Daily Rules, Proposed Rules, and Notices of the Federal Government
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
1. Integrity is a stock life insurance company organized under the laws of Ohio. Integrity is a wholly owned subsidiary of The Western and Southern Life Insurance Company, a stock life insurance company organized under the laws of Ohio. The Western and Southern Life Insurance Company is wholly owned by an Ohio-domiciled intermediate holding company, Western & Southern Financial Group, Inc., which is wholly owned by an Ohio-domiciled mutual insurance holding company, Western & Southern Mutual Holding Company.
2. Integrity Separate Account I and Integrity Separate Account II are registered under the Act as unit investment trusts (File Nos. 811-04844 and 811-07134, respectively). They are used to fund variable annuity contracts issued by Integrity. (“Integrity Contracts”)
3. National Integrity is a stock life insurance company organized under the laws of New York. National Integrity is a wholly owned direct subsidiary of Integrity and an indirect subsidiary of The Western and Southern Life Insurance Company.
4. National Integrity Separate Account I and National Integrity Separate Account II are registered under the Act as unit investment trusts (File Nos. 811-04846 and 811-07132, respectively). They are used to fund variable annuity contracts issued by National Integrity (“National Integrity Contracts”).
5. Integrity Contracts and the National Integrity Contracts cited in the application and affected by the Substitution are flexible premium deferred variable annuities (the “Contracts”).
6. Each Contract permits allocations of value to available fixed and variable subaccounts; each variable subaccount invests in a specific investment portfolio of an underlying mutual fund. Of the 24 Contracts affected by this application, 18 Contracts offer the same 56 portfolios (“Subset 1”), four Contracts offer the same 54 portfolios (“Subset 2”) and two Contracts offer the same 43 portfolios (“Subset 3”).
7. Each Contract permits transfers from one subaccount to another subaccount at any time prior to annuitization, subject to certain restrictions and charges described below. No sales charge applies to such a transfer of value among subaccounts. The Contracts permit up to twelve free transfers during any contract year. A fee of $20 is imposed on transfers in excess of twelve transfers in a contract year.
8. Each Contract reserves the right, upon notice to Contract owners and compliance with applicable law, to add, combine or remove subaccounts, or to withdraw assets from one subaccount and put them into another subaccount. Each Contract's prospectus provides that Applicants may add, remove or combine subaccounts or withdraw assets relating to a Contract from one subaccount and put them into another.
9. The Integrity Companies propose the substitution of four portfolios (two of which include three classes each) of Variable Insurance Products Fund III (the “Existing Portfolios”). As replacements, the Integrity Companies propose three portfolios (two of which include three classes) of Variable Insurance Products Fund III and, in the case of Fidelity VIP Contrafund, Variable Insurance Products II (the “Replacement Portfolios”). All of the Replacement Portfolios are currently available in the Contracts. Neither Variable Insurance Products Fund III, Variable Insurance Products Fund II, nor Fidelity Management and Research Company (collectively referred to as “Fidelity”) are affiliated with Applicants.
10. The investment objective, strategies and risks of each Replacement Portfolio are the same as, or similar to, the investment objective, strategies and risks of the corresponding Existing Portfolio. For each Existing Portfolio and each Replacement Portfolio, the investment objective, principal investment strategies and principal risks are shown in the table that follows.
11. Applicants state that the proposed substitutions are expected to provide benefits to the Contract owners, including better performing funds and simplification of fund offerings through the elimination of overlapping and duplicative portfolios in certain asset categories, particularly the large growth category. After the Substitution, Contract owners will continue to be able to select among funds with a full range of investment objectives, investment strategies and risks. Of the 24 Contracts affected by the Substitution, Contract owners in Subset 1 (18 Contracts) will be able to select among 52 portfolios, Contract owners in Subset 2 (four Contracts) will be able to select among 50 portfolios, and Contract owners in Subset 3 (two Contracts) will be able to select among 40 portfolios.
12. Applicants represent that each Replacement Portfolio has lower total gross and net expense ratios and equal or lower management fees than the corresponding Existing Portfolio. Service fees charged by each Replacement Portfolio pursuant to a 12b-1 plan are equal to those charged by the Existing Portfolio. The management fees the Replacement Portfolios and Existing Portfolios (the “Portfolios”) pay to Fidelity Management and Research Company (“FMR”) have two components: A group fee rate and an individual fund fee rate. The group fee rate is based on the monthly average net assets of all the registered investment companies with which FMR has management contracts. The second component is the individual fund fee rate, which for each Existing Portfolio (except one) is the same as the rate for the Replacement Portfolio, 0.30%. In the one instance, the rate paid on the Fidelity VIP Balanced Portfolio (Replacement Portfolio) is 0.15%, which is lower than is paid on the Fidelity VIP Growth and Income Portfolio (Existing Portfolio) of 0.20%. Detailed expense information is set forth in the Chart below. By reducing expenses, the Applicants represent that the Integrity Companies are offering their Contract owners and prospective investors a selection of better-managed funds at a reduced cost.
