[Federal Register Volume 71, Number 178 (Thursday, September 14, 2006)]
[Notices]
[Pages 54313-54316]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-7641]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-27477; File No. 812-13244]


National Life Insurance Company, et al.

September 7, 2006.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order pursuant to Section 26(c) of 
the Investment Company Act of 1940, as amended (the ``Act''), approving 
a certain substitution of securities.

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    Applicants: National Life Insurance Company (``NLIC''), National 
Variable Annuity Account II (``Annuity Account''), and National 
Variable Life Insurance Account (``Life Account'') (NLIC, Annuity 
Account and Life Account collectively, the ``Applicants''). Summary of 
Application: Applicants have submitted an application for an order of 
the Commission, pursuant to Section 26(c) of the Act, permitting NLIC 
to substitute securities issued by Fidelity VIP Index 500 Portfolio 
(``Fidelity Fund''), a series of Variable Insurance Products Fund II, 
or DWS Equity Index 500 VIP (``DWS Fund''), a series of DWS Investments 
VIT Funds, to support variable annuity contracts or variable life 
insurance contracts (separately, ``Contract'', collectively, 
``Contracts'') issued by NLIC, for securities issued by Sentinel 
Variable Products Growth Index Fund (``Sentinel Fund''), a series of 
Sentinel Variable Products Trust, held by both the Annuity Account or 
the Life Account (individually, ``Account'' and collectively, 
``Accounts'').
    Filing Date: The application was filed on October 28, 2005, amended 
on February 2, 2006, June 16, 2006, July 17, 2006, and September 1, 
2006.
    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 the Applicants with a copy of the request in 
person or by mail. Hearing requests must be received by the Commission 
by 5:30 p.m., on October 2, 2006 and should be accompanied by proof of 
service of Applicants in the form of an affidavit or, for 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 may request notification of a hearing by writing to the 
Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-0609. Applicants, c/o Kerry A. Jung, Esq., 
Senior Counsel, National Life Insurance Company, One National Life 
Drive, Montpelier, VT 05604.

FOR FURTHER INFORMATION CONTACT: Curtis A. Young, Senior Counsel, or 
Harry Eisentein, Branch Chief, Office of Insurance Products, Division 
of Invstmetn Management, at 202-551-6795.

SUPPLEMENTARY INFORMATION: The following is a summary of the amended 
and restated application. The complete application may be obtained for 
a fee from the Public Reference Room, 100 F street, NE., Washington, DC 
20549, 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. All owners of NLIC contracts, 
including the Contracts, are voting members of National Life Holding 
Company. NLIC is authorized to transact life insurance and annuity 
business in Vermont and 50 other jurisdictions. For purposes of the 
Act, NLIC is the depositor and sponsor of the Accounts as those terms 
have been interpreted by the Commission with respect to variable life 
insurance and variable annuity separate accounts.
    2. NLIC established the Annuity Account on November 1, 1996 and the 
Life Account on February 1, 1985, as segregated investment accounts 
under Vermont law. Under Vermont law, the assets of each Account 
attributable to the Contracts through which interests in that 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, such assets 
in each Account equal to the reserves and other liabilities with 
respect to such Account are not chargeable with liabilities arising out 
of any other business that NLIC may conduct. Income, gains and losses, 
realized and unrealized, from assets allocated to each Account are 
credited to or charged against that Account without regard to the other 
income, gains or losses of NLIC. Each Account is a ``separate account'' 
as defined by Rule 0-1(e) under the Act (File No. 811-08015 for the 
Annuity Account and File No. 811-09044 for the Life Account).
    3. The Annuity Account is divided into forty-nine subaccounts. Each 
subaccount invests exclusively in a corresponding series of one of 
thirteen management investment companies. The assets of the Annuity 
Account support variable annuity contracts, and interests in the 
Account offered through the Contracts have been registered under the 
Securities Act of 1933, as amended (``1933 Act'') on Form N-4 (File No. 
333-19583).
    4. The Life Account is divided into one hundred and twenty-nine 
subaccounts. Each subaccount invests exclusively in shares representing 
an interest in a corresponding series of one of thirteen management 
investment companies. The assets of the Life Account support variable 
life insurance contracts, and interests in this Account offered through 
the Contracts have been registered under the 1933 Act on Form N-6 (File 
Nos. 33-91938, 333-44723, and 333-67003).
    5. The Sentinel Variable Products Trust was organized as a business 
trust in Delaware on March 14, 2000, and is currently registered under 
the Act as an open-end diversified management investment company. It is 
a series investment company as defined by Rule 18f-2 under the Act.
    6. The Sentinel Fund's investment advisor, Sentinel Asset 
Management, Inc. (``SAM''), is an affiliated person of NLIC because it 
is controlled by NLIC.
    7. The Variable Insurance Products Fund II was created under an 
initial declaration of trust dated March 21, 1988, and is currently 
registered under the Act as an open-end management investment company. 
It is a series investment company as defined by Rule 18f-2 under the 
Act.
    8. The DWS Investments VIT Funds was organized on January 18, 1996, 
under the laws of the Commonwealth of Massachusetts, and is currently 
registered under the Act as an open-end management investment company. 
SVIT

