[Federal Register Volume 68, Number 20 (Thursday, January 30, 2003)]
[Notices]
[Pages 4803-4810]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-2168]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25913; File No. 812-12885]


Nationwide Life Insurance Company, et al.

January 24, 2003.
AGENCY: The Securities and Exchange Commission (the ``Commission'').

ACTION: Notice of Application for an order pursuant to section 6(c) of 
the Investment Company Act of 1940 (the ``1940 Act'') to amend a prior 
order of the Commission under section 6(c) of the 1940 Act which 
granted exemptions from the provisions of Sections 2(a)(32), 22(c), and 
27(i)(2)(A) of the 1940 Act and Rule 22c-1 thereunder to permit the 
recapture of credits applied to purchase payments made under certain 
deferred variable annuity contracts.

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Summary of Application: On January 19, 2000 the Commission issued an 
order pursuant to section 6(c) of the 1940 Act granting exemptions from 
sections 2(a)(32), 22(c) and 27(i)(2)(A) of the 1940 Act and Rule 22c-1 
thereunder to permit the recapture of credits applied to purchase 
payments made under certain variable annuity contracts issued by 
Nationwide Life Insure Company (the ``Original Order''. See Nationwide 
Life Insurance Company, et al., Investment Company Act Release No. 
24256 (File No. 812-11824). Applicants seek an amendment to the 
Original Order pursuant to section 6(c) of the 1940 Act granting 
exemptions from the provisions of sections 2(a)(32), 22(c) and 
27(i)(2)(A) of the 1940 Act and Rule 22c-1 thereunder to permit the 
recapture of credits applied to purchase payments made under certain 
variable annuity contracts under circumstances not contemplated under 
the Original Order. Applicants also request the relief under the order 
to extend to any current or current separate accounts of Nationwide 
Life Insurance Company which may in the future offer or support 
contracts that are substantially similar in all material respects to 
the contracts described in the Application (the ``Other Separate 
Accounts'') and to any other NASD registered broker/dealers under 
common control with Nationwide Life Insurance Company which may in the 
future serve as general distributor-principal underwriter of VA-II or 
Other Separate Accounts that offer or support variable annuity 
contracts that are substantially similar in all material respects to 
those describe in this Application.

Applicants: Nationwide Life Insurance Company (``Nationwide''); 
Nationwide Variable Account-II (``VA-II''); and Nationwide Investment 
Services Corporation (``NISC'') (all collectively, the ``Applicants'').

Filing Date: The Application was filed on September 23, 2002. Amended 
Applications were filed on January 14, 2003 and January 24, 2003.

Hearing or Notification of Hearing: An order granting the application 
will be

[[Page 4804]]

issued unless the Commission orders a hearing. Interested persons may 
request a hearing by writing the Secretary of the Commission and 
serving Applicants with a copy of the request, personally or by mail. 
Hearing request should be received by the Commission by 5:30 p.m. on 
February 14, 2003, 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 Secretary of 
the Commission.

ADDRESS: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, c/o Nationwide Life 
Insurance Company, One Nationwide Plaza 01-09-V3, Columbia, Ohio 43215, 
Attn: Jamie Casto, Esq.

FOR FURTHER INFORMATION CONTACT: Rebecca A. Marquigny, Senior Counsel, 
or Zandra Bailes, Branch Chief, at (202) 942-0670, 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 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (telephone (202) 942-8090).

Applicants' Representations

    1. Nationwide is a stock life insurance company organized under the 
laws of the State of Ohio. Nationwide offers traditional group and 
individual life insurance products as well as group and individual 
variable and fixed annuity contracts. Nationwide is wholly owned by 
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. On October 7, 1981, the Nationwide Spectrum Variable Account was 
established under Ohio law by Nationwide for the purpose of funding 
variable annuity contracts. On April 1, 1987, the Board of Directors 
for Nationwide changed the name of the Nationwide Spectrum Variable 
Account to Nationwide Variable Account-II. VA-II is registered as a 
unit investment trust (1940 Act No. 811-3330) and supports several 
different variable annuity contracts that are (or will be) registered 
separately on Form N-4.
    3. On January 19, 2000, the Commission issued the Original Order 
pursuant to Section 6(c) of the 1940 Act granting exemptions from 
Section 2(a)(32), 22(c) and 27(i)(2)(A) of the 1940 Act and Rule 22c-1 
thereunder to permit the recapture of credits applied to purchase 
payments made under certain variable annuity contracts (the ``Original 
Contracts'').
    4. Recapture of Credits under the Original Order. Nationwide 
currently offers an optional benefit (for a charge equal to an 
annualized rate of 0.45% of the daily net assets of the variable 
account for the first 7 contract years) that allows for the investment 
of 103% of all purchase payments made during the first twelve months of 
the contract. The investment in excess of the remitted purchase payment 
(3% in connection with the Original Contracts) is referred to as the 
``Credit.''
    During the first 7 contract years, the Credit is fully vested 
except during the contractual free-look period and when certain 
withdrawals are taken from the contract.
    If the contract owner cancels the contract pursuant to the 
contractual free-look privilege, Nationwide recaptures the Credit. For 
those jurisdictions that allow a return of contract value upon exercise 
of the free-look provision, the contract owner will also forfeit any 
amounts deducted from the contract as an Extra Value Option charge.
    If, after the free-look period and before the end of the 7th 
contract year, the contract owner withdraws value from the contract 
that is subject to a Contingent Deferred Sales Charge (``CDSC''), 
Nationwide recaptures a portion of the Credit. The CDSC schedule is as 
follows:

