[Federal Register Volume 68, Number 69 (Thursday, April 10, 2003)]
[Notices]
[Pages 17692-17697]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-8811]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25993; File No. 812-12913]


National Life Insurance Company, et al.; Notice of Application

April 4, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order pursuant to Section 26(c) of 
the Investment Company Act of 1940 (the ``Act'') approving certain 
substitutions of securities.

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

Applicants: National Life Insurance Company (``NLIC''), National 
Variable Annuity Account II (``Annuity Account''), and National 
Variable Life Insurance Account (``Life Account'').

Filing Date: The application was filed on December 19, 2002, and 
amended and restated on April 3, 2003.

Summary of Application: Applicants request an order to permit NLIC to 
substitute securities issued by two series of the Sentinel Variable 
Products Trust (``SVPT'') to support variable annuity contracts or 
variable life insurance contracts (collectively, the ``Contracts'') 
issued by NLIC, for securities issued by two series of the Market 
Street Fund (``MSF''), and currently held by either the Annuity Account 
or the Life Account (each, an ``Account,'' together, the ``Accounts'').

Hearing or Notification of Hearing: An order granting the amended and 
restated 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 must be received by 
the Commission by 5:30 p.m. on April 29, 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.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, c/o D. Russell 
Morgan, Esq., Assistant General Counsel, National Life Insurance 
Company, National Life Drive, Montpelier, Vermont 05604. Copy to David 
S. Goldstein, Esq., Sutherland Asbill & Brennan LLP, 1275 Pennsylvania 
Avenue, NW., Washington, DC 20004-2415.

FOR FURTHER INFORMATION CONTACT: Ellen J. Sazzman, Senior Counsel, or 
Lorna J. MacLeod, Branch Chief, Office of Insurance Products, Division 
of Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee from 
the Public Reference Branch of the Commission, 450 5th Street, NW., 
Washington, DC 20549 (tel. (202) 942-8090).

Applicants' Representations

    1. MSF has eleven investment portfolios, two of which are the 
subject of this application (each, a Portfolio). SVPT currently has 
five investment portfolios, but is adding two more that are the subject 
of this application (each, a Fund).
    2. NLIC was a mutual life insurance company originally chartered by 
the State of Vermont in 1848. It is now a stock life insurance company, 
all of the outstanding stock of which is indirectly owned by National 
Life Holding Company, a mutual insurance holding company, established 
under Vermont law in 1999. All owners of NLIC contracts, including the 
Contracts, are voting members of National Life Holding Company. NLIC is 
authorized to transact life insurance and annuity business in Vermont 
and in 50 other jurisdictions. For purposes of the Act, NLIC is the 
depositor and sponsor of the Annuity Account and the Life Account as 
those terms have been interpreted by the Commission with respect to 
variable life insurance and variable annuity separate accounts.
    3. NLIC established the Annuity Account on November 1, 1996, and 
the Life Account on February 1, 1985, as segregated investment accounts 
under Vermont law. Under Vermont law, the assets of each Account 
attributable to the Contracts through which interests in that Account 
are issued are owned by NLIC but are held separately from all other 
assets of NLIC for the benefit of the owners of, and the persons 
entitled to payment under, those Contracts. Consequently, such assets 
in each Account equal to the reserves and other liabilities with 
respect to such Account are not chargeable with liabilities arising out 
of any other business that NLIC may conduct. Income, gains and losses, 
realized or unrealized, from assets allocated to each Account are 
credited to or charged against that Account without regard to the other 
income, gains or losses of NLIC. Each Account is a ``separate account'' 
as

