[Federal Register Volume 69, Number 30 (Friday, February 13, 2004)]
[Notices]
[Pages 7267-7270]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3192]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26349; File No. 812-13004]


Nationwide Life Insurance Company, et al.

February 9, 2004.
AGENCY: The Securities and Exchange Commission (the ``Commission'').

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

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

Summary of Application: On January 19, 2000, the Commission issued an 
order pursuant to section 6(c) of the 1940 Act granting exemptions from 
sections 2(a)(32), 22(c) and 27(i)(2)(A) of the 1940 Act and Rule 22c-1 
thereunder to permit the recapture of credits applied to purchase 
payments made under certain variable annuity contracts issued by 
Nationwide (the ``Original Order''). See Nationwide Life Insurance 
Company, et al., Investment Company Act Release No. 24256 (File No. 
812-11824). On February 20, 2003, the Commission issued an amended 
order pursuant to section 6(c) of the 1940 Act permitting Nationwide to 
recapture credits under circumstances not contemplated in the Original 
Order (the ``Amended Order''). See Nationwide Life Insurance Company, 
et al., Investment Company Act Release No. 25938 (File No. 812-12885). 
Applicants seek an amendment to the Amended Order pursuant to section 
6(c) of the 1940 Act granting exemptions from the provisions of 
sections 2(a)(32), 22(c) and 27(i)(2)(A) of the 1940 Act and Rule 22c-1 
thereunder to permit the recapture of credits applied to purchase 
payments made under certain variable annuity contracts under 
circumstances not contemplated under either the Original Order or the 
Amended Order. Applicants also request the relief under the order to 
extend to any current or future separate accounts of Nationwide which 
may in the future offer or support contracts that are substantially 
similar in all material respects to the contracts described in the 
application (the ``Other Separate Accounts'') and to any other NASD 
registered broker/dealers under common control with Nationwide which 
may in the future serve as general distributor-principal underwriter of 
VA-II or Other Separate Accounts that offer or support variable annuity 
contracts that are substantially similar in all material respects to 
those described in the Application.

Filing Date: The application was filed on August 15, 2003. Amended 
applications were filed on November 5, 2003, and on January 9, 2004.

Hearing of Notification of Hearing: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Secretary of the 
Commission and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests should be received by the 
Commission by 5:30 p.m. on March 10, 2004, 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 Nationwide Life 
Insurance Company, One Nationwide Plaza 01-09-V3, Columbus, Ohio 43215, 
Attn: Jamie Casto, Esq.

FOR FURTHER INFORMATION CONTACT: Rebecca A. Marquigny, Senior Counsel, 
or Zandra Bailes, Branch Chief, at (202) 942-0670, Office of Insurance 
Products, Division of Investment Management.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee from the 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (telephone (202) 942-8090).

Applicants' Representations

    1. Nationwide is a stock life insurance company organized under the 
laws of the State of Ohio. Nationwide offers traditional group and 
individual life insurance products as well as group and individual 
variable and fixed annuity contracts. Nationwide is wholly owned by 
Nationwide Financial Services, Inc. (``NFS''). NFS, a Delaware 
Corporation, is a publicly traded holding company with two classes of 
common stock outstanding, each with different voting rights. This 
enables Nationwide Corporation (the holder of all the outstanding Class 
B Common Stock) to control NFS. Nationwide Corporation stock is held by 
Nationwide Mutual Insurance Company (95.24%) and Nationwide Mutual Fire 
Insurance Company (4.76%), the ultimate controllers of Nationwide.
    2. On October 7, 1981, the Nationwide Spectrum Variable Account was 
established under Ohio law by Nationwide for the purpose of funding 
variable annuity contracts. On April 1, 1987, the Board of Directors 
for Nationwide changed the name of the Nationwide Spectrum Variable 
Account to Nationwide Variable Account-II. VA-II is registered as a 
unit investment trust (File No. 811-3330) and supports several 
different variable annuity contracts that are registered separately on 
Form N-4.
    3. On January 19, 2000, the Commission issued the Original Order 
pursuant to section 6(c) of the 1940 Act granting exemptions from 
sections 2(a)(32), 22(c) and 27(i)(2)(A) of the 1940 Act and Rule 22c-1 
thereunder to permit the recapture of credits applied to purchase 
payments made under certain variable annuity contracts (the ``Original 
Contracts''). On February 20, 2003, the Commission issued the Amended 
Order pursuant to section 6(c) of the 1940 Act permitting Nationwide to 
recapture credits under circumstances not contemplated in the Original 
Order.
    4. Nationwide intends to offer a 5% credit option as part of some 
of its variable annuity contracts. The related contract features are as 
follows: a. The contract requires an initial purchase payment of 
$15,000. If the contract

