[Federal Register: July 16, 2003 (Volume 68, Number 136)]
[Notices]
[Page 42141-42147]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16jy03-128]
[[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.
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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
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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