[Federal Register Volume 60, Number 197 (Thursday, October 12, 1995)]
[Notices]
[Pages 53225-53228]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-25253]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-21397; File No. 812-9512]
Nationwide Life Insurance Company, et al.
October 5, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS: Nationwide Life Insurance Company (``NWL''), Nationwide
Life and Annuity Insurance Company (``NWLAIC'') (together, the
``Companies''); Nationwide Variable Account, Nationwide Variable
Account II, Nationwide Variable Account 3, Nationwide Variable Account
4, Nationwide Variable Account 5, Nationwide Variable Account 6,
Nationwide Multi-Flex Variable Account, Nationwide Fidelity Advisor
Variable Account (together, the ``NWL Accounts''); Nationwide VA
Separate Account-A, Nationwide VA Separate Account-B, Nationwide VA
Separate Account-C (together, the ``NWLAIC Accounts;'' the NWL Accounts
and the NWLAIC Accounts are herein collectively referred to as the
``Existing Accounts''); Fidelity Investments Institutional Services
Company, Inc. (``Fidelity''); and Nationwide Financial Services, Inc.
(``NFS'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
granting an exemption from sections 26(a)(2)(C) and 27(c)(2) of the
Act.
SUMMARY OF APPLICATION: Applicants request an order permitting NWL and
NWLAIC to deduct mortality and expense risk charges from the assets of
certain separate accounts that fund certain group or individual
deferred variable annuity contracts.
FILING DATES: The application was filed on March 6, 1995, and was
amended on August 16, 1995. Applicants have agreed to file an amendment
during the notice period, the substance of which is included in this
notice.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request
[[Page 53226]]
a hearing by writing to the SEC's Secretary and serving applications
with a copy of the request, personally or by mail. Hearing requests
should be received by the Commission by 5:30 p.m. on October 30, 1995,
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 SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549;
NWL and NWLAIC, One Nationwide Plaza, Columbus, Ohio 43216; and
Fidelity, 82 Devonshire Street, Boston, Massachusetts 021090.
FOR FURTHER INFORMATION CONTACT:
Sarah A. Wagman, Staff Attorney, at (202) 942-0654, or Robert A.
Robertson, Branch Chief, at (202) 942-0564 (Division of Investment
Management, Office of Investment Company Regulation).
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application may be obtained for a fee form the SEC's
Public Reference Branch.
Applicants' Representations
1. NWL and NWLAIC are stock life insurance companies incorporated
under Ohio law. NWLAIC is a wholly-owned subsidiary of NWL.
2. The NWL Accounts were established by NWL, and the NWLAIC
Accounts by NWLAIC, to fund certain group or individual deferred
variable annuity contracts, including the contracts described in the
application the (``Subject Contracts''). The first Subject Contract
(``Subject Contract No. 1'') is funded through the Nationwide Variable
Account. The second Subject Contract (``Subject Contract No. 2'') is
funded through Nationwide VA Separate Account-B. The third Subject
Contract (``Subject Contract No. 3'') is funded through Nationwide
Fidelity Advisory Variable Account.
3. The Existing Accounts are registered with the SEC as unit
investment trusts under the Act. Applicants request that the relief
sought herein extent to all future separate accounts (``Future
Accounts''; together with the Existing Accounts, the ``Separate
Accounts'') which may be established by NWL or NWLAIC for the purpose
of funding the Subject Contracts and any contracts established by NWL
or NWLAIC in the future which will be substantially similar in all
material respects to Subject Contracts Nos. 1, 2, or 3 (``Future
Contracts;'' together with the Subject Contracts, the ``Contracts'').
Future Contracts established under any Existing Account will be offered
as separate classes of securities under that Existing Account. The
Contracts shall be registered as securities under the Securities Act of
1933.
4. The Contracts may be sold as non-tax qualified contracts or as
Individual Retirement Annuities qualifying for special tax treatment
under section 408(b) of the Internal Revenue Code of 1986 (the
``Code''). The Contracts also may be sold as tax-qualified contracts
purchased and used in connection with retirement plans under section
401 of the Code, or as tax-sheltered annuities under section 403(b) of
the Code. Certain Contracts may qualify for special tax treatment under
section 408(a) of the Code.