[[Page 7268]]

owner elects to make subsequent purchase payments, they must be at 
least $1,000 each ($150 each if submitted via automatic electronic 
transfer).
    b. The contract assesses a Variable Account Charge equal to an 
annualized rate of 1.55% of the daily net assets of the variable 
account.
    c. The standard Contingent Deferred Sales Charge (``CDSC'') 
schedule under the contract is as follows:

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

    d. The contract permits a certain amount of CDSC-free withdrawals 
each year. This annual ``free-out'' amount is equal to 15% of purchase 
payments that are subject to CDSC. Additionally, no CDSC is assessed: 
Upon the annuitant's death, upon annuitization of the contract, when 
distributions are necessary in order to meet minimum distribution 
requirements under the Internal Revenue Code of 1986, 26 U.S.C. et 
seq., (the ``Code''), and under an age-based ``free-withdrawal'' 
program that allows contract owners to take systematic withdrawals of 
certain contract value percentages at specified ages without incurring 
a CDSC. Finally, the contract includes a Long-Term Care/Nursing Home 
Waiver at no additional charge that allows a contract owner to withdraw 
value from the contract free of CDSC under certain circumstances.
    e. The contract provides for a death benefit to be paid to a 
beneficiary upon the death of the annuitant.
    f. The contract may be modified or augmented by a number of ``rider 
options'' that enable owners to elect certain contract features or 
benefits that fit their particular needs. The rider options available 
under the contract include:
    i. Four Year CDSC Option. The Four Year CDSC Option reduces the 
standard 8 year CDSC period to 4 years as follows:

