[Federal Register Volume 66, Number 71 (Thursday, April 12, 2001)]
[Notices]
[Pages 18989-18993]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-9110]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24932; File No. 811-5999; 811-2520]


Nationwide Life Insurance Company, 
et al.

April 6, 2001.

AGENCY: The Securities and Exchange Commission (the ``Commission'').

ACTION:  Notice of application for an order of deregistration pursuant 
to Section 8(f) of the Investment Company Act of 1940 (``1940 Act'').

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

    Summary of Application: Applicants seek an order approving the 
deregistration pursuant to Section 8(f) of the Investment Company Act 
of 1940 of NACo Variable Account (``NACo Separate Account'') and the 
Nationwide DC Variable Account (``DCVA Separate Account'').
    Applicants: Nationwide Life Insurance Company (``Nationwide''), the 
NACo Separate Account and the DCVA Separate Account (the two separate 
accounts are referred to collectively as the ``Separate Accounts''). 
The foregoing are referred to collectively as the ``Applicants'').
    Filing Date: The application was filed on February 22, 2001 and 
amended on March 21, 2001, April 4, 2001, and April 6, 2001.
    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 April 30, 2001, 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 requester's interest, the reason for the request, and the 
issues contested. Persons who wish to be notified of a

[[Page 18990]]

hearing may request notification of a hearing by writing to the 
Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street NW., Washington DC 20549-0609. Applicants: Michael Moser or 
Michael Stobart, Nationwide Life Insurance Company, One Nationwide 
Plaza, 1-09-V3, Columbus, Ohio 43215.

FOR FURTHER INFORMATION CONTACT: Martha Atkins, Attorney, at (202) 942-
0668, or Keith Carpenter, Branch Chief, at (202) 942-0679, 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 SEC's Public 
Reference Branch, 450 Fifth Street NW., Washington DC 20549-0102 (tel. 
(202) 942-8090).

Applicants' Representations

    1. The Separate Accounts were established under Ohio law as 
segregated asset accounts of Nationwide and were registered under the 
1940 Act as unit investment trusts.\1\ Nationwide maintains and 
preserves the records of the Applicants as required by Rules 31a-1 and 
31a-2 of the 1940 Act and will continue to do so for the period 
specified in those rules.\2\ The Applicants are not parties to any 
litigation or administrative proceeding arising out of or in connection 
with the operations of the Separate Accounts. Currently, 55 different 
sub-accounts of the DCVA Separate Account and 41 different sub-accounts 
of the NACo Separate Account represent the investment options within 
the Separate Accounts. Each sub-account corresponds to a distinct open-
end management investment company or series thereof (``mutual fund'') 
registered under the 1940 Act. These are the only investments of the 
Separate Accounts and the Separate Accounts do not and will not 
purchase securities issued by any entity purchasing an annuity through 
the Applicant Separate Accounts, or any company directly or indirectly 
controlling, controlled by, or under common control with of any such 
entity. The DCVA Separate Account assets and liabilities both equal 
approximately $3.56 billion; the NACo Separate Account assets and 
liabilities both equal approximately $3.36 billion. The Separate 
Accounts' assets reflect the value of the underlying investment 
options, while the Separate Accounts' liabilities reflect the reserves 
held to meet contractual obligations to purchasers of annuities issued 
through the Separate Accounts.
---------------------------------------------------------------------------

    \1\ Pursuant to Ohio Revised Code Section 3907.15, DCVA Separate 
Account was established on November 2, 1977 (1940 Act File No. 811-
2520); and NACo Separate Account was established on September 7, 
1988 (1940 Act File No. 811-5999).
    \2\ Custodian of Records: John M. Davis, Assistant Vice 
President, Financial Operations, One Nationwide Plaza, 1-12-G3, 
Columbus, OH 43215, (614) 249-7892.
---------------------------------------------------------------------------