[[Page 17693]]

defined by Rule 0-1(e) under the Act, and is registered with the 
Commission as a unit investment trust.
    4. The Annuity Account is divided into twenty-eight subaccounts. 
Each subaccount invests exclusively in a corresponding investment 
portfolio of one of twelve series-type management investment companies. 
The assets of the Annuity Account support variable annuity contracts, 
and interests in the Account offered through such contracts have been 
registered under the Securities Act of 1933 (the ``1933 Act'').
    5. The Life Account is divided into eighty-six subaccounts. Each 
subaccount invests exclusively in shares representing an interest in a 
corresponding investment portfolio of one of fourteen series-type 
management investment companies. The assets of the Life Account support 
variable life insurance contracts, and interests in this Account 
offered through such contracts have been registered under the 1933 Act.
    6. Market Street Fund. MSF was originally incorporated in Maryland 
on March 21, 1985, but reorganized into a Delaware business trust on 
January 26, 2001. MSF is registered under the Act as an open-end 
diversified management investment company. MSF is a series investment 
company as defined by Rule 18f-2 under the Act and currently comprises 
eleven investment portfolios. MSF issues a separate series of shares of 
beneficial interest in connection with each portfolio and has 
registered these shares under the 1933 Act. Gartmore Mutual Fund 
Capital Trust (``Gartmore''), serves as investment adviser to the MSF 
Balanced and Bond Portfolios, and selects their subadvisers. The 
subadviser to the MSF Balanced Portfolio is currently Fred Alger 
Management, Inc., and the subadviser to the Bond Portfolio is currently 
Western Asset Management Company.
    7. The investment objective of the MSF Bond Portfolio is to seek a 
high level of current income consistent with prudent investment risk. 
This Portfolio invests in a diversified portfolio of fixed-income 
securities of U.S. and foreign issuers. The Portfolio's subadviser uses 
active fixed-income management techniques by focusing on four key 
areas: (1) Sector and sub-sector allocation, (2) issue selection, (3) 
duration, and (4) term structure.
    8. The investment objective of the MSF Balanced Portfolio is to 
realize as high a level of long-term total rate of return as is 
consistent with prudent investment risk. The MSF Balanced Portfolio's 
equity portion is invested primarily in equity securities, such as 
common or preferred stocks, which are listed on U.S. exchanges or 
traded in the over-the-counter markets. The Portfolio's subadviser uses 
a growth-oriented strategy. Growth-oriented investments involve seeking 
securities of issuers with above-average recent earnings growth rates 
and what the subadviser views as a reasonable likelihood of maintaining 
these rates in the foreseeable future. The subadviser focuses on stocks 
of companies with growth potential and fixed-income securities, with 
emphasis on income-producing securities that appear to have some 
potential for capital appreciation. Normally, the Portfolio invests in 
common stocks and fixed-income securities that include commercial paper 
and bonds rated within the four highest rating categories by an 
established rating agency or if not rated, that are determined by the 
subadviser to be of comparable quality. Ordinarily, at least 25% of the 
Portfolio's net assets are invested in fixed-income securities.
    9. Sentinel Variable Products Trust. SVPT was organized as a 
business trust in Delaware on March 14, 2000, and is currently 
registered under the Act as an open-end diversified management 
investment company. SVPT is a series investment company as defined by 
Rule 18f-2 under the Act and currently comprises five investment 