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

    An annualized charge of 0.20% of the daily net assets of the 
variable account is assessed for the election of this rider option. The 
charge associated with this option will be assessed for the life of the 
contract.
    ii. No CDSC Option. The No CDSC Option eliminates the assessment of 
CDSC upon withdrawal of value from the contract. An annualized charge 
of 0.25% of the daily net assets of the variable account is assessed 
for the election of this rider option. The charge associated with the 
No CDSC Option will be assessed for the life of the contract.
    iii. Greater of One-Year or 5% Enhanced Death Benefit.
    iv. Beneficiary Protector Option II.
    v. Capital Preservation Plus Option.
    vi. 3% Extra Value Option. Nationwide offers a 3% Extra Value 
Option whereby Nationwide applies a credit equal to 3% of all purchase 
payments made during the first 12 months of the contract. The credit is 
funded from Nationwide's general account and is credited 
proportionately among the investment options chosen by the contract 
owner. The charge for this rider is an annualized rate of 0.10% of the 
daily net assets of the variable account for the first 8 contract years 
only.
    vii. 4% Extra Value Option. Nationwide offers a 4% Extra Value 
Option whereby Nationwide applies a credit equal to 4% of all purchase 
payments made during the first 12 months of the contract. The credit is 
funded from Nationwide's general account and is credited 
proportionately among the investment options chosen by the contract 
owner. The charge for this rider is an annualized rate of 0.25% of the 
daily net assets of the variable account for the first 8 contract years 
only.
    viii. 5% Extra Value Option. In addition to the 3% Extra Value 
Option and the 4% Extra Value Option, Nationwide intends to offer a 5% 
Extra Value Option whereby Nationwide applies a credit equal to 5% of 
all purchase payments made during the first 12 months of the contract. 
The credit will be funded from Nationwide's general account and will be 
credited proportionately among the investment options chosen by the 
contract owner. The charge for this rider will be an annualized rate of 
0.45% of the daily net assets of the variable account for the first 8 
contract years only.
    5. Applicants' request for relief concerns the recapture of the 5% 
Extra Value Option Credits as follows:
    a. The 5% credits will be fully vested except during the 
contractual free-look period and when certain surrenders of contract 
value are made. Nationwide intends to recapture 5% credits under the 
following circumstances:
    i. If the contract owner cancels the contract pursuant to the 
contractual free look privilege, Nationwide will recapture all of the 
credits applied to the contract under that option. For those 
jurisdictions that allow a return of contract value upon exercise of 
the free look provision, the contract owner will also forfeit any 
amounts deducted from the contract as an Extra Value Option charge.
    ii. If the contract owner surrenders the entire contract or takes a 
partial surrender of the contract after the free look period but prior 
to the end of the 7th contract year that is subject to a CDSC, or would 
be subject to a CDSC under the CDSC schedule standard to that contract, 
Nationwide will recapture a portion of the credits applied to the 
contract under that option. Accordingly, any amount withdrawn pursuant 
to the contractual free withdrawal privilege is not subject to 
recapture. CDSC is calculated in the same manner as it is calculated in 
Nationwide's other contracts that offer similar credits.
    b. Recapture in connection with the 5% Extra Value Option will 
depend on how many years have passed since the credit was applied to 
the contract. When a contract owner who elected the 5% Extra Value 
Option withdraws value from the contract that is or would be subject to 
a CDSC under the standard CDSC schedule applicable to that

[[Page 7269]]

contract, Nationwide will recapture the following credit amounts:

--------------------------------------------------------------------------------------------------------------------------------------------------------
   Number of completed years from date of
                   credit                          0           1           2           3           4           5           6           7           8
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Amount of credit recaptured.................          5        4.75           4           4           4           4           4           0           0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The recaptured amount will be taken proportionately from each 
investment option as allocated at the time of the withdrawal.
    c. Nationwide will not recapture credits:
    i. upon annuitization of the contract;
    ii. when a death benefit becomes payable;
    iii. if distributions are taken in order to meet minimum 
distribution requirements under the Code; and
    iv. if free withdrawals are taken pursuant to an age-based 
systematic withdrawal program.
    d. All credits applied under the 5% Extra Value Option are 
considered earnings, not purchase payments.
    e. At the end of the 7th contract year, credits are fully vested 
and are no longer subject to recapture.
    f. The charge associated with the 5% Extra Value Option will no 
longer be assessed after the end of the 8th contract year. To remove 
the rider option charge, Nationwide will replace the class of sub-
account units corresponding to total variable account charges that 
include the rider option charge with another class of sub-account units 
associated with total variable account charges without the rider option 
charge. The latter class of units will have a greater individual unit 
value than the original class. Therefore, a reduction in the number of 
units is necessary to ensure that the contract value remains the same 
as it was prior to the removal of the charge. From the date of the 
removal forward, the variable account value will be calculated using 
the class of sub-account unit values that do not reflect the rider 
option charge. The charge for that option will no longer be assessed in 
the daily sub-account valuation for the contract.
    6. Applicants seek an amendment to the Amended Order, pursuant to 
Section 6(c) of the 1940 Act, for exemption from sections 2(a)(32), 
22(c) and 27(i)(2)(A) of the 1940 Act and Rule 22c-1 thereunder to the 
extent necessary to permit Nationwide to issue contracts from the VA-II 
and Other Separate Accounts that provide for the recapture of:
    a. all of the 5% credit in the event that the contract owner 
cancels the contract pursuant to the contractual free look provisions;
    b. part or all of the 5% credit in the event that the contract 
owner takes a full surrender of the contract prior to the end of the 
7th contract year; and
    c. part or all of the 5% credit associated with partial surrenders 
taken from the contract prior to the end of the 7th contract year that 
are or would be subject to a CDSC under the standard CDSC schedule 
applicable to the contract, as discussed herein.

