
[Federal Register Volume 76, Number 71 (Wednesday, April 13, 2011)]
[Notices]
[Pages 20727-20731]
From the Federal Register Online via the Government Printing 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]]



------------------------------------------------------------------------
                                   Substituted           Replacement
                                    Portfolio             Portfolio
------------------------------------------------------------------------
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
                                                           -----------------------------------------------------
                                                                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]]



----------------------------------------------------------------------------------------------------------------
                                                              Substituted Portfolio      Replacement Portfolio
                                                           -----------------------------------------------------
                                                                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