[[Page 54314]]

is a series investment company as defined by Rule 18f-2 under the Act.
    9. Neither NLIC nor the Accounts are affiliated with the Fidelity 
Fund or the DWS Fund. In consideration for administrative services 
provided by NLIC to the Fidelity and DWS Funds, NLIC is paid an annual 
fee of 0.05% and 0.13%, respectively, of each fund's average net assets 
that are attributable to the Accounts.
    10. The Contracts are flexible premium variable life insurance 
Contracts and individual flexible premium deferred variable annuity 
Contracts. The Contracts provide for the accumulation of values on a 
variable basis, fixed basis, or both, during the accumulation period, 
and provide settlement or annuity payment options on a fixed basis. In 
each of the prospectuses for the Contracts, NLIC reserves the right to 
substitute shares of one series of an investment company for shares of 
another series, including a series of a different investment company.
    11. Contract owners may transfer among the subaccounts of the 
Variable Account and, subject to certain limitations, among the 
Variable Account, the fixed account and the guaranteed accounts. 
Contract owners may transfer among the subaccounts of the Life Account 
and between the Life Account and NLIC's general account, where 
available. Currently there is no charge for transfers. However, NLIC 
reserves the right to assess a $25 charge for each transfer in excess 
of twelve in any Contract year. Each series of an investment company in 
which a subaccount invests may also impose its own redemption fees.
    12. NLIC proposes to substitute (a) The Fidelity Fund, which is 
currently offered as an investment option, for the Sentinel Fund in the 
Annuity Account and the VariTrak and Sentinel Estate Provider products 
of the Life Account and (b) the DWS Fund, which is currently offered as 
an investment option, for the Sentinel Fund in the Sentinel Benefit 
Provider product of the Life Account. NLIC believes that by making the 
proposed substitution in each of the Accounts they can better serve the 
interests of the Contracts owners.
    13. The investment objective and principal investment strategies of 
each of the Sentinel Fund, the Fidelity Fund and the DWS Fund are as 
follows:

