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EFFECTIVE JANUARY 1, 2022, THIS LETTER IS WITHDRAWN. Please consult the following web page for more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements .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

Incoming Letter:

March 15, 2001 William J. Kotapish, Esquire Assistant Director Office of Insurance Products Division of Investment Management United States Securities and Exchange Commission Judiciary Plaza 450 Fifth Street NW Washington, D.C. 20549 Dear Mr. Kotapish: I am writing on behalf of Nationwide Life Insurance Company ("NWL"), its affiliate, Nationwide Life and Annuity Insurance Company ("NLAIC"), and various NWL and NLAIC (collectively, "Nationwide") separate accounts, all of which are registered as unit investment trusts under the Investment Company Act of 1940 and offer variable annuity contracts registered under the Securities Act of 1933 on Form N-4. The purpose of this letter is to request assurance from the staff (the "Staff") of the Securities and Exchange Commission (the "SEC") that it will not recommend enforcement action in connection with the manner in which Nationwide proposes to depict condensed financial information in certain variable annuity prospectuses pursuant to Item 4 of Form N-4. 3 Form N-4, as you know, is the prescribed form for insurance company separate accounts/unit investment trusts offering variable annuity contracts that are registered under the Investment Company Act of 1940 (the "1940 Act") and the Securities Act of 1933 (the "1933 Act"). Nationwide generally believes that continued adherence to the strict, technical directives of the Instructions to Item 4 of Form N-4 is unwarranted in some cases and may in fact be inconsistent with the policies embodied in the "plain English" initiative and the adoption of Rule 421 under the Securities Act of 1933. Nationwide also believes that the alternative mode of presentation it proposes for presenting condensed financial information comports favorably with the informational needs and interests of investors without compromising or frustrating any regulatory purpose. Background

NWL and NLAIC are stock life insurance companies organized under Ohio law. NWL is licensed to do business in all fifty states, the District of Columbia and Puerto Rico. NLAIC is licensed to do business in 47 states. NWL is wholly owned by Nationwide Financial Services, Inc., a holding company. NLAIC is wholly owned by NWL. Nationwide, through its registered separate accounts, has been an issuer of variable annuity contracts for more than twenty years. Over the last three years, Nationwide has embraced the practice of modularizing or "unbundling" various benefits within its variable annuity offerings. In the simplest terms, "unbundling" allows for the offering of a basic variable annuity contract along with an array of optional benefits. Each of these optional features or benefits, when elected, is provided for a specific charge that is added to basic contract charges and assessed against the assets of the separate account in question. Nationwide believes this allows consumers, with the aid of their financial advisers, to tailor individual variable annuity contracts to their specific financial needs and objectives. Moreover, by selecting only those benefits or features consistent with specific financial objectives, charges associated with unwanted benefits or features are avoided. Finally, the specific linkage of particular benefits with specific charges allows consumers to assess the costs and benefits of the optional benefit more precisely. Nationwide believes this attribute of "unbundling" is particularly desirable with respect to certain benefits, such as extra credit or "bonus" provisions. The optional benefits offered in Nationwide variable annuity products include, among other things, enhanced death benefits, deferred sales load waivers, guaranteed minimum income benefits, and, more recently, a 3% "extra credit" or bonus on first year purchase payments. 4

Although many Nationwide variable annuity investors select no optional benefits or only one optional benefit, the options that are available are generally not mutually exclusive and may be used together in a variety of combinations. Since there are many different options to choose from, each having a distinct charge, there are numerous possible combinations of contract charges as well. Operationally, Nationwide is able to account for each specific combination of contract charges through the systematic maintenance of a distinct unit value with respect to each combination. Accordingly, for each underlying mutual fund, a separate class of accumulation units associated with each possible combination of contract charges is maintained. While this allows Nationwide to administer the operation of the contracts effectively, the reproduction of this unit value information in tabular format for purposes of complying with the Instructions to Item 4 of Form N-4 can create results that appear to be wholly unintended and of dubious value for consumers. Specifically, the Instructions to Item 4 require the tabular depiction of each class

of unit values at the beginning of the period, the end of the period, as well as the number of units outstanding at the end of the period for each of the last ten fiscal years of the registrant. In a prospectus for an unbundled variable annuity contract, the Instructions to Item 4 can result in extensive unit value information that overwhelms the reader. For example, in the May 2000 prospectus of one Nationwide variable annuity product offering, 71% of the printed prospectus (180 of 252 pages) is devoted to compliance with the technical requirements of Item 4.

