[Federal Register Volume 66, Number 199 (Monday, October 15, 2001)]
[Notices]
[Pages 52463-52468]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-25780]


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

SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-25206; File No. 812-12570]


Nationwide Life Insurance Company, et al.

October 5, 2001.
AGENCY: The Securities and Exchange Commission (the ``Commission'').

ACTION: Notice of application for an order pursuant to section 26(c) of 
the Investment Company Act of 1940 (``1940 Act'').

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

    Applicants: Nationwide Life Insurance Company (``Nationwide''), the 
Nationwide Variable Account (the ``Separate Account''); and Nationwide 
Investment Services Corporation (``NISC'').
    Summary of the Application: Applicants seek an order pursuant to 
Section 26(c) of the 1940 Act, to permit the substitution of shares of 
the Prestige Balanced Fund--Class A with shares of the Nationwide 
Separate Account Trust--JP Morgan NSAT Balanced Fund, and shares of the 
Prestige International Fund--Class A with shares of the Templeton 
Foreign Fund--Class A, currently held in the Separate Account.
    Filing Date: The Application was filed on July 11, 2001, and 
amended on October 5, 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 October 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 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, Nationwide Life 
Insurance Company, Attn: Heather Harker, 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: The following is a summary of the 
Application. The complete Application is available for a fee from the 
Public Reference Branch of the Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (tel. (202) 942-8090).

Applicants' Representations

    1. Nationwide is a stock life insurance company organized under the 
laws of the State of Ohio. Nationwide is licensed to do business in the 
fifty states, the District of Columbia, and Puerto Rico. Nationwide 
offers traditional group and individual life insurance products as well 
as group and individual fixed and variable annuity contracts. 
Nationwide is a wholly owned subsidiary of Nationwide Financial 
Services, Inc. (``NFS''). NFS, a Delaware corporation, is a publicly 
traded holding company with two classes of common stock outstanding, 
each with different voting rights. This enables Nationwide Corporation 
(the holder of all the outstanding Class B Common Stock) to control 
NFS. Nationwide Corporation stock is held by Nationwide Mutual 
Insurance Company (95.24%) and Nationwide Mutual Fire Insurance Company 
(4.76%), the ultimate controllers of Nationwide.
    2. The Separate Account was established by Nationwide for the 
purpose of funding variable annuity contracts. The Separate Account was 
established under Ohio law on March 3, 1976 as a segregated asset 
account of Nationwide and is registered under the 1940 Act as a unit 
investment trust (File No. 811-2716). The Separate Account supports 
Deferred Variable Annuity Contracts (the ``Contracts'') registered 
under the Securities Act of 1933 (File Nos. 2-58043, 333-80481). 
Applicants incorporate by reference the registration statements 
corresponding to the aforementioned Contracts to the extent necessary 
to support and supplement the descriptions and representations in this 
Amended Application.
    3. The Contracts may be sold to individuals as: (i) Individual 
Retirement Annuities (``IRAs'') which are governed by Section 408(b) of 
the Internal Revenue Code (``Code''); (ii) Simple IRAs which are 
governed by Section 408(p) of the Code; (iii) SEP IRAs which are 
governed by Section 408(k) of the Code; (iv) Roth IRAs which are 
governed by Section 408A of the Code; or (v) qualified Contracts (to 
qualified plans on behalf of plan participants) which may qualify for 
special tax treatment under Section 401 of the Code. The Contracts are 
not sold as non-qualified annuities.
    4. Each Contract has a variable investment component that allows 
the investor to allocate purchase payments among a specific menu of 
underlying mutual fund options. One of the Contracts (File No. 2-58043) 
provides for a fixed account allocation which is supported by the 
assets of Nationwide's general account. The other Contract (File No. 
333-80481) permits allocations to Nationwide's Guaranteed Term Options 
(``GTOs''). The GTOs provide a guaranteed rate of interest over four 
different maturity durations: three (3), five (5), seven (7), or ten 
(10) years. For the duration selected, Nationwide declares a guaranteed 
interest rate and credits that rate to amounts allocated to the GTO. If 
the investor withdraws allocations from the GTO prior to the end of the 
interest rate guarantee period, the withdrawal is subject to a market 
value adjustment.
    5. The Separate Account maintains separate sub-accounts for each 
underlying mutual fund available under the Contracts. The mutual funds 
are the underlying investments on which the performance for each 
Contract is based. Contract owners may currently choose to have 
purchase payments allocated to one or more sub-accounts which invest in 
the underlying mutual funds.
    6. The prospectus portion of the registration statements for the 
Contracts contains provisions stipulating Nationwide's right to 
substitute shares of one underlying mutual fund for shares of another 
underlying mutual fund already purchased or to be