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act authorizes the Commission to exempt 
any person, security or transaction, or any class or classes of 
persons, securities or transactions from the provisions of the 1940 Act 
and the rules promulgated thereunder if and to the extent that such 
exemption is necessary or appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act. Applicants 
request that the Commission issue an order pursuant to section 6(c) of 
the 1940 Act granting the exemptions outlined herein with respect to 
the contracts funded by VA-II that are issued by Nationwide and 
underwritten or distributed by NISC. Applicants also request the relief 
under the order to extend to any of the Other Separate Accounts of 
Nationwide and to any other NASD registered broker/dealers under common 
control with Nationwide which may in the future serve as general 
distributor-principal underwriter of VA-II or Other Separate Accounts 
that offer or support variable annuity contracts that are substantially 
similar in all material respects to those described in the application. 
Applicants represent that any such future contracts funded by VA-II or 
Other Separate Accounts will be substantially similar in all material 
respects to the contracts described herein. Applicants believe that the 
requested exemptions are appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act.
    2. Applicants represent that it is not administratively feasible to 
track the credit amounts in VA-II after the credits are applied. 
Accordingly, the asset-based charge associated with the 5% Extra Value 
Option will be assessed against the entire amounts held in VA-II for 8 
contract years.
    3. Subsection (i) of section 27 provides that section 27 does not 
apply to any registered separate account funding variable insurance 
contracts, or to the sponsoring insurance company and principal 
underwriter of such account, except as provided in paragraph (2) of the 
subsection. Paragraph (2) provides that it shall be unlawful for any 
registered separate account funding variable insurance contracts or a 
sponsoring insurance company of such account to sell a contract funded 
by the registered separate account unless, among other things, such 
contract is a redeemable security. Section 2(a)(32) defines 
``redeemable security'' as any security, other than short-term paper, 
under the terms of which the holder, upon presentation to the issuer, 
is entitled to receive approximately his or her proportionate share of 
the issuer's current net assets, or the cash equivalent thereof.
    4. Applicants submit that recapturing the credit will not deprive 
an owner of his or her proportionate share of VA-II's current net 
assets. Applicants state than an owner's interest in the credit 
allocated to his or her contract value is not entirely vested until the 
end of the 7th contract year. Until the credit is vested, Applicants 
submit that Nationwide retains the right and interest in the credit, 
although not in any earnings attributable to the credit. Applicants 
argue that when Nationwide recaptures a credit, it is merely retrieving 
its own assets and the contract owner is not deprived of his or her 
proportionate share of separate account assets because his or her 
interest in the credit has not vested.
    5. Furthermore, Applicants state that permitting a contract owner 
to retain the credit upon cancellation of the contract pursuant to the 
contractual free-look privilege would be unfair and would encourage 
individuals to purchase a contract with the intention of retaining the 
credited amount for an unjustified profit at Nationwide's expense. 
Applicants represent that the recapture of the credit is designed to 
protect Nationwide when a contract owner takes partial or full 
surrender of the

[[Page 7270]]