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            Fund                        Objective                            Principal strategies
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Sentinel Fund..............  Seeks to match, as closely as    Invests at all times at least 80% of its total
                              possible before expenses, the    assets in the common stocks of the companies that
                              performance of the S&P 500/      comprise the Index.
                              Citigroup Growth Index          Normally intends to invest substantially all its
                              (``Index''), by investing in     total assets in these common stocks, in
                              common stocks of the companies   approximately the same weightings as the Index.
                              comprising the Index in         May hold up to 20% of its assets in money market
                              approximately the same           instruments and stock index options and futures,
                              weightings as the Index.         which it intends to buy, if at all, only in
                                                               anticipation of buying stocks. The Fund may not
                                                               purchase or sell derivative instruments if, as a
                                                               result, the aggregate initial margin and options
                                                               premiums required to establish these positions
                                                               exceed 5% of the Fund's total assets.
Fidelity Fund..............  Seeks investment results that    Normally invests at least 80% of assets in common
                              correspond to the total return   stocks included in the S&P 500.
                              of common stocks publicly       May buy and sell futures contracts, swaps, and
                              traded in the United States,     exchange traded funds, to increase or decrease
                              as represented by the S&P 500.   the Fund's exposure to changing security prices
                                                               or other factors that affect security values. The
                                                               Fund will not purchase any option if, as a
                                                               result, more than 5% of its total assets would be
                                                               invested in option premiums. Under normal
                                                               conditions, the Fund will not enter into any
                                                               futures contract, option, or swap agreement if,
                                                               as a result, the sum of (i) the current value of
                                                               assets hedged in the case of strategies involving
                                                               the sale of securities, and (ii) the current
                                                               value of the indices or other instruments
                                                               underlying the fund's other futures, options, or
                                                               swaps positions, would exceed 35% of the Fund's
                                                               total assets. These limitations do not apply to
                                                               options attached to, or acquired or traded
                                                               together with their underlying securities, and do
                                                               not apply to securities that incorporate features
                                                               similar to futures, options or swaps.
                                                              Lends securities to earn income for the Fund.
DWS Fund...................  Seeks to replicate, as closely   Investments at least 80% of its assets in the
                              as possible, before the          securities of the companies included in the
                              deduction of expenses, the       Standard & Poor's 500 Composite Stock Price Index
                              performance of the S&P 500.      (``S&P 500 Index'') and derivative instruments
                                                               such as futures contracts and options, relating
                                                               to the benchmark.
                                                              May not invest more than 15% of assets in options
                                                               on securities indices and may not invest more
                                                               than 5% of assets in futures on securities
                                                               indices or on options on futures.
                                                              Invests in a statistically selected sample of the
                                                               securities found in the S&P 500 Index, using a
                                                               process known as ``optimization.''
                                                              May exclude or remove any S&P stock if its
                                                               investment advisor believes that the stock is
                                                               illiquid or that the merit of the investment has
                                                               been impaired by financial conditions or other
                                                               extraordinary events.
                                                              May purchase a stock not included in the S&P 500
                                                               Index when it is believed to be a cost-efficient
                                                               way of approximating the S&P 500 Index's
                                                               performance.
                                                              May hold assets in short-term debt securities or
                                                               money market instruments for liquidity purposes.
                                                              My lend its investment securities up to 30% of its
                                                               total assets.
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    14. Projected advisory fees and expense ratios for the Fidelity 
Fund and DWS Fund are lower than the advisory fees and net expense 
ratios of the Sentinel Fund as of December 31, 2005.

[[Page 54315]]



                                              Expense Ratios for the Twelve Months Ended December 31, 2005
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                                                                                                      Total annual       Waivers and       New annual
                    Fund                       Management fee       12b-1 fee      Other expenses     expense ratio    reimbursements     expense ratio
                                                  (percent)                           (percent)         (percent)         (percent)         (percent)
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Sentinel Fund...............................              0.30  ................              1.59              1.89           \1\1.29              0.60
Fidelity Fund...............................              0.10              0.25              0.00              0.35  ................          \2\ 0.35
DWS Fund....................................              0.19  ................              0.15              0.34           \3\0.06             0.28
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\1\ SAM and/or an affiliate has agreed to waive fees and/or reimbursement expenses so that the net annual expense ratio of the Sentinel Fund, after
  expense offsets, is no more than 0.60% through December 31, 2006.
\2\ Fidelity management & Research Company (``FMR'') has contractually agreed to reimburse the Fidelity Fund to the extent that total operating expenses
  (excluding interest, taxes, certain securities lending costs, brokerage commissions and extraordinary expenses) as a percentage of average net assets
  exceed 0.35%. The expense limitation may not be increased without approval of the Fidelity Fund's shareholders and board of trustees. Therefore the
  expense limit is required by contact and is not voluntary on the Fidelity Fund manager's part.
\3\ Effective September 19, 2005, the DWS Fund's advisor contractually agreed to waive its fees and/or reimbursement expenses to the extent necessary to
  limit all expenses to 0.28% for Class A Shares until April 30, 2009.

