[Federal Register Volume 59, Number 5 (Friday, January 7, 1994)]
[Notices]
[Pages 1051-1053]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-397]


[[Page Unknown]]

[Federal Register: January 7, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-19992; File No. 812-8692]

 

Nationwide Life Insurance Company, et al.

January 3, 1994.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``1940 Act'').

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APPLICANTS: Nationwide Life Insurance Company (``Nationwide Life''), 
Nationwide Variable Account-5 (the ``Separate Account''), and 
Nationwide Financial Services, Inc., collectively, the ``Applicants.''

RELEVANT 1940 ACT SECTIONS: Order requested under section 6(c) of the 
1940 Act for exemptions from sections 26(a)(2)(C) and 27(c)(2) thereof.

SUMMARY OF APPLICATION: Applicants seek an order permitting the 
deduction of a mortality and expense risk charge from the assets of the 
Separate Account which serves as a funding medium for certain variable 
annuity contracts (the ``Contracts'') issued by Nationwide Life.

FILING DATE: The application was filed on November 22, 1993.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing on the application by writing to the Secretary of the 
SEC and serving the Applicants with a copy of the request, either 
personally or by mail. Hearing requests must be received by the SEC by 
5:30 p.m. on January 28, 1994, and should be accompanied by proof of 
service on the Applicants in the form of an affidavit or, for lawyers, 
by certificate. Hearing requests should state the nature of the 
interest, the reason for the request, and the issues contested. Persons 
may request notification of the date of a hearing by writing to the 
Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 5th Street NW., Washington, DC 20549. 
Applicants, c/o Carol Edwards Dunn, Esq., McCutchan, Druen, Maynard, 
Rath & Dietrich, One Nationwide Plaza, Columbus, Ohio 43216.

FOR FURTHER INFORMATION CONTACT: Patrice M. Pitts, Attorney, or Michael 
V. Wible, Special Counsel, Division of Investment Management, Office of 
Insurance Products, at (202) 272-2060.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee from the 
SEC's Public Reference Branch.

Applicants' Representations

    1. Nationwide Life is a stock life insurance company incorporated 
under the laws of Ohio.
    2. Nationwide Life established the Separate Account on November 1, 
1989, under Ohio law. The Separate Account is registered under the 1940 
Act as a unit investment trust, and serves as a funding medium for the 
Contracts. Just prior to the filing of this application, the Separate 
Account filed a Form N-4 registration statement with the SEC to 
register the Contracts under the Securities Act of 1933.
    3. The Separate Account consists of several subaccounts, each of 
which invests in one or more portfolios of several underlying 
registered investment companies.
    4. Nationwide Financial Services, Inc., will serve as the general 
distributor for the Contracts.
    5. The Contracts are sold to individuals either as non-qualified 
Contracts or for use in retirement plans which may qualify for special 
federal tax treatment under the Internal Revenue Code of 1986, as 
amended.
    6. The initial first year purchase payment must be at least $1,500 
for non-qualified Contracts. However, if periodic payments are expected 
by Nationwide Life, the initial first year minimum purchase payment may 
be satisfied by purchase payments made on an annualized basis. The 
cumulative total of all purchase payments under a Contract may not 
exceed $1,000,000 without the prior consent of Nationwide Life.
    7. The Contract owner may select one of three annuity payment 
options, each of which provides for a series of annuity payments 
commencing on the annuity commencement date. If the designated 
annuitant dies prior to the annuity commencement date, a death benefit 
will be paid to the beneficiary either as a single sum payment or in 
accordance with an annuity payment option, as elected by the 
beneficiary. If the annuitant dies prior to age 75, the amount of the 
death benefit will be the greater of the Contract value, or the sum of 
all purchase payments less any amounts surrendered. The amount of the 
death benefit will be limited to the Contract value if the annuity 
commencement date is deferred beyond age 75 of the annuitant and the 
annuitant dies after attaining such age. If the annuitant dies after 
the annuity commencement date, the death benefit (if any) will be as 
specified in the annuity payment option elected.
    8. If the Contract value at the date on which annuity payments 
commence is less than $500, the Contract value may be distributed in 
one lump sum instead of annuity payments. If any annuity payment would 
be less than $20, Nationwide Life shall have the right to change the 
frequency of payments to such intervals as will result in payments of 
at least $20.
    9. No sales charge is deducted from purchase payments made under 
the Contracts. If part or all of the Contract value is withdrawn, a 
contingent deferred sales charge (``CDSC'') may be assessed by the 
Company, and deducted from the amount withdrawn. For purposes of the 
CDSC, withdrawals are considered to come first from the oldest purchase 
payment made to the Contract, then the next oldest purchase payment, 
and so forth. The CDSC is calculated by multiplying the applicable CDSC 
percentage noted below by the purchase payments being withdrawn:

------------------------------------------------------------------------
 Number of completed years from the    Contingent deferred sales charge 
     date of purchase payment                     percentage            
------------------------------------------------------------------------
                 0                                    7                 
                 1                                    6                 
                 2                                    5                 
                 3                                    4                 
                 4                                    3                 
                 5                                    2                 
                 6                                    1                 
                 7                                    0                 
------------------------------------------------------------------------


