[Federal Register Volume 65, Number 104 (Tuesday, May 30, 2000)]
[Notices]
[Pages 34510-34513]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-13375]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24460; File No. 812-11684]


The Ohio National Life Insurance Company, et al.

May 19, 2000.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of Application for an Order under Section 6(c) of the 
Investment Company Act of 1940, as amended (the ``Act'') granting 
exemptions from the provisions of Sections 2(a)(32), 22(c), and 
27(i)(2)(A) of the Act and Rule 22c-1 thereunder, to permit the 
recapture of certain credits applied to purchase payments made under 
certain deferred variable annuity contracts.

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SUMMARY OF APPLICATIONS: Applicants seek an order under Section 6(c) of 
the Act to the extent necessary to permit the issuance and, under 
specified circumstances, the subsequent recapture of certain credits 
applied to purchase payments made under certain deferred variable 
annuity contracts, described herein, that The Ohio National Life 
Insurance Company (``Ohio National'') will issue through the Ohio 
National Variable Account A (the ``Account'') (the contracts are 
collectively referred to herein as the ``Contracts'').
    Applicants: Ohio National, the Account, and Ohio National Equities, 
Inc. (``ONEQ'') ( collectively, ``Applicants'').
    Filing Date: The Application was filed on November 19, 1999 and 
amended on March 17, 2000.
    Hearing or Notification of Hearing: An order granting the 
Application will be issued unless the SEC orders a hearing. Interested 
persons may request a hearing by writing to the SEC's Secretary and 
serving Applicants with a copy of the request, personally or by mail. 
Hearing requests should be received by the SEC by 5:30 on June 13, 2000 
and should be accompanied by proof of service on Applicants, in the 
form of an affidavit or, lawyers, a certificate of service. Hearing 
requests should state the nature of the writer's interest, the reason 
for the request, and the issues contested. Persons who wish to be 
notified of a hearing may request notification by writing to the SEC's 
Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, DC 20549-
0609. Applicants c/o Ronald L. Benedict, Esq., Corporate Vice 
President, Counsel and Secretary, The Ohio National Life Insurance 
Company, P.O. Box 237, Cincinnati, Ohio 45201.

FOR FURTHER INFORMATION CONTACT: Rebecca Marquigny, Senior Counsel, or 
Keith Carpenter, Branch Chief, Office of Insurance Products, Division 
of Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
Application. The complete Application may be obtained for a fee from 
the SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington, 
DC 20549-0102 (tel. (202) 942-8090.).

Applicants' Representations

    1. Ohio National was organized under the laws of Ohio in 1909. It 
writes life, accident and health insurance and annuities in 47 states, 
the District of Columbia and Puerto Rico. Currently, Ohio National has 
assets in excess of $7 billion and equity in excess of $710 million. 
Ohio National is a stock company ultimately owned by a mutual insurance 
holding company (Ohio National Mutual Holdings, Inc.) with Ohio 
Nation's contract owners having majority ownership of the latter.

[[Page 34511]]

