[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]



-----------------------------------------------------------------------

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'').

-----------------------------------------------------------------------

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
------------------------------------------------------------------------
0..........................................................            7
1..........................................................            6
2..........................................................            5
3..........................................................            4
4..........................................................            3
5..........................................................            2
6..........................................................            1
7..........................................................            0
------------------------------------------------------------------------

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   
------------------------------------------------------------------------
Under 59-\1/2\............................................             5
59-\1/2\ to 70\1/2\.......................................             7
70-\1/2\ to 75............................................             9
75 and over...............................................            13
------------------------------------------------------------------------

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