHER INFORMATION CONTACT:
Veena K. Jain, Attorney, or Kevin M. Kirchoff, Branch Chief, Office of
Insurance Products (Division of Investment Management), at (202) 942-
0670.
SUPPLEMENTARY INFORMATION: Following is a summary of the application;
the complete application is available for a fee from the Public
Reference Branch of the Commission.
Applicants' Representations
1. The Company, a stock life insurance company organized under Ohio
law, is wholly owned by Nationwide Corporation and is licensed to do
business in all fifty states, the District of Columbia, and Puerto
Rico.
2. The Separate Account was established by the Company to fund
certain variable annuity contracts and is registered pursuant to the
1940 Act as a unit investment trust.
3. The Separate Account issues two classes of contracts, individual
flexible purchase payment deferred variable annuity contracts
(``Flexible Contracts'') and modified single premium deferred variable
annuity contracts (``Modified Contracts,'' together with Flexible
Contracts, the ``Contracts'').
4. The Contracts are sold as non-qualified contracts or as
individual retirement annuities governed by Section 408(b) of the
Internal Revenue Code (``Code''). The Flexible Contracts may also
qualify for federal tax treatment under the provisions of Sections 401
or 403(b) of the Code. For Flexible Contracts the initial purchase
payment must be at least $1,500, and subsequent payments may be made in
any amount of $10 or more. For Modified Contracts the initial purchase
payment must be at least $15,000 with additional payments, if any, of
at least $5,000.
5. Upon withdrawal of part of all of the Contract value, a
contingent deferred sales charge (the ``Sales Charge'') may be imposed.
The Sales Charge is calculated by multiplying the applicable percentage
by the purchase payment amount withdraw, according to the following
table:
------------------------------------------------------------------------
Sales
Number of years from date of payment charge
percentage
------------------------------------------------------------------------
0........................................................... 7
1........................................................... 6
2........................................................... 5
3........................................................... 4
[[Page 4822]]
4........................................................... 3
5........................................................... 2
6........................................................... 1
7........................................................... 0
------------------------------------------------------------------------
6. After the first Contract year, owners of Flexible Contracts may
withdraw an amount, free of Sales Charge, equal to 10% of the sum of
all purchase payments made to the Contract at the time of withdrawal
less any purchase payments previously withdrawn that were subject to a
sales Charge. This ``free withdrawal'' privilege is offered on a yearly
basis after the first Contract year and is noncumulative. Withdrawals
from individual retirement annuities made to satisfy minimum
distribution rules, as required under the Code, are not subject to a
Sales Charge.
7. Beginning in the first Contract year, owners of the Modified
Contracts may withdraw an amount, free of Sales Charge, equal to 10% of
the sum of all purchase payments made to the Contract at the time of
withdrawal less any purchase payments previously withdrawn that were
subject to a Sales Charge. This privilege is noncumulative.
8. An annual Contract maintenance charge of $30 is deducted from
the value of the Flexible Contracts. If the Contract is a qualified
contract or 403(b) tax sheltered annuity, the charge is either $12 or
$0. Additionally, an administration charge equal on an annual basis to
0.05% of the daily net asset value of the Separate Account is deducted
from the Flexible Contract value. There is no Contract maintenance
charge deducted from the value of the Modified Contracts. An
administration charge equal on an annual basis to 0.15% of the daily
net asset value of the Separate Account is deducted from the Modified
Contract value. The Company also imposes a daily charge equal to an
annual effective rate of 1.25% of the net assets of the Separate
Account in connection with the assumption of certain mortality and
expense risks.
9. The prospectus for the Contracts provides that the Company may
substitute shares of another mutual fund for underlying mutual fund
shares if the mutual fund options available under the Contracts are no
longer available for investment by the Separate Account or if, in the
judgment of the Company's management, further investment in such
underlying mutual fund shares becomes inappropriate in view of the
purposes of the Contracts.
