[Federal Register Volume 75, Number 209 (Friday, October 29, 2010)]
[Notices]
[Pages 66806-66811]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-27367]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 29486; File No. 812-13648]
Nationwide Life Insurance Company, et al., Notice of Application
October 25, 2010.
AGENCY: Securities and Exchange Commission (the ``Commission'').
ACTION: Notice of application for an order of approval pursuant to
Section 26(c) of the Investment Company Act of 1940, as amended (the
``Act''), and an order of exemption pursuant to Section 17(b) of the
Act from Section 17(a) of the Act.
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Applicants: Nationwide Life Insurance Company (``NWL''), Nationwide
Life and Annuity Insurance Company (``NLAIC'') (together with NWL, the
``Insurance Companies''), Nationwide Variable Account-II (``Account
II''), Nationwide Variable Account-6 (``Account 6''), Nationwide
Variable Account-7 (``Account 7''), Nationwide Variable Account-8
(``Account 8''), Nationwide Variable Account-9 (``Account 9''),
Nationwide Variable Account-10 (``Account 10''), Nationwide Variable
Account-14 (``Account 14''), Nationwide VLI Separate Account-2 (``VLI
Account 2''), Nationwide VLI Separate Account-4 (``VLI Account 4''),
Nationwide VLI Separate Account-7 (``VLI Account 7''), Nationwide
Provident VA Separate Account 1 (``Account P-1''), Nationwide Provident
VLI Separate Account 1 (``VLI Account P-1''); Nationwide VA Separate
Account-B (``Account B''), Nationwide VL Separate Account-G (``Account
G''), Nationwide Provident VA Separate Account A (``Account P-A''), and
Nationwide Provident VLI Separate Account A (``VLI Account P-A'')
(together with Accounts II, 6, 7, 8, 9, 10, 14, P-1, B, G, and P-A
along with VLI Accounts 2, 4, 7, and P-1, the ``Separate Accounts'')
and Nationwide Variable Insurance Trust. The Insurance Companies and
the Separate Accounts are referred to collectively as the
``Applicants.'' The Applicants, together with Nationwide Variable
Insurance Trust are referred to as the ``Section 17(b) Applicants.''
SUMMARY: Summary of Application: Applicants seek an order approving the
proposed substitutions (the ``Substitutions'') of certain series of
Nationwide Variable Insurance Trust (the ``Trust'' or ``NVIT'') for
shares of series of other unaffiliated registered investment companies
held by the Separate Accounts under certain variable annuity contracts
and/or variable life insurance policies issued by the Insurance
Companies (collectively, the ``Contracts''). Section 17(b) Applicants
also seek an order pursuant to Section 17(b) of the Act to permit
certain in-kind transactions in connection with the Substitutions.
DATES: Filing Date: The application was filed on April 2, 2009, and
amended and restated on July 15, 2010 and October 21, 2010.
Hearing or 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 must be received by the
Commission by 5:30 p.m. on November 19, 2010, 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 requester's interest, the reason for the request, and the
issues contested. Persons who wish to be notified of a hearing may
request notification by writing to the Secretary of the Commission.
ADDRESSES: The Commission: Secretary, Securities and Exchange
Commission, 100 F Street, NE., Washington, DC 20549-1090; Applicants:
c/o Jamie Ruff Casto, Esq., Nationwide Life Insurance Company, One
Nationwide Plaza, 1-34-201, Columbus, Ohio 43215.
FOR FURTHER INFORMATION CONTACT: Rebecca A. Marquigny, Senior Counsel,
or Joyce M. Pickholz, Branch Chief, Office of Insurance Products,
Division of Investment Management, at (202) 551-6795.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or for an
applicant using the Company name box, at http://www.sec.gov/search/search.htm, or by calling (202) 551-8090.
