[Federal Register Volume 76, Number 71 (Wednesday, April 13, 2011)]
[Notices]
[Pages 20727-20731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-8731]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-29627; File No. 812-13806]
National Life Insurance Company, et al.
April 7, 2011.
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 ``1940 Act'').
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Applicants: National Life Insurance Company (``NLIC''), National
Variable Annuity Account II (``Annuity Account''), National Variable
Life Insurance Account (``Life Account'', and together with Annuity
Account, ``Separate Accounts'').
Summary of Application: Applicants request an order of the Commission
pursuant to Section 26(c) of 1940 Act, as amended, approving the
substitution of shares of the Money Market Portfolio (the ``Replacement
Portfolio'') of the Variable Insurance Products Fund V (``VIPFV'') for
shares of the Money Market Fund (the ``Substituted Portfolio'') of the
Sentinel Variable Products Trust (``SVPT'') held by the Separate
Accounts to support variable annuity contracts or variable life
insurance contracts (collectively, the ``Contracts'') issued by NLIC.
Filing Date: The application was originally filed on July 26, 2010 and
amended on December 13, 2010, and March 28, 2011.
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 NLIC with a copy of the request, personally or
by mail. Hearing requests must be received by the Commission by 5:30
p.m. on April 28, 2011, and should be accompanied by proof of service
on NLIC 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: Secretary, Securities and Exchange Commission, 100 F Street,
NE., Washington, DC 20549-1090. Applicants, c/o Lisa F. Muller,
Counsel, National Life Insurance Company, National Life Drive,
Montpelier, Vermont 05604.
FOR FURTHER INFORMATION CONTACT: Craig Ruckman, Attorney-Adviser, at
(202) 551-6753 or Michael Kosoff, Branch Chief, Office of Insurance
Products, Division of Investment Management, at (202) 551-6754.
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 an applicant
using the Company name box, at http://www.sec.gov/search/search.htm or
by calling (202) 551-8090.
Applicants' Representations
1. NLIC is a stock life insurance company, all the outstanding
stock of which is indirectly owned by National Life Holding Company, a
mutual insurance holding company established under Vermont law on
January 1, 1999. NLIC is authorized to transact life insurance and
annuity business in Vermont and in 50 other jurisdictions. For purposes
of the 1940 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.
2. Under Vermont law, the assets of each Separate Account
attributable to the Contracts through which interests in that Separate
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, the assets in
each Separate Account equal to the reserves and other contract
liabilities of the Separate Account are not chargeable with liabilities
arising out of any other
[[Page 20728]]
business that NLIC may conduct. Income, gains and losses, realized or
unrealized, from assets allocated to each Separate Account are credited
to or charged against that Separate Account without regard to the other
income, gains or losses of NLIC. Each Separate Account is a ``separate
account'' as defined by Rule 0-1(e) under the 1940 Act, and is
registered with the Commission as a unit investment trust.\1\
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\1\ File No. 811-08015 (Annuity Account); File No. 811-09044
(Life Account).
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3. The Annuity Account is divided into sixty-four subaccounts. Each
subaccount invests exclusively in shares of a corresponding investment
portfolio (a ``Portfolio'') of one of fifteen series-type management
investment companies, including the SVPT. The assets of the Annuity
Account support variable annuity contracts, and interests in the
Separate Account offered through such contracts have been registered
under the Securities Act of 1933, as amended (the ``1933 Act''), on
Form N-4 (File No. 333-19583).
4. The Life Account is divided into sixty-eight subaccounts. Each
subaccount invests exclusively in shares of a corresponding investment
portfolio (also, a ``Portfolio'') of one of sixteen series-type
management investment companies, including the SVPT. The assets of the
Life Account support variable life insurance contracts, and interests
in the Separate Account offered through such contracts have been
registered under the 1933 Act on Form N-6 (File Nos. 33-91938, 333-
44723, 333-151535, and 333-67003).
5. SVPT is registered under the 1940 Act as a diversified, open-end
management investment company.\2\ SVPT currently consists of six
investment portfolios, including the Substituted Portfolio, and issues
a separate series of shares of beneficial interest in connection with
each. SVPT has registered such shares under the 1933 Act on Form N-1A
(File No. 333-35832).
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\2\ File No. 811-09917.