portfolios. It plans to create two new Funds to receive the assets of 
the MSF Balanced Portfolio and MSF Bond Portfolio in the substitution. 
SVPT will issue a separate series of shares of beneficial interest in 
connection with each Fund and will register these shares under the 1933 
Act. NL Capital Management, Inc. (``NLCM'') will serve as investment 
adviser to each of the Funds. NLCM is affiliated with NLIC.
    10. The investment objective of the SVPT Bond Fund is to seek high 
current income while seeking to control risk, by investing mainly in 
investment grade bonds. The Fund will invest exclusively in fixed-
income securities. At least 80% of the Fund's assets will normally be 
invested in the following types of bonds: (1) corporate bonds which at 
the time of purchase are rated within the four highest rating 
categories of Moody's, Standard & Poor's, or any other nationally 
recognized statistical rating organization, (2) debt securities issued 
or guaranteed by the U.S. government, its agencies or 
instrumentalities, including mortgage-backed securities, (3) debt 
securities (payable in U.S. dollars) issued or guaranteed by Canadian 
governmental entities, and (4) debt obligations of domestic banks or 
bank holding companies, even though not rated by Moody's or Standard & 
Poor's, that NLCM believes have investment qualities comparable to 
investment grade corporate securities. The remainder of the Fund's 
assets may be invested in other fixed-income securities, such as 
straight or convertible debt securities and straight or convertible 
preferred stocks. The Fund will invest no more than 20% of its total 
assets in lower quality bonds.
    11. The investment objective of the SVPT Balanced Fund is to seek a 
combination of growth of capital and current income, with relatively 
low risk and relatively low fluctuations in value. It will seek this 
goal by investing in common stocks similar to those in the SVPT Common 
Stock Fund. NLCM tries to select stocks of leading companies that are 
financially strong and are selling at attractive prices in relation to 
their values and in investment grade bonds similar to those in the SVPT 
Bond Fund, with at least 25% of its total assets in bonds. When 
determining this percentage, convertible bonds and/or preferred stocks 
will be considered common stocks, unless these securities are held 
primarily for income. NLCM will divide the Fund's investments among 
stocks and bonds based on whether it believes stocks or bonds offer a 
better value at the time.
    12. The Contracts are flexible premium variable life insurance 
Contracts and individual flexible premium deferred variable annuity 
Contracts. The Contracts provide for the accumulation of values on a 
variable basis, fixed basis, or both, during the accumulation period, 
and provide settlement or annuity payment options on a fixed basis. 
Under each of the Contracts, NLIC reserves the right to substitute 
shares of one Fund or Portfolio for shares of another, including a fund 
or portfolio of a different investment company.
    13. Under all of the variable life insurance Contracts, a Contract 
owner may make unlimited transfers of accumulated value in a contract 
year between and among the subaccounts of the Life Account and NLIC's 
general account. Currently there is no charge for transfers, however, 
NLIC reserves the right to assess a $25 charge for each transfer in 
excess of twelve in any Contract year. Under the variable annuity 
Contracts, a Contract owner may make unlimited transfers of Contract 
value between and among the subaccounts of the Annuity Account and 
NLIC's general account. Currently there is no charge for transfers, 
however, NLIC reserves the right to assess a $25 charge for each 
transfer in excess of twelve in any Contract year.

