[Federal Register Volume 68, Number 136 (Wednesday, July 16, 2003)]
[Notices]
[Pages 42141-42147]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-17919]



[[Page 42141]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26097; File No. 812-12913]


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

July 9, 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, April 18, and June 25, 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 Gartmore 
Variable Insurance Trust (``GVIT''), which series are successors of two 
series of the Market Street Fund (``MSF''), and are 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 July 30, 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).

Background

    1. On December 19, 2002, Applicants applied for an order of the 
Commission, pursuant to section 26(c) of the Act, approving the 
substitution of securities issued by two series of SVPT for securities 
issued by two series of the MSF then held by the Accounts. Applicants 
amended that application on April 3, 2003 to reflect changes made in 
response to comments from the Commission staff as well as to update 
certain other information. The Commission published a notice of the 
amended application on April 4, 2003.
    2. The amended application discussed, among other things, the fact 
that shareholders of the two MSF series had recently approved the 
acquisition of each of the series by similar series of the GVIT. At the 
time, Applicants anticipated that the acquisition would occur shortly 
after the proposed substitutions. Shortly after the April 4, 2003 
notice of the amended application was published, Applicants became 
aware of the fact that the acquisition would, in fact, occur shortly 
before the proposed substitutions. In response, Applicants filed a 
second amended application on April 18, 2003, seeking an order 
approving the substitution of securities issued by the two series of 
SVPT for securities issued by two series of GVIT, which series were 
anticipated to be the successors of the two MSF series then held by the 
Accounts.

Applicants' Representations

    1. SVPT currently has seven investment portfolios, two of which are 
the subject of this application (each, a ``Fund''), while GVIT has 
thirty-four investment portfolios, two of which are the subject of this 
application (each, also a ``Fund''). Prior to its reorganization 
(described below), MSF had eleven investment portfolios, two of which 
were the subject of the December 19, 2002 application (each, a 
Portfolio).
    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 defined by Rule 0-1(e) under the Act, and is registered with the 
Commission as an 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

[[Page 42142]]

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. Until its existence ceased as a result of a 
reorganization on April 28, 2003, MSF was registered under the Act as 
an open-end diversified management investment company. MSF was a series 
investment company as defined by Rule 18f-2 under the Act and comprised 
eleven investment portfolios. MSF issued a separate series of shares of 
beneficial interest in connection with each portfolio and had 
registered these shares under the 1933 Act. Gartmore Mutual Fund 
Capital Trust (``Gartmore''), served as investment adviser to the MSF 
Balanced and Bond Portfolios, and selected their subadvisers. The most 
recent subadviser to the MSF Balanced Portfolio was Fred Alger 
Management, Inc., and the most recent subadviser to the Bond Portfolio 
was Western Asset Management Company.
    7. The investment objective of the MSF Bond Portfolio was to seek a 
high level of current income consistent with prudent investment risk. 
This Portfolio invested in a diversified portfolio of fixed-income 
securities of U.S. and foreign issuers. The Portfolio's subadviser used 
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 was to 
realize as high a level of long-term total rate of return as was 
consistent with prudent investment risk. The MSF Balanced Portfolio's 
equity portion was invested primarily in equity securities, such as 
common or preferred stocks, which were listed on U.S. exchanges or 
traded in the over-the-counter markets. The Portfolio's subadviser used 
a growth-oriented strategy. Growth-oriented investments involved 
seeking securities of issuers with above-average recent earnings growth 
rates and what the subadviser viewed as a reasonable likelihood of 
maintaining these rates in the foreseeable future. The subadviser 
focused 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 
invested in common stocks and fixed-income securities that included 
commercial paper and bonds rated within the four highest rating 
categories by an established rating agency or if not rated, that the 
subadviser determined were of comparable quality. Ordinarily, at least 
25% of the Portfolio's net assets were invested in fixed-income 
securities.
    9. Gartmore Variable Insurance Trust. GVIT was organized as a 
Massachusetts business trust on June 30, 1981. GVIT is registered under 
the Act as an open-end diversified management investment company. GVIT 
is a series investment company as defined by Rule 18f-2 under the Act 
and currently comprises thirty-four investment portfolios. GVIT issues 
a separate series of shares of beneficial interest in connection with 
each portfolio and has registered these shares under the 1933 Act. 
Gartmore serves as investment adviser to the J.P. Morgan GVIT Balanced 
Fund and Gartmore GVIT Government Bond Fund (``GVIT Government Bond 
Fund''), and selects their subadvisers. The subadviser to the J.P. 
Morgan GVIT Balanced Fund is currently J.P. Morgan Investment 
Management, Inc. Currently, Gartmore does not use a subadviser for the 
GVIT Government Bond Fund.
    10. The investment objective of the GVIT Government Bond Fund is to 
seek as high a level of income as is consistent with the preservation 
of capital. The Fund invests in those securities with the highest level 
of expected income while also minimizing fluctuation in the price of 
the Fund's shares. Under normal conditions, the GVIT Government Bond 
Fund invests at least 80% of its net assets in U.S. government and 
agency bonds, notes, and bills. The Fund also may invest in mortgage-
backed securities issued by U.S. government agencies. The Fund's 
dollar-weighted average maturity is generally five to nine years and 
its duration four to six years.
    11. The investment objective of the J.P. Morgan GVIT Balanced Fund 
is to seek a high total return from a diversified portfolio of equity 
and fixed-income securities. Under normal circumstances, the Fund 
invests at least 50% of its net assets in fixed-income securities 
(including U.S. government, corporate, mortgage-backed, and asset-
backed securities). The equity securities held by the Fund generally 
are common stocks of large and medium-sized companies included in the 
S&P 500 Index. The fixed-income securities held by the J.P. Morgan GVIT 
Balanced Fund are generally investment grade (or unrated securities of 
comparable quality), although a portion of the Fund's assets are 
invested in securities rated below investment grade. The Fund does not 
necessarily sell investment grade securities that are downgraded. The 
Fund also may invest in debt securities of issuers located in emerging 
nations or whose securities are traded in emerging securities markets.
    12. 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 seven investment 
portfolios, including two new Funds to receive certain of the assets of 
the GVIT Government Bond Fund and J.P. Morgan GVIT Balanced Fund in the 
proposed 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.
    13. 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.
    14. 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

