[Federal Register Volume 61, Number 149 (Thursday, August 1, 1996)]
[Notices]
[Pages 40260-40263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19566]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22102; 812-10102]


LB Series Fund, Inc. et al.; Notice of Application

July 26, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for exemption under the Investment 
Company Act of 1940 (the ``Act'').

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APPLICANTS: LB Series Fund, Inc., Lutheran Brotherhood Family of Funds 
(``LB Family of Funds''), Lutheran Brotherhood, Lutheran Brotherhood 
Research Corp., and all subsequently registered management investment 
companies advised by Lutheran Brotherhood or any entity under common 
control with Lutheran Brotherhood (together with the LB Series Funds 
and LB Family of Funds, the ``Funds'').

RELEVANT ACT SECTIONS: Order requested (a) under section 6(c) of the 
Act for an exemption from sections 13(a)(2), 13(a)(3), 18(f)(1), 22(f), 
and 22(g) of the Act and rule 2a-7 thereunder; (b) under sections 6(c) 
and 17(b) of the Act for an exemption from section 17(a)(1) of the Act; 
and (c) pursuant to section 17(d) of the Act and rule 17d-1 thereunder 
to permit certain joint transactions.

SUMMARY OF APPLICATION: Applicants request an order that would permit 
each applicant investment company to establish deferred compensation 
plans for its trustees who are not interested persons of the company.

FILING DATES: The application was filed on April 23, 1996 and amended 
on July 16, 1996.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a

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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 
received by the SEC by 5:30 p.m. on August 20, 1996 and should be 
accompanied by proof of service on the 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, 625 Fourth Avenue South, Minneapolis, Minnesota 
55415.

FOR FURTHER INFORMATION CONTACT:
Suzanne Krudys, Senior Attorney, at (202) 942-0641, or Alison E. Baur, 
at (202) 942-0564 (Division of Investment Management, Office of 
Investment Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee from 
the SEC's Public Reference Branch.

Applicants' Representations

    1. Each of LB Series Fund and LB Family of Funds is a registered 
open-end management investment company. Lutheran Brotherhood, a 
fraternal benefit society owned and operated by its members, serves as 
investment advisor to each series of LB Series Fund. LB Research Corp. 
serves as investment adviser to each series of LB Family of Funds.
    2. A majority of the board of directors of LB Series Fund and a 
majority of the board of trustees of LB Family of Funds (collectively, 
``Trustees'') currently consists of Trustees who are not ``interested 
persons'' within the meaning of section 2(a)(19) of the Act. Each 
Trustee that is not an ``interested person'' of a Fund, receives an 
annual fee. No Trustees who is an affiliated person of Lutheran 
Brotherhood receives any remuneration from LB Series Fund or LB Family 
of Funds.
    3. The proposed deferred fee arrangements would be implemented by 
means of a Deferred Compensation Plan (the ``Plan'') entered into by 
each Fund. The Plan would permit individual Trustees of a Fund who are 
not ``interested persons'' of such Fund to elect to defer receipt of 
all or a portion of their fees. This would enable the Trustees to defer 
payment of income taxes on such fees. The Trustees may amend the Plan 
from time to time. Such amendments will be consistent with any relief 
granted pursuant to this application and are limited to immaterial 
amendments or supplements, or amendments or supplements made to conform 
to any applicable law.
    4. Under the Plan, the Trustee's deferred fees will be credited to 
a book entry account established by each participating Fund (the 
``Deferred Fee Account'') as of the date such fees would have been paid 
to such Trustee. The value of the Deferred Fee Account will be 
periodically adjusted by treating the Deferred Fee Account as though an 
equivalent dollar amount had been invested and reinvested in certain 
designated securities (the ``Underlying Securities''). The Underlying 
Securities for a Deferred Fee Account will be shares of any of a 
selection of the Funds that the Trustees designates. The initial value 
