[Federal Register Volume 62, Number 21 (Friday, January 31, 1997)]
[Notices]
[Pages 4821-4824]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2358]


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

SECURITIES AND EXCHANGE COMMISSION
[Rel. No IC-22479; File No. 812-10390]


Nationwide Life Insurance Company, et al.

January 24, 1997.
AGENCY: The Securities and Exchange Commission (the ``Commission'').

ACTION: Notice of application for an order pursuant to the Investment 
Company Act of 1940 (``1940 Act'').

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

APPLICANTS: Nationwide Life Insurance Company (the ``Company''), 
Nationwide Fidelity Advisor Variable Account (``Separate Account'') and 
Fidelity Investments Institutional Services Company, Inc.

RELEVANT 1940 ACT SECTIONS: Order requested pursuant to Section 26(b).

SUMMARY OF THE APPLICATION: Applicants seek an order approving the 
proposed substitution of shares of certain portfolios of the Variable 
Insurance Products Funds (``VIP'') and the Variable Insurance Products 
Funds II (``VIP II'') for shares of certain funds of the Fidelity 
Advisor Annuity Fund (``FAA'') currently held by the Separate Account.

FILING DATES: The application was filed on October 10, 1996, and 
amended on January 17, 1997.

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 by writing to the Secretary of the 
Commission and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests should be received by the 
Commission by 5:30 p.m. on February 18, 1997, 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 requestor's interest, the reason for the request, and the 
issues contested. Persons may request notification of a hearing by 
writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549. Applicants, c/o Steven Savini, 
Druen, Rath & Dietrich, One Nationwide Plaza, 1-09-V8, Columbus, Ohio 
43216.

FOR FURTHER INFORMATION CONTACT:
Veena K. Jain, Attorney, or Kevin M. Kirchoff, Branch Chief, Office of 
Insurance Products (Division of Investment Management), at (202) 942-
0670.

SUPPLEMENTARY INFORMATION: Following is a summary of the application; 
the complete application is available for a fee from the Public 
Reference Branch of the Commission.

Applicants' Representations

    1. The Company, a stock life insurance company organized under Ohio 
law, is wholly owned by Nationwide Corporation and is licensed to do 
business in all fifty states, the District of Columbia, and Puerto 
Rico.
    2. The Separate Account was established by the Company to fund 
certain variable annuity contracts and is registered pursuant to the 
1940 Act as a unit investment trust.
    3. The Separate Account issues two classes of contracts, individual 
flexible purchase payment deferred variable annuity contracts 
(``Flexible Contracts'') and modified single premium deferred variable 
annuity contracts (``Modified Contracts,'' together with Flexible 
Contracts, the ``Contracts'').
    4. The Contracts are sold as non-qualified contracts or as 
individual retirement annuities governed by Section 408(b) of the 
Internal Revenue Code (``Code''). The Flexible Contracts may also 
qualify for federal tax treatment under the provisions of Sections 401 
or 403(b) of the Code. For Flexible 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 Modified Contracts the initial purchase 
payment must be at least $15,000 with additional payments, if any, of 
at least $5,000.
    5. Upon withdrawal of part of all of the Contract value, a 
contingent deferred sales charge (the ``Sales Charge'') may be imposed. 
The Sales Charge is calculated by multiplying the applicable percentage 
by the purchase payment amount withdraw, according to the following 
table:

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

[[Page 4822]]