------------------------------------------------------------------------
                                                                 CDSC
   Number of completed years from date of purchase payment    percentage
------------------------------------------------------------------------
0...........................................................          7
1...........................................................          7
2...........................................................          6
3...........................................................          5
4...........................................................          4
5...........................................................          3
6...........................................................          2
7...........................................................          0
------------------------------------------------------------------------

    Nationwide does not recapture any Credit if the withdrawal is a 
free withdrawal (a withdrawal not subject to the CDSC) as described in 
the contract. Thus, the percentage of the Credit that Nationwide 
recaptures is determined by the percentage of withdrawn purchase 
payments that are subject to CDSC. The recaptured amount is taken 
proportionately from each investment option as allocated at the time of 
the withdrawal.
    No recapture takes place after the end of the 7th contract year; if 
the contract is annuitized; if a death benefit becomes payable; if 
distributions are required in order to meet minimum distribution 
requirements under the Internal Revenue Code of 1986, as amended (the 
``Code''); if free withdrawals are being taken pursuant to an aged-
based systematic withdrawal program; or in connection with any other 
type of withdrawal not otherwise subject to a CDSC.
    5. The Original Order does not contemplate the following recapture 
procedures, which Nationwide intends to include in 4 new annuity 
contracts that will be registered with the Commission (the ``New 
Contracts''):
    a. Recapture of larger Credits over a longer period of time. In one 
of the New Contracts, Nationwide intends to offer a 3% Credit option 
and a 4% Credit option while imposing an 8 year CDSC schedule with a 
maximum CDSC of 8%. In another one of the New Contracts, Nationwide 
intends to offer a 3% Credit option and a 4% Credit option while 
imposing a 7 year CDSC schedule with a maximum CDSC of 7%. In the other 
2 New Contracts, Nationwide intends to offer only the 3% Credit option 
while imposing a 7 year CDSC schedule with a maximum CDSC of 7%. Each 
of the 7 year CDSC schedules described above is the same schedule that 
was contemplated in the Original Order.
    b. Recapture of Credits for 7 contract years for all of the New 
Contracts. Three of the 4 New Contracts have CDSC-reducing options that 
the contract owner can purchase: one option reduces the standard CDSC 
schedule to 4 years and the other option eliminates CDSC completely. 
For all of the New Contracts, Nationwide intends to recapture Credits 
for 7 contract years, even if the contract owner elected a CDSC-
reducing option.
    c. Recapture of Purchase Payment Credits. Purchase Payment Credits 
are credits that Nationwide applies to contracts when purchase payments 
reach certain aggregate amounts. Nationwide applies Purchase Payment 
Credits to every contract that meets the purchase payment thresholds 
(except for those contracts where the contract owner elected the No 
CDSC Option). Nationwide intends to recapture Purchase Payment Credits 
only upon a

[[Page 4805]]

contract owner's cancellation of the contract pursuant to the 
contractual free-look provisions.
    6. The New Contracts generally. The New Contracts are flexible 
purchase payment deferred annuity contracts that will be sold to 
individuals as: (i) Non-qualified contracts which are governed for tax 
purposes by section 72 of the Code; (ii) Individual Retirement 
Annuities (``IRAs''), Roth IRAs, SEP IRAs or Simple IRAs which are 
governed by section 408 of the Code; (iii) Non-ERISA Tax Sheltered 
Annuities which are governed by section 403(b) of the Code; or (iv) 
Investment-Only Contracts, sold to qualified plans governed by section 
401(a) of the Code. Contract owners may allocate their investments in 
the contract to variable investment options (underlying mutual funds), 
fixed investment options (including a fixed account Guaranteed Term 
Options or ``GTOs''), or a combination of fixed and variable investment 
options. The contracts also provide for certain services such as asset 
rebalancing, dollar cost averaging, and systematic withdrawals. If the 
annuitant dies before the annuitization date, Nationwide will pay a 
death benefit to the beneficiary. After two years from the date a New 
Contract is issued, a contract owner may elect to begin receiving 
annuity payments.
    7. Purchase Payment Credits. Nationwide intends to apply Purchase 
Payment Credits to the New Contracts when total cumulative purchase 
payments reach retain aggregate levels. When cumulative purchase 
payments (minus surrenders) reach $500,000, Nationwide will apply to 
the contract Purchase Payment Credits equal to 0.50% of total purchase 
payments up to $999,999. When cumulative purchase payments (minus 
surrenders) reach $1 million, Nationwide will apply to the contract 
Purchase Payment Credits equal to 1.00% of total purchase payments 
(reduced by any previous Purchase Payment Credits applied), and on all 
purchase payments thereafter. Purchase Payment Credits are considered 
earnings, not purchase payments.
    Purchase Payment Credits will be fully vested except during the 
contractual free-look period. If the contract owner cancels the 
contract pursuant to the contractual free-look provisions, Nationwide 
intends to recapture any Purchase Payment Credits applied.
    8. Individual Characteristics of the New Contracts. Each of the 4 
New Contracts is distinct and will be referred to as ``Contract A,'' 
``Contract B,'' ``Contract C,'' and ``Contract D.''
    a. Contract A. Contract A requires an initial purchase payment of 
$5,000 for non-qualified contracts and $3,000 for the remaining 
contract types (e.g., IRAs, etc.). If the contract owner elects to make 
subsequent purchase payments, they must be at least $500 each ($50 each 
if submitted via automatic electronic transfer).
    i. Contract A assesses a Variable Account Charge equal to an 
annualized rate of 1.15% of the daily net assets of the variable 
account and an annual Contract Maintenance charge of $30 that is waived 
when the contract value reaches $50,000 on any contract anniversary.
    ii. Contract A assesses a CDSC when certain amounts are withdrawn 
from the contract. The CDSC schedule is as follows:

------------------------------------------------------------------------
                                                                 CDSC
   Number of completed years from date of purchase payment    percentage
------------------------------------------------------------------------
0...........................................................          7
1...........................................................          7
2...........................................................          6
3...........................................................          5
4...........................................................          4
5...........................................................          3
6...........................................................          2
7...........................................................          0
------------------------------------------------------------------------

    Under Contract A, a certain amount of CDSC-free withdrawals is 
permitted each year. This annual ``free-out'' amount is equal to 10% of 
purchase payments that are subject to CDSC. Contract A also provides 
for the waiver of CDSC: upon the annuitant's death, upon annuitization 
of the contract, when distributions are necessary in order to meet 
minimum distribution requirements under the Code, and under an age-
based ``free-withdrawal'' program that allows contract owners to take 
systematic withdrawals of certain contract value percentages as 
specified ages without incurring a CDSC. Contact A includes a Long-Term 
Care/Nursing Home Waiver at no additional charge. The Long-Term Care/
Nursing Home allows a contract owner to withdraw value from the 
contract free of CDSC if: (1) The third contract anniversary has passed 
and the contract owner has been confined to a long-term care facility 
or hospital for a continuous 90-day period that began after the 
contract issue date; or (2) the contract owner has been diagnosed by a 
physician to have a terminal illness.
    iii. Contact A may be modified or augmented by a number of ``rider 
options'' that enable owners to elect certain contract features or 
benefits that fit their particular needs. The election of a rider 
option will result in a charge in addition to the basic Variable 
Account Charge. Rider options must be chosen at the time of application 
and once elected, a rider may not revoked. The rider options available 
under Contract A include:
    [sbull] Four year CDSC Option. The Four Year CDSC Option reduces 
the standard 7 year CDSC period to 4 years as follows:

------------------------------------------------------------------------
                                                                 CDSC
  Numbers of completed years from date of purchase payment    percentage
------------------------------------------------------------------------
0...........................................................          7
1...........................................................          6
2...........................................................          5
3...........................................................          4
4...........................................................          0
------------------------------------------------------------------------

    An annualized charge of 0.25% of the daily net assets of the 
variable account is assessed for the election of this rider option. 
Election of the Four Year CDSC Option increases the minimum initial 
purchase payment to $10,000. The charge associated with this option 
will be assessed for the life of the contract.
    [sbull] No CDSC Option. The No CDSC Option eliminates the 
assessment of CDSC upon withdrawal of value from the contract. An 
annualized charge of 0.30% of the daily net assets of the variable 
account is assessed for the election of this rider option. Election of 
the No CDSC Option: increases the minimum initial purchase payment to 
$10,000; eliminates the fixed account as an investment option under the 
contract; eliminates Enhanced Rate Dollar Cost Averaging as a contract 
owner service; and disqualifies the contract from receiving Purchase 
Payment Credits. The charge associated with the No CDSC Option will be 
assessed for the life of the contract.
    [sbull] 3% Extra Value Option. Nationwide intends to offer a 3% 
Extra Value Option whereby Nationwide applies a Credit equal to 3% of 
all purchase payments made during the first 12 months of the contract. 
The Credit will be funded from Nationwide's general account and will be 
credited proportionately among the investment options chosen by the 
contract owner. The charge for this rider will be an annualized rate of 
0.45% of the daily net assets of the variable account for the first 7 
contract years only.
    [sbull] One-Year Enhanced Death Benefit.
    [sbull] Greater of One-Year or 5% Enhanced Death Benefit.
    [sbull] Beneficiary Protector II Option.