13. Applicants submit that each of the Replacement Portfolios has demonstrated better performance than the corresponding Existing Portfolios during each of the periods measured. Detailed performance information is set forth in the Application.
1. The Substitution will take place at the portfolios' relative net asset values determined on the date of the Substitution in accordance with Section 22 of the Act and Rule 22c-1 thereunder with no change in the amount of any Contract owner's cash value, death benefit, living benefit or in the dollar value of his or her investment in any of the subaccounts. Accordingly, there will be no financial impact on any Contract owner. The Substitution will be effected by having each of the subaccounts that invests in the Existing Portfolios redeem its shares at the net asset value calculated on the date of the Substitution and purchase shares of the respective Replacement Portfolios at the net asset value calculated on the same date.
2. The Substitution will be described in detail in a written notice mailed to Contract owners. The notice will inform Contract owners of the Integrity Companies' intent to implement the Substitution and describe the Substitution, the reasons for engaging in the Substitution and how the Substitution will be implemented. Details regarding the effect on any investment in a GLWB will also be provided. The notice will be mailed to all Contract owners at least 30 days prior to the Substitution and will inform affected Contract owners that they may transfer assets from the subaccounts investing in the Existing Portfolios at anytime after receipt of the notice, and from the subaccounts investing in the Replacement Portfolios for 30 days after the Substitution, to subaccounts investing in other portfolios available under the respective Contracts, without the imposition of any transfer charge or limitation and without diminishing the number of free transfers that may be made in a given contract year. A supplement will be filed with the Commission for all current prospectuses containing the information to be included in the notice.
3. Each Contract owner will be provided with a prospectus for the Replacement Portfolios applicable to them. Within five days after the Substitution, the Integrity Companies will send each affected Contract owner written confirmation that the Substitution has occurred.
4. The Integrity Companies will pay all expenses and transaction costs of the Substitution, including all legal, accounting and allocated brokerage expenses relating to the Substitution. No costs will be borne by Contract owners. Affected Contract owners will not incur any fees or charges as a result of the Substitution, nor will their rights or the obligations of the Integrity Companies under the Contracts be altered in any way. The Substitution will not cause the fees and charges under the Contracts currently being paid by Contract owners to be greater after the Substitution than before the Substitution. The Substitution will have no adverse tax consequences to Contract owners and will in no way alter the tax benefits to Contract owners.
5. Each Contract and its prospectus expressly discloses the reservation of the Applicants' right, subject to applicable law, to substitute shares of another portfolio for shares of the portfolio in which a subaccount is invested.
6. The investment objectives and policies of the Replacement Portfolios are similar to those of the corresponding Existing Portfolios such that Contract owners will have reasonable continuity in investment expectations.
7. The Substitution will not result in the type of costly forced redemption that Section 26(c) was intended to guard against because the Contract owner will continue to have the same type of investment choices, with better potential returns and the same or lower expenses and will not otherwise have any incentive to redeem their shares or terminate their Contracts.
8. The purposes, terms and conditions of the proposed Substitution are consistent with the protection of investors, and the principles and purposes of Section 26(c), and do not entail any of the abuses that Section 26(c) is designed to prevent.
9. Current gross and net annual expenses in each Replacement Portfolio are lower than those of the corresponding Existing Portfolios.
10. Each Replacement Portfolio is an appropriate portfolio to move Contract owners' values currently allocated to the Existing Portfolios because the portfolios have similar investment objectives, strategies and risks.
11. The Substitution will be at the net asset values of the respective portfolio shares without the imposition of any transfer or similar charge and with no change in the amount of any Contract owners' values.
12. The Substitution will not cause the fees and charges under the Contracts currently being paid by Contract owners to be greater after the Substitution than before the Substitution and will result in Contract owners' Contract values being moved to portfolios with the lower current total net annual expenses.
13. In connection with assets held under Contracts affected by the Substitution, the Integrity Companies will not receive, for three years from the date of the Substitution, any direct or indirect benefits from the Replacement Portfolios, their advisors or
14. Notice of the proposed Substitution will be mailed to all Contract owners at least 30 days prior to the Substitution. All Contract owners will have an opportunity at anytime after receipt of the notice of the Substitution and for 30 days after the Substitution to transfer Contract account value affected by the Substitution to other available subaccounts without the imposition of any transfer charge or limitation and without being counted as one of the Contract owner's free transfers in a contract year.
15. Within five days after the Substitution, the Integrity Companies will send to its affected Contract owners a written confirmation that the Substitution has occurred.
16. The Substitution will in no way alter the insurance benefits to Contract owners or the contractual obligations of the Integrity Companies.
17. The Substitution will have no adverse tax consequences to Contract owners and will in no way alter the tax benefits to Contract owners.
For the reasons and upon the facts set forth above, the Applicants believe that the requested order meets the standards set forth in Section 26(c) and should, therefore, be granted.
For the Commission, by the Division of Investment Management, under delegated authority.