[[Page 42143]]

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.
    15. 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. The prospectuses for 
the Contracts disclose this right.
    16. 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.
    17. NLIC, on its behalf and on behalf of the Accounts, proposes to 
substitute shares of the SVPT Bond Fund for shares of the GVIT 
Government Bond Fund, and shares of the SVPT Balanced Fund for shares 
of the J.P. Morgan GVIT Balanced Fund. NLIC believes that by making the 
proposed substitutions in each of the Accounts, they can better serve 
the interests of owners of the Contracts.
    18. 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.
    19. 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 continued to invest in the MSF Bond and Balanced Portfolios.
    20. 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.
    21. 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, then 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, and the MSF Bond Portfolio would be acquired by the GVIT 
Government Bond Fund. As a result of this proposed reorganization, J.P. 
Morgan Investment Management, Inc. would be the subadviser of MSF 
Balanced Portfolio's assets and Gartmore would directly manage the 
assets of the MSF Bond Portfolio.
    22. At a meeting held on February 21, 2003, shareholders of MSF 
Balanced Portfolio and MSF Bond Portfolio approved the proposed 
reorganization. The proposed reorganization took place on April 28, 
2003. As of April 28, 2003: (1) J.P. Morgan GVIT Balanced Fund 
succeeded to the assets of MSF Balanced Portfolio, (2) holders of 
shares of MSF Balanced Portfolio (including the Accounts) had such 
shares exchanged for shares of J.P. Morgan GVIT Balanced Fund, (3) GVIT 
Government Bond Fund succeeded to the assets of MSF Bond Portfolio, and 
(4) holders of shares of MSF Bond Portfolio (including the Accounts) 
had such shares exchanged for shares of GVIT Government Bond Fund.
    23. NLIC continues to desire to end the joint use of the successors 
to the 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 successors to the MSF Bond and Balanced Portfolios held by 
the Accounts. This would avoid the possibility that GVIT may propose 
future changes that NLIC 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 NLICA contracts. NLIC had no role in the selection of the 
most recent subadvisers to the MSF Balanced and Bond Portfolios, no 
role in planning the

[[Page 42144]]

reorganization of MSF initiated by NLICA, and does not anticipate that 
it would have any role in future decisions relating to the GVIT 
Government Bond Fund or the J.P. Morgan GVIT Balanced Fund.
    24. Prior to the April 28, 2002 reorganization, the majority of the 
assets in the MSF Bond and Balanced Portfolios belonged to owners of 
variable annuity and variable life insurance contracts issued by NLICA 
and its affiliates and only relatively small portions of each consisted 
of assets beneficially owned by owners of the Contracts.