5. Fidelity, a registered broker-dealer under the Securities
Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc. (the ``NASD''), is the principal underwriter
for Contracts funded through the Nationwide Fidelity Advisor Variable
Account. NFS, a registered broker-dealer under the Securities Exchange
Act of 1934 and a member of the NASD, is the principal underwriter for
Contracts funded through the Nationwide Variable Account and the
Nationwide VA Separate Account-B. Applicants request that the relief
sought herein extend to any other broker-dealer and NASD member which
may serve as the principal underwriter for the Contracts.
6. Purchase payments under the Contracts will be allocated to the
Separate Accounts and, through a number of subaccounts, will be
invested in shares of various mutual funds, as specified in the
application. The minimum initial purchase payment for Subject Contracts
Nos. 1, and 2 is $15,000. Subsequent purchase payments, if any, must be
at least $5,000 each under Subject Contract No. 1, and at least $1,000
each under Subject Contract No. 2. The minimum initial purchase payment
for Subject Contract No. 3 is $5,000. Subsequent purchase payments, if
any, must be at least $1,000 each. Future Contracts may have greater or
lesser minimum initial and subsequent purchase payments.
7. At any time prior to annuitization, the Contract owner may
select one of three annuity payment options, each of which provides for
a series of annuity payments commencing on the annuitization date. Each
Contract also provides for a death benefit if the annuitant dies during
the accumulation period. The death benefit, if the annuitant dies prior
to the annuitization date, and prior to his or her eighty-sixth
birthday, is the greater of: (a) The sum of all purchase payments made
under the Contract less any amounts surrendered, (b) the sum of the
value of all Separate Account accumulation units attributable to the
Contract plus any amount held under the Contract in the general account
of the Companies (the ``Contract Value''), or (c) the Contract Value as
of the most recent five-year Contract anniversary, less any amounts
surrendered since such anniversary. If the annuitant dies after the
annuitization date, the death benefit (if any) will be as specified
under the annuity payment option elected. If the annuitant dies after
his or her eighty-sixth birthday, the death benefit is limited to the
Contract Value.
8. The Companies will charge against the Contract Value the amount
of any premium taxes levied by a state or any other governmental entity
upon purchase payments received by the company. Premium tax rates
currently range from approximately 0% to 3.5%. The Companies currently
deduct such charges from a Contract owner's Contract Value either: (i)
At the time the Contract is surrendered, (ii) at annuitization, or
(iii) in those states that so require, at the time purchase payments
are made to the Contract.
9. The Companies permit unlimited transfers among the funds under
each of the Subject Contracts. No fees or charges are currently imposed
for such transfers. The Companies, however, reserve the right to impose
a maximum fee of $10 per transfer under Future Contracts.
10. The Companies deduct, during both the accumulation and
annuitization periods, administration charges of 0.15% (for Subject
Contract No. 1) and 0.20% (for Subject Contract No. 2) of the daily net
assets of the Nationwide Variable Account and Nationwide VA Separate
Account-B, respectively. NWL does not assess any administration charge
with respect to Subject Contract No. 3. The administration charge is an
amount not greater than expenses without profit actually incurred and
directly attributable to services provided by NWL and NWLAIC,
respectively. The Companies assess the administration charges in
reliance on rule 26a-1 of the Act and may, with respect to Future
Contracts that are substantially similar in all material respects to
either Subject Contract No. 1 or Subject Contract No. 2, assess
administration charges greater than those imposed under Subject
Contracts Nos. 1 and 2. Any such
[[Page 53227]]
administration charges will be assessed in accordance with rule 26a-
1(b), and the Companies shall monitor the proceeds of the
administration charge, and other similar administrative or contract
maintenance charges, including any transfer fee, to ensure that they do
not exceed expenses without profit. Applicants represent that any
administrative charge, contract maintenance charge, or transfer fee
shall not be increased during the life of a Contract. The Companies
believe that the administration charges will yield an amount
considerably less than the Companies' current and projected
administrative costs.