[[Page 17694]]

    14. NLIC, on its behalf and on behalf of the Accounts, proposes to 
substitute shares of the SVPT Bond Fund for shares of the MSF Bond 
Portfolio, and shares of the SVPT Balanced Fund for shares of the MSF 
Balanced Portfolio. NLIC believes that by making the proposed 
substitutions in each of the Accounts, they can better serve the 
interests of owners of the Contracts.
    15. During 2000, NLIC and the Accounts applied for and received an 
order approving a number of substitutions of SVPT Funds for MSF 
Portfolios. At the time of that application, Sentinel Advisors Company 
(``SAC'') served as the investment manager and adviser to a number of 
the MSF Portfolios, including the Bond and Balanced Portfolios. SAC is 
a general partnership which at that time was owned and controlled by 
affiliates of NLIC, Provident Mutual Life Insurance Company 
(``PMLIC''), and The Penn Mutual Life Insurance Company (``Penn 
Mutual''). NLIC's affiliate controls the managing general partner and 
is entitled to a majority of the profits earned by SAC. NLIC, PMLIC, 
and Penn Mutual are not affiliated persons of each other. Effective 
June 30, 2002, NLCM (affiliated with NLIC) purchased all the stock of 
PMLIC's affiliates which owned PMLIC's interests in SAC, and as a 
result, NLIC's affiliates are now entitled to more than 90% of the 
profits of SAC. SAC's officers and investment personnel are all 
employees of NLCM, and they are the same officers and investment 
personnel who provide investment management services to the SVPT Funds. 
SAC, like NLCM, is located at NLIC's premises, in Montpelier, Vermont.
    16. With the substitutions applied for in the previous order, PMLIC 
and NLIC intended to end their joint use of MSF as an investment 
vehicle for both companies' variable life insurance and variable 
annuity contracts (including the Contracts). NLIC originally intended 
to substitute independently managed funds for the MSF Bond and Balanced 
(then Managed) Portfolios, at the time of the substitutions effected in 
late 2000. However, the available independently managed funds did not 
meet the conditions that the SEC would impose on the substitutions and 
SVPT did not have the Bond or Balanced Funds to receive the Accounts' 
assets in the MSF Bond and Balanced Portfolios. NLIC chose to proceed 
with the substitutions that the SEC would approve at the time and the 
Accounts have continued to invest in the MSF Bond and Balanced 
Portfolios.
    17. After the initial substitutions, SAC stepped down as investment 
adviser to all of the MSF Portfolios of which it had been the 
investment adviser. Market Street Investment Management Company 
(``MSIM'') became the investment manager to the MSF Portfolios, and 
selected subadvisers to manage the assets on a day-to-day basis, 
including Western Asset Management Company for the Bond Portfolio and 
Fred Alger Management, Inc., for the Balanced Portfolio. New investment 
advisory contracts were approved by the shareholders, and management 
fees and overall expense ratios rose significantly.
    18. In addition, effective September 30, 2002, PMLIC was acquired 
by Nationwide Financial Services, Inc. (``Nationwide''), in a sponsored 
demutualization transaction. PMLIC's name changed to Nationwide Life 
Insurance Company of America (``NLICA'') as part of this transaction. 
Also, effective October 1, 2002, Gartmore, an affiliate of Nationwide 
Financial, replaced MSIM as the MSF investment adviser. NLICA, under 
Nationwide's control, has proposed another reorganization of MSF, under 
which the MSF Balanced and Bond Portfolios would be acquired by series 
of the GVIT Trust, another series investment company offering shares to 
variable insurance product separate accounts, for which Gartmore also 
serves as investment adviser. Specifically, the MSF Balanced Portfolio 
would be acquired by the J.P. Morgan GVIT Balanced Fund, a series of 
the GVIT Trust, and the MSF Bond Portfolio would be acquired by the 
Gartmore GVIT Government Bond Fund. As a result of this proposed 
reorganization, the subadviser to the MSF Balanced Portfolio would be 
J.P. Morgan Investment Management, Inc. and Gartmore would directly 
manage the MSF Bond Portfolio.
    19. NLIC continues to desire to end the joint use of the remaining 
MSF Portfolios by separate accounts of both companies. NLIC continues 
to believe that the manner of accomplishing this separation which would 
involve the least confusion and disruption to owners of the Contracts 
would be for it to substitute shares of new SVPT Funds for those of the 
MSF Bond and Balanced Portfolios held by the Accounts. This would avoid 
the possibility that MSF may propose future changes which NLIC and 
NLICA could not support. Such a disagreement could create unnecessary 
expense and confusion for owners of both the Contracts and NLICA 
contracts, and could result in one or more material irreconcilable 
conflicts between the interests of Contract owners and owners of other 
NLICA contracts. NLIC had no role in the selection of the current 
subadvisers to the MSF Balanced and Bond Portfolios, no role in the 
planning for the reorganization now proposed by NLICA, and does not 
anticipate that it would have any role in future decisions to continue 
to engage or to replace such subadvisers.
    20. The majority of the assets in the MSF Bond and Balanced 
Portfolios belong to owners of variable annuity and variable life 
insurance contracts issued by NLICA and its affiliates and only 
relatively small portions of each consist of assets beneficially owned 
by owners of the Contracts.

------------------------------------------------------------------------
                                                             Approximate
                                                               percent
                                                Approximate  represented
                                                  percent         by
                  Portfolios                    represented   contracts
                                                  by NLIC     issued by
                                                 contracts     NLICA or
                                                                 its
                                                              affiliates
------------------------------------------------------------------------
MSF Bond......................................         24.5         75.5
MSF Balanced..................................         16.1         83.9
------------------------------------------------------------------------