Applicants' and Section 17(b) Applicants' Representations
1. NWL and NLAIC are stock life insurance companies organized under
the laws of the State of Ohio. NLAIC is wholly owned by NWL which is
wholly owned by Nationwide Financial Services, Inc. (``NFS''). NWL is
the depositor and sponsor of Accounts II, 6, 7, 8, 9, 10, 14 and P-1
and VLI Accounts 2, 4, 7, and P-1. NLAIC is the depositor and sponsor
of B, G, and P-A and VLI Account P-A.
2. All of the Separate Accounts are registered unit investment
trusts used to issue one or more Contracts together with their
respective Insurance Company. The file numbers for each Separate
Account's registration under the Act and each Contract's registration
under the Securities Act of 1933, as amended (``1933 Act'') are set
forth in the Application.
3. NVIT is registered under the Act as an open-end management
investment company of the series type, and it securities are registered
under the 1933 Act on Form N-1A (File Nos. 811-03213 and 002-73024).
Two of these series, the NVIT--American Century NVIT Multi-Cap Value
Fund and NVIT--Oppenheimer NVIT Large Cap Growth Fund (each an ``NVIT
Fund''), are the replacement funds (``New Funds'' or ``New
Portfolios'') in the proposed Substitutions.
[[Page 66807]]
4. Nationwide Fund Advisors (``NFA'') currently serves as
investment adviser to each of the NVIT Funds. NFA employs a subadvisory
structure as part of its advisory strategy with respect to the NVIT
Funds. Through an order from the Commission pursuant to Section 6(c) of
the Act, NVIT is exempt from Section 15(a) of the Act and Rule 18f-2
thereunder with respect to subadvisory agreements (the ``Manager of
Managers Order'').\1\
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\1\ In the Matter of Nationwide Investing Foundation, et al.,
1940 Act Rel. No. 23133 (April 28, 1998) (Order), File No. 812-
10764.
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5. Applicants represent that the relief granted in the Manager of
Managers Order extends to New Funds permitting NFA to enter into and
materially amend investment subadvisory agreements without obtaining
shareholder approval. Applicants indicate that the prospectuses for the
New Funds disclose and explain the existence, substance and effect of
the Manager of Managers Order. They also represent that if a new
Subadviser is retained for a Fund, Contract owners (``Contractowners'')
would receive all information about the new Subadviser that would be
included in a proxy statement, including any change in disclosure
caused by the addition of a new Subadviser.
6. All of the Contracts involved in the Substitutions (i) permit
transfers of contract value among the subaccounts pursuant to the
limitations of the particular Contract, and (ii) are subject to market
timing policies and procedures that may operate to limit transfers.
Applicants represent that to the extent that the Contracts contain
restrictions, limitations or transfer fees on a Contractowner's right
to transfer, such restrictions, limitations, and transfer fees will not
apply in connection with the proposed Substitutions.
7. Each Contract's prospectus contains provisions reserving
Insurance Company Applicants' right to substitute shares of one
Investment Option for shares of another Investment Option already
purchased or to be purchased in the future if: (i) Shares of a current
underlying mutual fund are no longer available for investment by the
Separate Account; or (ii) in the judgment of Insurance Company
Applicants' management, further investment in such Investment Option is
inappropriate in view of the purposes of the Contract. Each Insurance
Company Applicant's management has determined that further investment
in the New Funds is no longer appropriate in view of the purposes of
the Contracts.
8. Applicants represent that all of the portfolios involved in the
Substitutions are currently available as underlying investment options
in the Contracts.
9. Each Insurance Company, on its behalf and on behalf of the
Separate Accounts proposes to make certain substitutions of various
classes of shares of 6 funds currently available under the Contracts
(the ``Old Funds'' or ``Old Portfolios'') for shares of the following
classes of the corresponding NVIT New Funds:
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No. Old fund Old class NVIT New fund New class
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1............................... American Century Class I............ NVIT--American Class I
Variable Century NVIT
Portfolios, Inc.-- Multi Cap Value
American Century Fund (``New Multi
VP Value Fund Cap Value Fund'').