of the Deferred Compensation credited to a Deferred Fee Account will be 
effected at the respective current net asset value of each Fund 
designated by the trustee and thereafter, the value of such Deferred 
Account will fluctuate as the net asset value of the shares of each 
such Fund fluctuates and will also reflect the value of the assumed 
reinvestment of dividends and capital gains distributions from each 
such Fund in additional shares of such Fund. Shares will not be 
designated as Underlying Securities, and Underlying Securities will not 
be purchased, if there is a material risk that the purchase of such 
shares would result in a violation of section 12(d)(1) of the Act.
    5. As a matter of risk management, each Fund intends generally, and 
with respect to any money market Fund that values its assets by the 
amortized cost method undertakes, to purchase and maintain Underlying 
Securities in an amount equal to the deemed investments of the Deferred 
Fee Accounts of its Trustees. A Fund will either purchase its own 
shares or invest monies equal to the amount credited to the Deferred 
Fee Account as part of the general investment operations of the Fund.
    6. The amounts paid to the Trustees under the Plan are expected to 
be de minimis in relation to the net assets of the Fund. The Plan 
provides that a Fund's obligation to make payments from a Deferred Fee 
Account will be a general obligation of the Fund and payments made 
pursuant to the Plan will be made from the Fund's general assets and 
property. With respect to the obligations created under the Plan, the 
relationship of a Trustee to a Fund will be that of a general unsecured 
creditor. A Fund will be under no obligation to the Trustee to 
purchase, hold, or dispose of any investments but, if a Fund chooses to 
purchase investments to cover its obligations under the Plan, then any 
and all such investments will continue to be part of the general assets 
and property of the Fund.
    7. Under the Plan, a Trustee may specify that the Trustee's 
deferred fees be distributed in whole or in part commencing on or as 
soon as practicable after a date specified by the Trustee, which may 
not be sooner than the earlier of (a) A date one year following the 
deferral election, or (b) the first business day of January following 
the year in which the Trustee ceases to be a member of the Board of 
Trustees of the Fund. Notwithstanding any elections by a Trustee, his 
or her deferrals under the Plan shall be distributed (x) in the event 
of the Trustee's death, or (y) upon: the dissolution, liquidation, or 
winding up of the Fund, whether voluntary or involuntary; the voluntary 
sale, conveyance or transfer of all or substantially all of the Fund's 
assets (unless the obligations of the Fund shall have been assumed by 
another Fund); or the merger of the Fund into another trust or 
corporation or its consolidation with one or more other trusts or 
corporations (unless the obligations of the Fund are assumed by such 
surviving entity and the surviving entity is another Fund). In 
addition, upon application by a Trustee and a determination by an 
administrator designated by the Trustees that such Trustee has suffered 
a severe and unanticipated financial hardship, the administrator shall 
distribute to the Trustee, in a single lump sum, an amount equal to the 
lesser of the amount needed by the Trustee to meet the hardship, or the 
balance of the Trustee's Deferred Fee Account. Payments will be made in 
a lump sum or in installments as elected by the Trustee. In the event 
of the Trustee's death, amounts payable under the Plan will be payable 
to the trustee's designated beneficiary. In all other events, the 
Trustee's right to receive payments will be nontransferable.
    8. The Plan will not obligate any Fund to retain the services of a 
Trustee, nor will it obligate any Fund to pay any (or any particular 
level of) Trustee's fees to any Trustee. Rather, it will merely permit 
a Trustee to elect to defer receipt of all or part of the Trustee's 
fees which he or she would otherwise receive for future services from 
each Fund. The proposed arrangements will not affect the voting rights 
of the shareholders of any of the Funds. If a Fund purchases Underlying 
Securities issued by another Fund, the purchasing Fund will vote