5 Conservatively, an estimated 150 additional pages will be required to display similar information for the May 2001 prospectus for this particular product, meaning that approximately 82% of the prospectus will consist of page-after-page (roughly 330 in number) of accumulation unit value information presented to comply with Item 4. Nationwide's Proposed Alternative

In lieu of reproducing page-after-page of accumulation unit value data (only a small portion of which will be relevant for purposes of any individual investor) for inclusion in its prospectuses, Nationwide proposes to depict only two classes of unit values: one reflecting the highest possible combination of contract charges, the other reflecting the lowest possible combination of contract charges. 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. Both classes of unit values will be shown in conformity with the Instructions to Item 4 of Form N-4, including the following. This information will be presented in tabular format and will show for each underlying mutual fund the accumulation unit value at the beginning of the period, accumulation unit value at the end of the period, and the number of units outstanding at the end of the period. Both classes of accumulation unit value information will be presented for each of the last ten fiscal years (or the life of the registrant-separate account, if less). For classes of accumulation units that reflect combinations of contract charges between the two extremes, Nationwide proposes to include all such data within the Statement of Additional Information, shown in conformity with the Instructions to Item 4 of Form N-4. These tables in the Statement of Additional Information will be accompanied by "plain English" disclosure that accumulation unit values reflecting the highest and lowest combination of contract charges are contained in the prospectus. Accordingly, within the prospectus and the Statement of Additional Information, all accumulation unit value information will be set forth and made available as required by Item 4 of Form N-4. In the prospectus, along with the two classes of accumulation unit values representing the highest and lowest possible combination of contract charges, Nationwide proposes to include "plain English" disclosure, making it clear that the two classes of presented accumulation unit values represent the highest and lowest possible contract charge combinations, and that actual unit value information for any combination of charges between the two extremes is available within the Statement of Additional Information, which is available upon request without charge. This "plain English" disclosure will also include a toll free phone number for investors who wish to request a Statement of Additional Information. In addition, Nationwide may also include addresses, enabling investors to request a Statement of Additional Information in writing, or web site data for investors who wish to access the Statement of Additional Information electronically. Analysis/Rationale

In summary, Nationwide believes that the advent of "unbundled" variable annuity product offerings was never contemplated when the current version of Form N-4 was adopted. 6 In addition, continued strict adherence to the Instructions to Item 4 of Form N-4 will result in prospectus documents that are at odds with the precepts and policy underpinnings of the SEC's "plain English" initiative and Rule 421. Though we recognize that this represents what amounts to a subjective viewpoint, Nationwide believes it is not unfair to conclude that most reasonable observers would concur with this judgment. Form N-4 itself admonishes registrants to "avoid the use of excessive detail" and to respond to the items of Part A by being as "simple and as direct as possible and include only information needed to understand the fundamental characteristics of the registrants." 7 In many ways, this language, formulated nearly twenty years ago, precisely foreshadowed more recent Staff pronouncements in connection with the "plain English" initiative and Rule 421. Our assumption, which apparently mirrors the SEC's assumptions in adopting Rule 421, 8 is that disclosure documents such as prospectuses should be made more inviting (and therefore more likely to be read and understood by investors) by presenting information succinctly without unnecessary repetition or undue emphasis on hyper-technical information. The kind of documents intended to be eradicated by Rule 421 are those which are, to the ordinary investor, highly technical and intrinsically intimidating. The task of making a variable annuity prospectus usable and readable (not to mention inviting) for a typical investor is, in our view, not consistent with the inclusion of hundreds of pages of accumulation unit value information. While we recognize that Rule 421 was never intended to foster brevity per se, certainly not at the expense of completeness, we feel it is highly relevant that, for any individual investor (i.e., with one existing or prospective class of unit values), only one combination of contract charges, and thus one class of accumulation unit values, will have any relevance or meaning whatsoever. If all unit value information is required, there will be, in some cases, literally hundreds of pages of unit value data that must be considered extraneous with respect to each individual investor. Indirectly, the SEC has previously recognized the undesirability of this set of circumstances. In its proposing release for Form N-6 (the proposed form for variable life insurance registration), 9 the SEC specifically declined to include condensed financial information requirements (similar to Form N-4) as a part of form N-6, stating that "because of the individualized nature of variable life insurance charges, such as cost of insurance, there does not appear to be a comparable measure of performance that is applicable to all holders of a particular variable life insurance policy." The practice of unbundling has the
effect of individualizing annuity contract pricing in the same way variable life policies are individually priced. In addition to the foregoing, the cost of producing, printing, and disseminating this extraneous information to prospective and existing contract holders presents Nationwide with economic burdens that are, in our view, disproportionate to any remaining regulatory purpose that may be served. As with virtually any business, these expenses will ultimately, in some form, be passed on to consumers and will be reflected in the pricing of future products and benefits. Moreover, the extra expense and the burden of producing this extraneous information puts Nationwide at a competitive disadvantage versus certain competitors. Although there may be no variable annuity issuers which have utilized the practice of "unbundling" to the extent Nationwide has, many other insurance companies offer optional benefit with pricing differentials. Many of these companies assess the same kinds of asset-based fees as Nationwide, but deduct them through the periodic cancellation of units rather than through the maintenance of unique unit values. Though the net result to consumers is the same, Nationwide is required to present alternative accumulation unit value information in its prospectuses while other companies, which achieve precisely the same result through slightly different means, have no similar obligation. Finally, we believe also that Nationwide's proposed alternative is consistent with a recent SEC proposal to parse out in a more accessible format another category of potentially voluminous financial information related to variable contracts. Specifically, the SEC proposed to require fee tables in variable life insurance prospectuses to show underlying fund charges only for the least and most expensive funds. This approach will allow an investor to review the range of fund charges for a contract, and then, if more detailed information is desired, access underlying fund prospectuses for information concerning each fund's charges. The SEC proposed this approach because it concluded that investors would be overwhelmed by information of limited relevance if the fees and charges for each portfolio company were separately delineated in the fee table. 10