    15. The Applicants note that the primary differences between the 
Sentinel Fund and the Fidelity Fund are that (1) The Fidelity Fund 
seeks to match the S&P 500 index, while the Sentinel Fund seeks to 
match only the Citigroup Growth portion of the S&P 500 Index and (2) 
the Fidelity Fund may lend securuities while the Sentinel Fund does 
not. Applicants state the primary difference between the Sentinel Fund 
and the DWS Fund are that (1) The DWS Fund seeks to match the S&P 500 
Index, while the Sentinel Fund seeks to match only the Citigroup Growth 
portion of the S&P 500 Index, (2) the DWS Fund may invest in securities 
other than those included in the S&P 500 Index under certain 
cirucmstances in which the Sentinel Fund could not and (3) DWS Fund may 
lend securities, while the Sentinel Fund does not. While there are some 
differences in these strategies, NLIC believes that the Fidelity Fund 
and the DWS Fund offer an investment strategy that is sufficiently 
similar to the Sentinel Fund considering the benefits of the proposed 
substitution.
    16. Applicants state that the Fidelity and DWS Funds each have 
significantly more assets than the Sentinel Fund. In addition, each of 
the Fidelity and DWS Funds has also significantly outperformed the 
Sentinel Fund in the one and three year peiods ended June 30, 2006 as 
well as the period since the inception of the Sentinel fund.

                                                             Performance as of June 30, 2006
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                                                                                                                               Since
                          Fund                                1-year          3-year          5-year          10-year        inception    Since 11/30/00
                                                             (percent)       (percent)       (percent)       (percent)       (percent)       (percent)
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Sentinel Fund...........................................            3.81            6.42           -0.26           (\1\)           -3.36            3.36
Fidelity Fund...........................................            8.57           11.04            2.27            8.05           10.26            8.76
DWS Fund................................................            8.34           10.91            2.18           (\1\)            4.64            0.76
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\1\ Not applicable.

    17. Supplements to the prospectus will advise Contract owners that 
they are permitted from the date of the supplement until the date of 
the proposed substitution to make transfers of all amounts under the 
Contracts invested in the Sentinel Fund subaccount to another 
subaccount available under the Contracts without those transfers 
counting as ``free'' transfers permitted under the Contracts at any 
time prior to the substitution.
    18. The proposed substitution will take place at relative net asset 
value with no change in the amount of any Contract owner's account 
value or death benefit or in the dollar value of any Account. Contract 
owners will not incur any fees or charges as a result of the proposed 
substitutions, nor will their rights or NLIC's obligations under the 
Contracts be altered in any way. All expenses incurred in connection 
with the proposed substitution is not expected to impose any tax 
liability on Contract owners. The proposed substitution will not cause 
the Contract fees and charges currently being paid by Contract owners 
to be greater than those being charged at the time of the substitution. 
The proposed substituting will not be treated as a transfer or exchange 
for purposes of assessing transfer charges or for determining the 
number of remaining ``free'' transfers or exchanges in a Contract year.
    19. Within five days of the substitution, Contract owners affected 
by the substitution will be sent a written notice informing them that 
the substitution was carried out and that for the next 30 days they may 
make transfers of all accumulated or contract value under a Contract 
invested in the Fidelity Fund or DWS Fund subaccount, as applicable, on 
the date of the notice to another subaccount available under the 
Contract without the transfers counting as part of the limited number 
of transfers permitted in a Contract year free of charge. The notice as 
delivered in certain states also may explain that, under the insurance 
regulations in those states, Contract owners who are affected by the 
substitutions may exchange their Contracts for fixed-benefit life 
insurance contracts or annuity contracts, as applicable, issued by NLIC 
during the 60 days following the proposed substitutions. A current 
prospectus for the Fidelity Fund or DWS Fund, as applicable, each of 
which is a currently available investment option under the applicable 
Contract, will precede or accompany the notice.
    20. NLIC will not receive, for three years from the date of the 
substitution, any direct or indirect benefits from the Fidelity Fund or 
the DWS Fund or their respective advisors or underwriters or any of 
their respective affiliates in connection with the assets attributable 
to the Contracts, which in the aggregate (including, without 
limitation, all advisory, 12b-1, shareholder servicing, administration, 
marketing support or similar fees) is higher than the benefit it would 
have received from the