    21. NLIC believes that many of the owners of the Contracts who 
invested in the MSF Bond and Balanced Portfolios did so at the time 
these Portfolios were managed by SAC, and that most would prefer to 
invest in funds or portfolios selected by NLIC and over which NLIC has 
some influence.
    22. Projected expense levels for the SVPT Bond and Balanced Funds 
are the same as those currently experienced by the MSF Bond and 
Balanced Portfolios because each will be capped by NLIC for two years 
at levels equal to the percentage expense levels experienced by its 
corresponding MSF Portfolio for the 2002 fiscal year. Likewise, the 
management fee rates (including breakpoints) of the SVPT Bond and 
Balanced Funds are the same as that of their corresponding MSF 
Portfolios. In addition, for those Contract owners who were Contract 
owners on the date of the proposed substitutions, NLIC will not 
increase Account or other asset-based expenses under the Contracts for 
a period of 24 months following the date of the proposed substitutions.
    23. NLIC notes that the equity portion of the SVPT Balanced Fund 
would be managed in a different style from that currently employed by 
the MSF Balanced Portfolio, utilizing a more value-oriented style 
similar to that employed by Sentinel Balanced Fund, as contrasted with 
the more growth-oriented style employed by Fred Alger Management. It 
expects that the fixed-income portion of the SVPT Balanced Fund would 
be comparable to the fixed-income portion of the MSF Balanced 
Portfolio, as currently managed. However, if the Portfolio is acquired 
by

[[Page 17695]]

J.P. Morgan GVIT Balanced Fund, the investment style for the equity 
portion of the Portfolio will change anyway, and furthermore, the 
fixed-income portion of the Portfolio would have greater flexibility to 
invest in lower quality debt instruments and emerging market 
securities. NLIC also notes that it already has available to the 
Accounts three equity portfolios managed by Fred Alger Management, the 
Alger American Growth Portfolio, the Alger American Leveraged AllCap 
Portfolio, and the Alger American Small Capitalization Portfolio. As a 
result, any Contract owners who wish to invest a portion of their 
Contract value using Alger's equity investment style would be able to 
participate by allocating assets to one of these investment choices.
    24. NLIC expects that the SVPT Bond Fund would be similar in 
investment style and categories of investments to the MSF Bond 
Portfolio as currently operated, and certainly similar to the MSF Bond 
Portfolio as managed by SAC prior to 2001. In contrast, if the proposed 
reorganization occurs, the Gartmore GVIT Government Bond Fund will be 
limited to investments in U.S. government and agency bonds, bills, and 
notes, while the SVPT Bond Fund would, like the current MSF Bond 
Portfolio, be able to invest in investment grade corporate issuers.
    25. As the two new SVPT Portfolios will initially be relatively 
small in size (the SVPT Bond Fund is expected to initially have net 
assets of approximately $19 million, and the SVPT Balanced Fund is 
expected to initially have net assets of approximately $12 million), 
NLIC does not anticipate earning material profits from the management 
of these assets in the first few years after the proposed 
substitutions. Rather, its motivation is to complete the termination of 
the joint use of the MSF Portfolios which it initially sought in 2000, 
and to regain a level of control over its Contract owner assets which 
it lost as its joint venture with PMLIC ended.
    26. In light of the significant beneficial ownership position of 
NLICA (and affiliate) contract owners, Contract owners and future NLIC 
contract owners cannot expect to command a majority voting position in 
either of the MSF Bond or Balanced Portfolios in the event that they, 
as a group, desire that a Portfolio move in a direction different from 
that generally desired by owners of NLICA (or its affiliates'') 
contracts. In addition, unless the growth in the number of Contracts or 
the assets supporting them increases at a much greater rate than those 
of similar contracts issued by PMLIC and its affiliates, owners of 
Contracts have no prospects of ever gaining a position capable of 
influencing the future direction of these Portfolios.
    27. NLIC also notes that it has had no prior business relationship 
with Nationwide, which now controls NLICA and the investment advisor to 
MSF. NLIC has never selected a Nationwide-controlled entity to provide 
investment advisory services to its Contract owners, and while it has 
no particular problem with Nationwide, NLIC feels that it should not be 
forced into a position of offering investment portfolios managed by 
Nationwide-affiliated entities simply because Nationwide has acquired 
PMLIC.
    28. The following charts show the approximate year-end size (in net 
assets), expense ratio (ratio of operating expenses as a percentage of 
average net assets), and annual total returns for each of the past 
three years for each of the Funds and Portfolios involved in the 
proposed substitutions.