Conclusion

In summary, we request assurance that the Staff will not recommend enforcement action to the SEC if, in response to Item 4 of Form N-4, Nationwide provides in prospectuses used in the offer and sale of "unbundled" variable annuity contracts information for two classes of accumulation unit values only: one reflecting the highest possible combination of contract charges, the other reflecting the lowest possible charges. We believe this proposal, as described herein, provides quick and convenient access to all accumulation unit value information, and serves the interests of investors (by providing ready access to any possible accumulation unit value) and Nationwide. We also believe our proposal is thoroughly consistent with other Part A information required on Form N-4. Specifically, example numbers and standardized performance information are required to reflect the highest possible contract fee/charge scenario, as will our proposal which includes the presentation of unit values reflecting the highest possible contract charges. Finally, we believe our proposal should be considered in light of the information provided on a routine basis by Nationwide to current contract holders. For example, Nationwide provides quarterly statements that contain unit value information that is unique to each individual contract holder. In other words, every three months, every Nationwide contract holder is provided with specific information regarding his or her accumulation units and unit values. This information includes, with respect to each class of accumulation units held by the contract owner, the number of units owned and the unit value for each underlying mutual fund at the beginning and end of the quarter, as well as the number and value of units that were purchased or sold during the quarter. We greatly appreciate your consideration of our proposal and the opportunity to share our views on this subject. If you have any questions, please contact Heather Harker at 614-249-0075 or the undersigned at 614-249-8537. Sincerely yours, Steven Savini, Esq. Nationwide Life Insurance Company Cc: Mr. Paul Cellupica, Esq. Senior Special Counsel

Endnotes

1

See Plain English Disclosure, Securities Act Rel. No. 7497, Exchange Act Rel. No. 39593, Investment Company Act Rel. No. 23011 (Jan. 28, 1998) [63 FR 6370 (Feb. 6, 1998)] (Adopting Release for Plain English rules). 2

Cf. Cova Financial Services Life Insurance Company (pub. avail. April 15, 1996) (permitting tables required by Item 4(a) to be included in an appendix to the prospectus). 3 Nationwide's request relates to prospectuses used in the offer and sale of variable annuity contracts offered by the Nationwide Variable Account, Nationwide Variable Account - 8, Nationwide Variable Account - 9, Nationwide VA Separate Account - D, and the Nationwide Fidelity Adviser Variable Account. 4 "Unbundling" is now a widespread practice within the variable annuity industry, and even though most of the benefits Nationwide has unbundled are representative of industry practice generally, virtually any type of benefit can be "unbundled." Because of the advantages associated with unbundling, we believe the practice of unbundling will continue to expand. 5 See Nationwide Variable Account - 9 (1940 Act File No. 811-08241; 1933 Act No. 333-28995) 6 According to the proposing release for Form N-4 (Investment Company Act Release 13689 - January 5, 1984), the original purpose for inclusion of condensed financial information in From N-4 was to "increase the comparability of management account [registered on form N-3] and trust account prospectuses." 7 See Form N-4, I. Preparation of the Registration Statement or Amendment, Part A. The Prospectus

8 See the Executive Summary of the Adopting Release of Rule 421 (Investment Company Act Release 23011 - February 6, 1998) 9 Investment Company Act Release 23066 (March 13, 1998) 10 See Investment Company Act Release No. 23066 at 26-27 (March 13, 1998)

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Modified: 10/26/2001