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6. Sentinel Asset Management, Inc. (``Sentinel'') serves as the
investment adviser to each SVPT Portfolio. Sentinel manages the
Porfolios' investments and the business operations of the SVPT under
the overall supervision of the SVPT board of trustees. Sentinel has the
responsibility for making all investment decisions for the SVPT
Portfolios and receives an investment management fee from each
Portfolio. Sentinel is a registered investment adviser. Sentinel is an
indirect wholly-owned subsidiary of National Life Holding Company and
therefore is under common control with NLIC.
7. VIPFV is registered under the 1940 Act as a diversified, open-
end management investment company.\3\ Currently, VIPFV has 31
investment portfolios, one of which--the Replacement Portfolio--would
be involved in the proposed Substitution. VIPFV issues a separate
series of shares of beneficial interest in connection with each
portfolio and has registered such shares under the 1933 Act on Form N-
1A (File No. 33-17704).
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\3\ File No. 811-05361.
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8. Fidelity Management & Research Company (``FMR'') serves as the
manager of each portfolio of VIPFV. As the manager, FMR has overall
responsibility for directing portfolio investments and handling the
VIPFV's business affairs. FMR receives an investment management fee
from each portfolio. FMR is a registered investment adviser. Fidelity
Investments Money Management, Inc. (``FIMM'') and other affiliates of
FMR serve as sub-advisers for the Replacement Portfolio. FIMM has the
day-to-day responsibility of choosing investments for the Replacement
Portfolio. In addition, Fidelity Research & Analysis Company
(``FRAC''), another affiliate of FMR, serves as a sub-adviser for the
Portfolio and may provide investment research and advice for the
Portfolio.\4\ None of VIPFV, FMR, FIMM, or FRAC are affiliated persons
(or affiliated persons of affiliated persons) of any of the Applicants.
Likewise, none of the Applicants are affiliated persons (or affiliated
persons of affiliated persons) of VIPFV, FMR, FIMM, or FRAC.
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\4\ FMR does not manage the sub-advisers for the VIPFV Money
Market Portfolio pursuant to a ``manager-of-managers'' exemption.
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9. Each Contract permits Contract owners to transfer contract value
between and allocate contract value among the subaccounts. Currently,
NLIC does not assess a transfer charge or limit the number of transfers
permitted each year. However, NLIC reserves the right, upon prior
notice, to impose a transfer charge of $25 for each transfer in excess
of 12 in any one contract year. NLIC does have in place market timing
policies and procedures that may operate to limit transfers. Under the
Life Account, transfers resulting from loans, dollar cost averaging,
portfolio rebalancing features, or the initial reallocation from a
money market subaccount do not count as transfers for the purpose of
determining the transfer charge.
10. Pursuant to each Contract, NLIC reserves the right to
substitute shares of one portfolio for shares of another. Each
Contract's prospectus discloses that NLIC reserves the right to
substitute shares of one portfolio for shares of another if the shares
of the portfolio should no longer be available for investment or, if in
NLIC's judgment further investment in such portfolio shares should
become inappropriate.
11. NLIC proposes to substitute Service Class Shares of the Money
Market Portfolio of the Variable Insurance Products Fund V for shares
of the Money Market Fund of the Sentinel Variable Products Trust
(``Substitution'').
12. The Applicants assert that the Substitution is necessary in
order to provide the Contract owners with continued access to a money
market portfolio investment option. Currently, the only money market
portfolio investment option offered under the Contracts is the
Substituted Portfolio. The Applicants contend that the Substituted
Portfolio is small and, because it is only offered as an investment
option under the Contracts, there is little prospect of it growing in
size sufficiently to materially decrease its expense ratio or obtain
economies of scale. In addition, Sentinel has been subsidizing the
Substituted Portfolio's expenses for some time, but cannot continue to
do so indefinitely.\5\
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\5\ For the fiscal year ended December 31, 2010, Sentinel
reimbursed the Substituted Portfolio in an amount equal to 0.37% of
the Portfolio's average daily net assets. This reimbursement was
made to avoid the Substituted Portfolio having a negative yield in
the current very low interest rate environment. Sentinel may cease
the reimbursement at any time and is only providing it to the extent
necessary to avoid a negative yield.
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NLIC has determined that Contract owners would be better served if
the Substituted Portfolio is closed and replaced as an investment
option by another, larger, money market fund with lower expenses and
better prospects for future growth and competitive yields.
13. The table below sets forth the name, investment adviser,
investment objective, principal investment strategies, and principal
risks of both the Substituted Portfolio and the Replacement Portfolio.
[[Page 20729]]
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Substituted Replacement
Portfolio Portfolio
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Name........................ Sentinel Variable Variable Insurance
Products Trust Products Fund V
Sentinel Variable Money Market
Products Money Portfolio.