(``Old Value
Fund'').
2............................... Old Value Fund..... Class II........... New Multi Cap Class II
Value Fund.
3............................... Fidelity Variable Initial Class...... NVIT--Oppenheimer Class I
Insurance Products NVIT Large Cap
(``VIP'') Fund-- Growth Fund
VIP Contrafund (``New Large Cap
Portfolio (``Old Growth Fund'').
Contrafund
Portfolio'').
4............................... Old Contrafund Service Class...... New Large Cap Class I
Portfolio. Growth Fund.
5............................... Old Contrafund Service Class 2.... New Large Cap Class II
Portfolio. Growth Fund.
6............................... Fidelity VIP Fund-- Initial Class...... New Large Cap Class I
VIP Growth Growth Fund.
Opportunities
Portfolio (``Old
Growth Opps.
Fund'').
7............................... Old Growth Opps. Service Class...... New Large Cap Class I
Fund. Growth Fund.
8............................... Old Growth Opps. Service Class 2.... New Large Cap Class II
Fund. Growth Fund.
9............................... Oppenheimer Non-Service Shares. New Large Cap Class I
Variable Account Growth Fund.
Funds--Oppenheimer
Capital
Appreciation Fund/
VA (``Old Cap
Appreciation
Fund'').
10.............................. Old Cap Service Shares..... New Large Cap Class II
Appreciation Fund. Growth Fund.
11.............................. T. Rowe Price Class II........... New Large Cap Class I
Equity Series, Growth Fund.
Inc.--T. Rowe
Price Blue Chip
Growth Portfolio
(``Old Blue Chip
Fund'').
12.............................. Old Blue Chip Fund. Class II........... New Large Cap Class II
Growth Fund.
13.............................. T. Rowe Price Class II........... New Multi Cap Class I
Equity Series, Value Fund.
Inc.--T. Rowe
Price Equity
Income Portfolio
(``Old Equity
Income Fund'').
14.............................. Old Equity Income Class II........... New Multi Cap Class II
Fund. Value Fund.
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10. Applicants state that the proposed Substitutions are part of
each Insurance Company's overall business plan to make the Contracts
more attractive to purchasers and more efficient to administer and
oversee.
11. Applicants assert their belief that the Substitutions will: (i)
Consolidate investment options resulting in a less confusing menu of
investment options for investors, greater efficiency in administration
of the Contracts and the capacity to add other types of investment
options; (ii) make the investment decision process more manageable for
the investor through consistent disclosure format and terminology
making it easier for Contractowners to analyze fund information and
make informed investment decisions relating to allocation of his or her
Contract value; (iii) enable the Insurance Companies to reduce certain
costs that they incur in administering the Contracts by removing
overlapping investment options; (iv) lower administrative costs for the
Insurance Companies which could result in resources being reallocated
to providing other contractowner services and support, and an overall
more efficient and customer-friendly product offering. (v) enable the
[[Page 66808]]
Trust's sub-advised strategy and augment the Insurance Companies' goal
of efficiently offering a continuously competitive menu of investment
options to its existing and prospective contractowners; (vi) provide
investors with a more favorable and less confusing overall investment
experience; and (vii) reduce the number and potential for variation of
trading policies that contractowners must navigate and understand.
12. Applicants submit that each Substitution provides an alternate
investment option that has the same or lower net operating expenses as
the Old Fund. The applicable management fees, 12b-1 fees, other
expenses, contractual waiver or reimbursement values and total
operating expenses for each Old and New Fund are presented in detail in
the Application and summarized below:
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Advisor Other Waiver/ Total
No. New/Old fund Class fees 12b-1 Fees expenses reimburs't expenses
(percent) (percent) (percent) (percent) (percent)
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1................................... Old Value Fund......... Class I................. 0.97 N/A 0.00 0.00 0.97
New Multi Cap Value Class I................. 0.57 N/A 3.10 2.75 0.92
Fund.