11. No sales charge is deducted from purchase payments made under
the Contracts. However, a contingent deferred sales charge (``CDSC'')
may be assessed by NWL or NWLAIC if part or all of the Contract Value
is withdrawn. Currently, a CDSC is only imposed under Subject Contract
No. 1. The CDSC is calculated by multiplying the purchase payments that
are withdrawn by a percentage, according to the following schedule:
------------------------------------------------------------------------
CDSC
Number of completed years from the date of purchase payment percentage
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0.......................................................... 7
1.......................................................... 6
2.......................................................... 5
3.......................................................... 4
4.......................................................... 3
5.......................................................... 2
6.......................................................... 1
7.......................................................... 0
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For purposes of imposing the CDSC, purchase payments are considered to
be withdrawn on a first-in, first-out basis, and purchase payments are
considered to be withdrawn before earnings thereon. Applicants believe
that the proceeds from the imposition of the CDSC may not be sufficient
to cover all sales expenses. With respect to Future Contracts
substantially similar in all material respects to Subject Contract No.
1, applicants reserve the right to impose a CDSC up to 9%, in
accordance with rule 6c-8(b)(1).
12. Under Subject Contract No. 1, each Contract year the annuitant
may withdraw, without the imposition of a CDSC, an amount equal to 10%
of the total sum of all purchase payments made up to the time of
withdrawal, less any purchase payments previously withdrawn that were
subject to the CDSC. The CDSC-free withdrawal privilege also may be
exercised pursuant to a systematic withdrawal program, under which the
annuitant may withdraw each Contract year, without the imposition of a
CDSC, an amount up to the greater of (a) 10% of the total sum of all
purchase payments made up to the time of withdrawal, less any purchase
payments previously withdrawn (the ``10% Withdrawal Privilege''), or
(b) the specified percentage of the Contract Value based on the
annuitant's age, as follows:
------------------------------------------------------------------------
Percentage
Annuitant's age of contract
value
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Under 59-\1/2\............................................ 5
59-\1/2\ to 70\1/2\....................................... 7
70-\1/2\ to 75............................................ 9
75 and over............................................... 13
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If total amounts withdrawn in any Contract year exceed the CDSC-free
amount as calculated in connection with the systematic withdrawal
privilege, the annuitant may only withdraw, without the imposition of a
CDSC, an amount equal to the 10% Withdrawal Privilege. The annuitant
may elect to withdraw such CDSC-free amounts only once each Contract
year.
13. The Companies intend to assess mortality and expense risk
charges against the assets of the Separate Accounts. The aggregate
mortality and expense risk charges are equal (for Subject Contracts
Nos. 1 and 2), on an annual basis, to 1.25% of the net asset value of
the Separate Accounts. Of this amount, 0.80% is attributable to
mortality risks, and 0.45% is attributable to expense risks. With
respect to Subject Contract No. 3, NWL assesses a mortality risk charge
equal, on an annual basis, to 0.80% of the net asset value of the
Separate Accounts, and does not assess an expense risk charge. With
respect to Future Contracts, the Companies reserve the right to assess
a maximum mortality risk charge of 0.95% of the daily net assets of the
Separate Accounts associated with Future Contracts, subject to
obtaining an appropriate SEC order. The mortality and expense risk
charges are guaranteed not to increase for the duration of a Contract.
14. The mortality risk the Companies assume is twofold: (a) the
annuity risk of guaranteeing to make monthly payments for the lifetime
of the annuitant regardless of how long the annuitant may live, and (b)
assuming the risk of a guaranteed minimum death benefit. The annuity
risk is present in the form of annuity purchase rates that are
guaranteed at issue for the life of the Contract. There is also the
risk that the average life expectancy of the entire population may grow
longer. The Companies assume an expense risk in connection with their
guarantee that they will not increase annual contract charges
regardless of actual expenses incurred.
15. If the mortality and expense risk charges are insufficient to
cover the actual costs of the mortality and expense risks, the loss
will be borne by the Companies. Conversely, if the mortality and
expense risk charges prove more than sufficient, the expense will be a
profit to the Companies. In such a situation, the profit will become
part of the general account surplus of either NWL or NWLAIC, depending
on which is the issuing company, and may be used to compensate each
Company for unrecovered distribution expenses.
Applicant's Legal Analysis
1. Applicants request an exemption under section 6(c) of the Act
from sections 26(a)(2)(C) and 27(c)(2) of the Act to permit the
deduction of mortality and expense risk charges from the assets of the
Separate Accounts under the Contracts.
