[Federal Register Volume 60, Number 226 (Friday, November 24, 1995)]
[Notices]
[Pages 58114-58116]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28615]



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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-21501; 812-9678]


Fortis Advantage Portfolios, Inc., et al.; Notice of Application

November 13, 1995.
agency: Securities and Exchange Commission (the ``SEC'').

action: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``Act'').

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applicants: Fortis Advantage Portfolios, Inc., Fortis Equity 
Portfolios, Inc., Fortis Fiduciary Fund, Inc., Fortis Worldwide 
Portfolios, Inc., Fortis Growth Fund, Inc., Fortis Money Portfolios, 
Inc., Fortis Securities, Inc., Fortis Series Fund, Inc., Fortis Tax-
Free Portfolios, Inc., Fortis Income Portfolios, Inc., Special 
Portfolios, Inc. (collectively, the ``Funds''), and Lazard Freres & Co. 
LLC (``Lazard Freres'').

relevant act sections: Order requested under sections 6(c) and 17(b) of 
the Act for an exemption from section 17(a) of the Act, and under 
section 6(c) for an exemption from section 17(e) of the Act and rule 
17e-1 thereunder.

summary of applications: Applicants request an exemption to permit each 
Fund to use certain securities dealers that are affiliated persons of 
affiliated persons (``second-tier affiliates''), solely because of 
subadvisory relationships with one or more other Funds, to engage in 
principal transactions with the Fund. The order also would permit a 
Fund to use second-tier affiliates as brokers in connection with 
certain principal transactions and to pay commissions to such brokers 
without complying with the monitoring and recordkeeping requirements 
set forth in rule 17e-1.

filing dates: The application was filed on July 24, 1995 and amended on 
September 29, 1995.

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 

[[Page 58115]]
received by the SEC by 5:30 p.m. on December 8, 1995, and should be 
accompanied by proof of service on 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 who wish to be notified of a 
hearing may request notification by writing to the SEC's Secretary.

addresses: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, 500 Bielenberg, St. Paul, Minnesota, 55125.

for further information contact: Marianne H. Khawly, Staff Attorney, at 
(202) 942-0562, or Robert A. Robertson, Branch Chief, at (202) 942-0564 
(Office of Investment Company Regulation, Division of Investment 
Management).

supplementary information: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch.