----------------------------------------------------------------------------------------------------------------
                                                                                 Anticipated
                                                             Anticipated net    expense ratio
                      SVPT bond fund                          assets after          after         Total return
                                                              substitution      substitution
                                                              (in millions)       (percent)
----------------------------------------------------------------------------------------------------------------
                                                                         $19              0.67               N/A


----------------------------------------------------------------------------------------------------------------
                                                              Net assets at
                    MSF bond portfolio                        year-end  (in     Expense ratio     Total return
                                                                millions)         (percent)         (percent)
----------------------------------------------------------------------------------------------------------------
2000......................................................             $39.0              0.52              9.68
2001......................................................              53.4              0.67              7.40
2002......................................................              67.0              0.67              9.09


----------------------------------------------------------------------------------------------------------------
                                                             Anticipated net     Anticipated
                                                              assets after      expense ratio
                    SVPT balanced fund                        substitution          after         Total return
                                                              (in millions)     substitution
----------------------------------------------------------------------------------------------------------------
                                                                         $12              0.79               N/A


----------------------------------------------------------------------------------------------------------------
                                                             Net assets at
                  MSF balanced portfolio                     year-end  (in     Expense ratio      Total return
                                                               millions)         (percent)         (percent)
----------------------------------------------------------------------------------------------------------------
2000.....................................................             $71.5              0.57              8.75
2001.....................................................              69.0              0.82             (7.02)
2002.....................................................              58.4              0.79            (10.26)
----------------------------------------------------------------------------------------------------------------

    29. The following charts show the approximate annual management 
fees, other expenses and total expenses of each of the Funds or 
Portfolios involved in the proposed substitutions both before and after 
any reimbursement or fee waivers. The management fees and expenses 
shown for the MSF Bond and Balanced Portfolios are for the last 
complete fiscal year, 2002.

[[Page 17696]]



----------------------------------------------------------------------------------------------------------------
                                                          In percent
                                             ------------------------------------
                    Fund                           Before             After         Revenue sharing percentage
                                              reimbursement or  reimbursement or
                                                 fee waiver        fee waiver
----------------------------------------------------------------------------------------------------------------
MSF Bond....................................              0.40              0.40  N/A
                                                          0.29              0.27  ..............................
                                             ------------------------------------
                                                          0.69              0.67  ..............................
                                             ====================================
SVPT Bond...................................              0.40              0.40  N/A
                                                          0.29              0.27  ..............................
                                             ------------------------------------
                                                          0.69              0.67  ..............................
                                             ====================================
MSF Balanced................................              0.55              0.55  N/A
                                                          0.27              0.24  ..............................
                                             ------------------------------------
                                                          0.82              0.79  ..............................
                                             ====================================
SVPT Balanced...............................              0.55              0.55  N/A
                                                          0.32              0.24  ..............................
                                             ------------------------------------
                                                          0.87              0.79  ..............................
----------------------------------------------------------------------------------------------------------------