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

    6. After the first Contract year, owners of Flexible 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 ``free withdrawal'' privilege is offered on a yearly 
basis after the first Contract year and 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.
    7. Beginning in the first Contract year, owners of the Modified 
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.
    8. An annual Contract maintenance charge of $30 is deducted from 
the value of the Flexible Contracts. If the Contract is a qualified 
contract or 403(b) tax sheltered annuity, the charge is either $12 or 
$0. Additionally, an administration charge equal on an annual basis to 
0.05% of the daily net asset value of the Separate Account is deducted 
from the Flexible Contract value. There is no Contract maintenance 
charge deducted from the value of the Modified Contracts. An 
administration charge equal on an annual basis to 0.15% of the daily 
net asset value of the Separate Account is deducted from the Modified 
Contract value. The Company also imposes a daily charge equal to an 
annual effective rate of 1.25% of the net assets of the Separate 
Account in connection with the assumption of certain mortality and 
expense risks.
    9. The prospectus for the Contracts provides that the Company may 
substitute shares of another mutual fund for underlying mutual fund 
shares if the mutual fund options available under the Contracts are no 
longer available for investment by the Separate Account or if, in the 
judgment of the Company's management, further investment in such 
underlying mutual fund shares becomes inappropriate in view of the 
purposes of the Contracts.
    10. Purchase payments under the Contracts are allocated to the 
Separate Account and invested at net asset value in shares of FAA. FAA 
is organized as a Massachusetts business trust and registered pursuant 
to the 1940 Act as an open-end investment company. FAA is currently 
comprised of six diversified funds that are offered exclusively to the 
Separate Account: FAA Overseas Fund, FAA Growth Opportunities Fund, FAA 
Income & Growth Fund, FAA Government Investment Fund, FAA High Yield 
Fund, and FAA Money Market Fund. The funds are managed by Fidelity 
Management & Research Company (``FMR''), which is registered as an 
investment adviser pursuant to the Investment Advisers Act of 1940. FMR 
is indirectly owned by FMR Corp. (``Fidelity'').
    11. VIP and VIPII are organized as Massachusetts business trusts 
and were established on November 13, 1981, and March 21, 1988, 
respectively. VIP and VIPII are registered pursuant to the 1940 Act as 
open-end management investment companies and are managed by FMR. Shares 
of the portfolios of VIP and VIPII are issued to insurance company 
separate accounts to fund variable life insurance and variable annuity 
products.
    12. Applicants propose to substitute shares of three portfolios of 
VIP and one portfolio of VIPII for four funds of FAA held by the 
Separate Account:
    a. Shares of the VIP Overseas Portfolio are proposed to be 
substituted for shares of the FAA Overseas Fund. Applicants represent 
that the investment objectives of the FAA Overseas Fund and the VIP 
Overseas Portfolio are virtually identical. Both funds seek growth of 
capital by investing primarily in securities of issuers whose principal 
activities are outside of the U.S. Both funds normally invest at least 
65% of their total assets in securities of issuers from at least three 
different countries outside of North America.
    b. Shares of the VIP High Income Portfolio are proposed to be 
substituted for shares of the FAA High Yield Fund. Applicants represent 
that the investment objectives of the FAA High Yield Fund and the VIP 
High Income Portfolio are closely comparable. The VIP High Income 
Portfolio seeks high current income by investing primarily in income-
producing debt securities, preferred stocks, and convertible 
securities. In choosing investments the fund also considers growth of 
capital. The FAA High Yield Fund seeks a combination of a high level of 
income and the potential for capital gains by investing in a 
diversified portfolio consisting primarily of high-yielding, fixed-
income, and zero-coupon securities, such as bonds, debentures, notes, 
convertible securities, and preferred stocks.
    c. Shares of the VIPII Investment Grade Bond Portfolio are proposed 
to be substituted for shares of the FAA Government Investment Fund. 
Applicants submit that the overall purpose of the two funds is closely 
comparable and that the investment objectives of either the VIPII 
Investment Grade Bond Portfolio or the FAA Government Investment Fund 
are consistent with the interests of investors seeking investment 
opportunities consisting mostly of debt obligations in the form of 
fixed interest securities. The VIPII Investment Grade Bond Portfolio 
seeks as high a level of current income as is consistent with the 
preservation of capital by investing primarily in a range of investment 
grade, fixed-income securities. As of December 31, 1995, the fund's 
dollar-weighted average maturity was approximately 7.5 years. The FAA 
Government Investment Fund seeks a high level of current income by 
investing primarily in obligations issued or guaranteed by the U.S. 
government or any of its agencies or instrumentalities. As of December 
31, 1995, the fund's dollar-weighted average maturity was approximately 
8.8 years.
    d. Shares of the VIP Money Market Portfolio are proposed to be 
substituted for shares of the FAA Money Market Fund. Applicants 
represent that the investment objectives of the FAA Money Market Fund 
and the VIP Money Market Portfolio are identical. Both seek to obtain 
as high a level of current income as is consistent with preserving 
capital and providing liquidity. Both invest in high quality, short-
term money market securities and try to maintain a stable $1.00 share 
price.
    13. FAA, VIP, and VIPII (and each of their respective funds or 
portfolios) are managed by FMR, which employs essentially the same 
methodology for each of the non-money market portfolios or funds in 
calculating management fees and other expenses. The management fee for 
each VIP and VIPII portfolio (excluding the VIP Money Market Portfolio) 
as well as each of the FAA funds (excluding the FAA Money Market Fund) 
are calculated by adding a group fee rate to an individual fund fee 
rate and multiplying the result by each portfolio's average net assets. 
The group fee rate is based on the average net assets of all the mutual 
funds advised by FMR and cannot exceed certain maximum rates. The 
management fees for the FAA Money Market Fund and the VIP Money Market 
Portfolio are calculated by multiplying the sum of the two components 
by average net assets and adding an