    Each Contract year after the first, the Contract owner may withdraw 
without CDSC an amount equal to 10% of the total sum of all purchase 
payments made to the Contract, less any purchase payments previously 
withdrawn which were subject to CDSC. This CDSC-free withdrawal 
privilege is non-cumulative. Free amounts not taken during any given 
Contract year cannot be taken as free amounts in a subsequent Contract 
year.
    10. An annual Contract Maintenance Charge of $30 is deducted from 
the Contract value, as well as an Administration Charge equal on an 
annual basis to 0.05% of the daily net asset value of the Variable 
Account. The 0.05% Administration Charge is deducted during both the 
``pay-in'' accumulation phase and the ``pay-out'' annuity phase. 
Nationwide Life relies upon Rule 26a-1 to assess both the Contract 
Maintenance Charge and the Administration Charge. In this regard, 
Nationwide Life will monitor the proceeds of the Administration Charge 
to ensure that they do not exceed expenses.
    11. Nationwide Life seeks to assess a mortality and expense risk 
charge at an annual rate of 1.25% of the value of the daily net asset 
value of the Separate Account. Of this amount, 0.80% represents 
mortality risks and 0.45% represents expense risks.
    12. The mortality risk Nationwide Life assumes is twofold: (a) the 
risk of guaranteeing to make monthly payments--at rates set at the time 
the Contract is issued--for the lifetime of the annuitant, no matter 
how long the annuitant may live, and no matter how long all annuitants 
as a class may live; and (b) the guaranteed minimum death benefit risk 
assumed by Nationwide Life in connection with its promise to return, at 
a minimum, the Contract owner's purchase payments upon death of the 
designated annuitant prior to the annuity commencement date, even if 
the investment experience in the Separate Account has eroded the 
Contract owner's principal investment.
    13. The expense risk Nationwide Life assumes results from its 
guarantee that the annual Contract charges (i.e., the Contract 
Maintenance Charge, the Administration Charge and the mortality and 
expense risk charge) will never be increased regardless of the actual 
expense incurred by Nationwide Life.
    14. If the mortality and expense risk charge is insufficient to 
cover the actual cost of the mortality and expense risk, the loss will 
be borne by Nationwide Life. Conversely, if the mortality and expense 
risk charge proves more than sufficient, the excess will be a profit to 
Nationwide Life and will become part of its general account surplus.

Applicants' Legal Analysis and Conclusions

    1. The Applicants request an exemption from sections 26(a)(2)(C) 
and 27(c)(2) of the 1940 Act to the extent relief is necessary to 
permit the deduction of a mortality and expense risk charge from the 
assets of the Separate Account which serves as a funding medium for the 
Contracts.
    2. Sections 26(a)(2)(C) and 27(c)(2), as herein pertinent, prohibit 
a registered unit investment trust and any depositor thereof or 
underwriter therefor from selling periodic payment plan certificates 
unless the proceeds of all payments (other than sales load) are 
deposited with a qualified bank as trustee or custodian and held under 
arrangements which prohibit any payment to the depositor or principal 
underwriter except a fee, not exceeding such reasonable amounts as the 
Commission may prescribe, for performing bookkeeping and other 
administrative services.
    3. The Applicants represent that the mortality and expense risk 
charge 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 Nationwide Life's analysis 
of publicly available information of other insurance companies of 
similar size and risk ratings offering similar products. Nationwide 
Life will maintain, and make available to the Commission, a memorandum 
setting forth in detail the products analyzed in the course of, and the 
methodology and results of, its comparative survey.
    4. Nationwide Life also maintains a supporting actuarial memorandum 
demonstrating the reasonableness of the mortality and expense risk 
charge, given the risks assumed under the Contracts. This memorandum 
will be made available to the Commission upon request.
    5. Should revenue from the CDSC prove insufficient to cover all 
sales expenses, Nationwide Life bears this shortfall in the general 
account. To this extent, some portion of the profit, if any, from the 
mortality and expense risk charge could be used to make up unrecovered 
sales expenses. Nationwide Life has concluded that there is a 
reasonable likelihood that the proposed distribution financing 
arrangement will benefit the Separate Account and the owners of the 
Contracts. The basis for this conclusion is set forth in a memorandum 
which will be made available to the Commission upon its request.
    6. Nationwide Life represents that the Separate Account will invest 
only in investment companies which, if they should adopt any 
distribution financing plan under Rule 12b-1 under the 1940 Act, will 
have a board of trustees or directors, the majority of which will be 
``disinterested,'' as defined by the Act. Such boards of directors or 
trustees must formulate and approve any such distribution plan.

Applicants' Conclusion

    The Applicants assert that for the reasons set forth above, the 
requested exemptions from sections 26(a)(2)(C) and 27(c)(2) of the 1940 
Act to deduct a mortality and expense risk charge under the Contracts 
meet the standards in section 6(c) of the 1940 Act. The Applicants 
assert that the requested exemptions are necessary or appropriate in 
the public interest or for the protection of investors, and for 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. 94-397 Filed 1-6-94; 8:45 am]
BILLING CODE 8010-01-M