[Federal Register Volume 59, Number 204 (Monday, October 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26218]


[[Page Unknown]]

[Federal Register: October 24, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-2063; File No. 812-9158]

 

Nationwide Variable Account-7, et al.

October 17, 1994.
agency: Securities and Exchange Commission (``SEC'' or the 
``Commission'').

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''), 
Nationwide Variable Account-7 (the ``Account'') and Fidelity 
Investments Institutional Services Company, Inc. (``Fidelity'').

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) of the 
1940 Act.

summary of application: Applicants seek an order permitting them to 
deduct a daily charge from the assets of the Account for mortality and 
expense risks in connection with the offering of certain variable 
annuity contracts.

filing date: The application was filed on August 10, 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 on this application by writing to the 
Secretary of the SEC and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on November 14, 1994 and should be accompanied 
by proof of service on Applicants in the form of an affidavit or, for 
lawyers, by certificate of service. 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 Fifth Street NW., Washington, DC 20549. 
Applicants: Steven Savini, McCutchan, Druen, Rath & Dietrich, One 
Nationwide Plaza, Columbus, Ohio 43216.

for further information contact: Barbara J. Whisler, Senior Attorney at 
(202) 942-0670, 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 Public 
Reference Branch of the SEC.

Applicants' Representations

    1. Nationwide is a stock life insurance company incorporated under 
the laws of Ohio. The Account was established under Ohio law on July 
22, 1994 and is registered as a unit investment trust with the 
Commission (file Nos. 33-82174 and 33-82190). Applicants incorporate by 
reference the registration statements for the Account filed on Forms N-
4 with the Commission. The Account will fund two types of contracts: 
individual flexible purchase payment deferred variable annuity 
contracts (the ``Flexible Premium Contracts''); and, modified single 
premium deferred variable annuity contracts (the ``Single Premium 
Contracts'', together, with the Flexible Premium Contracts, the 
``Contracts'').
    2. Fidelity serves as the general distributor for the Contracts.
    3. The Contracts are sold to individuals either as nonqualified 
contracts or as individual retirement annuities which may qualify for 
special tax treatment under the provisions of Section 408(b) of the 
Internal Revenue Code of 1986, as amended (the ``Code''). The Flexible 
Premium Contracts may also be sold as qualified contracts (to qualified 
plans on behalf of qualified plan participants) which may qualify for 
special federal tax treatment under the provisions of Section 401 of 
the Code or as Section 403(b) tax sheltered annuities. Purchase 
payments may be allocated by the Contract owner to one or more 
subaccounts of the Account. Each subaccount of the Account will invest 
at net asset value in shares of corresponding mutual funds registered 
under the 1940 Act. For Flexible Premium 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 Individual Premium Contracts the initial 
purchase payment must be at least $15,000 with additional payments, if 
any, of at least $5,000. Additional purchase payments under Individual 
Premium Contracts are not permitted for Contracts purchased in New 
York. Prior to the annuity commencement date, a Contract owner may 
elect any of three annuity payment options.
    4. Upon withdrawal of part or all of the Contract value, a 
contingent deferred sales charge (the ``Sales Charge'') may be imposed 
by Nationwide. The Sales Charge is calculated by multiplying the 
applicable percentage by the amount withdrawn and is deducted from the 
amount withdrawn rather than from the contract value remaining after 
withdrawal. The Sales Charge will be applied as follows:

------------------------------------------------------------------------
                                                                 Sales  
            Number of years from date of payment                charge  
                                                              percentage
------------------------------------------------------------------------
0...........................................................          7 
1...........................................................          6 
2...........................................................          5 
3...........................................................          4 
4...........................................................          3 
5...........................................................          2 
6...........................................................          1 
7...........................................................          0 
------------------------------------------------------------------------