[[Page 52464]]

purchased in the future with purchase payments made under the Contracts 
in the event that: (i) The underlying mutual fund options currently 
available under the Contracts are no longer available for investment by 
the Separate Account; or (ii) in the judgment of Nationwide's 
management, further investment in such underlying mutual fund shares is 
inappropriate in view of the purposes of the Contract(s).
    7. The Separate Account offers Prestige International Fund--Class A 
and Prestige Balanced Fund--Class A, series of Nationwide Mutual Funds 
(``NMF'') (formerly Nationwide Investing Foundation III). According to 
its registration statement, Nationwide Mutual Funds was established and 
organized as an Ohio corporation by a Declaration of Trust, as 
subsequently amended, on October 30, 1997, as a diversified, open-end 
management investment company. Investment management and advisory 
services are provided to NMF pursuant to an investment management 
agreement entered into with Villanova Mutual Fund Capital Trust 
(``VMF''). Besides Prestige International Fund and Prestige Balanced 
Fund, NMF has 39 other portfolios.
    8. Applicants have been informed by VMF that it wishes to liquidate 
the Prestige International Fund--Class A and Prestige Balanced Fund--
Class A and terminate all operations of such funds. The reasons 
proffered by VMF for this decision are as follows:
    9. When the Prestige International Fund and the Prestige Balanced 
Fund (collectively referred to throughout this paragraph as the 
``Fund'') were created, it was anticipated that the Funds would be 
offered as an investment option for certain variable annuity contracts 
as well as for sale to the public as stand-alone investments. The 
Funds, however, have not attracted sufficient assets to grow to an 
efficient size and are no longer expected to do so. Additionally, on a 
longer-term basis, the Funds have been out-performed by other mutual 
funds with similar objectives. The Applicants have also been informed 
by NMF that NMF is scheduling a shareholder meeting and preparing a 
proxy solicitation to all shareholders in order to allow the 
shareholders to vote on NMF's decision to liquidate the Funds. Since 
the decision to ask shareholders to approve liquidation of the Funds, 
the Funds are neither being actively marketed to the public nor are 
they being offered thorough other Nationwide Separate Accounts. 
Consequently their assets are not growing and thus it is not expected 
that the Funds will attain economies of scale. Accordingly, all 
shareholders, including beneficial shareholders/Contract owners having 
interests in the Separate Account, will be better served with the 
alternative to the Funds.
    10. In light of the foregoing, as well as the following 
representations and analyses, the Applicants propose to substitute 
shares of the Prestige Balanced Fund--Class A with shares of the 
Nationwide Separate Account Trust--J.P. Morgan NSAT Balanced Fund and 
shares of the Prestige International Fund--Class A with shares of 
Templeton Foreign Fund--Class A.
    11. Information concerning the Substituted Funds and Replacement 
Funds, as well as additional rationale for each replacement proposed in 
this Amended Application is provided below.
    12. Prestige Balanced Fund--Class A to be replaced with the 
Nationwide Separate Account Trust--JP Morgan NSAT Balanced Fund