    2. Variable Account A was established in 1969 by Ohio National as a 
separate account under Ohio law for the purpose of funding variable 
annuity contracts issued by Ohio National. The Account is a segregated 
asset account of Ohio National. The Account and its component sub-
accounts are registered together with the Commission as a single unit 
investment trust under the Act (File No. 811-1978). The Account will 
fund the variable benefits available under the Contracts. The offering 
of the Contracts will be registered under the Securities Act of 1933 
(the ``1933 Act''). That portion of the assets of the Account that is 
equal to the reserves and other Contract liabilities with respect to 
the Account is not chargeable with liabilities arising out of any other 
business of Ohio National. Any income, gains or losses, realized or 
unrealized, from assets allocated to the Account are, in accordance 
with the Contracts, credited to or charged against the Account, without 
regard to other income, gains or losses of Ohio National.
    3. ONEQ is the principal underwriter of the Contracts. ONEQ is 
registered with the Commission as a broker-dealer under the Securities 
Exchange Act of 1934 and is a member of the National Association of 
Securities Dealers, Inc. The Contracts are sold by insurance agents of 
Ohio National who are also registered representatives of registered 
broker-dealers that have entered into distribution agreements with 
ONEQ. ONEQ is a wholly-owned subsidiary of Ohio National.
    4. The minimum initial purchase payment is $5,000 ($2,000 for 
IRAs). A Contract owner may make additional payments of at least $500 
at any time ($300 for payroll deduction plans). Ohio National may limit 
total purchase payments to $1,500,000.
    5. Ohio National credits extra amounts to the Contract each time a 
Contract owner makes a purchase payment (the ``Credit''). The Credit 
equals 4% of each purchase payment. Ohio National allocates Credit 
amounts pro rata to the Sub-Accounts (defined herein) and to Ohio 
National's general account in the same ratio as the purchase payments. 
Ohio National will fund Credit amounts from its general account assets.
    6. The Credit is not part of the amount a Contract owner will be 
paid if the 10-day free look option is exercised. Ohio National may not 
offer a Credit on purchase payments made within one year of a free 
partial withdrawal to the extent those purchase payments are less than 
the amount withdrawn. Credit amounts applied within one year of the 
date of death are deducted from amounts payable for any death benefit 
or stepped-up death benefit where the amount to be paid is based upon 
Contract value (as opposed to being based on payments minus 
withdrawals). Credit amounts paid within one year of a Contract owner's 
confinement in a nursing facility are deducted from any amounts paid 
under the nursing facility confinement benefit.
    7. The free look period is the 10-day period during which an owner 
may return a Contract after it has been delivered and receive a full 
refund of the Contract value, less any Credit amounts. The owner bears 
the investment risk from the time of purchase until he or she returns 
the Contract. The refund amount may be more or less than the purchase 
payment the owner made, unless the law requires that the full amount of 
the purchase payment be refunded.
    8. The Contract's death benefit provision states that a death 
benefit will be paid to the Contract owner's designated beneficiary if 
the annuitant (and any contingent annuitant) dies before annuity 
payments begin. This death benefit will be the greatest of: (i) The 
Contract value (minus any Credit amounts applied within one year of the 
date of death); or (ii) the net of purchase payments less withdrawals; 
or (iii) the stepped-up death benefit amount if the Contract has been 
in effect for at least 8 years.\1\ However, if the death benefit is not 
claimed within 90 days after the date of death, Ohio National will pay 
the Contract value (minus any Credit amounts applied within one year of 
the date of death) instead of any greater death benefit. The death 
benefit is an optional feature of the Contract that must be elected by 
the owner. Ohio National presently does not assess a charge for the 
death benefit but reserves the right to do so for Contracts issued in 
the future in an amount up to 0.25% of annual premium.
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    \1\ For the 8-year period beginning on the eighth Contract 
anniversary, the stepped-up death benefit will be the greater of (i) 
the Contract value (minus any Credit amounts applied during the 
preceding year) as of the eighth anniversary or (ii) the net of 
purchase payments less withdrawal made on or before the eight 
anniversary. At the beginning of each later 8-year period (until the 
annuitant attains age 90), the stepped-up death benefit will be the 
greater of (i) The Contract value (minus any credit amounts applied 
during the preceding year) on that date or (ii) the death benefit as 
of the last day of the preceding 8-year period. The stepped-up death 
benefit amount is increased by purchase payment and decreased by 
withdrawals made during each 8-year period after the eighth 
anniversary. In those states where permitted, the Contract owner may 
elect an optional annual stepped-up death benefit at the time the 
Contract is issued. With that option, the death benefit will be 
increased in the manner indicated above, until the annuitant attains 
age 80, on each Contract anniversary on which the Contract value 
(minus any Credit amounts applied during the preceding year) exceeds 
the death benefit for the previous year. There is an additional 
charge (presently at an annual rate of 0.10% of the optional death 
benefit amount, which rate may be increased to no more than 0.25% on 
Contracts in the future) for this optional benefit.
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    9. The Contract's nursing facility confinement benefit provision 
provides that, if the annuitant is, or has been, confined to a state 
licensed or legally operated in-patient nursing home facility for at 
least 30 consecutive days, Ohio National will not assess a surrender 
charge on partial withdrawals of up to $5,000 per month. Under the 
Contract's nursing facility confinement benefit provision, a Contract 
owner may withdraw, subject to the $5,000 per month limit, an aggregate 
amount equal to one half of the Contract value as of the beginning of 
the confinement without incurring a surrender charge. Any Credit 
amounts applied within one year before confinement will be deducted 
from the proceeds of the first such withdrawal. This waiver of the 
surrender charge may not be available in all states and it only applies 
when: (i) The confinement begins after the first contract anniversary 
and before annuity payments begin; (ii) the Contract was issued before 
the annuitant's 80\th\ birthday; and (iii) Ohio National receives the 
request for withdrawal, together with proof of the confinement, at Ohio 
National's home office while the annuitant is confined or within 90 
days after discharge from the facility.
    10. The amount the owner receives upon exercise of free look 
rescission rights or payment of the Contract's death benefit will 
always equal or exceed the surrender value of the Contract.\2\ The 
amount the owner receives upon payment of a partial withdrawal in 
connection with the Contract's nursing facility confinement benefit 
will always equal or exceed the amount the owner would have received 
had the surrender charge not been waived.
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    \2\ The surrender value of the Contract equals the Contract 
value minus the contingent deferred sales charge or ``CDSC.''
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    11. Owners of the Contracts may allocate their purchase payments 
among a number of sub-accounts of the Account (the ``Sub-Accounts''). 
Each Sub-Account will invest in shares of a corresponding portfolio of 
Ohio National Fund, Inc., The Dow (SM) Target Variable Fund LLC, 
Goldman Sachs Variable Insurance Trust, Janus Aspen Series, J.P. Morgan 
Series Trust II, Lazard Retirement Series, Inc., Mitchell Hutchins 
Series Trust, Morgan Stanley Dean Witter Universal Funds,