Market Fund.
Investment Adviser Sentinel............ FMR (FIMM, FRAC).
(Subadviser).
Investment Objective........ Seeks as high a Seeks as high a
level of current level of current
income as is income as is
consistent with consistent with
stable principal preservation of
values and capital and
liquidity. liquidity.
Principal Investment The Fund invests FMR invests the
Strategies. exclusively in Fund's assets in
dollar-denominated U.S. dollar-
money market denominated money
instruments, market securities
including U.S. of domestic and
government foreign issuers and
securities, bank repurchase
obligations, agreements. FMR
repurchase also may enter into
agreements, reverse repurchase
commercial paper, agreements for the
and other corporate Fund.
debt obligations. FMR will invest more
All such than 25% of the
investments will Fund's total assets
have remaining in the financial
maturities of 397 services
days or less. industries.
The Fund may also In buying and
invest up to 10% of selling securities
its total assets in for the Fund, FMR
shares of complies with
institutional money industry-standard
market funds that regulatory
invest primarily in requirements for
securities in which money market funds
the Fund could regarding the
invest directly. quality, maturity,
and diversification
of the fund's
investments.
The Fund seeks to FMR stresses
maintain a net maintaining a
asset value of stable $1.00 share
$1.00 per share by price, liquidity,
using the amortized and income.
cost method of
valuing its
securities. The
Fund is required to
maintain a dollar-
weighted average
portfolio maturity
of 90 days or less.
The Fund may ....................
participate in a
securities lending
program.
Principal Risks............. General Interest
Fixed-Income Rate Charges.
Securities Risk. Foreign
Government Exposure.
Securities Risk. Financial
Services Exposure.
Issuer-
Specific Changes.
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14. The table below compares the investment management fees,
distribution fees, other expenses, total operating expenses, fee
waivers and net operating expenses for the year ended December 31,
2010, expressed as an annual percentage of average daily net assets, of
the Substituted Portfolio and the Replacement Portfolio.
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Substituted Portfolio Replacement Portfolio
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Sentinel Variable
Products Trust Sentinel Variable Insurance
Variable Products Money Products Fund V Money
Market Fund Market Portfolio
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Management Fee............................................ 0.25% 0.18%
Distribution and Service (12b-1) Fee...................... None 0.10%
Other Expenses............................................ 0.27% 0.08%
Total Operating Expenses.................................. 0.52% 0.36%
Fee Waivers and Expense Reimbursements \6\................ 0.37% N/A
Net Operating Expenses.................................... 0.15% 0.36%
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\6\ Fee waivers and expense reimbursements are not contractual and may be terminated at any time.
The management fee for the Replacement Portfolio in the table above
consists of two components: a so-called ``group'' fee of 0.11% and an
``income-related'' fee of 0.07%. The income-related fee varies from
month to month depending on the level of the Replacement Portfolio's
monthly gross income from an annual rate of 0.05% of average daily net
assets throughout the month when the annualized gross yield for the
month is 0% to an annual rate of 0.27% of average daily net assets
throughout the month when the annualized gross yield for the month is
15%. The group fee rate is based on the average daily net assets for
all of the mutual funds managed by FMR. The group fee is capped at an
annual rate of 0.37% of average daily net assets.
15. The table below compares the 1-year, 5-year, and 10-year
average annual total return of the Substituted Portfolio and
Replacement Portfolio, as well as the yield for the seven days ending
December 31, 2010 and the net asset values of the Substituted Portfolio
and Replacement Portfolio as of December 31, 2010.
[[Page 20730]]
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Substituted Portfolio Replacement Portfolio
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Sentinel Variable
Products Trust Sentinel Variable Insurance
Variable Products Money Products Fund V Money
Market Fund Market Portfolio
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1-Year Average Annual Return.............................. 0.00% 0.14%
5-Year Average Annual Return.............................. 2.24% 2.69%
10-Yr Average Annual Return............................... 2.07% 2.40%
7-Day Yield............................................... 0.00% 0.11%
Net Asset Value........................................... $15,290,904 $155,272,000
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As of December 31, 2010.