2................................... Old Value Fund......... Class II................ 0.87 0.25 0.00 0.00 1.12
New Multi Cap Value Class II................ 0.57 0.25 3.10 2.83 1.09
Fund.
3................................... Old Contrafund Initial................. 0.56 N/A 0.11 0.00 0.67
Portfolio.
New Large Cap Growth Class I................. 0.50 N/A 3.51 3.36 0.65
Fund.
4................................... Old Contrafund Service................. 0.56 0.10 0.11 0.00 0.77
Portfolio.
New Large Cap Growth Class I................. 0.50 N/A 3.51 3.36 0.65
Fund.
5................................... Old Contrafund Class 2................. 0.56 0.25 0.11 0.00 0.92
Portfolio.
New Large Cap Growth Class II................ 0.50 0.25 3.51 3.36 0.90
Fund.
6................................... Old Growth Opps. Fund.. Initial................. 0.56 N/A 0.16 0.00 0.72
New: Large Cap Growth Class I................. 0.50 N/A 3.51 3.36 0.65
Fund.
7................................... Old Growth Opps. Fund.. Service................. 0.56 0.10 0.16 0.00 0.82
New Large Cap Growth Class I................. 0.50 N/A 3.51 3.36 0.65
Fund.
8................................... Old Growth Opps. Fund.. Service 2............... 0.56 0.25 0.17 0.00 0.98
New Large Cap Growth Class II................ 0.50 0.25 3.51 3.36 0.90
Fund.
9................................... Old Cap Appreciation Non-Service............. 0.66 N/A 0.12 0.00 0.78
Fund.
New Large Cap Growth Class I................. 0.50 N/A 3.51 3.36 0.65
Fund.
10.................................. Old Cap Appreciation Service................. 0.66 0.25 0.13 0.00 1.04
Fund.
New Large Cap Growth Class II................ 0.50 0.25 3.51 3.36 0.90
Fund.
11.................................. Old Blue Chip Fund..... Class II................ 0.85 0.25 0.00 0.00 1.10
New Large Cap Growth Class I................. 0.50 N/A 3.51 3.36 0.65
Fund.
12.................................. Old Blue Chip Fund..... Class II................ 0.85 0.25 0.00 0.00 1.10
New Large Cap Growth Class II................ 0.50 0.25 3.51 3.36 0.90
Fund.
13.................................. Old Equity Income Fund. Class II................ 0.85 0.25 0.00 0.00 1.10
New Multi Cap Value Class I................. 0.57 N/A 3.10 2.75 0.92
Fund.
14.................................. Old Equity Income Fund. Class II................ 0.85 0.25 0.00 0.00 1.10
New Multi Cap Value Class II................ 0.57 0.25 3.10 2.83 1.09
Fund.
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The following summarizes the more complete comparison of New and
Old Funds provided in the Application.
13. Substitutions #1 & #2: Old Value Fund Verses New Multi Cap
Value Fund. Applicants represent that both Old Value Fund and New Multi
Cap Value Fund have similar investment objectives and substantially
similar policies and risks. Specifically, Applicants state that both
``seek long-term capital growth or appreciation, and secondarily income
* * * [and] seek to meet their objectives by investing in equity
securities, using a value investment strategy that looks for companies
that are undervalued or are temporarily out of favor in the market.''
Both funds allow for the use of derivatives securities, preferred
stock, convertible and foreign securities without limitation.
Applicants acknowledge that differences in the funds' risks and
investment objectives and strategies exist, but assert the belief that
these differences are immaterial and do not introduce Contractowners to
materially greater risks than before the Substitution.