[[Page 54316]]

Sentinel Fund or its advisor, underwriter or affiliates absent any 
waivers.
    21. Applicants state that the substitution and selection of the 
Fidelity Fund and the DWS Fund was not motivated by any financial 
consideration paid or to be paid to NLIC or its affiliates by the 
Fidelity Fund or the DWS Fund or their respective advisor, underwriters 
or affiliates.

Applicants' Legal Analysis

    1. Applicants state that the proposed substitution is a 
substitution within the meaning of Section 26(c) of the Act, which 
requires the depositor of a registered unit investment trust holding 
the securities of a single issuer to receive commission approval before 
substituting the securities held by the trust.
    2. Applicants note that the prospectuses disclose that the 
Contracts expressly reserve for NLIC the right, subject to compliance 
with applicable law, to substitute shares of one series of an 
investment company held by a subaccount for another series, including a 
series of a different investment company, when, among other things, in 
NLIC's judgment the investment in such series is inappropriate.
    3. Applicants assert that the proposed substitution will provide 
Contract owners a sufficiently similar investment strategy considering 
the opportunity for lower expenses and greater economies of scale. In 
addition, Applicants generally submit that the proposed substitution 
meets the standards that the Commission and its staff have applied to 
similar substitutions that have been approved in the past.
    4. Applicants anticipate that Contract owners will be at least as 
well off with the proposed array of subaccounts offered after the 
proposed substitution as they have been with the array of subaccounts 
offered prior to the substitution. Applicants' assert that the proposed 
substitution retains for Contract owners the investment flexibility 
that is a central feature of the Contracts.
    5. Applicants assert that the proposed substitution is not the type 
of substitution which Section 26(c) was designed to prevent. Unlike 
traditional unit investment trusts where a depositor could only 
substitute an investment security in a manner that permanently affected 
all the investors in the trust, the Contracts provide each Contract 
owner with the right to exercise her or his own judgment and transfer 
accumulation and contract values into other subaccounts.
    6. Applicants note that the Contracts will offer Contract owners an 
opportunity to transfer amounts out of the Sentinel Fund, prior to the 
substitution, or the Fidelity Fund or DWS Fund, as applicable, after 
the substitution, into any of the remaining subaccounts without cost or 
other disadvantage. The proposed substitution, therefore, will not 
result in the type of costly forced redemption which Section 26(c) was 
designed to prevent.
    7. The Applicants note that within five days after the proposed 
substitution, Contract owners affected by the substitution will be sent 
a written notice informing them that the substitution was carried out 
and that, for the next 30 days, they may make one transfer of all 
accumulated or contract value under a Contract invested in the Fidelity 
Fund or the DWS Fund, as applicable, on the date of the notice to 
another subaccount available under their Contract without the transfer 
counting as one of a limited number of transfers permitted in a 
Contract year free of charge.
    8. Applicants state the proposed substitution in also unlike the 
type of substitutions which Section 26(c) was designed to prevent in 
that by purchasing a Contract, Contract owners select much more than a 
particular investment company in which to invest their account values. 
They also select the specific type of insurance coverage offered by 
NLIC under their Contract as well as numerous other rights and 
privileges set forth in the Contract. Contract owners may also have 
considered NLIC's size, financial condition, type and its reputation 
for service in selecting their Contract. These factors will not change 
as a result of the proposed substitution.

Conclusion

    Applicants submit that, for all the reasons stated above, the 
proposed substitution is consistent with the protection of investors 
and the purposes fairly intended by the policy and provisions of the 
Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 06-7641 Filed 9-13-06; 8:45 am]
BILLING CODE 8010-01-M