    2. The Separate Accounts were established for the purpose of 
funding group variable annuity contracts (``Contracts'') to be used as 
funding media for public sector deferred compensation plans governed 
under Section 457 of the Internal Revenue Code (``the Code''), which 
satisfy the requirements set forth in Code Section 457(g) that plan 
assets and income be held for the exclusive benefit of plan 
participants and beneficiaries (``Section 457 Plans''). Sponsors of 
such plans include states, the political subdivisions of states, and 
other non-federal governmental agencies and organizations exempt from 
taxation under the Code. Section 457 Plans are established by public 
sector employers for their employees for many of the same purposes and 
in much the same manner as Section 401(k) plans are established and 
maintained by private sector employers. Despite some variance in tax 
treatment under the Code, Section 457 Plans are, for practical 
purposes, the public sector equivalent of private sector 401(k) plans. 
While the vast majority of Contracts are issued to Section 457 Plans, 
they may also be used by governmental employers establishing retirement 
plans under Code Section 414(d) that qualify for favorable tax 
treatment. Such contracts are explicitly exempted from registration 
under the Securities Act of 1933 (``1933 Act'') and insurance company 
separate accounts issuing such contracts are excluded from the 
definition of ``investment company'' under the 1940 Act.\3\
---------------------------------------------------------------------------

    \3\ Securities arising out of a contract issued by an insurance 
company are exempted from registration under Section 3(a)(2)(C) of 
the 1933 Act if the security is issued in connection with a 
governmental plan as defined in Section 414(d) of the Code and such 
plan has been ``established by an employer for the exclusive benefit 
of its employees * * * if under such plan it is impossible * * * for 
any part of the corpus or income to be used for, or diverted to, 
purposes other than the exclusive benefit of such employees. * * *'' 
In addition, Section 3(c)(11) of the 1940 Act exempts from 
registration any separate account, the assets of which are derived 
from contributions under governmental plans in connection with which 
interests, participations, or securities are exempted from 
registration under the provisions of Section 5 of the 1933 Act by 
Section 3(a)(2)(C) of such Act.
---------------------------------------------------------------------------

    Applicants represent that the assets of the Separate Accounts 
derive solely from contributions made under retirement plan 
arrangements described in the preceding paragraph, which either qualify 
for favorable tax treatment under Section 414(d) of the Code or are 
Section 457 Plans. The Separate Accounts do not hold any assets 
attributable to individual retirement accounts or annuities established 
pursuant to Code Section 408 or to tax sheltered annuities or custodial 
accounts established pursuant to Code Section 403(b). The Separate 
Accounts sell contracts only to governmental entities (``Contract 
Owners'') eligible to sponsor retirement plans qualifying under Section 
414(d) (``Qualified Plans'') and Section 457 Plans (collectively, the 
``Plans''). The Separate Accounts will be used for no purpose other 
than to fund Plans that invest in the Separate Accounts through 
purchase of the Contracts.
    3. In practice, the sale of the Contracts differs markedly from the 
sale of most variable annuity contracts issued in conjunction with 
separate accounts registered under the 1940 Act. Typically, Nationwide 
may be selected as an investment provider to a public sector plan only 
after participating in extensive bid, proposal, and procurement 
processes that are normally prescribed by local statute, regulation or 
ordinance.\4\ Plans are normally represented in this process by legal 
counsel, benefits consultants, and investment advisers. A typical 
``request for proposal'' from a public sector plan may seek hundreds of 
pages of documentation regarding Nationwide, the contracts, and 
services being offered. This elaborate process stands in sharp contrast 
to the process by which ordinary consumers purchase interests in 
typical variable annuities or other investment company securities.
---------------------------------------------------------------------------

    \4\ See California Pub. Con. Code (Deering 2000); Del. Code Ann. 
tit. 29, section 69 (Lexis 2000); Mont. Code Ann. tit. 18 (1999); 
Nev. Rev. Stat. section 332 and section 333 (1999); Wash. Rev. Code 
tit. 39 (2000).
---------------------------------------------------------------------------