Applicants' Representations

    1. The Funds are Minnesota corporations. Except for Fortis 
Securities, the Funds are open-end management investment companies 
registered under the Act. Fortis Securities is a closed-end management 
investment company registered under the Act. Fortis Advisers, a 
registered investment adviser under the Investment Advisers Act of 1940 
(the ``Advisers Act''), serves as investment adviser to each of the 
Funds.
    2. Applicants request that the relief sought in the application 
also apply to any other registered investment company, or separate 
portfolio thereof, that in the future (a) is a member of the Fortis 
group of investment companies as defined in rule 11a-3 under the Act, 
and (b) either (i) is advised by Fortis Advisers or any entity 
controlling, controlled by, or under common control with Fortis 
Advisers, or (ii) has its shares distributed by Fortis Investors, Inc. 
or any entity controlling, controlled by, or under common control with 
Fortis Investors.
    3. Lazard Freres is registered as an investment adviser under the 
Advisers Act and as a broker-dealer under the Securities Exchange Act 
of 1934. Lazard Freres Asset Management, a separate operating division 
of Lazard Freres, Morgan Stanley Asset Management Limited, and Warburg 
Investment Management International Ltd. (collectively, the 
``Subadvisers'') have contracted with Fortis Advisers to serve as 
subadvisers for three of the portfolios within Fortis Series Fund.
    4. Applicants request relief to permit an ``Eligible Dealer,'' a 
hereinafter defined, to engage in principal transactions with a Fund in 
the ordinary course of business. An Eligible Dealer is a person that 
subadvises one or more Funds or Fund portfolios not engaging in the 
relevant principal transaction that conducts advisory and securities 
dealer operations via the same legal entity that is a second-tier 
affiliate of the Fund or Fund portfolio engaging in the transaction 
solely by reason of being a subadviser of one or more of the other 
Funds. An Eligible Dealer is not (a) an affiliated person of the Fund 
or Fund portfolio engaging in the transaction, (b) Fortis Advisers, or 
any other entity that in the future serves as investment adviser to the 
Fund or Fund Portfolio engaging in the transaction, or an affiliated 
person thereof, or (c) an officer, director, employee, promoter, or 
principal underwriter of any Fund or Fund portfolio, or an affiliated 
person of such officer, director, employee, promoter, or principal 
underwriter.
    5. Applicants also request an exemption that would permit each Fund 
to use an ``Eligible Broker,'' as hereinafter defined, as broker in 
connection with the sale of securities to or by such Fund or Fund 
portfolio on a securities exchange. An Eligible Broker is a subadviser 
of one or more Funds or Fund portfolios that are not parties to the 
transactions, conducts advisory and brokerage operations through the 
same legal entity, and is a second-tier affiliate of the Fund or Fund 
portfolio engaging in the transaction solely by reason of subadvising 
one or more other Funds or Fund portfolios. The requested relief would 
permit the Fund or Fund portfolio engaging in the transaction to pay 
commissions, fees, or other remuneration to the Eligible Broker without 
complying with the requirements set forth in rules 17e-1(b)(3) and 17e-
1(c).
    6. With the exception of Lazard Freres Asset Management, each 
broker-dealer that is affiliated with a subadviser to a Fund is a 
separate legal entity from the subadviser. Lazard Freres Asset 
Management is a separate operating division of Lazard Freres. As the 
only subadviser that conducts its advisory operations through the same 
legal entity, Lazard Freres is currently the only entity that satisfies 
the definitions of Eligible Dealer and Eligible Broker.

Applicants' Legal Analysis

    1. Applicants request an order under sections 6(c) and 17(b) of the 
Act for an exemption from section 17(a) of the Act. Section 17(a), 
among other things, prohibits an affiliated person of a registered 
investment company, or affiliated person of such person, acting as 
principal, from selling to or purchasing from such registered company 
any security or other property.
    2. Section 2(a)(3) of the Act defines ``affiliated person.'' Under 
this definition, each subadviser would be a second-tier affiliate of 
each Fund and Fund portfolio it does not manage, to the extent the 
Funds and Fund portfolios are deemed to be under common control with, 
and therefore an affiliated person of, each other Fund and each other 
portfolio of the Funds. Accordingly, relief from section 17(a) is 
required for an Eligible Dealer to engage in principal transactions 
with a Fund.
    3. Section 6(c) of the Act provides that the SEC may exempt any 
person, security, or transaction, or any class or classes of persons, 
securities, or transactions, from any provisions of the Act or of any 
rule 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. Section 17(b) of the Act provides that the 
SEC may exempt a transaction from section 17(a) of the Act if evidence 
establishes that the terms of the proposed transaction, including the 
consideration to be paid, are reasonable and fair and do not involve 
overreaching on the part of any person concerned, and that the proposed 
transaction is consistent with the policy of the registered investment 
company concerned and with the general purposes of the Act. For the 
reasons discussed below, applicants believe that the proposed 
transactions meet the standards of sections 6(c) and 17(b).
    4. Applicants believe that no element of self-dealing would be 
involved in the proposed transactions because the subadviser 
recommending the transaction would be dealing with an entity that in 
economic reality is a competitor of the subadviser. Applicants state 
that each transaction between a Fund and an Eligible Dealer would be 
the product of arms-length bargaining and that the subadviser 
recommending the transaction can neither lose nor gain financially on 
the basis of whether the transaction is beneficial or detrimental to 
the Eligible Dealer. Because the pecuniary interests of a subadviser 
would be solely and directly aligned with those of the Fund it 
subadvises, applicants argue, it is reasonable to conclude that the 
consideration to be paid to or received by such Fund in connection with 
a 