[[Page 4806]]

    b. Contract B. Contract B requires an initial purchase payment of 
$5,000 for non-qualified contracts and $3,000 for the remaining 
contract types (e.g., IRAs, etc.). If the contract owner elects to make 
subsequent purchase payments, they must be at least $500 each ($50 each 
if submitted via automatic electronic transfer).
    i. Contract B assesses a Variable Account Charge equal to an 
annualized rate of 1.10% of the daily net assets of the variable 
account and an annual Contract Maintenance Charge of $30 that is waived 
when the contract values reaches $50,000 on any contract anniversary.
    ii. Contract B assesses a CDSC when certain amounts are withdrawn 
from the contract. The CDSC schedule is as follows:

------------------------------------------------------------------------
                                                                 CDSC
   Number of completed years from date of purchase payment    percentage
------------------------------------------------------------------------
0...........................................................          7
1...........................................................          7
2...........................................................          6
3...........................................................          5
4...........................................................          4
5...........................................................          3
6...........................................................          2
7...........................................................          0
------------------------------------------------------------------------

    Under Contract B, a certain amount of CDSC-free withdrawals is 
permitted each year. This annual free-out'' amount is equal to 10% of 
purchase payments that are subject to CDSC. Contract B also provides 
for the waiver of CDSC: upon the annuitant's death, upon annuitization 
of the contract, when distributions are necessary in order to meet 
minimum distribution requirements under the Code, and under an age-
based ``free-withdrawal'' program that allows contract owners to take 
systematic withdrawals of certain contract value percentages as 
specified ages without incurring a CDSC. Contract B includes a Long-
Term Care/Nursing Home Waiver at no additional charge. The Long-Term 
Care/Nursing Home allows a contract owner to withdraw value from the 
contract free of CDSC if: (1) The third contract anniversary has passed 
and the contract owner has been confined to a long-term care facility 
or hospital for a continuous 90-day period that began after the 
contract issue date; or (2) the contract owner has been diagnosed by a 
physician to have a terminal illness.
    iii. Contract B also offers rider options that will result in a 
charge in addition to the basic Variable Account Charge. Rider options 
must be chosen at the time of application and once elected, a rider 
option may not be revoked. The rider options available under Contract B 
include:
    [sbull] 3% Extra Value Option. Nationwide intends to offer a 3% 
Extra Value Option whereby Nationwide applies a Credit equal to 3% of 
all purchase payments made during the first 12 months of the contract. 
The Credit will be funded from Nationwide's general account and will be 
credited proportionately among the investment options chosen by the 
contract owner. The charge for this rider will be an annualized rate of 
0.45% of the daily net assets of the variable account for the first 7 
contract years only.
    [sbull] Spousal Protection Annuity Option.
    [sbull] One-Year Enhanced Death Benefit.
    [sbull] Greater of One-Year or 5% Enhanced Death Benefit.
    [sbull] One-Month Enhanced Death Benefit.
    [sbull] Beneficiary Protector II Option.
    c. Contract C. Contract C requires an initial purchase payment of 
$5,000 for non-qualified contracts and $3,000 for the remaining 
contract types (e.g., IRAs, etc.). If the contract owner elects to make 
subsequent purchase payments, they must be at least $500 each ($50 each 
if submitted via automatic electronic transfer).
    i. Contract C assesses a Variable Account Charge equal to an 
annualized rate of 1.15% of the daily net assets of the variable 
account and an annual Contract Maintenance Charge of $30 that is waived 
when the contract value reaches $50,000 on any contract anniversary.
    ii. Contract C assesses a CDSC when certain amounts are withdrawn 
from the contract. The CDSC schedule is as follows:

------------------------------------------------------------------------
                                                                 CDSC
   Number of completed years from date of purchase payment    percentage
------------------------------------------------------------------------
0...........................................................          7
1...........................................................          7
2...........................................................          6
3...........................................................          5
4...........................................................          4
5...........................................................          3
6...........................................................          2
7...........................................................          0
------------------------------------------------------------------------

    Under Contract C, a certain amount of CDSC-free withdrawals is 
permitted each year. This annual ``free-out'' amount is equal to 10% of 
purchase payments that are subject to CDSC. Contract C also provides 
for the waiver of CDSC: upon the annuitant's death, upon annuitization 
of the contract, when distributions are necessary in order to meet 
minimum distribution requirements under the Code, and under an age-
based ``free-withdrawal'' program that allows contract owners to take 
systematic withdrawals of certain contract value percentages as 
specified ages without incurring a CDSC. Contract C includes a Long-
term Care/Nursing Home Waiver at no additional charge. The Long-Term 
Care/Nursing Home allows a contract owner to withdraw value from the 
contract free of CDSC if: (1) The third contract anniversary has passed 
and the contract owner has been confined to a long-term care facility 
or hospital for a continuous 90-day period that began after the 
contract issue date; or (2) the contract owner has been diagnosed by a 
physician to have a terminal illness.
    iii. Contract C also offers rider options that will result in a 
charge in addition to the basic Variable Account Charge. Rider options 
must be chosen at the time of application and once elected, a rider 
option may not be revoked. The rider options available under Contract C 
include:
    [sbull] Four Year CDSC Option. The Four Year CDSC Option reduces 
the standard 7 year CDSC period to 4 years as follows:

------------------------------------------------------------------------
                                                                 CDSC
   Number of completed years from date of purchase payment    percentage
------------------------------------------------------------------------
0...........................................................          7
1...........................................................          6
2...........................................................          5
3...........................................................          4
4...........................................................          0
------------------------------------------------------------------------

    An annualized charge of 0.25% of the daily net assets of the 
variable account is assessed for the election of this rider option. 
Election of the Four Year CDSC Option increases the minimum initial 
purchase payment to $10,000. The charge associated with this option 
will be assessed for the life of the contract.
    [sbull] No CDSC Option. The No CDSC Option eliminates the 
assessment of CDSC upon withdrawal of value from the contract. An 
annualized charge of 0.30% of the daily net assets of the variable 
account is assessed for the election of this rider option. Election of 
the No CDSC Option: increases the minimum initial purchase payment to 
$10,000; eliminates the fixed account as an investment option under the 
contract; eliminates Enhanced Rate Dollar Cost Averaging as a contract 
owner service; and disqualifies the contract from receiving Purchase 
Payment Credits. The charge associated with the No CDSC Option will be 
assessed for the life of the contract.