    4. The Contracts offered in conjunction with the Separate Accounts 
have been approved by insurance regulators in each of the fifty states.
    5. Applicants represent that if the Separate Accounts were 
established today for the purposes they currently serve, the Separate 
Accounts would not be registered under the 1940 Act. In addition, 
Applicants represent that the exclusive benefit requirement imposed on 
Section 457 Plans by the Small Business Job Protection Act of 1996 
(``Job Protection Act'') and the subsequent interpretation by the staff 
of the Commission with respect to registering separate accounts issuing

[[Page 18991]]

contracts to 457 Plans,\5\ as well as the changing requirements of the 
typical public sector plan over more than the last decade, have created 
circumstances making continued registered status for the Separate 
Accounts burdensome to Nationwide and the plans they serve.
---------------------------------------------------------------------------

    \5\ Massachusetts Mutual Life Insurance Company (pub. avail. 
Aug. 10, 1998).
---------------------------------------------------------------------------

    For example, when one of Applicants' existing public sector plan 
clients seeks to add, deselect, or substitute a particular underlying 
mutual fund, Applicants must either (a) find a way to make such changes 
applicable (or transparent to) all other public sector plans holding an 
interest in the Separate Account in question, or (b) deny the specific 
Contract owner/public sector plan request. Even when such changes can 
be made, Applicants must modify prospectuses through the post-effective 
amendment process and disseminate prospectuses (or prospectus 
supplements) reflecting such changes to all public sector plans/
Contract owners with interests in the Separate Account in question. In 
addition, Nationwide must seek the approval of the Commission under 
Section 26(b) of the 1940 Act (in the case of a substitution), and 
otherwise attempt to shoe-horn investment options and other plan-
specific attributes into the regulatory format associated with 
standardized, mass-distributed registered separate account/unit 
investment trust offerings. These processes create unwarranted 
administrative burdens, expense, and delays. Applicants' major 
competitors currently face no such similar requirements, thus creating 
a competitive disadvantage for the Applicants.
    6. Applicants represent that there are significant expenses 
incurred in connection with the regulatory requirements associated with 
offering investment media through registered separate accounts/unit 
investment trusts, such as costs related to printing, postage, 
professional, and registration fees (at the separate account level) by 
virtue of the registered status of the Separate Accounts. Applicants 
represent that, as unregistered entities, the Separate Accounts and 
Nationwide will be better able to respond to competitive pressures in 
terms of bids delivered to existing and prospective plan clients and 
this will serve the interests of Applicants and the plans.
    7. Applicants represent that, in response to the demand for 
flexibility and customization, the Separate Accounts were modified to 
permit a non-standardized pricing structure. Rather than dictating a 
price certain, Applicants apply a ten factor pricing algorithm to 
determine the fee level for each Contract Owner subject to a cap equal 
to 0.95% of the net assets of the Separate Accounts. The prospectuses 
for the Separate Accounts set forth the cap and the mechanism by which 
actual pricing for a specific plan is formulated. This disclosure 
cannot identify with particularity the expenses applicable to a given 
Contract Owner/governmental plan--this specific information is 
communicated by other means. In contrast, companies offering products 
other than through registered separate account unit investment trusts 
are able to deliver unified disclosure documents to plans that 
incorporate only investor-specific information. This eliminates the 
need for the often burdensome and potentially confusing exercise of 
synthesizing multiple sources of information. Applicants represent 