----------------------------------------------------------------------------------------------------------------
                    Substituted fund                                         Replacement fund
----------------------------------------------------------------------------------------------------------------
Prestige Balanced Fund--Class A:
    Investment Objective: The Fund seeks a high total    Nationwide Separate Account Trust--J.P. Morgan NSAT
     return from a diversified portfolio of equity and    Balanced Fund (formerly, Nationwide Balanced Fund)
     fixed income securities. Under normal market        Investment Objective: The Fund seeks a high total
     conditions, the Fund will invest approximately 60%   return from a diversified portfolio of equity and
     of its assets in equity securities and 40% in        fixed income securities. Under normal market
     fixed income securities (including U.S.              conditions, the Fund will invest approximately 60% of
     Government, corporate, mortgage-backed and asset-    its assets in equity securities and 40% in fixed
     backed securities). The equity securities will       income securities (including U.S. Government,
     primarily be securities of large and medium sized    corporate, mortgage-backed and asset-backed
     companies included in the Standard & Poor's 500      securities). The equity securities will primarily be
     Index. The fixed income securities held by the       securities of large and medium sized companies
     Fund will generally be investment grade              included in the Standard & Poor's 500 Index. The fixed
     securities, or unrated securities of comparable      income securities held by the Fund will generally be
     quality, although a portion of the Fund's fixed      investment grade securities, or unrated securities of
     income will be invested in securities rated below    comparable quality, although a portion of the Fund's
     investment grade (these securities are commonly      fixed income will be invested in securities rated
     known as junk bonds). Villanova Mutual Fund          below investment grade (these securities are commonly
     Capital Trust serves as the Fund's investment        known as junk bonds). Villanova Mutual Fund Capital
     adviser and J.P. Morgan Investment Management Inc.   Trust serves as the Fund's investment adviser and J.P.
     is the Fund's sub-adviser.                           Morgan Investment Management Inc. is the Fund's sub-
                                                          adviser.


----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
                                        Substituted Fund                     Replacement Fund
                                        Prestige Balanced Fund--Class A      Nationwide Separate account
                                                                             Trust--JP Morgan NSAT
                                                                             Balanced Fund
Adviser...............................  Villanova Mutual Fund                Villanova Mutual Fund
                                        Capital Trust                        Capital Trust
Subadviser............................  J.P. Morgan Investment Management,   J.P. Morgan Investment Management,
                                         Inc.                                 Inc.
With reimbursements/waivers (as of 12/
 31/00):
    Management Fees...................  0.75%                                0.75%
    Other Expenses....................  0.10%                                0.15%
    12b-1 Fees........................  0.25%                                0.00%
----------------------------------------------------------------------------------------------------------------
        Total Expenses................  1.10%                                0.90%
                                       =========================================================================

[[Page 52465]]

 
Without re-imbursements/waivers (as of
 12/31/00):
    Management Fees...................  0.75%                                0.75%
    Other Expenses....................  1.82%                                0.32%
    12b-1 Fees........................  0.25%                                0.00%
                                       -------------------------------------------------------------------------
        Total Expenses................  2.82%                                1.07%
----------------------------------------------------------------------------------------------------------------

    Specific assets and performance information as of June 20, 2001, is 
as follows (performance represents average annual total returns):

----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
                                        Substituted Fund                     Replacement Fund
                                        Prestige Balanced Fund--Class A      Nationwide Separate Account
                                                                             Trust--JP Morgan NSAT
                                                                             Balanced Fund
----------------------------------------------------------------------------------------------------------------
Inception Date........................  11/02/98                             10/31/97
Fund Assets as of 06/30/01 (in          $2,700,000.00                        $135,600,000.00
 millions).
1 Year................................  -4.53%                               -4.56%
3 Year................................  N/A                                  0.00%
5 Year................................  N/A                                  N/A
Inception to 06/30/01.................  4.74%                                2/23%
----------------------------------------------------------------------------------------------------------------