14. Substitutions #3-#5: Old Contrafund Portfolio Verses New Large
Cap Growth Fund. Applicants represent that both the Old Contrafund
Portfolio and the New Large Cap Growth Fund ``have similar investment
objectives and substantially similar policies and risks. Both funds
seek long-term capital growth or appreciation, and both invest at least
80% of their respective net assets in common stocks. Both funds
diversify among a variety of industries and sectors.'' Applicants
acknowledge that differences in the funds' risks and investment
objectives and strategies exist, but assert the belief that these
differences are immaterial and do not introduce Contractowners to
materially greater risks than before the Substitution.
15. Substitutions #6-#8: Old Growth Opps. Fund Verses New Large Cap
Growth Fund. Applicants represent that both Old Growth Opps. Fund and
New Large Cap Growth Fund have similar investment objectives and
substantially similar policies and risks. Both funds seek capital
growth, investing primarily in common stocks. Both funds employ a
growth style of investing, seeking companies with above-average growth
potential or whose earnings are expected to grow consistently faster
than those of other companies. Applicants also note that New Large Cap
Growth Fund has a diversification policy affirmatively seeking to limit
risk which Old Growth Opps. Fund does not share. Applicants assert that
both funds have similar investment objectives and substantially similar
policies and risks. Applicants state that while the funds' investment
objectives are not identical, any distinction between them is
immaterial, since both funds are intended for long-term investment and
represent that any differences in their investment objectives do not
introduce Contract Owners to greater risks than before the
Substitution.
16. Substitutions #9 & #10: Old Cap Appreciation Fund Verses New
Large Cap Growth Fund. Applicants represent that Old Cap Appreciation
Fund and
[[Page 66809]]
New Large Cap Growth Fund have similar investment objectives and
substantially similar policies and risks, seek capital growth or
appreciation by investing in common stocks using a growth style
investment strategy, diversify broadly among companies and industries,
and invest in a similar percentage of foreign securities. Applicants
state that both funds look for companies in businesses that have above-
average growth potential, growth rates the portfolio manager believes
are sustainable over time, and stocks with reasonable valuations
relative to their growth potential. Applicants represent that
immaterial differences in risks, investment objectives and strategies
exist but do not expose Contractowners to materially greater risks
post-Substitution.
17. Substitutions #11 & #12: Old Blue Chip Fund Verses New Large
Cap Growth Fund. Applicants believe Old Blue Chip Fund and New Large
Cap Growth Fund have similar investment objectives and substantially
similar policies and risks. Both funds seek long-term capital growth
and invest at least 80% of their net assets in stocks of established
companies using a growth style of investing. Applicants believe that
the differences in risks, investment objectives and strategies are
immaterial, and the risks to Contractowners will not be materially
greater after the Substitutions.
18. Substitutions #13 & #14: Old Equity Income Fund Verses New
Multi Cap Value Fund. Applicants state their belief that Old Equity
Income Fund and New Multi Cap Value Fund have similar investment
objectives and substantially similar policies and risks. Both funds
seek capital appreciation and dividend income, although seeking current
income is a secondary objective of New Multi Cap Value Fund. Applicants
represent that both funds invest at least 80% of their respective net
assets in common stocks of companies of any size, employing a value
style of investing, and allow foreign securities, preferred stocks,
convertible securities and derivatives to be used as principal
strategies. Applicants assert that immaterial differences in risks and
investment objectives and strategies exist, but believe these
differences do not introduce Contractowners to materially greater risks
after the Substitutions.
19. Substitution Procedure: In-Kind Transactions. Applicants assert
that as of the effective date of the Substitutions (``Substitution
Date''), a portion of the securities of the Old Funds will be redeemed
in-kind and those securities received will be used to purchase shares
of the New Funds. Applicants assert that redemption requests and
purchase orders will be placed simultaneously so that contract values
will remain fully invested at all times. They further represent that
all redemptions of shares of the Old Portfolios and purchases of shares
of the New Portfolios will be effected will take place at relative net
asset value determined on the Substitution Date in accordance with
Section 22(c) of the Act and Rule 22c-1 thereunder with no change in
the amount of any Contractowner's Contract value, cash value, death
benefit, or dollar value of his or her investment in the Separate
Accounts.