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

    25. 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.
    26. Because the MSF Bond and Balanced Portfolios were only very 
recently reorganized into the GVIT Government Bond Fund or the J.P. 
Morgan GVIT Balanced Fund, Applicants believe that it is appropriate to 
compare and contrast the SVPT Bond and Balanced Funds with the MSF Bond 
and Balanced Portfolios. For the reasons explained below, Applicants 
assert that owners of the Contracts will be better off invested in the 
SVPT Bond and Balanced Funds than they would have been in the 
corresponding MSF Funds.
    27. Projected expense levels for the SVPT Bond and Balanced Funds 
are the same as those recently experienced by the MSF Bond and Balanced 
Portfolios because each SVPT Fund 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.
    28. The projected expense levels for the SVPT Bond and Balanced 
Funds are substantially lower than those recently experienced by, or 
currently anticipated for, the J.P. Morgan GVIT Balanced Fund and the 
GVIT Government Bond Fund. Therefore, from an expense perspective, 
Contract owners will be substantially better off invested in the SVPT 
Bond Fund or Balanced Fund than they would be in the J.P. Morgan GVIT 
Balanced Fund or the GVIT Government Bond Fund.
    29. NLIC notes that the equity portion of the SVPT Balanced Fund 
would be managed in a different style from that recently 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. The 
J.P. Morgan GVIT Balanced Fund does not lean towards either a growth-
oriented or a value-oriented investment style with regard to the equity 
portion of its portfolio. In this respect, it differs somewhat from 
both the MSF Balanced Portfolio and the SVPT Balanced Fund. NLIC 
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 managed before April 28, 2003. However, the J.P. Morgan 
GVIT Balanced Fund differs from both the MSF Balanced Portfolio and the 
SVPT Balanced Fund in that the fixed-income portion of the J.P. Morgan 
GVIT Balanced Fund has 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 do so by allocating assets to one of 
these investment choices.
    30. NLIC expects that the SVPT Bond Fund would be similar in 
investment style and categories of investments to the MSF Bond 
Portfolio as recently operated, and certainly similar to the MSF Bond 
Portfolio as managed by SAC prior to 2001. In contrast, the Gartmore 
GVIT Government Bond Fund is limited to investments in U.S. government 
and agency bonds, bills, and notes, while the SVPT Bond Fund would (as 
did the MSF Bond Portfolio) be able to invest in investment grade 
corporate issuers.
    31. 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 (now GVIT Funds) 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.
    32. 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 an influential (much less a 
majority) voting position in either of the GVIT Bond or Balanced Funds 
in the event that they, as a group, desire that such a Fund 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 NLICA and its 
affiliates, owners of Contracts have no prospects of ever gaining a 
position capable of influencing the future direction of these Funds.
    33. NLIC also notes that it has had no prior business relationship 
with Nationwide, which now controls NLICA, or with Gartmore, the 
investment advisor to J.P. Morgan GVIT Balanced Fund and GVIT 
Government Bond Fund. 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 believes 
that it should not be forced into a position of offering investment 
portfolios managed by Nationwide-affiliated entities simply because 
Nationwide has acquired PMLIC.
    34. 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.