[[Page 4807]]

    [sbull] 3% Extra Value Option. Nationwide intends to offer a 3% 
Extra Value Option whereby Nationwide applies a Credit equal to 3% of 
all purchase payments made during the first 12 months of the contract. 
The Credit will be funded from Nationwide's general account and will be 
credited proportionately among the investment options chosen by the 
contract owner. The charge for this rider will be an annualized rate of 
0.30% of the daily net assets of the variable account for the first 7 
contract years only.
    [sbull] 4% Extra Value Option. Nationwide intends to offer a 4% 
Extra Value Option whereby Nationwide applies a Credit equal to 4% of 
all purchase payments made during the first 12 months of the contract. 
The Credit will be funded from Nationwide's general account and will be 
credited proportionately among the investment options chosen by the 
contract owner. The charge for this rider will be an annualized rate of 
0.40% of the daily net assets of the variable account for the first 7 
contract years only.
    [sbull] One-Year Enhanced Death Benefit.
    d. Contract D. Contract D requires an initial purchase payment of 
$15,000. If the contract owner elects to make subsequent purchase 
payments, they must be at least $1,000 each ($150 each if submitted via 
automatic electronic transfer).
    i. Contract D assesses a Variable Account Charge equal to an 
annualized rate of 1.55% of the daily net assets of the variable 
account.
    ii. Contract D assesses a CDSC when certain amounts are withdrawn 
from the contract. The CDSC schedule is as follows:

------------------------------------------------------------------------
                                                                 CDSC
   Number of completed years from date of purchase payment    percentage
------------------------------------------------------------------------
0...........................................................          8
1...........................................................          7
2...........................................................          6
3...........................................................          5
4...........................................................          4
5...........................................................          3
6...........................................................          2
7...........................................................          1
8...........................................................          0
------------------------------------------------------------------------

    Under Contract D, a certain amount of CDSC-free withdrawals is 
permitted each year. This annual ``free-out'' amount is equal to 15% of 
purchase payments that are subject to CDSC. Contract D also provides 
for the waiver of CDSC: upon the annuitant's death, upon annuitization 
of the contract, when distributions are necessary in order to meet 
minimum distribution requirements under the Code, and under an age-
based ``free-withdrawal'' program that allows contract owners to take 
systematic withdrawals of certain contract value percentages as 
specified ages without incurring a CDSC. Contract D includes a Long-
Term Care/Nursing Home Waiver at no additional charge. The Long-Term 
Care/Nursing Home allows a contract owner to withdraw value from the 
contract free of CDSC if: (1) The third contract anniversary has passed 
and the contract owner has been confined to a long-term care facility 
or hospital for a continous 90-day period that began after the contract 
issue date; or (2) the contract owner has been diagnosed by physician 
to have a terminal illness.
    iii. Contract D also offers rider options that will result in a 
charge in addition to the basic Variable Account Charge. Rider options 
must be chosen at the time of application and once elected, a rider 
option may not be revoked. The rider options available under Contract D 
include:
    [sbull] Four Year CDSC Option. The Four Year CDSC Option reduces 
the standard 8 year CDSC period to 4 years as follows:

------------------------------------------------------------------------
                                                                 CDSC
   Number of completed years from date of purchase payment    percentage
------------------------------------------------------------------------
0...........................................................          7
1...........................................................          6
2...........................................................          5
3...........................................................          4
4...........................................................          0
------------------------------------------------------------------------