10. Purchase payments under the Contracts are allocated to the
Separate Account and invested at net asset value in shares of FAA. FAA
is organized as a Massachusetts business trust and registered pursuant
to the 1940 Act as an open-end investment company. FAA is currently
comprised of six diversified funds that are offered exclusively to the
Separate Account: FAA Overseas Fund, FAA Growth Opportunities Fund, FAA
Income & Growth Fund, FAA Government Investment Fund, FAA High Yield
Fund, and FAA Money Market Fund. The funds are managed by Fidelity
Management & Research Company (``FMR''), which is registered as an
investment adviser pursuant to the Investment Advisers Act of 1940. FMR
is indirectly owned by FMR Corp. (``Fidelity'').
11. VIP and VIPII are organized as Massachusetts business trusts
and were established on November 13, 1981, and March 21, 1988,
respectively. VIP and VIPII are registered pursuant to the 1940 Act as
open-end management investment companies and are managed by FMR. Shares
of the portfolios of VIP and VIPII are issued to insurance company
separate accounts to fund variable life insurance and variable annuity
products.
12. Applicants propose to substitute shares of three portfolios of
VIP and one portfolio of VIPII for four funds of FAA held by the
Separate Account:
a. Shares of the VIP Overseas Portfolio are proposed to be
substituted for shares of the FAA Overseas Fund. Applicants represent
that the investment objectives of the FAA Overseas Fund and the VIP
Overseas Portfolio are virtually identical. Both funds seek growth of
capital by investing primarily in securities of issuers whose principal
activities are outside of the U.S. Both funds normally invest at least
65% of their total assets in securities of issuers from at least three
different countries outside of North America.
b. Shares of the VIP High Income Portfolio are proposed to be
substituted for shares of the FAA High Yield Fund. Applicants represent
that the investment objectives of the FAA High Yield Fund and the VIP
High Income Portfolio are closely comparable. The VIP High Income
Portfolio seeks high current income by investing primarily in income-
producing debt securities, preferred stocks, and convertible
securities. In choosing investments the fund also considers growth of
capital. The FAA High Yield Fund seeks a combination of a high level of
income and the potential for capital gains by investing in a
diversified portfolio consisting primarily of high-yielding, fixed-
income, and zero-coupon securities, such as bonds, debentures, notes,
convertible securities, and preferred stocks.
c. Shares of the VIPII Investment Grade Bond Portfolio are proposed
to be substituted for shares of the FAA Government Investment Fund.
Applicants submit that the overall purpose of the two funds is closely
comparable and that the investment objectives of either the VIPII
Investment Grade Bond Portfolio or the FAA Government Investment Fund
are consistent with the interests of investors seeking investment
opportunities consisting mostly of debt obligations in the form of
fixed interest securities. The VIPII Investment Grade Bond Portfolio
seeks as high a level of current income as is consistent with the
preservation of capital by investing primarily in a range of investment
grade, fixed-income securities. As of December 31, 1995, the fund's
dollar-weighted average maturity was approximately 7.5 years. The FAA
Government Investment Fund seeks a high level of current income by
investing primarily in obligations issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities. As of December
31, 1995, the fund's dollar-weighted average maturity was approximately
8.8 years.
d. Shares of the VIP Money Market Portfolio are proposed to be
substituted for shares of the FAA Money Market Fund. Applicants
represent that the investment objectives of the FAA Money Market Fund
and the VIP Money Market Portfolio are identical. Both seek to obtain
as high a level of current income as is consistent with preserving
capital and providing liquidity. Both invest in high quality, short-
term money market securities and try to maintain a stable $1.00 share
price.
13. FAA, VIP, and VIPII (and each of their respective funds or
portfolios) are managed by FMR, which employs essentially the same
methodology for each of the non-money market portfolios or funds in
calculating management fees and other expenses. The management fee for
each VIP and VIPII portfolio (excluding the VIP Money Market Portfolio)
as well as each of the FAA funds (excluding the FAA Money Market Fund)
are calculated by adding a group fee rate to an individual fund fee
rate and multiplying the result by each portfolio's average net assets.