[[Page 42145]]



----------------------------------------------------------------------------------------------------------------
                                                            Anticipated net     Anticipated
                                                             assets after      expense ratio
                      SVPT Bond Fund                       substitution (in        after          Total return
                                                               millions)        substitution
----------------------------------------------------------------------------------------------------------------
                                                                        $19              0.67%               N/A
----------------------------------------------------------
                    MSF Bond Portfolio                       Net assets at     Expense ratio      Total return
                                                             Year-End (in
                                                               millions)
----------------------------------------------------------
2000.....................................................             $39.0              0.52%             9.68%
2001.....................................................             $53.4              0.67%             7.40%
2002.....................................................             $67.0              0.67%             9.09%
----------------------------------------------------------
                GVIT Government Bond Fund                    Net assets at     Expense ratio      Total return
                                                             year-end (in
                                                               millions)
----------------------------------------------------------
2000.....................................................              $867              0.73%            12.54%
2001.....................................................            $1,301              0.73%             7.25%
2002.....................................................            $1,983              0.73%            10.98%
----------------------------------------------------------
                    SVPT Balanced Fund                      Anticipated net     Anticipated       Total return
                                                             assets after      expense ratio
                                                           substitution (in        after
                                                               millions)        substitution
----------------------------------------------------------
                                                                        $12              0.79%               N/A
----------------------------------------------------------
                  MSF Balanced Portfolio                     Net assets at     Expense ratio      Total return
                                                             year-end (in
                                                               millions)
----------------------------------------------------------
2000.....................................................             $71.5              0.57%             8.75%
2001.....................................................             $69.0              0.82%           (7.02)%
2002.....................................................             $58.4              0.79%          (10.26)%
----------------------------------------------------------
              J.P. Morgan GVIT Balanced Fund                 Net assets at     Expense ratio      Total return
                                                             year-end (in
                                                               millions)
----------------------------------------------------------
2000.....................................................              $113              1.07%           (0.35)%
2001.....................................................              $150              1.03%           (3.77)%
2002.....................................................              $147              1.00%          (12.31)%
----------------------------------------------------------------------------------------------------------------

    35. 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 and for the GVIT 
Government Bond and J.P. Morgan GVIT Balanced Funds are for the last 
complete fiscal year, 2002.

----------------------------------------------------------------------------------------------------------------
                                                                Before             After
                           Fund                            reimbursement or  reimbursement or   Revenue sharing
                                                              fee waiver        fee waiver         percentage
----------------------------------------------------------------------------------------------------------------
MSF Bond.................................................             0.40%             0.40%               N/A
                                                                      0.29%             0.27%  .................
                                                          ------------------------------------
                                                                      0.69%             0.67%  .................
                                                          ====================================
GVIT Government Bond.....................................             0.49%             0.49%               N/A
                                                                      0.24%             0.24%  .................
                                                          ------------------------------------
                                                                      0.73%             0.73%  .................
                                                          ====================================
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%  .................
                                                          ====================================

[[Page 42146]]

 
J.P. Morgan GVIT Balanced................................             0.73%             0.73%               N/A
                                                                      0.27%             0.26%  .................
                                                          ------------------------------------
                                                                      1.00%             0.99%  .................
                                                          ====================================
SVPT Balanced............................................             0.55%             0.55%               N/A
                                                                      0.32%             0.24%  .................
                                                          ------------------------------------
                                                                      0.87%             0.79%  .................
----------------------------------------------------------------------------------------------------------------

    36. By disclosure in supplements to the various May 1, 2002 
prospectuses for the Contracts and the Accounts and similar disclosure 
in May 1, 2003 prospectuses, 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 shares of the GVIT Government 
Bond Fund and the J.P. Morgan GVIT Balanced Fund as described herein.
    37. The supplement and prospectus disclosure about the proposed 
substitutions advises, (and any subsequent supplements will advise), 
Contract owners that from the date of the supplement or prospectus 
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 
supplement and 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 and prospectuses also advise, and will 
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.
    38. 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.
    39. 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.
    40. NLIC will permit Contract owners to make one transfer of 
Contract value (or annuity unit exchange) out of the GVIT Government 
Bond Fund subaccount to another subaccount, and out of the J.P. Morgan 
GVIT Balanced Fund 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 Fund subaccount to another subaccount, and out of the SVPT 
Balanced Fund 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.
    41. 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 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.
    42. 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 of 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

[[Page 42147]]

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.
    43. 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. 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. 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.
    3. In the case of the proposed substitutions, the GVIT Funds would 
be replaced by funds with substantially similar investment objectives 
to those of the MSF Portfolios, 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 changes of GVIT as it evolves under Nationwide's 
management.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. 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. 03-17919 Filed 7-15-03; 8:45 am]
BILLING CODE 8010-01-P