20. Likewise, Section 17(b) Applicants represent that: (i) The New
Fund shares sold in-kind will be of the type and quality that a New
Fund could have acquired with the proceeds from the sale of its shares
had the shares been sold for cash; and (ii) NFA and the relevant
subadviser(s) will analyze the portfolio securities being offered to
each relevant New Fund and will retain only those securities that it
would have acquired for each such fund in a cash transaction.
Whether NFA or relevant Subadviser of a New Fund accepts or
declines to accept a particular portfolio security in-kind, Applicants
represent that each Substitution will be effected by redeeming shares
of the Existing Fund in cash and/or in-kind on the Substitution Date
and using the proceeds of those redemptions to purchase shares of the
New Fund at their net asset value on the same date.
21. Substitution Costs and Fund Expenses. Applicants state that the
Insurance Companies have agreed to bear all expenses incurred in
connection with the Substitutions and related filings and notices,
including legal, accounting, brokerage, and other fees and expenses. In
addition, Applicants assert that Contractowners will have the same or
lower net operating expenses after the Substitutions as prior to the
Substitutions.
22. With respect to those who are Contractowners on the
Substitution Date, Applicants specifically represent the following: On
the last business day of each fiscal period (not to exceed a fiscal
quarter) during the twenty-four (24) months following the Substitution
Date, the Insurance Companies will reimburse those Contractowners with
Contract value allocated to a subaccount corresponding to an New Fund
to the extent that, for that period, the New Fund's net operating
expenses (taking into account fee waivers and expense reimbursements)
and subaccount expenses (asset based fees and charges deducted on a
daily basis from sub-account assets and reflected in the calculation of
sub-account unit values) exceed, on an annualized basis, the sum of the
Old Fund's net operating expenses (taking into account fee waivers and
expense reimbursements) and subaccount expenses (asset based fees and
charges deducted on a daily basis from sub-account assets and reflected
in the calculation of sub-account unit values) for fiscal year 2009.
23. Contract Charges and Benefits. Applicants represent that the
Insurance Companies will not increase the Contract fees and charges
that would otherwise be assessed under the terms of the Contracts for a
period of at least two (2) years following the Substitution Date. To
the extent the Contracts contain restrictions, limitations or fees for
transfers, Applicants represent such provisions will not apply in
connection with the proposed Substitutions, and each Substitution
redemption and purchase will not be treated as a transfer for purposes
of assessing transfer charges or computing the number of permissible
transfers under the Contracts. Applicants state that Contractowners
will not incur any fees or charges as a result of the proposed
Substitutions, nor will their rights or insurance benefits or the
Insurance Companies' obligations under the Contracts be altered in any
way. Applicants also affirm that the Substitutions will not result in
adverse tax consequences to Contractowners and will not alter any tax
benefits associated with the Contracts.
24. Manager of Managers Order. Applicants further represent that,
after the Substitution Date, the New Funds will not change a
Subadviser, add a new Subadviser, or otherwise rely on the Manager of
Managers Order without first obtaining shareholder approval of the
change in Subadviser, the new Subadviser, or the Fund's ability add or
to replace a subadviser in reliance on Manager of Managers Order. In
addition, before the Substitutions, Applicants state that each
Contractowner will have been provided with a New Portfolio prospectus
describing the existence, substance and effect of the Manager of
Managers Order.