16. As of the effective date of the Substitution (the ``Effective
Date''), each Separate Account will redeem shares of the Substituted
Portfolio. The proceeds of such redemptions will then be used to
purchase shares of the Replacement Portfolio, with the subaccount of
the applicable Separate Account investing the proceeds of its
redemption from the Substituted Portfolio in the applicable Replacement
Portfolio. Redemptions and purchases will occur simultaneously so that
contract values will remain fully invested at all times. All
redemptions of shares of the Substituted Portfolio and purchases of
shares of the Replacement Portfolio will be effected in accordance with
Section 22(c) of the Act and Rule 22c-1 thereunder. The Substitution
will take place at relative net asset value as of the Effective Date
with no change in the amount of any Contract owner's contract value or
death benefit or in the dollar value of his or her investments in the
money market subaccount of the appropriate Separate Account.
17. Contract values attributable to investments in the Substituted
Portfolio will be transferred to the Replacement Portfolio without
charge (including sales charges or surrender charges) and without
counting toward the number of transfers that may be permitted without
charge. Contract owners will not incur any additional fees or charges
as a result of the Substitution, nor will their rights or NLIC's
obligations under the Contracts be altered in any way and the
Substitution will not change Contract owners' insurance benefits under
the Contracts. All expenses incurred in connection with the
Substitution, including legal, accounting, transactional, and other
fees and expenses, including brokerage commissions, will be paid by
NLIC. In addition, the Substitution will not impose any tax liability
on Contract owners. The Substitution will not cause the Contract fees
and charges currently paid by existing Contract owners to be greater
after the Substitution than before the Substitution. NLIC will not
exercise any right it may have under the Contracts to impose
restrictions on transfers under the Contracts for the period beginning
on the date the Application was filed with the Commission through at
least thirty (30) days following the Effective Date.\7\
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\7\ One exception to this would be restrictions that NLIC may
impose to prevent or restrict ``market timing'' activities by
Contract owners or their agents.
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18. For twenty-four months following the Effective Date and for
those Contracts with contract value invested in the Substituted
Portfolio on the Effective Date, NLIC will reimburse, on the last
business day of each fiscal period (not to exceed a fiscal quarter),
the sub-accounts investing in the Replacement Portfolio to the extent
that the Replacement Portfolio's net annual expenses (taking into
account contractual fee waivers and expense reimbursements) for such
period exceeds, on an annualized basis, the net annual expenses (taking
into account contractual fee waivers and expense reimbursements) of the
Substituted Portfolio for the fiscal year ended December 31, 2010. In
addition, for twenty-four months following the Effective Date, NLIC
will not increase asset-based fees or charges for Contracts outstanding
on the Effective Date.
19. Existing Contract owners as of the date the Application was
filed, and new Contract owners who have purchased or who will purchase
a Contract subsequent to that date but prior to the Effective Date,
have been or will be notified of the proposed Substitution by means of
a prospectus or prospectus supplement for each of the Contracts (``Pre-
Substitution Notice''). The Pre-Substitution Notice will state that the
Applicants filed the Application, set forth the anticipated Effective
Date, explain that contract values attributable to investments in the
Substituted Portfolio would be attributable to the Replacement
Portfolio as of the Effective Date, and state that, from the date the
Application was first filed with the Commission through the date thirty
(30) days after the Substitution, Contract owners may make one transfer
of contract value from the sub-account investing in the Substituted
Portfolio (before the Substitution) or the Replacement Portfolio (after
the Substitution) to one or more other sub-account(s) without a
transfer charge and without that transfer counting against any
contractual transfer limitations.
20. All Contract owners will receive a copy of the most recent
prospectus for the Replacement Portfolio prior to the Substitution.
Within five (5) days following the Substitution, Contract owners
affected by the Substitution will be notified in writing that the
Substitution was carried out. This notice will restate the information
set forth in the Pre-Substitution Notice, and will also explain that
the contract values attributable to investments in the Substituted
Portfolio were transferred to the Replacement Portfolio without charge
(including sales charges or surrender charges) and without counting
toward the number of transfers that may be permitted without charge.
Legal Analysis
1. Applicants request an order of the Commission pursuant to
Section 26(c) of the 1940 Act approving the Substitution.
2. Applicants assert that Section 26(c) of the 1940 Act prohibits
any depositor or trustee of a unit investment trust that invests
exclusively in the securities of a single issuer from substituting the
securities of another issuer without the approval of the Commission.
