SEC Division of Investment Management staff letter: Nationwide Life Insurance Company

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EFFECTIVE JANUARY 1, 2022, THIS LETTER IS WITHDRAWN. Please consult the following web page for more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements .

Nationwide Life Insurance Company

March 16, 2001

RESPONSE OF THE OFFICE OF INSURANCE PRODUCTS

DIVISION OF INVESTMENT MANAGEMENT

Nationwide Life Insurance Company, et al.

By letter dated March 15, 2001, you request assurance that the staff would not recommend enforcement action to the Commission based upon the manner in which Nationwide Life Insurance Company and its affiliate, Nationwide Life and Annuity Insurance Company, (collectively, "Nationwide") will disclose accumulation unit value information in the prospectuses for certain variable annuity contracts issued by Nationwide. Your letter states that Nationwide offers variable annuity contracts through various registered separate accounts ("Nationwide Separate Accounts"). Each Nationwide Separate Account is registered as a unit investment trust under the Investment Company Act of 1940 on Form N-4, and the variable annuity contracts issued through each Nationwide Separate Account are registered under the Securities Act of 1933, also on Form N-4. You state that various benefits under certain of the variable annuity contracts issued through the Nationwide Separate Accounts are "unbundled," meaning that they are offered as optional features. If an investor selects one of these optional features, a specific charge is added to the basic contract charge that the investor pays and is assessed against the assets of the Nationwide Separate Account in question. These optional features include enhanced death benefits, deferred sales load waivers, guaranteed minimum income benefits, and a bonus on purchase payments made in the first contract year. You state that the unbundling of contract features allows investors, with the aid of their financial advisers, to tailor individual variable annuity contracts to their specific financial needs and objectives, and to avoid charges associated with unwanted features by selecting only those features consistent with their specific financial objectives. You also state that the specific linkage of particular benefits with specific charges allows investors to assess the costs and benefits of an optional benefit more precisely. You state that a contract owner may select one or more of these optional features, in a variety of combinations, resulting in numerous possible combinations of contract charges. You also state that Nationwide maintains a separate class of accumulation units for each such combination of charges. You claim that, as a result, the prospectus disclosure required by Item 4 of Form N-4 for each class of accumulation units can result in extensive unit value information that overwhelms the reader. For example, in the May 2000 prospectus for one Nationwide variable annuity contract, 180 out of the 252 pages of the prospectus are devoted to the accumulation unit value tables required by Item 4 of Form N-4. Further, you estimate that 150 additional pages will be required to display similar information for the May 2001 prospectus for this particular contract, with the result that the accumulation unit value information required by Item 4 will take up approximately 82% of the prospectus. You propose that, with respect to each
variable annuity contract offered through a Nationwide Separate Account, Nationwide will include in the prospectus for the contract the information required by Item 4(a) of Form N-4 only with respect to two classes of accumulation units. In particular, one class of unit values will depict the highest possible combination of contract charges and will be shown for each available underlying mutual fund; the other class of unit values will depict the lowest possible contract charges and will also be shown for each available underlying mutual fund. Nationwide will include classes of accumulation units that reflect combinations of charges between the highest and lowest possible charges in the Statement of Additional Information (SAI). All of the accumulation unit value tables in the prospectus and the SAI will comply with the Instructions to Item 4 of Form N-4. As a result, the prospectus and SAI together will contain all accumulation unit value information as required by Item 4 of Form N-4. You represent that plain English disclosure accompanying the accumulation unit value tables in the prospectus will explain that the two classes of accumulation unit values represent the highest and lowest possible contract charge combinations, and that the SAI, which is available upon request without charge, contains the unit values for all other possible combinations of charges. You represent that this accompanying disclosure will include a toll-free telephone number for investors to call to request an SAI. You represent that this disclosure may also include alternative means of obtaining an SAI, such as addresses enabling investors to send a written request for an SAI, or web site information for investors who wish to access the SAI electronically. You also represent that plain English disclosure accompanying the accumulation unit values in the SAI will make clear that accumulation unit values reflecting the highest and lowest combination of contract charges are contained in the prospectus. In addition, you represent that Nationwide provides a quarterly statement to each individual contract owner. These statements disclose, with respect to each class of accumulation units held by the contract owner, the unit value and number of units held at the beginning of the quarter, the number and value of units purchased and sold during the quarter, and the unit value and number of units held at the end of the quarter. Item 4(a) of Form N-4 requires that, for each class of accumulation units, a variable annuity separate account must furnish a table that includes the accumulation unit value at the beginning of the period, the accumulation unit value at the end of the period, and the number of accumulation units outstanding at the end of the period for each of the last ten fiscal years, or for the life of the separate account if less than ten years. You argue that strict adherence to Item 4 of Form N-4 will result in prospectuses that are inconsistent with the Commission's
recent initiatives requiring prospectuses to be written in plain English. 1 In particular, you note that, for any individual investor, only one combination of contract charges, and one class of accumulation unit values, will be relevant. You state that the remaining accumulation unit value tables, which may take up hundreds of pages, must be considered extraneous with respect to each individual investor. In addition, you argue that the costs of producing, printing, and disseminating these accumulation unit value tables impose burdens that are disproportionate to any regulatory purpose, and that these costs will ultimately be passed on to investors. In our view, your proposal is consistent with the Commission's efforts to improve prospectuses. 2 The disclosure necessary to satisfy Item 4(a) becomes more lengthy as a variable annuity contract adds multiple classes of accumulation units, each of which corresponds to a different combination of charges available under the contract. As you point out, only the accumulation unit values that correspond to the combination of contract charges that will actually be paid by a particular investor are directly relevant to that investor. Based on the representations in your letter, we would not recommend enforcement action to the Commission if the prospectus for each of Nationwide's variable annuity contracts includes the information required by Item 4(a) of Form N-4 only with respect to the classes of accumulation units corresponding to the highest and lowest combination of charges available under the contract. This disclosure would provide investors with information about accumulation unit values in a concise manner that will not distract the investor's attention from the other material information in the prospectus. Our conclusion is based in particular on the representations that: (1) accumulation unit value tables that comply with the Instructions to Item 4 of Form N-4 for all classes of accumulation units available under the contract that are not shown in the prospectus will be included in the SAI, and these tables will be accompanied by plain English disclosure making clear that accumulation unit values reflecting the highest and lowest combination of contract charges are contained in the prospectus; (2) the prospectus will include plain English disclosure accompanying the tables for the two classes of accumulation units shown, explaining that these two classes of units have values representing the highest and lowest possible contract charge combinations, and that tables for all other classes of accumulation units, corresponding to all other possible combinations of contract charges, are included in the SAI, which is available without charge upon request through a toll-free telephone number; and (3) Nationwide provides a quarterly statement to each individual contract owner that discloses, with respect to each class of accumulation units held by the contract owner, the unit value and number of units held
at the beginning of the quarter, the number and value of units purchased and sold during the quarter, and the unit value and number of units held at the end of the quarter. Because our position is based on the facts and representations set forth in your letter, you should note that different facts or representations may require a different conclusion. Paul G. Cellupica Senior Special Counsel