    An annualized charge of 0.20% of the daily net assets of the 
variable account is assessed for the election of this rider option. The 
charge associated with this option will be assessed for the life of the 
contract.
    [sbull] No CDSC Option. The No CDSC Option eliminates the 
assessment of CDSC upon withdrawal of value from the contract. An 
annualized charge of 0.25% of the daily net assets of the variable 
account is assessed for the election of this rider option. Election of 
the No CDSC Option: eliminates the fixed account as an investment 
option under the contract; eliminates enhanced Rate Dollar Cost 
Averaging as a contract owner service; and disqualifies the contract 
from receiving Purchase Payment Credits. The charge associated with the 
No CDSC Option will be assessed for the life of the contract.
    [sbull] 3% Extra Value Option. Nationwide intends to offer a 3% 
Extra Value Option whereby Nationwide applies a Credit equal to 3% of 
all purchase payments made during the first 12 months of the contract. 
The Credit will be funded from Nationwide's general account and will be 
credited proportionately among the investment options chosen by the 
contract owner. The charge for this rider will be an annualized rate of 
0.10% of the daily net assets of the variable account for the first 8 
contract years only.
    [sbull] 4% Extra Value Option. Nationwide intends to offer a 4% 
Extra Value Option whereby Nationwide applies a Credit equal to 4% of 
all purchase payments made during the first 12 months of the contract. 
The Credit will be funded from Nationwide's general account and will be 
credited proportionately among the investment options chosen by the 
contract owner. The charge for this rider will be an annualized rate of 
0.25% of the daily net assets of the variable account for the first 8 
contract years only.
    [sbull] Greater of One-Year or 5% Enhanced Death Benefit.
    [sbull] Beneficiary Protector II Option.
    9. Credits under the New Contracts.
    a. Credits applied to the New Contracts will be fully vested except 
during the contractual free-look period and when certain surrenders of 
contract value are made.
    i. Similar to the Original Contracts, if the contract owner 
exercises the contractual free-look privilege, Nationwide will 
recapture the Credit. For those jurisdictions that allow a return of 
contract value upon exercise of the free-look provision, the contract 
owner will also forfeit any amounts deducted from the contract as an 
Extra Value Option charge.
    ii. After the contractual free-look period and before the end of 
the 7th contract year, certain withdrawals from contract value will 
subject the Credit to recapture. Prior to the end of the 7th contract 
year, if the contract owner withdraws value from the contract that is 
or would be subject to a CDSC under the standard CDSC schedule 
applicable to the contract, then Nationwide may recapture a portion of 
the Credit. Accordingly, any amount withdrawn pursuant to the 
contractual free withdrawal privilege is not subject to recapture. CDSC 
in the New Contracts is calculated in the same manner that CDSC is 
calculated in the Original Contracts. Thus, the percentage of the 
Credit to be recaptured will be determined by the percentage of total 
purchase payments reflected in the amount withdrawn that is or would be 
subject to CDSC under the standard CDSC schedule applicable to the 
contract. The recaptured amount will be taken proportionately from each

[[Page 4808]]

investment option as allocated at the time of the withdrawal.
    b. Similar to the Original Contracts, under the New Contracts, 
Nationwide will not recapture Credits: (i) Upon annuitization of the 
contract; (ii) when a death benefit becomes payable; (iii) if 
distributions are taken in order to meet minimum distribution 
requirements under the Code; and (iv) if free withdrawals are taken 
pursuant to an age-based systematic withdrawal program.
    c. Similar to the Original Contracts, all Credits applied to the 
New Contracts are considered earnings, not purchase payments.
    d. Similar to the Original Contacts, under the New Contracts, at 
the end of the 7th contract year, Credits are fully vested and are no 
longer subject to recapture.
    e. Similar to the Original Contracts, under the New Contracts, the 
charge associated with the Extra Value Option will no longer be 
assessed after the end of the 7th contract year for Contracts A, B, and 
C, and after the end of the 8th contract year for Contract D. To remove 
the rider option charge, Nationwide will replace the class of sub-
account units corresponding to total variable account charges that 
include the rider option charge with another class of sub-account units 
associated with total variable account charges without the rider option 
charge. The latter class of units will have a greater individual unit 
value than the original class. Therefore, a reduction in the number of 
units is necessary to ensure that the contract value remains the same 
as it was prior to the removal of the charge.
    From the date of the removal forward, the variable account value 
will be calculated using the class of sub-account unit values that do 
not reflect the rider option charge. Thus, the charge for that option 
is no longer assessed in the daily sub-account valuation for the 
contract.
    10. Applicants seek an amendment to the Order, pursuant to section 
6(c) of the 1940 Act, for exemption from sections 2(a)(32), 22(c) and 
27(i)(2)(A) of the 1940 Act and Rule 22c-1 thereunder to the extent 
necessary to permit Nationwide to issue contracts from the Nationwide 
Variable Account-II and the Other Separate Accounts that:
    a. provide for the recapture of Purchase Payment Credits upon a 
contract owner's cancellation of the contract pursuant to the 
contractual free-look provisions; and
    b. provide for the recapture of 3% and 4% Credits for 7 contract 
years, regardless of whether the contract owner elects a CDSC-reducing 
option.