The group fee rate is based on the average net assets of all the mutual
funds advised by FMR and cannot exceed certain maximum rates. The
management fees for the FAA Money Market Fund and the VIP Money Market
Portfolio are calculated by multiplying the sum of the two components
by average net assets and adding an
[[Page 4823]]
income-based fee. One component is the group fee rate. The other
component, the individual fund fee rate, is 0.03%. The income-based fee
is 6% of the fund's gross income in excess of a 5% yield, and the fee
is capped at 0.24% of the fund's average net assets.
14. The following chart represents the management fees and other
financial data for each of the FAA funds to be replaced, and the same
data for the corresponding VIP or VIPII portfolio that will serve as a
substitute. The ``Other Expenses'' consist of operating costs paid to
transfer agency and shareholder servicing affiliates of Fidelity and
FMR. The ``Expense Ratio'' data represent each fund's total expenses as
a percentage of the fund's average net assets. All data presented,
including ``Total Return'' data, represent the financial status of each
fund for the year 1995, as of December 31, 1995.
----------------------------------------------------------------------------------------------------------------
Total
Group fund management Other Expense Total
Fund fee rate fee expenses ratio return
(percent) (percent) (percent) (percent) (percent)
----------------------------------------------------------------------------------------------------------------
FAA Money Market Fund.......................... 0.1482 0.24 0.55 0.79 5.17
VIP Money Market Portfolio..................... 0.1482 0.24 0.06 0.33 5.87
FAA Overseas Fund.............................. 0.3097 0.00 1.50 1.50 10.20
VIP Overseas Portfolio......................... 0.3097 0.76 0.09 0.91 9.74
FAA High Yield Fund............................ 0.1482 0.43 0.57 1.00 20.12
VIP High Income Portfolio...................... 0.1482 0.60 0.08 0.71 20.72
FAA Government Investment...................... 0.1482 0.45 1.00 1.00 16.54
VIP Investment Grade Bond...................... 0.1482 0.45 0.09 0.59 17.32
----------------------------------------------------------------------------------------------------------------
15. A prospectus for each of the VIP and VIPII portfolios to be
substituted will be provided to each Contract owner. In addition, a
prospectus supplement will describe the fact that the Company is in the
process of applying for approval from the Securities and Exchange
Commission to substitute securities as contemplated in the current
prospectuses for the Contracts. Following the substitution, Contract
owners will be free to re-allocate their investment in the Contract
among the existing portfolios and six new portfolios to be added as
investment options under the Contracts.
16. The Company will establish a date on which the substitution
will be effected (the ``Exchange Date''), which will be no later than
forty-five days after the issuance of the order sought by Applicants.
Contract owners will be notified of the Exchange Date; those with
interests remaining in any of the four funds to be removed (the FAA
Money Market Fund, the FAA Overseas Fund, the FAA High Yield Fund, and
the FAA Government Investment Fund) will be advised that these funds
will be replaced on the Exchange Date. Contract owners also will be
advised that they are free to make changes in allocation among any of
the investment options available under the Contracts, in advance of the
Exchange Date. All necessary forms and other information necessary for
Contract owners to make exchanges among investment options will be
provided.
17. On the Exchange Date, all shares held by the Separate Account
in the FAA Money Market Fund, the FAA Overseas Fund, the FAA Government
Investment Fund, and the FAA High Yield Fund will be redeemed,
resulting in a complete liquidation of these sub-accounts of the
Separate Account. Contemporaneously with the redemption of such shares,
the Separate Account will purchase shares in the VIP Money Market
Portfolio, the VIP Overseas Portfolio, the VIPII Investment Grade Bond
Portfolio, and the VIP High Income Portfolio. Securities of the
affected funds of FAA will be distributed in kind and will be used to
purchase shares of the corresponding portfolios of VIP and VIPII that
will serve as substitute funds. All shares will be purchased and
redeemed at prices based on the current net asset values per share next
computed after receipt of the redemption request and in a manner
consistent with Rule 22c-1 under the 1940 Act. All Contract owners
affected by the Exchange Date transaction will receive a confirmation
of the transaction within five days of the Exchange Date, in accordance
with Rule 10b-10 under the Securities Exchange Act of 1934.