that, as unregistered entities, the Separate Accounts and Nationwide 
will be able to deliver less confusing, more plan-specific disclosure 
that will serve the interests of Applicants and the plans.
    8. Applicants represent that the granting of the Order requested in 
the amended application will in no way impair, abridge, or modify the 
contractual obligations owed by Nationwide to its existing Plan 
clients, with one exception. The Contracts offered by Nationwide, and 
purchased by the Plans pursuant to the bid and procurement processes 
outlined in section 3 supra, provide that Nationwide may change any 
provision of the Contract, at its discretion, upon 90 days written 
notice. The only provision of the Contract that will be affected by the 
deregistration of the Separate Accounts relates to the requirement to 
obtain the approval of the Commission for the substitution of 
securities in the Separate Accounts. Applicants have notified all 
Contract Owners of their efforts to deregister the Separate Accounts 
and the fact that the aforementioned provision relative to fund 
substitutions will be eliminated. Aside from this contractual change, 
no other provisions of any existing Contracts will be modified.
    Applicants represent that, within 3 days subsequent to the granting 
of the Order requested in this Amended Application, they will provide a 
plain English written notice to each Contract Owner explaining (a) that 
the Separate Accounts are no longer registered under the 1940 Act; (b) 
that interests arising out of the Contracts will not in the future be 
registered under the 1933 Act; (c) the consequences of the 
deregistration, including how the deregistration affects the legal 
rights and responsibilities of the Applicants, Contract Owners, and 
Plan participants, both as to interests arising out of the Contracts 
that were issued in the past and interests arising out of the Contracts 
to be issued in the future, which explanation of the consequences will 
include, without limitation, any diminution of the legal protections 
and rights of the Contract Owners and the Plan participants under the 
1940 Act, the 1933 Act, and the Securities Exchange Act of 1934 (the 
``Exchange Act''); and (d) that the Contract Owners may, at any time, 
surrender their Contracts for any reason without payment of any 
deferred sales load, surrender charge, or exit penalty of any kind.
    Within 75 days of the granting of the Order requested in this 
Amended Application, Applicants will furnish each Plan participant a 
plain English written notice which provides all of the information set 
forth in the preceding paragraph. In lieu of item (d) in the preceding 
paragraph, the notice to Plan participants shall explain their rights 
to transfer to other investment options under their Plan (in cases 
where there are other options) without payment of any deferred sales 
load, surrender charge, or exit penalty of any kind.
    In addition, subsequent to deregistration, Applicants will continue 
to furnish the Contract Owners and Plan participants with all data and 
information necessary for informed decision making in connection with 
participation in the Contract and utilization of the underlying 
investment options. This includes informational brochures about the 
Contracts (provided in lieu of variable annuity prospectuses); 
individual fund data sheets, summaries, and prospectuses; quarterly 
fund performance updates presented in conformity with National 
Association of Securities Dealers rules; transaction confirmations 
(Nationwide will continue to furnish transaction confirmations in the 
same manner it presently provides such information in accord with Rule 
10b-10 under the Exchange Act); as well as informational sheets that 
detail the phone numbers and websites for obtaining information 
associated with the Contracts.
    9. Applicants represent that all of their Contract Owners and Plan 
participants using the Separate Accounts as of the date of 
deregistration will not be subject as of that date, or in the future, 
to deferred sales loads, surrender charges or exit penalties of any 
kind.