    30. By disclosure added to supplements to the various May 1, 2002 
prospectuses for the Contracts and the Accounts, all owners of the 
Contracts have been notified of NLIC's intention to take the necessary 
actions, including seeking the order requested by this application, to 
substitute shares of the SVPT Bond and Balanced Funds for the MSF Bond 
and Balanced Portfolios as described herein.
    31. The additional prospectus disclosure (and any subsequent 
supplements) about the proposed substitutions will advise Contract 
owners that from the date of the supplement until the date of the 
proposed substitution, owners are permitted to make one transfer of all 
amounts under a Contract invested in either of the affected subaccounts 
to another subaccount available under a Contract other than one of the 
other affected subaccounts without that transfer counting as a ``free'' 
transfer permitted under a Contact. The prospectus disclosure also 
informs (and any subsequent supplements will inform) Contract owners 
that NLIC will not exercise any rights reserved under any Contract to 
impose additional restrictions on transfers until at least 30 days 
after the proposed substitutions. The supplements will also advise 
Contract owners that if the proposed substitutions are carried out, 
then each Contract owner affected by a substitution will be sent a 
written notice (described below) informing them of the fact and details 
of the substitutions.
    32. The proposed substitutions will take place at relative net 
asset value with no change in the amount of any Contract owner's 
account value or death benefit or in the dollar value of his or her 
investment in any of the Accounts. Contract owners will not incur any 
fees or charges as a result of the proposed substitutions, nor will 
their rights or NLIC's obligations under the Contracts be altered in 
any way. All applicable expenses incurred in connection with the 
proposed substitutions, including brokerage commissions, legal, 
accounting and other fees and expenses, will be paid by NLIC. In 
addition, the proposed substitutions will not impose any tax liability 
on Contract owners. The proposed substitutions will not cause the 
Contract fees and charges currently being paid by existing Contract 
owners to be greater after the proposed substitutions than before the 
proposed substitutions.
    33. The proposed substitutions will not, of course, be treated as a 
transfer of Contract value or an exchange of annuity units for the 
purpose of assessing transfer charges or for determining the number of 
remaining ``free'' transfers or exchanges in a Contract year. NLIC will 
not exercise any right it may have under the Contracts to impose 
restrictions on or charges for Contract value transfers or annuity unit 
exchanges under the Contracts for a period of at least 30 days 
following the substitutions. One exception to this is that NLIC may 
impose restrictions on transfers to prevent or limit ``market timing'' 
activities by Contract owners or agents of Contract owners.
    34. NLIC will permit Contract owners to make one transfer of 
Contract value (or annuity unit exchange) out of the MSF Bond Portfolio 
subaccount to another subaccount, and out of the MSF Balanced Portfolio 
subaccount to another subaccount, without the transfer (or exchange) 
being treated as one of a limited number of transfers (or exchanges) 
permitted without a transfer charge. Likewise, for at least 30 days 
following the proposed substitutions, NLIC will permit Contract owners 
affected by the substitutions to make one transfer of Contract value 
(or annuity unit exchange) out of the SVPT Bond Portfolio subaccount to 
another subaccount, and out of the SVPT Balanced Portfolio subaccount 
to another subaccount, without the transfer (or exchange) being treated 
as one of a limited number of transfers (or exchanges) permitted 
without a transfer charge. All Contract owners, even those who are 
``market timers,'' may avail themselves of the ``free'' transfer 
privilege both before and after the proposed substitutions.
    35. To the extent that the annualized expenses of the SVPT Bond and 
Balanced Portfolios exceeds, for each fiscal period (such period being 
less than 90 days) during the twenty-four months following the 
substitutions, the 2002 net expense level of the MSF Bond and Balanced 
Portfolios, NLIC will, for each Contract outstanding on the date of the 
proposed substitutions, make a corresponding reduction in separate 
account (or subaccount) expenses on the last day of such fiscal period, 
such that the amount of the SVPT Balanced and Bond Portfolios' net 
expenses, together with those of the corresponding separate account (or 
subaccount) will, on an annualized basis, be no greater than the sum of 
the net expenses of the MSF Balanced and Bond Portfolios' and the 
expenses of the separate account (or

[[Page 17697]]

subaccount) for the 2002 fiscal year. In addition, for twenty-four 
months following the substitutions, NLIC will not increase asset-based 
fees or charges for Contracts outstanding on the day of the proposed 
substitutions.
    36. In addition to the prospectus disclosure (and supplements) 
distributed to owners of Contracts, within five days after the proposed 
substitutions, any Contract owners who were affected by the 
substitution will be sent a written notice informing them that the 
substitutions were carried out and that they may make one transfer of 
all accumulation or contract value under a Contract invested in any one 
of the affected subaccounts on the date of the notice to another 
subaccount available under their Contract without that transfer 
counting as one of a limited number transfers permitted in a Contract 
year free of charge. The notice will also reiterate the fact that NLIC 
will not exercise any rights reserved by it under any of the Contracts 
to impose additional restrictions on transfers until at least 30 days 
after the proposed substitutions. The notice as delivered in certain 
states also may explain that, under the insurance regulations in those 
states, Contract owners who are affected by the substitutions may 
exchange their Contracts for fixed-benefit life insurance contracts or 
annuity contracts, as applicable, issued by NLIC during the 60 days 
following the proposed substitutions. Current prospectuses for the new 
Funds will precede or accompany the notices.
    37. NLIC also is seeking approval of the proposed substitutions 
from any state insurance regulators whose approval may be necessary or 
appropriate.