Applicants' Legal Analysis
1. Section 26(b) of the 1940 Act prohibits a depositor or trustee
of a registered unit investment trust holding the securities of a
single issuer from substituting another security for such security
unless the Commission has approved the substitution after finding that
it is consistent with the protection of investors and the purposes
fairly intended by the policy and provisions of the 1940 Act.
2. Applicants request that the Commission issue an order pursuant
to Section 26(b) of the 1940 Act to permit the Separate Account to
substitute shares of the VIP Money Market Portfolio, the VIP Overseas
Portfolio, the VIP High Income Portfolio, and the VIPII Investment
Grand Bond Portfolio for shares of the FAA Money Market Fund, the FAA
Overseas Fund, the FAA High Yield Fund, and the FAA Government
Investment Fund, respectively.
3. Applicants represent that, to the extent that any aspect of the
proposed substitution requires approval under Section 11 of the Act,
they will rely upon Rule 11a-2 under the 1940 Act.
4. Applicants represent that the proposed substitution, in
accordance with the standards set forth under Section 26(b) of the Act,
is in the best interest of Contract owners. With respect to management
and fund objectives, the FAA funds are closely comparable (and in two
cases, the FAA Money Market Fund and the FAA Overseas Fund, practically
identical) to the VIP and VIPII portfolios that are proposed as
substitutes. Accordingly, the proposed substitution should not create
incentives for Contract owners to surrender Contracts and seek out
other investment opportunities (incurring additional sales charges) in
order to maintain a desired investment strategy. Applicants submit that
the close comparability of the funds proposed as substitutes ensures
that investment strategies currently employed by Contract owners may be
maintained after the substitution.
5. Applicants state that the VIP and VIPII portfolios are currently
offered to more than forty five different insurance company separate
accounts. The FAA funds are offered only to the Separate Account.
Applicants represent that the VIP and VIPII portfolios have
significantly greater assets than the FAA funds and, accordingly, have
much lower expenses as a percentage of net assets than do the FAA
funds. Lower per share expenses create the opportunity for better
performance
[[Page 4824]]
among mutual funds with similar management and investment objectives.
In addition, Applicants state that the elimination of four of the FAA
funds after the proposed substitution will allow FMR, the advisor for
the VIP and VIPII portfolios (as well as for the FAA funds), to
eliminate duplicative efforts and realize further economies of scale
(through the addition of assets to the VIP and VIPII portfolios), which
can be then passed on to owners of the Contracts issued by the Separate
Account in the form of lower expense ratios and the opportunity for
better investment performance.
6. Applicants represent that the substitution will take place at
relative net asset value with no increase or decrease in the amount of
any Contract owner's Contract value. In addition, the substitution will
result in no additional fees for Contract owners, nor will current
charges be increased. None of the contractual obligations currently
assumed by the Company will in any way be abridged or modified as a
result of the substitution.
7. Applicants further represent that Contract owners will in no way
bear any added cost or expense in connection with the proposed
substitution, including any additional brokerage costs or expense. In
addition, Contract owners will be apprised of the substitution well in
advance of the Exchange Date. The Contracts permit exchanges among
funds as often as once per business day with no charge. Accordingly,
Contract owners will be free to re-allocate their investment in the
Contracts, if they choose to do so, prior to the Exchange Date. The
proposed substitution will in no way alter a Contract owner's right to
surrender a Contract in accordance with its terms.
8. Applicants further represent that the proposed substitution
should in no way affect whatever tax benefits Contract owners currently
enjoy as a result of holding the Contracts and will not engender any
adverse tax consequences.
Conclusion
For the reasons summarized above, applicants assert that the
proposed substitution is consistent with the protection of investors
and the purposes fairly intended by the policy and provisions of the
1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-2358 Filed 1-30-97; 8:45 am]
BILLING CODE 8010-01-M