contract shortly after the credit is applied, leaving Nationwide 
insufficient time to recover the cost of the credit.
    6. Applicants assert that the 5% Extra Value Option will be 
attractive to and in the interest of investors because it will permit 
owners to have an additional 5% of purchase payments remitted during 
the first twelve months invested in selected investment options from 
the date the purchase payment is received. Also, any earnings 
attributable to the credit will be retained by the contract owner in 
addition to the principal amount of the credit, provided the 
contingencies set forth in the application are satisfied. Finally, 
Applicants assert that the 5% Extra Value Option will be particularly 
attractive to and in the interest of long-term investors due to the 
elimination of the charge after 8 contract years. Applicants assert 
that the elimination of the 5% Extra Value Option charge will allow 
prospective purchasers to assess the value of the 5% Extra Value 
Option, and elect or decline it, based on their particular 
circumstances, preferences and expectations.
    7. Applicants submit that the provisions for recapture of the 
credit under the contracts do not violate sections 2(a)(32) and 
27(i)(2)(A) of the 1940 Act. Nevertheless, to avoid any possible 
uncertainties, Applicants request an exemption from those Sections, to 
the extent deemed necessary, to permit the recapture of any credit 
under the circumstances described herein with respect to the contracts 
and any future contracts issued in conjunction with VA-II or any Other 
Separate Accounts without loss of the relief from section 27 provided 
by section 27(i).
    8. Section 22(c) of the 1940 Act authorizes the Commission to make 
rules and regulations applicable to registered investment companies and 
to principal underwriters of, and dealers in, the redeemable securities 
of any registered investment company to accomplish the same purposes as 
contemplated by section 22(a). Rule 22c-1 thereunder prohibits a 
registered investment company issuing any redeemable security, a person 
designated in such issuer's prospectus as authorized to consummate 
transactions in any such security, and a principal underwriter of, or 
dealer in, such security, from selling, redeeming, or repurchasing any 
such security except at a price based on the current net asset value of 
such security which is next computed after receipt of a tender of such 
security for redemption or of an order to purchase or sell such 
security.
    9. It could be argued that Nationwide's recapture of the credit 
constitutes a redemption of securities for a price other than one based 
on the current net asset value of the separate accounts. Applicants 
contend, however, that recapture of the credit does not violate section 
22(c) and Rule 22c-1. Applicants argue that such recapture does not 
involve either of the evils or harmful events that Rule 22c-1 was 
intended to eliminate or reduce, namely: (1) The dilution of the value 
of outstanding redeemable securities of registered investment companies 
through their sale at a price below net asset value or their redemption 
or repurchase at a price above it; and (2) other unfair results 
including speculative trading practices. These evils were the result of 
backward pricing, the practice of pricing a mutual fund share based on 
the per share net asset value determined as of the close of the market 
on the previous day. Backward pricing diluted the value of outstanding 
mutual fund shares by allowing investors to take advantage of increases 
or decreases in net asset value that were not yet reflected in the 
mutual fund share price.
    10. Applicants submit that the recapture of credits described 
herein does not pose such a threat of dilution. To recapture any 
credit, Nationwide will redeem contract owners' interests in the sub-
accounts at a price determined on the basis of current sub-account 
accumulation unit values. In no event will the amount recaptured be 
more than the amount of the credit that Nationwide paid out of its 
general account. Although contract owners will be entitled to retain 
any investment gain attributable to a credit, the amount of such gain 
will be determined on the basis of the current net asset value of the 
respective sub-account. Thus, no dilution will occur upon the recapture 
of the credit.
    11. Applicants also submit that the second harm that Rule 22c-1 was 
designed to address, namely, speculative trading practices calculated 
to take advantage of backward pricing, will not occur as a result of 
the recapture of the credit.
    12. To avoid any uncertainty as to full compliance with the 1940 
Act, Applicants request an exemption from the provisions of section 
22(c) and Rule 22c-1 to the extent deemed necessary to permit them to 
recapture the credit under the contracts and any future contracts (that 
are substantially similar in all material respects to the contracts 
described herein) issued in conjunction with VA-II or any Other 
Separate Accounts.
    13. Section 6(c) of the 1940 Act provides:

    The Commission, by rules and regulations upon its own motion, or 
by order upon application, may conditionally or unconditionally 
exempt any person, security, or transactions, or any class or 
classes of persons, securities, or transactions, from any provision 
or provisions of this title or of any rule or regulation thereunder, 
if an to the extent that such exemption is necessary or appropriate 
in the public interest and consistent with the protection of 
investors and the purposes fairly intended by the policy and 
provisions of this title.

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

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-3192 Filed 2-12-04; 8:45 am]
BILLING CODE 8010-01-P