[[Page 34512]]

Inc., Salomon Brothers Variable Series Fund Inc., and Strong Variable 
Insurance Funds, Inc.
    12. Ohio National, at a later date, may decide to create additional 
Sub-Accounts to invest in any additional funding media as may not or in 
the future be available. Ohio National, from time to time, also may 
combine or eliminate Sub-Accounts, or transfer the assets to and from 
Sub-Accounts.
    13. The Contract provides for various surrender options, annuity 
benefits and annuity payout options, as well as transfer privileges 
among Sub-Accounts, dollar cost averaging, and other features. The 
Contract contains the following charges: (i) A CDSC as a percentage of 
the amount withdrawn or surrendered; \3\ (ii) a $30 annual 
administrative charge; (iii) a mortality and expense risk charge of 
1.15%; (iv) administrative expense charge of 0.25%; (v) a transfer fee 
of $10 after the first transfer made during a calendar month; and (vi) 
any applicable state premium tax.
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    \3\ The CDSC Schedule is as follows: 9% in year 1; 8% in year 2; 
7% in year 3; 6% in year 4; 5% in year 5; 4% in year 6; 2% in year 
7; 1% in year 8; and 0% in year 9 and thereafter.
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Applicants' Legal Analysis

    1. Section 6(c) of the Act authorizes the Commission to exempt any 
person, security or transaction, or any class or classes of persons, 
securities or transactions from the provisions of the Act and the rules 
promulgated thereunder if and to the extent that such exemption is 
necessary or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the Act. Applicants request that the Commission, 
pursuant to Section 6(c) of the Act, grant the exemptions requested 
below. Applicants represent that it is not administratively feasible to 
track the Credit amount in the Account after the Credit is applied. 
Accordingly, the asset-based charges applicable to the Account will be 
assessed against the entire amounts held in the Account, including the 
Credit amount, during the free look period and the one year recapture 
periods. As a result, during such periods, the aggregate asset-based 
charges assessed against an owner's annuity account value will be 
higher than those that would be charged if the owner's annuity account 
value did not include the Credit.
    2. Subsection (i) of Section 27 of the Act provides that Section 27 
does not apply to any registered separate account funding variable 
insurance contracts, or to the sponsoring insurance company and 
principal underwriter of such account, except as provided in paragraph 
(2) of the subsection. Paragraph (2) provides that it shall be unlawful 
for such a separate account or sponsoring insurance company to sell a 
contract funded by the registered separate account unless such contract 
is a redeemable security. Section 2(a)(32) defines ``redeemable 
security'' as any security, other than short-term paper, under the 
terms of which the holder, upon presentation to the issuer, is entitled 
to receive approximately his proportionate share of the issuer's 
current net assets, or the cash equivalent thereof.
    3. Applicants submit that the recapture of the Credit amount in the 
circumstance set forth in the Application would not deprive an owner of 
his or her proportionate share of the issuer's current net assets. An 
owner's interest in the Credit amount allocated to his or her annuity 
account value upon receipt of an initial purchase payment is not vested 
until the applicable free look period has expired without return of the 
Contract. Similarly, and owner's interest in the Credit amounts 
allocated to his or her annuity account within one year of the date of 
death or confinement to a nursing facility also is not vested. Until 
the right to recapture has expired and any Credit amount is vested, 
Ohio National retains the right and interest in the Credit amount, 
although not in the earnings attributable to that amount. Thus, when 
Ohio National recaptures any Credit, it is merely retrieving its own 
assets, and the owner has not been deprived of a proportionate share of 
the Account's assets because his or her interest in the Credit amount 
has not vested.
    4. In addition, permitting an owner to retain a Credit amount under 
a Contract upon the exercise of the free look would not only be unfair, 
but would also encourage individuals to purchase a Contract with no 
intention of keeping it and returning it for a quick profit. 
Furthermore, the recapture of Credit amounts within one year preceding 
the date of death or confinement to a nursing facility is designed to 
provide Ohio National with a measure of protection against anti-
selection. The risk here is that, rather than spreading purchase 
payments over a number of years, an owner might make very large 
purchase payments shortly before death or confinement, thereby leaving 