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act authorizes the Commission to exempt 
any person, security or transaction, or any class or classes of 
persons, securities or transactions from the provisions of the 1940 Act 
and the rules 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 1940 Act. Applicants 
request that the Commission issue an order pursuant to section 6(c) of 
the 1940 Act granting the exemptions outlined herein with respect to 
the New Contracts funded by VA-II that are issued by Nationwide and 
underwritten or distributed by NISC. Applicants also request the relief 
under the order to extend to any of the Other Separate Accounts of 
Nationwide and to any other NASD registered broker/dealers under common 
control with Nationwide which may in the future serve as general 
distributor-principal underwriter of VA-II or Other Separate Accounts 
that offer or support variable annuity contracts that are substantially 
similar in all material respects to those described in the Application. 
Applicants represent that any such future contracts funded by VA-II or 
Other Separate Accounts will be substantially similar in all material 
respects to the New Contracts described herein. Applicants believe that 
the requested exemptions are appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act.
    2. Applicants represents that the charges associated with the 
respective Extra Value Options are consistent with the requirements of 
section 26(e)(A)(2) of the 1940 Act. Section 26(e)(A)(2) provides that 
it is unlawful for registered separate accounts or sponsoring insurance 
companies to sell any variable insurance contract ``unless the fees and 
charges deducted under the contract, in the aggregate, are reasonable 
in relation to the services rendered, the expenses expected to be 
incurred, and the risks assumed by the insurance company.'' Because the 
Credits associated with the Extra Value Options will be funded from 
Nationwide's general account, the Credits create an expense for 
Nationwide. In addition, the risk of not recovering that expense is 
substantial in light of the fact that under several different 
contingencies, the Credit will be fully or partially vested, and thus 
may be withdrawn from the contract, long before the expense associated 
with furnishing the Credit has been recouped. Accordingly, Applicants 
represent that the charges associated with the Extra Value Options, in 
addition to the basic Variable Account Charge applicable to each 
contract, are reasonable and therefore consistent with the requirements 
of section 26(e)(2)(A) of the 1940 Act. A similar representation will 
be made in the registration statements for the contracts, as required 
under section 26(e)(2)(A). Applicants also submit that the risk of not 
recovering the expense associated with rider options is substantially 
diminished if the contract value, including the Credit, is not 
surrendered or otherwise distributed prior to the end of the 7th 
contract year. Thus, the elimination of the rider option charge is 
entirely warranted and will benefit contract owners.
    3. Applicants represent that it is not administratively feasible to 
track the Credit amounts in VA-II after the Credits are applied. 
Accordingly, the asset-based charges associated with the Extra Value 
Options will be assessed against the entire amounts held in VA-II for 7 
contract years for Contracts A, B, and C, and for 8 contract years for 
Contract D.
    4. Subsection (i) of section 27 provides that section 27 does not 
apply to any registered separate account funding variable insurance 
contracts, or to the sponsoring insurance company and principal 
underwriter of such account, except as provided in paragraph (2) of the 
subsection. Paragraph (2) provides that it shall be unlawful for any 
registered separate account funding variable insurance contracts or a 
sponsoring insurance company of such account to sell a contract funded 
by the registered separate account unless, among other things, such 
contract is a redeemable security. Section 2(a)(32) defines 
``redeemable security'' as any security, other than short-term paper, 
under the terms of which the holder, upon presentation to the issuer, 
is entitled to receive approximately his or her proportionate share of 
the issuer's current net assets, or the cash equivalent thereof.
    5. Applicants submit that recapturing the Credit will not deprive 
an owner of his or her proportionate share of VA-II's current net 
assets. Applicants state that an owner's interest in the Credit 
allocated to his or her contract value is not entirely vested until the 
end of the 7th contract year. Until the Credit is vested, Applicants 
submit that Nationwide retains the right and interest in the Credit, 
although not in any earnings attributable to the Credit.

[[Page 4809]]