[[Page 4823]]

income-based fee. One component is the group fee rate. The other 
component, the individual fund fee rate, is 0.03%. The income-based fee 
is 6% of the fund's gross income in excess of a 5% yield, and the fee 
is capped at 0.24% of the fund's average net assets.
    14. The following chart represents the management fees and other 
financial data for each of the FAA funds to be replaced, and the same 
data for the corresponding VIP or VIPII portfolio that will serve as a 
substitute. The ``Other Expenses'' consist of operating costs paid to 
transfer agency and shareholder servicing affiliates of Fidelity and 
FMR. The ``Expense Ratio'' data represent each fund's total expenses as 
a percentage of the fund's average net assets. All data presented, 
including ``Total Return'' data, represent the financial status of each 
fund for the year 1995, as of December 31, 1995.

----------------------------------------------------------------------------------------------------------------
                                                                 Total                                          
                                                  Group fund   management     Other       Expense       Total   
                      Fund                         fee rate       fee        expenses      ratio        return  
                                                  (percent)    (percent)    (percent)    (percent)    (percent) 
----------------------------------------------------------------------------------------------------------------
FAA Money Market Fund..........................       0.1482         0.24         0.55         0.79         5.17
VIP Money Market Portfolio.....................       0.1482         0.24         0.06         0.33         5.87
FAA Overseas Fund..............................       0.3097         0.00         1.50         1.50        10.20
VIP Overseas Portfolio.........................       0.3097         0.76         0.09         0.91         9.74
FAA High Yield Fund............................       0.1482         0.43         0.57         1.00        20.12
VIP High Income Portfolio......................       0.1482         0.60         0.08         0.71        20.72
FAA Government Investment......................       0.1482         0.45         1.00         1.00        16.54
VIP Investment Grade Bond......................       0.1482         0.45         0.09         0.59        17.32
----------------------------------------------------------------------------------------------------------------

    15. A prospectus for each of the VIP and VIPII portfolios to be 
substituted will be provided to each Contract owner. In addition, a 
prospectus supplement will describe the fact that the Company is in the 
process of applying for approval from the Securities and Exchange 
Commission to substitute securities as contemplated in the current 
prospectuses for the Contracts. Following the substitution, Contract 
owners will be free to re-allocate their investment in the Contract 
among the existing portfolios and six new portfolios to be added as 
investment options under the Contracts.
    16. The Company will establish a date on which the substitution 
will be effected (the ``Exchange Date''), which will be no later than 
forty-five days after the issuance of the order sought by Applicants. 
Contract owners will be notified of the Exchange Date; those with 
interests remaining in any of the four funds to be removed (the FAA 
Money Market Fund, the FAA Overseas Fund, the FAA High Yield Fund, and 
the FAA Government Investment Fund) will be advised that these funds 
will be replaced on the Exchange Date. Contract owners also will be 
advised that they are free to make changes in allocation among any of 
the investment options available under the Contracts, in advance of the 
Exchange Date. All necessary forms and other information necessary for 
Contract owners to make exchanges among investment options will be 
provided.
    17. On the Exchange Date, all shares held by the Separate Account 
in the FAA Money Market Fund, the FAA Overseas Fund, the FAA Government 
Investment Fund, and the FAA High Yield Fund will be redeemed, 
resulting in a complete liquidation of these sub-accounts of the 
Separate Account. Contemporaneously with the redemption of such shares, 
the Separate Account will purchase shares in the VIP Money Market 
Portfolio, the VIP Overseas Portfolio, the VIPII Investment Grade Bond 
Portfolio, and the VIP High Income Portfolio. Securities of the 
affected funds of FAA will be distributed in kind and will be used to 
purchase shares of the corresponding portfolios of VIP and VIPII that 
will serve as substitute funds. All shares will be purchased and 
redeemed at prices based on the current net asset values per share next 
computed after receipt of the redemption request and in a manner 
consistent with Rule 22c-1 under the 1940 Act. All Contract owners 
affected by the Exchange Date transaction will receive a confirmation 
of the transaction within five days of the Exchange Date, in accordance 
with Rule 10b-10 under the Securities Exchange Act of 1934.