Ohio National little time to recover the cost of the Credit amounts. As 
noted earlier, the amounts recaptured equal the Credit amounts provided 
by Ohio National from its general account assets, and any gain would 
remain a part of the owner's Contract value. In addition, with respect 
to free look and death benefit recapture of Credit amounts, the amount 
the owner receives will always equal or exceed the surrender value of 
the Contract and, with respect to the recapture of Credit amount in 
connection with a partial withdrawal made under the nursing facility 
confinement benefit, the amount the owner receives will always equal or 
exceed the amount the owner would have received had the surrender 
charge not been waived.
    5. Applicants represent that the Credit will be attractive to and 
in the interest of investors because it will permit owners to put 104% 
of their purchase payments to work for them in the selected Sub-
Accounts. In addition, the owner will retain any earnings attributable 
to the Credit, as well as the principal Credit amount once vested.
    6. Applicants submit that the provisions for recapture of any 
Credit under the Contracts do not violate Sections 2(a)(32) and 
27(i)(2)(A) of the Act. Applicants believe that a contrary conclusion 
would be inconsistent with a stated purpose of the National Securities 
Markets Improvement Act of 1996 (``NSMIA''), which is to amend the Act 
to ``provide more effective and less burdensome regulation.'' Sections 
26(e) and 27(i) were added to the Act to implement the purposes of 
NSMIA and Congressional intent. The application of a Credit to purchase 
payments made under the Contracts should not raise any questions as to 
Ohio National's compliance with the provisions of Section 27(i). 
However, to avoid any uncertainty as to full compliance with the Act, 
Applicants request an exemption from Sections 2(a)(32) and 27(i)(2)(A), 
to the extent deemed necessary, to permit the recapture of any Credit 
under the circumstances described in the Application, without the loss 
of relief from Section 27 provided by Section 27(i).
    7. Section 22(c) of the Act authorizes the Commission to make rules 
and regulations applicable to registered investment companies and to 
principal underwriters of, and dealers in, the redeemable securities of 
any registered investment company to accomplish the same purposes as 
contemplated by Section 22(a). Rule 22c-1 thereunder prohibits a 
registered investment company issuing any redeemable security, a person 
designated in such issuer's prospectus as authorized to consummate 
transactions in any such security, and a principal underwriter of, or 
dealer in, such security, from selling, redeeming, or repurchasing any 
such

[[Page 34513]]

security except at a price based on the current net asset value of such 
security which is next computed after receipt of a tender of such 
security for redemption or of an order to purchase or sell such 
security.
    8. Ohio National's recapture of the Credit might arguably be viewed 
as resulting in the redemption of redeemable securities for a price 
other than one based on the current net asset value of the Account. 
Applicants contend, however, that the recapture of the Credit does not 
violate Section 22(c) and Rule 22c-1. To effect a recapture of a 
Credit, Ohio National will redeem interests in an owner's Account at a 
price determined on the basis of the current net asset value of that 
Account. The amount recaptured will equal the amount of the Credit that 
Ohio National paid out of its general account assets. Although the 
owner will be entitled to retain any investment gain attributable to 
the Credit, the amount of that gain will be determined on the basis of 
the current net asset value of the Account. Thus, no dilution will 
occur upon the recapture of the Credit. Applicants also submit that the 
second harm that Rule 22c-1 was designed to address, namely speculative 
trading practices calculated to take advantage of backward pricing, 
will not occur as a result of the recapture of the Credit. However, to 
avoid any uncertainty as to full compliance with the Act, Applicants 
request an exemption from the provisions of Section 22(c) and Rule 22c-
1 to the extent deemed necessary to permit them to recapture the Credit 
under the Contracts.

Conclusion

    Applicants submit, based on the grounds summarized above, that 
their exemptive request meets the standards set out in Section 6(c) of 
the Act, namely, that the exemptions requested are necessary or 
appropriate in the public interest and consistent with the protection 
of investors and the purposes fairly intended by the policy and 
provisions of the Act, and that, therefore, the Commission should grant 
the requested order.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 00-13375 Filed 5-26-00; 8:45 am]
BILLING CODE 8010-01-M