    13. The Prestige Balanced Fund is managed by Villanova Mutual Fund 
Capital Trust (``VMF''). VMF is indirectly affiliated with the 
Applicants. The Fund is subadvised by J.P. Morgan Investment 
Management, Inc. (``J.P. Morgan''). J.P. Morgan is not affiliated with 
the Applicants.
    14. Applicants therefore propose to substitute the Prestige 
Balanced Fund--Class A shares (``Substituted Fund'') into the 
Nationwide Separate Account Trust--JP Morgan NSAT Balanced Fund 
(``Replacement Fund''). Both the Substituted Fund and the Replacement 
Fund are in Trusts that are managed by affiliates of the Applicants.
    15. The Substituted Fund and the Replacement Fund have essentially 
identical investment objectives. The Substituted Fund and Replacement 
Fund have the same fund adviser and sub-adviser. Further, the 
underlying mutual fund expenses of the Replacement Fund with, and 
without, reimbursements are significantly lower in comparison to the 
Substituted Fund. Applicants represent that neither Nationwide nor any 
of its affiliates will receive an increase in servicing fees or other 
form of revenue associated with the offering of the Nationwide Separate 
Account Trust--J.P. Morgan NSAT Balanced Fund as the Replacement Fund 
as described herein.
    16. The Applicants assert that the proposed substitution is 
appropriate and in the best interest of the Contract owners. The 
Replacement Fund maintains essentially an identical investment 
objective as the Substituted Fund with the same investment adviser and 
sub-adviser, while benefiting from the economies of scale of the much 
larger Replacement Fund with well over $135 million in assets as 
compared to the $2.7 million in assets of the Substituted Fund. The 
Replacement Fund has lower expenses, as well as good prospects for 
growth.
    17. At the time of the substitution, the aggregate fees and 
expenses of the Replacement Fund are expected to be lower than those of 
the Substituted Fund. Applicants agree that Nationwide will not 
increase the Contract charges or the total separate account charges 
(net of any waiver or reimbursement) of the sub-accounts that invest in 
the Replacement Fund for those Contract owners who were Contract owners 
at the time of the substitution for a period of two years from the date 
the Commission Order requested herein is received. Nationwide further 
agrees that if the total operating expenses for the Replacement Fund 
(taking into account any expense reimbursement or waiver) for any 
fiscal quarter for the two-year period following the date of the Order 
exceed on an annualized basis 1.10% of the average daily net assets of 
the separate account, Nationwide will make a corresponding reduction 
(through reimbursement or waiver) in the separate account expenses--at 
the end of that quarter--of the sub-accounts that invest in such 
Replacement Fund for Contract owners who were Contract owners at the 
time of the substitution.
    18. Prestige International Fund--Class A to be replaced with 
Templeton Foreign Fund--Class A.

----------------------------------------------------------------------------------------------------------------
                    Substituted fund                                         Replacement fund
----------------------------------------------------------------------------------------------------------------
Prestige International Fund--Class A:                    Templeton Foreign Fund--Class A:
    Investment Objective: Capital appreciation. The         Investment Objective: Seeks long-term capital growth
     Funds seeks to accomplish its investment objective      through a flexible policy of investing in stocks
     by investing primarily in equity securities of non-     and debt obligations of companies and governments
     United States companies that, in the opinion of         outside the United States, including emerging
     its subadviser, are inexpensively priced relative       markets. Depending upon current market conditions,
     to the return on total capital or equity. The Fund      the Fund generally invests up to 25% of its total
     invests primarily in equity securities of non-          assets in debt securities of companies and
     United States companies. Under normal market            governments located anywhere in the world.
     conditions, the Fund will invest at least 80% of        Templeton Investment Counsel, Inc. serves as the
     the value of its total assets in the equity             Fund's investment adviser.
     securities of companies within at least three
     different countries (not including the United
     States). Villanova Mutual Fund Capital Trust
     serves as the Fund's investment adviser and Lazard
     Asset Management is the Fund's subadviser.


----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
                                        Substituted Fund                     Replacement Fund
                                        Prestige Internationla Fund--Class   Templeton Foreign Fund--Class A
                                         A

[[Page 52466]]

 
Adviser...............................  Villanova Mutual Fund                Templeton Investment Counsel, Inc.
                                        Capital Trust
Subadviser............................  Lazard Asset Management              N/A
With reimbursements/waivers (as of 12/
 31/00):
    Management Fees...................  0.85%                                0.61%
    Other Expenses....................  0.20%                                0.29%
    12b-1 Fees........................  0.25%                                0.25%
                                       -------------------------------------------------------------------------
        Total Expenses................  1.30%                                1.15%
                                       =========================================================================
Without reimbursements/waivers (as of
 12/31/00):
    Management Fees...................  0.85%                                N/A
    Other Expenses....................  1.54%                                N/A
    12b-1 Fees........................  0.25%                                N/A
                                       -------------------------------------------------------------------------
        Total Expenses................  2.64%                                M/A
----------------------------------------------------------------------------------------------------------------

    Specific assets and performance information as of June 30, 2001 is 
as follows (performance represents average annual total returns):