Applicants' Legal Analysis

    1. Section 26(b) of the 1940 Act prohibits a depositor or trustee 
of a registered unit investment trust holding the securities of a 
single issuer from substituting another security for such security 
unless the Commission has approved the substitution after finding that 
it is consistent with the protection of investors and the purposes 
fairly intended by the policy and provisions of the 1940 Act.
    2. Applicants request that the Commission issue an order pursuant 
to Section 26(b) of the 1940 Act to permit the Separate Account to 
substitute shares of the VIP Money Market Portfolio, the VIP Overseas 
Portfolio, the VIP High Income Portfolio, and the VIPII Investment 
Grand Bond Portfolio for shares of the FAA Money Market Fund, the FAA 
Overseas Fund, the FAA High Yield Fund, and the FAA Government 
Investment Fund, respectively.
    3. Applicants represent that, to the extent that any aspect of the 
proposed substitution requires approval under Section 11 of the Act, 
they will rely upon Rule 11a-2 under the 1940 Act.
    4. Applicants represent that the proposed substitution, in 
accordance with the standards set forth under Section 26(b) of the Act, 
is in the best interest of Contract owners. With respect to management 
and fund objectives, the FAA funds are closely comparable (and in two 
cases, the FAA Money Market Fund and the FAA Overseas Fund, practically 
identical) to the VIP and VIPII portfolios that are proposed as 
substitutes. Accordingly, the proposed substitution should not create 
incentives for Contract owners to surrender Contracts and seek out 
other investment opportunities (incurring additional sales charges) in 
order to maintain a desired investment strategy. Applicants submit that 
the close comparability of the funds proposed as substitutes ensures 
that investment strategies currently employed by Contract owners may be 
maintained after the substitution.
    5. Applicants state that the VIP and VIPII portfolios are currently 
offered to more than forty five different insurance company separate 
accounts. The FAA funds are offered only to the Separate Account. 
Applicants represent that the VIP and VIPII portfolios have 
significantly greater assets than the FAA funds and, accordingly, have 
much lower expenses as a percentage of net assets than do the FAA 
funds. Lower per share expenses create the opportunity for better 
performance

[[Page 4824]]

among mutual funds with similar management and investment objectives. 
In addition, Applicants state that the elimination of four of the FAA 
funds after the proposed substitution will allow FMR, the advisor for 
the VIP and VIPII portfolios (as well as for the FAA funds), to 
eliminate duplicative efforts and realize further economies of scale 
(through the addition of assets to the VIP and VIPII portfolios), which 
can be then passed on to owners of the Contracts issued by the Separate 
Account in the form of lower expense ratios and the opportunity for 
better investment performance.
    6. Applicants represent that the substitution will take place at 
relative net asset value with no increase or decrease in the amount of 
any Contract owner's Contract value. In addition, the substitution will 
result in no additional fees for Contract owners, nor will current 
charges be increased. None of the contractual obligations currently 
assumed by the Company will in any way be abridged or modified as a 
result of the substitution.
    7. Applicants further represent that Contract owners will in no way 
bear any added cost or expense in connection with the proposed 
substitution, including any additional brokerage costs or expense. In 
addition, Contract owners will be apprised of the substitution well in 
advance of the Exchange Date. The Contracts permit exchanges among 
funds as often as once per business day with no charge. Accordingly, 
Contract owners will be free to re-allocate their investment in the 
Contracts, if they choose to do so, prior to the Exchange Date. The 
proposed substitution will in no way alter a Contract owner's right to 
surrender a Contract in accordance with its terms.
    8. Applicants further represent that the proposed substitution 
should in no way affect whatever tax benefits Contract owners currently 
enjoy as a result of holding the Contracts and will not engender any 
adverse tax consequences.

Conclusion

    For the reasons summarized above, applicants assert that the 
proposed substitution is 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. 97-2358 Filed 1-30-97; 8:45 am]
BILLING CODE 8010-01-M