25. Notice Procedures. Applicants represent that prospectus
supplements for the Contracts will be delivered to Contractowners at
least thirty (30) days before the Substitution Date. Applicants state
that the supplement (``Pre-Substitution Notice'') will: (i) Notify all
Contractowners of the Insurance Company's intent to implement the
Substitutions, that this Amended Application has been filed to obtain
the
[[Page 66810]]
necessary orders to do so, and indicate the anticipated Substitution
Date; (ii) advise Contractowners that from the date of the supplement
until the Substitution Date, Contractowners are permitted to transfer
Contract value out of any Old Fund sub-account to any other sub-
account(s) offered under the Contract without the transfer being
treated as a transfer for purposes of transfer limitations and fees
otherwise applicable under the terms of the Contract; (iii) instruct
Contractowners how to submit transfer requests in light of the proposed
Substitutions; (iv) advise Contractowners that any Contract value
remaining in an Old Fund sub-account on the Substitution Date will be
transferred to the corresponding New Fund sub-account, and that the
Substitutions will take place at relative net asset value without
charge (including sales charges or surrender charges) and without
counting toward the number of transfers that may be permitted without
charge; (v) inform Contractowners that for at least thirty (30) days
following the Substitution Date, the Insurance Companies will permit
Contractowners to make transfers of Contract value out of each New Fund
sub-account to any other sub-account(s) offered under the Contract
without the transfer being treated as a transfer for purposes of
transfer limitations and fees that would otherwise apply under the
terms of the Contract; and (vi) inform Contractowners that, except as
described in the market timing provision of the relevant prospectus,
the respective Insurance Company will not exercise any rights reserved
by it under the Contracts to impose additional restrictions on
transfers out of a New Fund for at least thirty (30) days after the
Substitution Date.
26. Applicants also represent that: (i) Prior to the Substitutions;
all existing Contractowners will have received the appropriate
prospectus supplements containing this disclosure and the most recent
prospectus and/or supplement for the New Portfolios (ii) new purchasers
will be provided the prospectus supplement, contract prospectus, and
the prospectus and/or supplement for the New Funds in accordance with
all applicable legal requirements; and (iii) prospective Contract
purchasers will be provided the prospectus supplement and the Contract
prospectus. Applicants also represent that, within five (5) business
days after the Substitution Date, Contractowners will be sent a written
confirmation of the Substitutions which will restate the information
set forth in the Pre-Substitution Notice.
Applicants' Legal Analysis
1. Applicants request that the Commission issue an order pursuant
to Section 26(c) of the Act approving the Substitutions.
2. Section 26(c) of the Act makes it unlawful for any depositor or
trustee of a registered unit investment trust holding the security of a
single issuer to substitute another security for such security unless
the Commission approves the substitution. The Commission shall approve
such a substitution if the evidence establishes that it is consistent
with the protection of investors and the purposes fairly intended by
the policy and provisions of the Act.
3. Applicants state that the right to make such a substitution has
been reserved under the Contracts and is disclosed in the prospectus
for the related Contracts. Applicants declare that, in all material
respects, each New Fund and its corresponding Old Fund have similar,
substantially similar, or identical investment objectives and
strategies, and that each proposed Substitutions retains for
Contractowners the investment flexibility and expertise in asset
management features of the Contracts. They assert that after the
Substitution Date, Contractowners invested in a New Fund will have the
same or lower net operating expense ratio(s) as before the
Substitution. Further, Applicants have agreed to certain expense limits
to ensure affected Contractowners do not incur higher expenses as a
result of a Substitution for a period of twenty four (24) months after
the Substitution.
4. Applicants submit that the proposed Substitutions meet the
standards set forth in Section 26(c) and assert that replacement of the
Old Portfolios with the New Portfolios is consistent with the
protection of Contractowners and the purposes fairly intended by the
policy and provisions of the Act. Specifically, they argue that the
Substitutions will not result in the type of costly forced redemption
that Section 26(c) was designed to prevent. Rather, Applicants conclude
that ``[a]ny impact on the investment programs of affected
Contractowners should be negligible,'' and affirm the Substitutions
will have no impact on other aspects of the Contracts including the
annuity, life, or tax benefits they afford affected Contractowners.
5. Section 17(b) Applicants request that the Commission issue an
order pursuant to Section 17(b) of the 1940 Act exempting them from the
provisions of Section 17(a) of the 1940 Act to the extent necessary to
permit them to carry out the in-kind Substitution transactions (``In-
Kind Transactions'').