    5. After the first Contract year, owners of Flexible Premium 
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. Withdrawals 
from individual retirement annuities made to satisfy minimum 
distribution rules, as required under the Code, are not subject to a 
Sales Charge. Additionally, certain withdrawals not subject to a Sales 
Charge may be made from Flexible Premium Contracts issued as 403(b) tax 
sheltered annuities or as qualified contracts under Section 401 of the 
Code. No Sales Charge will apply when withdrawals are made because a 
qualified plan participant or 403(b) tax sheltered annuity Contract 
owner dies, experiences financial hardship, becomes disabled, attains 
age 59\1/2\ and has participated in the Contract for a minimum of 
fifteen years, or annuitizes after two years in the Contract.
    6. Owners of Individual Premium 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. Additionally, if the owner of the Contract 
withdraws amounts pursuant to a systematic withdrawal program under the 
Contract, the owner annually may withdraw, free of Sales Charge, an 
amount up to the greater of: (a) 10% of the sum of all purchase 
payments made to the Contract at the time of withdrawal, less any 
purchase payments withdrawn; or (b) a specified percentage of the 
Contract value based upon the Contract owner's age as set forth in the 
application.
    7. An annual Contract maintenance charge of $30 is deducted from 
the value of the Contract with respect to Flexible Premium Contracts. 
If the Contract is a qualified contract or a 403(b) tax sheltered 
annuity, the charge will be either $12 or $0 depending, according to 
Applicants, upon certain factors and objective standards which will be 
determined on a nondiscriminatory basis by Nationwide. Additionally, an 
administration charge equal on an annual basis to 0.05% of the daily 
net asset value of the Account is deducted from the Contract value. 
This administration charge is deducted during both the accumulation and 
the annuity phases of the Contract.
    8. There is no Contract maintenance charge deducted from the value 
of the Individual Premium Contracts. An administration charge equal on 
an annual basis to 0.15% of the daily net asset value of the Account is 
deducted from the Contract value during both the accumulation and the 
annuity phases of the Contract. Nationwide estimates that the annual 
administration charge of 0.05% for the Flexible Premium Contracts (even 
when this charge is added to the $30 annual Contract maintenance 
charge) and the annual administration charge of 0.15% for the 
Individual Premium Contracts will yield an amount considerably less 
than the current and projected future administrative costs of 
Nationwide. Applicants state that Nationwide will rely on Rule 26a-1 
under the 1940 Act in deducting both administration charges for the 
Contracts and the Contract maintenance charges for the Contracts and 
the Contract maintenance charge associated only with the Flexible 
Premium Contracts. Additionally, Applicants represent that the annual 
Contract maintenance charge and the administration charges will never 
increase. Applicants further state that Nationwide will monitor the 
proceeds of the charges to ensure that the charges do not exceed 
expenses.
    9. Nationwide will impose a daily charge equal to an annual 
effective rate of 1.25% of the value of the net assets of the Account 
to compensate Nationwide for assuming certain mortality and expense 
risks in connection with the Contracts. Approximately .80% of the 1.25% 
charge is attributable to mortality risk, and approximately .45% is 
attributable to expense risk. If the mortality and expense risk charge 
is insufficient to cover actual costs and assumed risks, Nationwide 
will bear the loss. Conversely, if the charge exceeds costs, the excess 
will be profit to Nationwide. If Nationwide realizes a profit from the 
charge, the profit will become part of Nationwide's general account and 
may be used in Nationwide's discretion.
    10. Applicants state that the mortality risk borne by Nationwide 
consists of: (a) The guarantee to make monthly payments for the 
lifetime of the annuitant regardless of how long that annuitant may 
live; and (b) the guaranteed minimum death benefit risk. Applicants 
state that the guaranteed minimum death benefit risk assumed by 
Nationwide in connection with the Flexible Premium Contracts consists 
of Nationwide's promise to return, at a minimum, the Contract owner's 
purchase payments upon the death of the designated annuitant prior to 
the annuity commencement date. This promise is applicable even where 
the investment experience in the Account has eroded the purchase 
payments made by the Contract owner. Where the annuitant dies after his 
or her 75th birthday, the death benefit is limited to the value of the 
Contract.
    11. Applicants state that the guaranteed minimum death benefit risk 
assumed by Nationwide in connection with the Individual Premium 
Contracts consists of Nationwide's promise to pay a death benefit equal 
to the greatest of: (a) The sum of all purchase payments made to the 
Contract less any purchase payments withdrawn; (b) the value of the 
Contract; or, (c) the value of the Contract as of the most recent five 
year Contract anniversary, less any amounts withdrawn since that most 
recent anniversary, even where the investment experience in the Account 
has eroded the Contract owner's principal investment. Where the 
annuitant dies after his or her 86th birthday, the death benefit is 
limited to the Contract value.
    12. Applicants state that the expense risk assumed by Nationwide is 
the guarantee that the Contract maintenance charge and the 
administration charges will never increase regardless of actual 
expenses incurred by Nationwide.

Applicants' Legal Analysis and Conditions

    1. Applicants request that the Commission, pursuant to Section 6(c) 
of the 1940 Act, grant the exemptions from Sections 26(a)(2)(C) and 
27(c)(2) of the 1940 Act in connection with Applicants' assessment of 
the daily charge for mortality and expense risks. Sections 26(a)(2)(C) 
and 27(c)(2) of the 1940 Act, in pertinent part, 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 amount as the Commission may prescribe, for 
performing bookkeeping and other administrative services of a character 
normally performed by the bank itself.
    2. Applicants assert that the charge for mortality and expense 
risks is reasonable in relation to the risks assumed by Nationwide 
under the Contracts.
    3. Applicants represent that the charge of 1.25% for the mortality 
and expense risks is within the range of industry practice with respect 
to comparable annuity products. Applicants state that this 
representation is based upon the analysis by Nationwide of publicly 
available information relative to other insurance companies of similar 
size and risk ratings offering similar products. Applicants represent 
that Nationwide will maintain a memorandum, available to the Commission 
upon request, setting forth in detail the products analyzed in the 
course of, and the methodology and results of, its comparative survey. 
Nationwide also maintains a supporting actuarial memorandum, available 
to the Commission upon request, demonstrating the reasonableness of the 
mortality and expense risk charge given the risks assumed under the 
Contracts.
    4. Applicants represent that Nationwide has concluded that there is 
a reasonable likelihood that the proposed distribution financing 
arrangement will benefit the Account and the Contract owners. The basis 
for such conclusion is set forth in a memorandum which will be 
maintained by Nationwide and will be made available to the Commission 
upon request.
    5. Applicants represent that the Account will invest only in 
management investment companies which undertake, in the event such 
company adopts a plan under Rule 12b-1 of the 1940 Act to finance 
distribution expenses, to have such plan formulated and approved by the 
company's board of directors, a majority of whom are not interested 
persons of such company within the meaning of the 1940 Act.

Conclusion

    Applicants assert that for the reasons and upon the facts set forth 
above, the requested exemptions from Sections 26(a)(2)(C) and 27(c)(2) 
of the 1940 Act 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.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-26218 Filed 10-21-94; 8:45 am]
BILLING CODE 8010-01-M