2. Sections 26(a)(2)(C) and 27(c)(2), in relevant part, prohibit a
principle underwriter for, or depositor of, a registered unit
investment trust from selling periodic payment plan certificates unless
the proceeds of all payments, other than sales loads, on such
certificates are deposited with a qualified trustee or custodian,
within the meaning of section 26(a)(1), and are held under arrangements
that 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 trustee or custodian. The Companies' deduction of
mortality and expense risk charges from the assets of the Separate
Accounts may be deemed to be a payment prohibited by sections
26(a)(2)(C) and 27(c)(2).
3. Section 6(c) of the Act authorizes the Commission, by order upon
application, to conditionally or unconditionally grant an exemption
from any provision of the Act, or any rule or regulation promulgated
thereunder, if and to the extent that such exemption is necessary or
appropriate in the public interest and consistent with the protection
of investors and the purposes fairly intended by the policy and
provisions of the Act.
4. Applicants request an exemption under section 6(c) from sections
26(a)(2)(C) and 27(c)(2) to permit the issuance of Contracts subject to
the proposed mortality and expense risk charges. Applicants believe
that the proposed mortality and expense risk charges on the Subject
Contracts and
[[Page 53228]]
any Future Contracts funded through Existing or Future Accounts meet
the standards of sections 6(c). Applicants believe that any future
request for relief with respect to any Future Contract would be
substantively and materially the same as the relief sought herein.
Applicants believe that the requested relief would eliminate the need
for the filing of redundant exemptive applications or amendments,
thereby reducing administrative expenses, maximizing efficient use of
resources and, thus, promoting competitiveness in the variable annuity
market. The delay and expense of repeatedly seeking exemptive relief
would impair the Companies' ability to take advantage of business
opportunities as they arise.
5. The Companies believe that the level of the mortality and
expense risk charges is within the range of industry practice for
comparable annuity products and is reasonable in relation to the risks
assumed under the Contracts. This representation is based upon the
Companies' analysis of publicly available information regarding other
insurance companies of similar size and risk ratings offering similar
products. The Companies will maintain at their administrative offices,
made available to the SEC upon request, memoranda setting forth in
detail the products analyzed in the course of, and the methodology and
results of, their comparative review.
6. The Companies represent that, in connection with Future
Contracts (substantially similar in all material respects to Subject
Contracts Nos. 1 and 2 if a mortality and expense risk charge is
imposed; Subject Contract No. 3 if only a mortality risk charge is
imposed), any mortality and expense risk charges assessed shall be
within the range of industry practice for comparable annuity products
and shall be reasonable in relation to the risks assumed under the
Contracts. This representation will be based upon the Companies'
analysis of publicly available information regarding other insurance
companies of similar size and risk ratings offering similar products.
The Companies will maintain at their administrative offices, made
available to the SEC upon request, memoranda setting forth in detail
the products analyzed in the course of, and the methodology and results
of, their comparative review.
7. The Companies believe that there is a reasonable likelihood that
this distribution financing arrangement will benefit Existing Accounts
and Contract owners. The basis of this conclusion is set forth in
memoranda maintained by the Companies at their administrative offices,
made available to the SEC upon its request.
8. Applicants represent that, with respect to Future Contracts that
shall be substantially similar in all material respects to Subject
Contracts Nos. 1, 2, or 3, the Companies shall determine that there is
a reasonable likelihood that this distribution financing arrangement
will benefit Future or Existing Accounts and Future Contract owners.
The basis of this conclusion will be set forth in memoranda maintained
by the Companies at their administrative offices, made available to the
SEC upon its request.
9. Applicants represent that investments of the Separate Accounts
will be made only in investment companies that, if they adopt any
distribution financing plan under rule 12b-1 under the Act, will have
such plan formulated and approved by the investment companies' boards
of trustees or directors, the majority of which will not be
``interested persons'' as defined in the Act.
Conclusion
For the reasons set forth above, applicants believe that the
requested exemption is necessary or appropriate in the public interest
and consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 95-25253 Filed 10-11-95; 8:45 am]
BILLING CODE 8010-01-M