[[Page 58116]]
principal transaction with an Eligible Dealer will be reasonable and 
fair.
    5. Applicants also request relief under sections 6(c) and 17(b) for 
an exemption from section 17(a) to permit Lazard Freres to engage in 
principal transactions with registered investment companies, or 
portfolios of any registered investment company, of which Lazard Freres 
is, or becomes in the future, a second-tier affiliate solely because of 
its advisory or subadvisory relationship with other portfolios of that 
investment company or other investment companies under common control 
with that investment company.
    6. Applicants furthermore request relief under section 6(c) for an 
exemption from section 17(e) of the Act and rule 17e-1 thereunder. 
Section 17(e)(2)(A) provides in relevant part that it shall be unlawful 
for any affiliated person of a registered investment company, or an 
affiliated person of such person, acting as broker in connection with 
the sale of securities to or by such company, to receive from any 
source a commission for effecting such transaction which exceeds the 
usual and customary broker's commission if the sale is effected on a 
securities exchange. When a subadviser is a second-tier affiliate of a 
Fund and conducts brokerage operations via the same legal entity, the 
brokerage component also is a second-tier affiliate of the Funds not 
subadvised by the subadviser. Consequently, transactions involving a 
Fund that are brokered by an Eligible Broker are subject to section 
17(e)(2).
    7. Rule 17e-1 provides that, for purposes of section 17(e)(2)(A), a 
commission shall be deemed as not exceeding the usual and customary 
broker's commission, if certain specified procedures are followed. 
These procedures include the requirement in rule 17e-1(b)(3) that a 
registered investment company's board of directors, including a 
majority of disinterested directors, determines, no less frequently 
than quarterly, that all transactions effected pursuant to the rule 
comply with procedures reasonably designed to provide that the 
brokerage commission is consistent with the standards set forth in the 
rule. The procedures also include the requirement in rule 17e-1(c) 
under the Act that the investment company maintain and preserve certain 
written records about each transaction effected pursuant to the rule.
    8. Applicants believe that the proposed transactions raise no 
possibility of self-dealing or any concern that the Funds would be 
managed in the interest of the Eligible Brokers. A subadviser who 
recommends that an Eligible Broker act as broker to a particular 
transaction would neither lose nor gain financially on the basis of 
whether or not the transaction benefits the Eligible Broker, because 
the subadviser's only pecuniary interest in the transaction is its 
advisory fee, which is based on net assets under management. 
Accordingly, the subadviser would have no interest in benefitting 
Lazard Freres or any future Eligible Broker at the expense of the Fund 
or Funds it subadvises.
    9. Applicants believe that under the circumstances the monitoring 
and recordkeeping provisions of rule 17e-1 would be unduly burdensome 
to the Funds. Applicants believe that the situations contemplated by 
the relief are similar to the arms-length bargaining that normally 
prevails when an investment adviser acts on behalf of an investment 
company. Accordingly, applicants believe that the proposed transactions 
meet the standards of section 6(c) because they are 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.
    10. Applicants also request relief under section 6(c) from section 
17(e) and rule 17e-1 to permit Lazard Freres to receive commissions 
from any registered investment company or portfolio thereof for which 
Lazard Freres is, or becomes in the future, a second-tier affiliate 
solely because of its advisory or subadvisory relationship with other 
portfolios of the same investment company or other investment companies 
under common control with the investment company, without compliance 
with the requirements of 17e-1 (b)(3) and (c). For the reasons 
discussed above, applicants believe that the proposal meets the section 
6(c) standard.

Applicants' Condition

    Applicants agree that the requested order is subject to the 
condition that, with respect to any brokerage transactions conducted in 
reliance on the requested order, applicants will comply with all of the 
provisions of rule 17e-1 except those of rule 17e-1 (b)(3) and (c).

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-28615 Filed 11-22-95; 8:45 am]
BILLING CODE 8010-01-M