----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
                                        Substituted Fund                     Replacement Fund
                                        Prestige International Fund--Class   Templeton Foreign Fund--Class A
                                         A
Inception Date........................  11/02/98                             10/05/82
Fund Assets as of 6/30/01.............  $14,600,000.00                       $9,562,581,603.00
1 Year................................  -20.13%                              -3.03%
3 Year................................  N/A                                  5.90%
5 Year................................  N/A                                  7.06%
Inception to 6/30/01..................  -0.93%                               14.32%
----------------------------------------------------------------------------------------------------------------

    19. The Prestige International Fund is managed by Villanova Mutual 
Fund Capital Trust (``VMF''). VMF is indirectly affiliated with the 
Applicants. The Prestige International Fund is subadvised by Lazard 
Asset Management (``LAM''). LAM is not affiliated with the Applicants.
    20. Applicants therefore propose to substitute the Prestige 
International Fund--Class A shares (``Substituted Fund'') into the 
Templeton Foreign Fund--Class A (``Replacement Fund''). The Substituted 
Fund is managed by an affiliate of the Applicants. Neither the 
Replacement Fund nor its investment adviser is affiliated with the 
Applicants.
    21. The Substituted Fund and the Replacement Fund have 
substantially similar investment objectives of capital appreciation 
through investing in foreign securities. In addition, the Replacement 
Fund has had better long-term historical performance as well as a 
larger asset base than the Substituted Fund. Further, the underlying 
mutual fund expenses of the Replacement Fund are significantly lower in 
comparison to the Substituted Fund. Applicants represent that neither 
Nationwide nor any of its affiliates will receive an increase in 
servicing fees or any other form of revenue associated with the 
offering of Templeton Foreign Fund--Class A as the Replacement Fund 
described herein.
    22. The Applicants assert that the proposed substitution is 
appropriate and in the best interest of the Contract owners. The 
Replacement Fund will maintain a substantially similar investment 
objective as the Substituted Fund while benefiting from the economics 
of scale of the much larger Replacement Fund with more than $9 billion 
in assets as compared to the $14.6 million in assets of the Substituted 
Fund. The Replacement Fund has lower underlying mutual fund expenses, 
as well as better prospects for growth.
    23. Contract owners will not be subject to a higher 12b-1 fee as a 
result of the substitution, unless a higher 12b-1 fee is subsequently 
adopted by the Contract owners after receipt of the Commission Order 
requested herein.
    24. The Applicants represent that Nationwide does not, and will not 
for a period of three years from the date of the Commission Order 
requested herein, receive any direct or indirect benefit from the 
Replacement Fund or its adviser (or the adviser's affiliates) that 
exceeds the amount it had received from the Substituted Fund, its 
adviser and/or the adviser's affiliates, including without limitation, 
12b-1, shareholder service, administration or other service fees, 
revenue sharing or other arrangement, either with specific reference to 
the Replacement Fund or as part of an overall business arrangement.
    25. Applicants represent that the investment objectives of the 
Substituted Funds and corresponding Replacement Funds are either 
identical (in the case of Prestige Balanced Fund and J.P. Morgan NSAT 
Balanced Fund) or closely comparable. In any event, when viewed in the 
context of the wide spectrum (most conservative to most aggressive) of 
investment objectives reflected in contemporary mutual fund offerings, 
the Substituted Funds and corresponding Replacement Funds are at a 
minimum closely comparable.
    26. For these reasons, Applicants assert that the substitution of 
the Replacement Funds for the Substituted Funds will not create 
circumstances in which Contract owners will be forced to surrender 
their Contracts and purchase alternative investments (incurring 
deferred sales charges on the Contracts or new sales charges on new 
investments) in order to maintain an investment strategy contemplated 
when making their original purchase.
    27. Applicants state that the proposed substitution will take place 
on a date designated by Nationwide (the ``Exchange Date''). In 
addition, the Applicants state that the proposed substitution will 
occur at the relative net asset values of the Replacement Funds and the 
Substitute Funds on the Exchange Date and that at charges will be 
assessed in connection with the substitution transaction. Nationwide 
will bear all of the costs (including legal, accounting, brokerage, and 
other expenses) associated with the substitution. Accordingly, Contract