6. Section 17(a)(1) of the Act, in relevant part, prohibits any
affiliated person of a registered investment company, or any affiliated
person of such person, acting as principal, from knowingly selling any
security or other property to that company. Section 17(a)(2) of the Act
generally prohibits the persons described above, acting as principal,
from knowingly purchasing any security or other property from the
registered company. Pursuant to Section 17(a)(1) of the Act, the
Section 17(b) Applicants may be considered affiliates of one or more of
the portfolios involved in the Substitutions. Because the Substitutions
may be effected, in whole or in part, by means of in-kind redemptions
and subsequent purchases of shares and by means of In-Kind
Transactions, the Substitutions may be deemed to involve one or more
purchases or sales of securities or property between affiliates.
7. Section 17(b) of the Act provides that the Commission may, upon
application, grant an order exempting any transaction from the
prohibitions of Section 17(a) if the evidence establishes that: the
terms of the proposed transaction, including the consideration to be
paid or received, are reasonable and fair and do not involve
overreaching on the part of any person concerned; the proposed
transaction is consistent with the policy of each registered investment
company concerned, as recited in its registration statement and records
filed under the Act; and the proposed transaction is consistent with
the general purposes of the Act.
8. Based on the facts presented above, Section 17(b) Applicants
submit that the terms of the In-Kind Transactions, including the
consideration to be paid and received, are reasonable, fair, and do not
involve overreaching because: (i) The Contractowners' Contract values
will not be adversely impacted or diluted; and (ii) Section 17(b)
Applicants agree to carry out the In-Kind Transactions in conformity
with all of the conditions of Rule 17a-7 and the procedures adopted
thereunder, except that the consideration paid for the securities being
purchased or sold may not be entirely cash. Thus, Section 17(b)
Applicants conclude that the purposes intended by implementation of the
rule are met by the terms of the In-Kind Transactions.
9. In support of this position Section 17(b) Applicants assert that
the proposed In-Kind Transactions will be effected based upon the
independent current market price of the portfolio
[[Page 66811]]
securities as specified in Rule 17a-7(b) and will include only
securities for which market quotations are readily available on the
Substitution Date. In accordance with Rule 17a-7(c), Section 17(b)
Applicants assert that the proposed In-Kind Transactions will be
consistent with the policy of each registered investment company and
separate series thereof participating in the In-Kind Transactions, as
recited in the relevant registered investment company's registration
statement and reports. As specified in Rule 17a-7(d), the Application
states that no brokerage commission, fee (except for any customary
transfer fees), or other remuneration will be paid in connection with
the proposed In-Kind Transactions. Likewise, Section 17(b) Applicants
represent that Trust's Board of Trustees has adopted and implemented
the fund governance and oversight procedures as required by Rule 17a-
7(e) and (f). The Application also states, ``pursuant to Rule 17a-
7(e)(3), during the calendar quarter following the quarter in which any
In-Kind Transactions occur, the Trust's Board of Trustees will review
reports submitted by NFA in respect of such In-Kind Transactions in
order to determine that all such In-Kind Transactions made during the
preceding quarter were effected in accordance with the representations
stated herein.'' Finally, Applicants represent that a written record of
the procedures for the proposed In-Kind Transactions will be maintained
and preserved in accordance with Rule 17a-7(g).
Conclusions
Section 26 Applicants submit that for the reasons summarized above
the proposed Substitutions meet the standards of Section 26(c) of the
1940 Act and request that the Commission issue an order of approval
pursuant to Section 26(c) of the 1940 Act. Section 17 Applicants submit
that the proposed In-Kind Transactions meet the standards of Section
17(b) of the 1940 Act and request that the Commission issue an order of
exemption pursuant to Section 17(b) of the 1940 Act.
For the Commission, by the Division of Investment Management
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-27367 Filed 10-28-10; 8:45 am]
BILLING CODE 8011-01-P