[[Page 18992]]

Applicants' Legal Analysis

    1. Section 3(c)(11) of the 1940 Act excludes from the definition of 
investment company ``any separate account the assets of which are 
derived solely from * * * contributions under governmental plans in 
connection with which interests, participations, or securities are 
exempted from the registration provisions of Section 5 of the 
Securities Act of 1933 by section 3(a)(2)(C) of such Act. * * *'' Thus, 
for purposes of the application, separate accounts seeking an exemption 
must, under Section 3(c)(11) of the 1940 Act: (1) hold assets derived 
from governmental plan contributions; and (2) the ``interests, 
participations, or securities'' of these plans must be exempted from 
registration under Section 3(a)(2)(C) of the 1933 Act.
    2. Section 3(a)(2)(C) of the 1933 Act exempts ``any security 
arising out of a contract issued by an insurance company, which * * * 
is issued in connection with * * * a governmental plan as defined in 
Section 414(d) of [the Internal Revenue] Code which has been 
established by an employer for the exclusive benefit of its employees 
or their beneficiaries for the purpose of distributing to such 
employees or their beneficiaries the corpus and income of the funds 
accumulated under such plan, if under such plan it is impossible, prior 
to satisfaction of all liabilities with respect to such employees and 
their beneficiaries, for any part of the corpus or income to be used 
for, or diverted to, purposes other than the exclusive benefit of such 
employees or their beneficiaries. * * *'' Thus, in the context of the 
application, the second requirement for an exemption under Section 
3(c)(11) of the 1940 Act is met by an insurance contract issued to a 
Code Section 414(d) governmental plan that is established for the 
``exclusive benefit'' of plan participants and their beneficiaries.
    3. Prior to the enactment of the Job Protection Act in 1996, the 
assets of a deferred compensation plan sponsored by a State or local 
government or instrumentality were required by Code Section 457 to 
remain the property of the employer and to be subject to the claims of 
the employer's general creditors. Therefore, in order to be treated as 
a Section 457 Plan, the plan's assets could not be held for the 
exclusive benefit of its participants. Accordingly, the specific 
requirements of Code Section 457 contravened the exclusive benefit 
requirements of Section 3(a)(2) of the 1933 Act \6\ and the related 
investment company exemption of Section 3(c)(11) of the 1940 Act. 
During this period the staff of the Commission (the ``Staff'') issued 
relief on a no-action basis to insurers and banks offering annuity 
contracts and interests in collective trusts (respectively) to State 
and local government employers sponsoring deferred compensation plans 
meeting the eligibility requirements of Code Section 457 based on the 
representation that plan assets would not be used for any purpose other 
than for the exclusive benefit of plan participants and their 
beneficiaries.\7\ However, the Staff indicated that such a 
representation alone would not provide an adequate basis for relief 
from registration based on the exemption from registration under 
Section 3(a)(2) of the 1933 Act without additional specific 
restrictions being placed on an employer's ability to withdraw assets 
of the Plan.\8\
---------------------------------------------------------------------------

    \6\ Separate Account DCVA was formed in 1977 prior to any 
exemption from registration for governmental plans. In 1980, 
Congress added the Section 3(c)(11) exemption that includes the 
exemption for governmental plans. Senator Sarbanes, the sponsor of 
the 1980 Amendments, remarked before the Senate that the purpose of 
the bill was to ``exempt from registration bank and insurance 
company funding of certain public employee retirement plans without 
regard to their qualification under Section 401 of the IRS Code.'' 
(Emphasis added.) See 126 Cong. Rec. S 27273 (cum. ed. Sept. 25, 
1980). The legislative history gave rise to uncertainty as to the 
applicability of the Section 3(c)(11) exemption for 457 plans. See 
Wells Fargo Bank, N.A. (pub. avail. Sept. 7, 1988). Within this 
context Separate Account NACo registered in 1990.
    \7\ See The Lincoln National Life Insurance Company (pub. avail. 
Oct. 26, 1992); Hartford Life Insurance Company (pub. avail. June 
24, 1992); Pan American Life Insurance Company (pub. avail. Nov. 19, 
1991); Standard Insurance Company (pub. avail. Sept. 11, 1991); 
Aetna Life Insurance and Annuity Company (pub. avail. Sept. 11, 
1991); Principal Mutual Life Insurance Company (pub. avail. June 27, 
1991); Metropolitan Life Insurance Company (pub. avail. June 6, 
1991); Monarch Life Insurance Company (pub. avail. Apr. 3, 1991); 
The Travelers Insurance Company (pub. avail. Aug. 6, 1990); Great-
West Life Annuity Insurance Co. (pub. avail. Feb. 1, 1990); Fidelity 
Management Trust Company (pub. avail. Nov. 2, 1989); Aetna Life 
Insurance Company (pub. avail. Oct. 18, 1989); Nationwide Life 
Insurance Company (pub. avail. May 12, 1989); North Shore Savings 
and Loan Association (pub. avail. Dec. 8, 1988); and Wells Fargo 
Bank, N.A. (pub. avail. Sept. 7, 1988).
    \8\ See State Street Bank and Trust Company (pub. avail. Aug. 1, 
1996).
---------------------------------------------------------------------------

