Nationwide Life Insurance Company has agreed to pay an $8 million fine to settle SEC charges that it "routinely" violated pricing rules on its insurance contracts and underlying mutual funds.
The U.S. Securities and Exchange Commission on Thursday charged the Columbus, Ohio-based insurance and financial services company with "routinely violating" pricing rules in its daily processing of purchase and redemption orders for the contracts and the underlying funds.
“For more than a 15-year period, Nationwide intentionally delayed the delivery of untracked mail containing orders from customers and processed them at the next day’s prices in violation of the law,” said Sharon B. Binger, director of the SEC’s Philadelphia Regional Office.
Nationwide agreed to settle the charges and pay an $8 million penalty, neither admitting nor denying the findings, and must cease and desist from committing future violations of the rules, according to the SEC.
"There were no allegations that Nationwide benefitted from its P.O. Box mail processing practices or the process benefitted certain groups of investors over others," The company said Thursday in a statement. "The SEC acknowledges Nationwide’s change in practices that occurred in 2011 and Nationwide’s cooperation in the investigation in the SEC’s order. Nationwide chose to settle this matter to bring closure and remain focused on the needs of its members."
Mutual fund share pricing rules require that an investment company compute the value of its shares at least once daily at a specific time disclosed to investors. According to the SEC, Nationwide’s prospectuses stated that orders received before 4 p.m. at its home office would receive the current day’s price, while orders received after 4 p.m. would receive the next day’s price.
The SEC alleged that Nationwide intentionally delayed the retrieval of mail related to its variable contracts business. Therefore, in spite of receiving customer orders and other variable contract mail in its P.O. boxes at least several hours before the 4 p.m. cut-off time, the company avoided its requirement to process the orders using the current day’s price by ensuring this mail wasn’t delivered to its offices until after 4 p.m.
Meanwhile, Nationwide did arrange for prompt pickup and delivery of U.S. Postal Service Priority Mail or Priority Express Mail that enabled contract owners to track an order’s time of delivery to the P.O. boxes, according to the SEC. Those orders were assigned the current day’s price.
The SEC alleged that Nationwide instructed the post office to divide mail directed to the P.O. Box for its variable contract business from mail directed to P.O. boxes for other lines of business and maintain it in separate areas of the post office loading dock, typically using a private courier to deliver the mail from the loading dock to its offices. The courier travelled to the post office in the morning of each business day to retrieve mail for the other lines of business, but was instructed not to retrieve variable contract mail at these times. Nationwide instead allegedly instructed the courier to deliver variable contract mail no earlier than 4:01 p.m. in order to deem it received when it arrived “in the building.”
If the courier arrived in Nationwide’s parking lot before 4 p.m., the instructions were to wait until 4:01 p.m. to enter the building. The SEC claims that some couriers intentionally delayed their arrival time by stopping to purchase meals or fuel. By contrast, priority mail related to the variable contract business was promptly retrieved by the courier and processed by Nationwide before 4 p.m. for pricing at the current day’s price.
The SEC alleged that Nationwide employees complained to post office staff when portions of the variable contract mail were inadvertently mixed together with the other mail and therefore delivered to the offices before 4 p.m. After one such incident, Nationwide requested a meeting with the post office and stressed that it needed “late delivery” of variable contract mail “due to regulations that require Nationwide to process any mail received by 4 p.m. the same day.”
Nationwide consented to the entry of the SEC’s order finding that the firm willfully violated Rule 22c-1 under the Investment Company Act of 1940.