Applicants argue that when Nationwide recaptures a Credit, it is merely 
retrieving its own assets and the contract owner is not deprived of his 
or her proportionate share of separate account assets because his/her 
interest in the Credit has not vested.
    6. Furthermore, Applicants state that permitting a contract owner 
to retain the Credit upon cancellation of the contract pursuant to the 
contractual free-look privilege would be unfair and would encourage 
individuals to purchase a contract with the intention of retaining the 
credited amount for an unjustified profit at Nationwide's expense. 
Furthermore, the recapture of the Credit is designed to protect 
Nationwide when a contract owner takes partial or full surrender of the 
contract shortly after the Credit is applied, leaving Nationwide 
insufficient time to recover the cost of the Credit.
    7. Applicants assert that the Extra Value Option will be attractive 
to and in the interest of investors because it will permit owners to 
have an additional 3% or 4% of purchase payments remitted during the 
first twelve months invested in selected investment options from the 
date the purchase payment is received. Also, any earnings attributable 
to the Credit will be retained by the contract owner in addition to the 
principal amount of the Credit, provided the contingencies set forth in 
this Application are satisfied. Finally, Applicants believe that the 
Extra Value Option will be particularly attractive to and in the 
interest of long-term investors due to the elimination of the charge 
after 7 contract years for Contracts A, B, and C, and after 8 contract 
years for Contract D. Applicants assert that the elimination of the 
Extra Value Option charge will allow prospective purchasers to assess 
the value of the Extra Value Option, and elect or decline it, based on 
their particular circumstances, preferences and expectations.
    8. Applicants submit that recapturing the Purchase Payment Credit 
will not deprive an owner of his or her proportionate share of VA-II's 
current net assets. Applicants state that an owner's interest in the 
Purchase Payment Credit allocated to his or her contract value is not 
entirely vested until the end of the contractual free-look period. 
Until the Purchase Payment Credit is vested, Applicants submit that 
Nationwide retains the right and interest in the Purchase Payment 
Credit, although not in any earnings attributable to the Purchase 
Payment Credit. Applicants argue that when Nationwide recaptures a 
Purchase Payment Credit, it is merely retrieving its own assets, and 
the contract owner is not deprived of his or her proportionate share of 
separate account assets because his/her interest in the Purchase 
Payment Credit has not vested.
    9. Furthermore, Applicants state that permitting a contract owner 
to retain the Purchase Payment Credit upon cancellation of the contract 
pursuant to the contractual free-look privilege would be unfair and 
would encourage individuals to purchase a contract with the intention 
of retaining the credited amount for an unjustified profit at 
Nationwide's expense.
    10. Applicants assert that Purchase Payment Credits recognize the 
efficiencies associated with issuing and administering contracts with 
higher aggregate purchase payments, and are thus attractive to, and in 
the best interest of, certain purchasers.
    11. Applicants submit that the provisions for recapture of the 
Credit and the Purchase Payment Credit under the contracts do not 
violate section 2(a)(32) and 27(i)(2)(A) of the 1940 Act. Nevertheless, 
to avoid any possible uncertainties, Applicants request an exemption 
from those sections, to the extent deemed necessary to permit the 
recapture of any Credit or Purchase Payment Credit under the 
circumstances described herein with respect to the New Contracts and 
any future contracts issued in conjunction with VA-II or any Other 
Separate Accounts without loss of the relief from section 27 provided 
by section 27(i).
    12. Section 22(c) of the 1940 Act authorizes the Commission to make 
rules and regulations applicable to registered investment companies and 
to principal underwriters of, and dealers in, the redeemable securities 
of any registered investment company to accomplish the same purposes as 
contemplated by section 22(a). Rule 22c-1 thereunder prohibits a 
registered investment company issuing any redeemable security, a person 
designated in such issuer's prospectus as authorized to consummate 
transactions in any such security, and a principal underwriter of, or 
dealer in, such security, from selling, redeeming, or repurchasing any 
such security except at a price based on the current net asset value of 
such security which is next computed after receipt of a tender of such 
security for redemption or of an order to purchase or sell such 
security.
    13. It could be argued that Nationwide's recapture of the Credit 
and/or the Purchase Payment Credit constitutes a redemption of 
securities for a price other than one based on the current net asset 
value of the separate accounts. Applicants contend, however, that 
recapture of these credits does not violate section 22(c) and Rule 22c-
1. Applicants argue that such recapture does not involve either of the 
evils or harmful events that Rule 22c-1 was intended to eliminate or 
reduce, namely: (1) The dilution of the value of outstanding redeemable 
securities of registered investment companies through their sale at a 
price below net asset value or their redemption or repurchase at a 
price above it, and (2) other unfair results including speculative 
trading practices. These evils were the result of backward pricing, the 
practice of pricing a mutual fund share based on the per share net 
asset value determined as of the close of the market on the previous 
day. Backward pricing diluted the value of outstanding mutual fund 
shares by allowing investors to take advantage of increases or 
decreases in net asset value that were not yet reflected in the mutual 
fund share price. Applicants submit that the recapture of Credits and 
Purchase Payment Credits described herein does not pose such a threat 
of dilution. To recapture any credit, Nationwide will redeem contract 
owners' interests in the sub-accounts at a price determined on the 
basis of current sub-account accumulation unit values. In no event will 
the amount recaptured be more than the amount of the Credit or Purchase 
Payment Credit that Nationwide paid out of its general account. 
Although Contract owners will be entitled to retain any investment gain 
attributable to a credit, the amount of such gain will be determined on 
the basis of the current net asset value of the respective sub-account. 
Thus, no dilution will occur upon the recapture of the Credit or 
Purchase Payment Credit.
    14. Applicants also submit that the second harm that Rule 22c-1 was 
designed to address, namely, speculative trading practices calculated 
to take advantage of backward pricing, will not occur as a result of 
the recapture of the Credit or Purchase Payment Credit.
    15. To avoid any uncertainty as to full compliance with the 1940 
Act, Applicants request an exemption from the provisions of section 
22(c) and Rule 22c-1 to the extent deemed necessary to permit them to 
recapture the Credit and the Purchase Payment Credit under the 
contracts and any future contracts (that are substantially similar in 
all material respects to the contracts described herein) issued in 
conjunction with VA-II or any Other Separate Accounts.

[[Page 4810]]

Conclusion

    Applicants submit that their request for an amended Order is 
appropriate in the public interest. Applicants state that such an 
amended Order would promote competitiveness in the variable annuity 
market by eliminating the need to file redundant exemptive 
applications, thereby reducing administrative expenses and maximizing 
the efficient use of Applicants' resources. Applicants argue that 
investors would not receive any benefit or additional protection by 
requiring Applicants to repeatedly seek exemptive relief that would 
present no issue under the 1940 Act that has not already been addressed 
in the Application described herein. Applicants submit that filing 
additional applications would impair their ability to effectively take 
advantage of business opportunities as they arise. Furthermore, 
Applicants state that if they were repeatedly required to seek 
exemptive relief with respect to the same issues addressed in the 
Application described herein, investors would not receive any benefit 
or additional protection thereby.
    Applicants further submit, based on the grounds summarized above, 
that their exemptive request meets the standards set out in section 
6(c) of the 1940 Act, namely, that the exemptions requested are 
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 1940 Act, and that, therefore, the Commission 
should grant the requested amended Order.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-2168 Filed 1-29-03; 8:45 am]
BILLING CODE 8010-01-M