    4. The Job Protection Act in 1996, however, changed the tax law 
governing Section 457 Plans by specifically requiring that governmental 
deferred compensation plans hold plan assets for the exclusive benefit 
of the plans' participants to the same degree required of Code Section 
401 Plans. Thus, Section 457 Plans share the requirement that all 
assets and income be held for the exclusive benefit of plan 
participants and beneficiaries.
    5. This fundamental change in the federal tax law was considered 
and analyzed in a request for no-action assurance submitted by 
Massachusetts Mutual Life Insurance Company (``MassMutual'').\9\ In 
MassMutual, relief from registration requirements was requested in 
conjunction with group variable annuity contracts issued through 
unregistered separate accounts which solely supported not only Code 
Section 401 and code Section 414(d) Plans, but also Code Section 457 
Plans. In MassMutual, it was argued that the enactment of Code Section 
457(g) (the exclusive benefit rule) under the Job Protection Act should 
assure the Staff that Section 457 Plans provide exactly the same 
protections to plan participants and beneficiaries as Qualified Plans 
and other Section 414(d)\10\ Plans for which a statutory exemption from 
registration exists under Section 3(a)(2) of the 1933 Act. Accordingly, 
in the wake of MassMutual, Applicants maintain that it is well settled 
that Section 3(a)(2) of the 1933 Act and Section 3(c)(11) of the 1940 
Act may be relied upon to exclude separate accounts issuing securities 
to Section 457 Plans from the definition of investment company.
---------------------------------------------------------------------------

    \9\ Massachusetts Mutual Life Insurance Company (pub. avail. 
Aug. 10, 1998).
    \10\ Section 414(d) of the Code provides that a `` `governmental 
plan' means a plan established and maintained for its employees by 
the Government of the United States, by the government of any State 
or political subdivision thereof, or by any agency or 
instrumentality of any of the foregoing.''
---------------------------------------------------------------------------

    6. Applicants state that, as in MassMutual, the Section 457 Plans 
to whom Applicants have issued Contracts will satisfy the same 
conditions as those imposed on Section 414(d) Plans for purposes of the 
exemption under Section 3(a)(2) of the 1933 Act--namely, that each plan 
has ``been established by the [state or local government] employer for 
the exclusive benefit of its employees or their beneficiaries for the 
purposes of distributing to such employees or their beneficiaries the 
corpus and income of the funds accumulated under such plan,'' and that 
``under [each] such plan, it [will be] impossible, prior to 
satisfaction of all liabilities with respect to such employees and 
their beneficiaries, for any part of the corpus or income to be used 
for, or diverted to, purposes other than the exclusive benefit of such 
employees or their beneficiaries. * * *'' Further, each Contract issued 
to a Section 457 Plan requires that the assets and income of the plan 
held under the Contract be used for the exclusive benefit of plan 
participants and their beneficiaries, and therefore under the

[[Page 18993]]

terms of the Contract, it is impossible for the employer sponsor of the 
Section 457 Plan to use the assets invested in the Contract for any 
other purpose.
    7. The Applicants rely on the exclusion from the definition of 
investment company that is identical to statutory provisions relied on 
by MassMutual, and no other provision of the 1940 Act compels 
Applicants to register under the 1940 Act. Applicants therefore believe 
they are entitled to rely on the Staff's position articulated in 
MassMutual, that the exclusion under Section 3(c)(11) is available to 
the Separate Accounts, and that the Separate Accounts should no longer 
be considered ``investment companies'' for purposes of registration 
under the 1940 Act.
    8. Applicants assert that, with the passage of the Job Protection 
Act and subsequent issuance of the MassMutual no-action relief by the 
Staff, there no longer remains any doubt that Section 3(a)(2) of the 
1933 Act and Section 3(c)(11) of the 1940 Act may be relied upon to 
exclude separate accounts issuing securities to Section 457 Plans from 
the definition of investment company. Given this change in the law, the 
needs of the Contract Owners, and the competitive landscape of the 
government retirement plan market, deregistration of the Separate 
Accounts is 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, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-9110 Filed 4-11-01; 3:28 pm]
BILLING CODE 8010-01-M