[[Page 52467]]

owners' Contract values will not be affected in any way by the 
substitution. The proposed substitution will not impose any tax 
liability on Contract owners and will not cause the fees and charges 
currently being paid by existing Contract owners to be greater after 
the proposed substitution than before the proposed substitution. 
Applicants also represent that the proposed substitution will not be 
treated as a transfer for the purposes of daily transfer limitations. 
Nationwide has informed Contract owners that it will not exercise any 
rights it may have under the Contracts to impose additional 
restrictions on transfers or eliminate the transfer privilege under any 
of the Contracts from the date Contract owners are informed of the 
Exchange Date until at least thirty (30) days following the 
substitution.
    28. The prospectuses, as well as the Contracts for which this 
Amended Application is being filed, state that Nationwide may 
substitute, eliminate, and/or combine shares of one mutual fund for 
shares of another mutual fund already purchased or to be purchased in 
the future if either of the following occurs:
    (a) Shares of a current mutual fund are no longer available for 
investment; or
    (b) Further investment in a mutual fund shares is inappropriate.
    29. The prospectus also states that no substitution, elimination, 
and/or combination of shares may take place without the prior approval 
of the Commission and individual state insurance department.
    30. The Applicants have taken several steps toward accomplishing 
the proposed substitution. The Replacement Funds either already exist 
as underlying mutual fund options in the Separate Accounts that offer 
the Substituted Funds, or have been added via Post-Effective Amendment 
to the Registration Statements. Additionally, Nationwide has 
supplemented the Separate Account prospectuses concurrently with the 
filing of the original Application to inform all existing and 
prospective variable annuity contract owners of the fact that 
Nationwide has filed an Application with the Commission to effect a 
substitution of shares of the Replacement Funds for shares of the 
Substituted Funds. The prospectus supplements indicate that nationwide 
will not exercise any rights reserved by it to impose restrictions or 
fees on transfers beginning on the date Contract owners are notified of 
the Exchange Date and continuing until at least thirty (30) days after 
the Exchange Date. Although the variable annuity contracts reserve to 
Nationwide the right to restrict transfer privileges, from the date 
Contract owners are informed of the Exchange Date until at least thirty 
(30) days after the Exchange Date, Contract owners will be free to 
transfer unit values (which include both accumulation unit values and 
annuity unit values) or to allocate subsequent purchase payments or 
premium payments to other underlying mutual fund options available 
under the Contracts, including the Replacement Funds, in accordance 
with the provisions of the Contracts, without imposition of any 
transfer penalties. Therefore, such transfers will be free and without 
limitation.
    31. Existing and prospective Contract owners have been provided 
with current prospectuses for the Replacement Funds.
    32. If the order for which this Amended Application is being made 
is granted. Nationwide will establish an Exchange Date. Nationwide 
anticipates that the Exchange Date will be at least thirty (3) but not 
more than sixty (60) days after the Order is granted. Contract owners 
will be notified of the impending Exchange Date. Contract owners with 
interest remaining in the Substituted Funds will be advised that the 
Substituted Funds will be replaced with the Replacement Funds on the 
Exchange Date. Contract owners will also be advised that they are free 
to make allocation changes among any of the investment options 
available under the Contracts, in accordance with the terms of the 
Contracts, in advance of the Exchange Date and that Nationwide will not 
exercise any rights it may have under the Contracts to impose transfer 
restrictions or eliminate the transfer privilege until at least 30 days 
after the Exchange Date. All necessary forms and other information 
necessary for Contract owners to effectuate exchanges among investment 
options will continue to be provided.
    33. On the Exchange Date, all shares held by the Separate Account 
in the Substituted Funds will be redeemed in cash, resulting in a 
complete liquidation of the sub-accounts. Contemporaneously with this 
redemption, cash proceeds received from the Substituted Funds will be 
used to purchase shares in the corresponding Replacement Funds. All 
shares will be purchased and redeemed at prices based on the current 
net asset value per share next computed after receipt of the redemption 
request and in a manner consistent with Section 22(c) of the 1940 Act 
and Rule 22c-1 thereunder with no change in the amount of any Contract 
owner's Contract value or in the dollar value of his or her investment 
in the Separate Account. Contract owners will not suffer any adverse 
tax consequences as a result of the substitution. Fees charged under 
the Contracts will not increase because of the substitution.
    34. Nationwide asserts that it is likely that unit values (which 
both accumulation unit values and annuity unit values) of the 
Substituted Funds and the Replacement Funds will be different on the 
Exchange date. In order to keep each contract owner's Contract value 
the same after the Exchange Date as immediately prior to the Exchange 
date, the number of units held by beneficial shareholders in the 
substituted Funds are likely to be different than the number of units 
held by beneficial shareholders in the corresponding Replacement Funds 
when the exchange takes place.
    35. Within five (5) days of the Exchange Date, all Contract owners 
affected by the transaction will receive a written confirmation of the 
transaction in accordance with Rule 10b-10 under the Securities 
Exchange Act of 1934. The confirmation will state that Contract owners 
may transfer all cash value under an annuity contract in the affected 
sub-accounts to any other available sub-accounts. The notice will also 
reiterate that Nationwide will not exercise any right reserved by it 
under the contracts to impose any restrictions or fees on transfers 
until at least thirty (30) days after the Exchange Date.

