[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