[[Page 40262]]

such shares in proportion to the votes of all other holders of shares 
of such other Fund.

Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act 
granting relief from sections 13(a)(2), 13(a)(3), 18(f)(1), 22(f), and 
22(g) of the Act and rule 2a-7 thereunder to the extent necessary to 
permit the Funds to enter into deferred fee arrangements with their 
Trustees; under sections 6(c) and 17(b) of the Act granting relief from 
section 17(a)(1) to the extent necessary to permit the Funds to sell 
securities issued by them to participating Funds; and pursuant to 
section 17(d) of the Act and rule 17d-1 thereunder to permit the Funds 
to engage in certain joint transactions incident to such deferred fee 
arrangements.
    2. Section 6(c) provides that the SEC may exempt any person, 
security, or transaction from any provision of the Act, 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.
    3. Section 18(f)(1) generally prohibits a registered open-end 
investment company from issuing senior securities. Section 13(a)(2) 
requires that a registered investment company obtain shareholder 
authorization before issuing any senior security not contemplated by 
the recitals of policy in its registration statement. Applicants state 
that the Plan possesses none of the characteristics of senior 
securities that led Congress to enact these sections. The Plan would 
not: (a) Encourage increased borrowings by investment companies without 
adequate assets and reserves; (b) induce speculative investments or 
provide opportunities for manipulative allocation of any Fund's 
expenses or profits; (c) affect control of any Fund; (d) be 
inconsistent with the theory of mutuality of risk; or (e) confuse 
investors or convey a false impression as to the safety of their 
investments. All liabilities created by credits to the Deferred Fee 
Account under the Plan would be offset by equal amounts of assets that 
would not otherwise exist if the fees were paid on a current basis.
    4. Section 13(a)(3) provides that no registered investment company 
shall, unless authorized by the vote of a majority of its outstanding 
voting securities, deviate from any investment policy that is 
changeable only if authorized by shareholder vote. Any relief granted 
from section 13(a)(3) of the Act would extend only to existing series 
of LB Series Fund with a fundamental investment restriction prohibiting 
the purchase of securities issued by investment companies 
(collectively, the ``Restriction Series''). Applicants submit that it 
is appropriate to exempt the Restriction Series from the provisions of 
13(a)(3) as to enable the Restriction Series to invest in shares of 
other Funds pursuant to the Plan without a shareholder vote. Applicants 
state that the value of the Underlying Securities will be de minimis in 
relation to the total net assets of the Restriction Series, and will at 
all times equal the value of the Restrictions Series' obligations to 
pay deferred fees. Applicants will provide notice to shareholders in 
their statements of additional information of the deferred fee 
arrangements with the Trustees.
    5. Section 22(f) prohibits undisclosed restrictions on the 
transferability or negotiability of redeemable securities issued by 
open-end investment companies. The Plan would set forth any 
restrictions on transferability or negotiability, and such restrictions 
are primarily to benefit the participating trustees and would not 
adversely affect the interests of the Trustees, the Fund or any 
shareholder of any Fund.
    6. Section 22(g) generally prohibits registered open-end investment 
companies from issuing any of their securities for services or for 
property other than cash or securities. These provisions prevent the 
dilution of equity and voting power that may result when securities are 
issued for consideration that is not readily valued. Applicants submit 
that the Plan would provide for deferral of payment of fees that would 
be payable independent of the Plan, and thus should be viewed as being 
issued not in return for services but in return for a Fund not being 
required to pay such fees on a current basis.
    7. Rule 2a-7 imposes certain restrictions on the investments of 
money market funds that use the amortized cost method or the penny-
rounding method of computing their per share price. This would prohibit 
a Fund that is a money market fund from investing in the shares of any 
other Fund. Applicants submit that the requested exemption would permit 
the Funds to achieve an exact matching of Underlying Securities with 
the deemed investments of the Deferred Fee Accounts, thereby ensuring 
that the deferred fee arrangements would not affect net asset value. 
Applicants further assert that the amounts involved in all cases would 
be de minimis in relation to the total net assets of each Fund, and 
would have no effect on the per share net asset value of the Funds.
    8. Section 17(a)(1) generally prohibits an affiliated person of a 
registered investment company, or any affiliated person of such person, 
from selling any security to such registered investment company. Funds 
that are advised by the same entity may be ``affiliated persons'' of 
one another under section 2(a)(3)(C) of the Act by reason of being 
under the common control of their adviser. Applicants assert that 
section 17(a)(1) was designed to prevent sponsors of investment 
companies from using investment company assets as capital for 
enterprises with which they were associated or to acquire controlling 
interests in such enterprises. Applicants submit that an exemption from 
this provision would not implicate Congress' concerns in enacting 
section 17(a)(1), but would facilitate the matching of each Fund's 
liability for deferred Trustees' fees with the Underlying Securities 
that would determine the amount of such Fund's liability.
    9. Section 17(b) authorizes the SEC to exempt a proposed 
transaction from section 17(a) if evidence establishes that: (a) The 
terms of the transaction, including the consideration to be paid or 
received, are reasonable and fair and do not involve overreaching; (b) 
the transaction is consistent with the policy of each registered 
investment company concerned; and (c) the transaction is consistent 
with the general purposes of the Act. Applicants assert that the 
proposed transaction satisfies the criteria of sections 6(c) and 17(b).
    10. Section 17(d) and rule 17d-1 generally prohibit a registered 
investment company's joint or joint and several participation with an 
affiliated person in a transaction in connection with any joint 
enterprise or other joint arrangement on a basis different from or less 
advantageous than that of the affiliated person. Applicants assert that 
any adjustments made to the Deferred Fee Accounts to reflect the 
income, gain or loss on investments of the assets of a Fund would be 
identical in amount to income gain or loss by a shareholder of the same 
Fund whose shares were not held in the Deferred Fee Account. The 
Trustee would neither directly or indirectly receive a benefit which 
would otherwise inure to the Funds or their shareholders. Deferral of a 
Trustee's fees in accordance with the Plan would essentially maintain 
the parties, viewed both separately and in their relationship to one 
another,in the same position as if fees were paid on a current basis. 
When all payments have been made to a participating Trustee, the 
participating Trustee would be no better off (apart from the effect of 
tax deferral) than if he or she had received deferred fees on a

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current basis and invested them in shares of the Underlying Securities.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. With respect to the requested relief from rule 2a-7, any money 
market Fund that values its assets by the amortized cost method or the 
penny-rounding method will buy and hold Underlying Securities that 
determine the performance of Deferred Fee Accounts to achieve an exact 
match between such Fund's liability to pay deferred fees and the assets 
that offset that liability.
    2. If a Fund purchases Underlying Securities issued by an 
affiliated Fund, the purchasing Fund will vote such shares in 
proportion to the votes of all other holders of shares of such 
affiliated Fund.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-19566 Filed 7-31-96; 8:45 am]
BILLING CODE 8010-01-M