Applicants' Legal Analysis

    1. The proposed substitutions appear to involve substitutions of 
securities within the meaning of section 26(c) of the Act.
    2. Applicants state that the Contracts expressly reserve for NLIC 
the right, subject to compliance with applicable law, to substitute 
shares of one Portfolio or Fund held by a subaccount of an Account for 
another. The prospectuses for the Contracts and the Accounts contain 
appropriate disclosure of this right.
    3. Applicants state that NLIC reserved this right of substitution 
both to protect themselves and their Contract owners in situations 
where either might be harmed or disadvantaged by circumstances 
surrounding the issuer of the shares held by one or more of their 
separate accounts and to afford the opportunity to replace such shares 
where to do so could benefit itself and Contract owners. The 
prospectuses for the Contracts and Accounts contain appropriate 
disclosure of this right.
    4. In the case of the proposed substitutions, the MSF Portfolios 
would be replaced by funds with substantially similar investment 
objectives, and management would return to the investment management 
team which managed the MSF Portfolios prior to the reorganization in 
late 2000 (in the case of many of the Contract owners, the management 
team that was in place at the time they made the decision to allocate 
Contract value to the MSF Portfolios). The substitutions would also 
prevent Contract owners from being affected by any additional 
reorganization of MSF as it adapts to Nationwide's acquisition of 
PMLIC.
    5. In addition to the foregoing, Applicants generally submit that 
the proposed substitutions meet the standards that the Commission and 
its staff have applied to similar substitutions that have been approved 
in the past.
    6. Applicants anticipate that Contract owners will be at least as 
well off with the proposed array of subaccounts offered after the 
proposed substitutions as they have been with the array of subaccounts 
offered prior to the substitutions. The proposed substitutions retain 
for Contract owners the investment flexibility which is a central 
feature of the Contracts. If the proposed substitutions are carried 
out, all Contract owners will be permitted to allocate purchase 
payments and transfer accumulated values and contract values between 
and among the same number of subaccounts as they could before the 
proposed substitutions.
    7. Applicants argue that each of the proposed substitutions is not 
the type of substitution which Section 26(c) was designed to prevent. 
Unlike traditional unit investment trusts where a depositor could only 
substitute an investment security in a manner which permanently 
affected all the investors in the trust, the Contracts provide each 
Contract owner with the right to exercise his or her own judgment and 
transfer accumulation and contract values into other subaccounts. 
Moreover, the Contracts will offer Contract owners the opportunity to 
transfer amounts out of the affected subaccounts into any of the 
remaining subaccounts without cost or other disadvantage. The proposed 
substitutions, therefore, will not result in the type of costly forced 
redemption which Section 26(c) was designed to prevent.
    8. In addition, Applicants argue that the proposed substitutions 
are unlike the type of substitution which Section 26(c) was designed to 
prevent in that by purchasing a Contract, Contract owners select the 
specific type of insurance coverage offered by NLIC under their 
Contract as well as numerous other rights and privileges set forth in 
the Contract. Therefore, Applicants contend that Contract owners may 
also have considered NLIC's size, financial condition, type and its 
reputation for service in selecting their Contract. These factors will 
not change as a result of the proposed substitutions.
    9. Applicants submit that, for all the reasons stated above, the 
proposed substitutions are consistent with the protection of investors 
and the purposes fairly intended by the policy and provisions of the 
Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-8811 Filed 4-9-03; 8:45 am]
BILLING CODE 8010-01-P