Section 26(c) provides that such approval shall be granted by order of
the Commission, if the evidence establishes that the substitution is
consistent with the protection of investors and the purposes of the
1940 Act.
3. Applicants aver that Section 26(c) was intended to provide for
Commission scrutiny of a proposed substitution which could, in effect,
force shareholders dissatisfied with the substitute security to redeem
their shares, thereby possibly incurring a loss of the sales load
deducted from initial premium, an additional sales load upon
[[Page 20731]]
reinvestment of the proceeds of redemption, or both.\8\ The section was
designed to forestall the ability of a depositor to present holders of
interest in a unit investment trust with situations in which a holder's
only choice would be to continue an investment in an unsuitable
underlying security, or to elect a costly and, in effect, forced
redemption.
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\8\ House Comm. Interstate Commerce, Report of the Securities
and Exchange Commission on the Public Policy Implications of
Investment Company Growth, H.R. Rep. No. 2337, 89th Cong. 2d Session
337 (1966).
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4. Applicants represent that each Contract and its prospectus
reserves NLIC's right to substitute shares of one portfolio for shares
of another.
5. Applicants contend that based on a comparison of the basic
characteristics of the Replacement Portfolio and the Substituted
Portfolio, the Substitution will provide Contract owners with
substantially the same investment vehicle.
6. Applicants believe that the Replacement Portfolio and the
Substituted Portfolio have substantially the same investment objectives
and principal investment strategies, thus making the Replacement
Portfolio an appropriate candidate for the Substitution. Both the
Replacement Portfolio and the Substituted Portfolio seek a high level
of current income as is consistent with stable principal values and
liquidity. However, while both the Replacement Portfolio and the
Substituted Portfolio pursue their investment objective by investing in
U.S. dollar-denominated money market securities of domestic issuers as
well as repurchase agreements, only the Replacement Portfolio invests
in instruments issued by foreign issuers. Both the Replacement
Portfolio and the Substituted Portfolio seek to maintain a net asset
value of $1.00 per share as well as liquidity. Most significantly, both
the Replacement Portfolio and the Substituted Portfolio must comply
with the diversification and risk-limiting conditions of Rule 2a-7
under the Act. Notwithstanding one difference in the investment
strategies, both the Replacement Portfolio and the Substituted
Portfolio emphasize the same investment objective and follow
substantially the same investment strategies to pursue those
objectives. Thus, the Applicants believe that the money market
investment option available to Contract owners will not change in any
material respect as a result of the Substitution.
7. Applicants represent that the Replacement Portfolio entails
substantially the same investment risks as does the Substituted
Portfolio. In particular, given the diversification and risk-limiting
conditions of Rule 2a-7 under the Act, the Replacement Portfolio cannot
have a materially different risk profile than the Substituted
Portfolio.
8. Applicants assert that the Substitution will result in a
reduction in overall expenses of the Replacement Portfolio as compared
to the Substituted Portfolio. Although the Service Class shares of the
Replacement Portfolio are subject to a modest Rule 12b-1 distribution
and shareholder service plan expense that the Substituted Portfolio
does not bear, the total annual operating expenses for the Replacement
Portfolio have been significantly less than the total annual operating
expenses for the Substituted Portfolio in recent years.
9. The Applicants believe that Contract owners would benefit from
the significantly larger size of the Replacement Portfolio and the
somewhat higher yields that the Replacement Portfolio can be expected
to provide, as contrasted with the size and recent yields of the
Substituted Portfolio.
10. Applicants represent that for three years from the Effective
Date, NLIC and persons under common control with NLIC will not receive
in the aggregate any direct or indirect benefits from the Replacement
Portfolio, its investment adviser, or its principal underwriter (or
their affiliates) in connection with assets representing contract
values (at the time of the substitution) of the Contracts, at a higher
rate than they had received from the Substituted Portfolio, its
investment adviser, or its principal underwriter (or their affiliates)
including, without limitation: Rule 12b-1 fees, shareholder service
fees, administrative fees or other service fees, revenue-sharing
payments, or payments from other arrangements in connection with such
assets.
11. Applicants submit that the Substitution meets the standards set
forth in Section 26(c) and that, if implemented, the Substitution would
not raise any of the aforementioned concerns that Congress intended to
address when the 1940 Act was amended to include this provision.
Further, Applicants submit that the replacement of the Substituted
Portfolio with the Replacement Portfolio is consistent with the
protection of Contract owners and the purposes fairly intended by the
policy and provisions of the 1940 Act and, thus, meets the standards
necessary to support an order pursuant to Section 26(c) of the 1940
Act.
Conclusion
Applicants submit that for the reasons summarized above the
proposed Substitution meets 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.
For the Comission, by the Division of Investment Management
pursuant to delegated authority.
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-8731 Filed 4-12-11; 8:45 am]
BILLING CODE 8011-01-P