Applicants' Legal Analysis

    1. Applicants request that the Commission issue an Order under 
Section 26(c) of the 1940 Act to the extent necessary to permit the 
substitution of shares of the Replacement Funds for shares of the 
Substituted Funds.
    2. Section 26(c) of the 1940 Act prohibits a depositor or trustee 
of a registered unit investment trust holding the securities of the 
single issuer from substituting another security for such security 
unless the Commission approves the substitution, finding that it is 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act.
    3. Applicants represent that, to the extent that any aspect of the 
substitution transaction described herein is determined to require 
approval under section 11 of the 1940 Act, Rule 1a-2 under the 1940 Act 
will be relied upon with respect to the exemptive provisions outlined 
thereunder.
    4. Applicants represent that the proposed substitution, in 
accordance with the standards set forth under

[[Page 52468]]

section 26(c) of the 1940 Act, is in the best interest of Contract 
owners. With respect to management and fund objectives, the Replacement 
Funds, as has been demonstrated, are closely comparable to the 
corresponding Substituted Fund. Accordingly, the proposed substitution 
should not create incentives for Contract owner to surrender Contracts 
and seek out other investment opportunities (incurring additional sales 
charges) in order to maintain a desired investment strategy. On the 
contrary, the close comparability of the funds proposed as a substitute 
for the Substituted Funds ensures that investment strategies currently 
employed by Contract owners may be maintained after the substitution.
    5. Each of the Replacement Funds currently has greater assets than 
the Substituted Fund being substituted into it. This will create the 
opportunity for better performance between the Substituted Funds and 
Replacement Funds, which have similar management and investment 
objectives. The economies inherent in the Replacement Funds' greater 
asset size will be passed to Contract owners.
    6. The Applicants maintain that the substitutions will not result 
in the type of costly forced redemption that section 26(c) was intended 
to guard against and, for the following reasons, are consistent with 
the protection of investors and the purposes fairly intended by the 
1940 Act:
    a. Each Replacement Fund has investment objectives that are similar 
to those of the corresponding Substituted Fund, and permits Contract 
owners continuity of their investment objectives and expectations;
    b. Contract owners will not bear expenses incurred in connection 
with the substitutions, including legal, accounting and other fees and 
expenses, and brokerage expenses on portfolio transactions;
    c. The substitutions will take place at relative net asset values 
of the respective sub-accounts, without the imposition of any transfer 
or similar charges and with no change in the amount of any Contract 
owner's unit values, death benefit or dollar value in the sub-accounts;
    d. The substitutions will not cause the fees and charges under the 
Contracts currently being paid by Contract owners to be greater after 
the substitutions than before the substitutions, nor will Contract 
owner's rights, or the obligations of Nationwide, under the Contract be 
altered in any way;
    e. The substitutions will not be treated as a transfer for the 
purpose of assessing transfer charges or for determining the number of 
remaining permissible transfers in a Contract year;
    f. Within five (5) days after the substitutions, Nationwide will 
send to the affected Contract owners written confirmation that the 
substitutions have occurred;
    g. The substitutions will not impose any tax liability on Contract 
owners and will not cause the Contract fees and charges currently being 
paid by existing Contract owners to increase.
    7. Applicants assert that, for the reasons summarized above, the 
terms of the proposed substitution meet the standards set forth in 
section 26(c) of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-25780 Filed 10-12-01; 8:45 am]
BILLING CODE 8010-01-M