[Federal Register Volume 61, Number 181 (Tuesday, September 17, 1996)]
[Notices]
[Pages 48996-48998]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23703]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22211; 812-10152]
LifeUSA Funds, Inc., et al.; Notice of Application
September 10, 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: LifeUSA Funds, Inc. (``LUSA Fund''), IAI Investment Funds
I, Inc., IAI Investment Funds II, Inc., IAI Investment Funds III, Inc.,
IAI Investment Funds IV, Inc., IAI Investment Funds V, Inc., IAI
Investment Funds VI, Inc., IAI Investment Funds VII, Inc., IAI
Investment Funds VIII, Inc. (the IAI Investment Funds I through VIII
collectively, ``Underlying Funds''), Investment Advisers Inc.
(``IAI''), and IAI International Limited.
RELEVANT ACT SECTION: Order requested under section 6(c) of the Act
from section 12(d)(1) and under sections 6(c) and 17(b) of the Act from
section 17(a) of the Act.
SUMMARY OF APPLICATION: Applicants request an order to permit LUSA Fund
to invest substantially all of its assets in the securities of certain
affiliated investment companies in excess of the limits of Section
12(d)(1) of the Act.
FILING DATE: The application was filed on May 15, 1996, and amended on
July 31, 1996, and August 14, 1996. Applicants have agreed to file an
amendment during the notice period, the substance of which is included
in this notice.
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
applicant with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on October 7, 1996,
and should be accompanied by proof of service on the applicant, 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 may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants: 3700 First Bank Place, 601 Second Avenue South,
Minneapolis, MN 55402.
FOR FURTHER INFORMATION CONTACT:
Mercer E. Bullard, Branch Chief, at (202) 942-0564, or Elizabeth G.
Osterman, Assistant Director, 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. LUSA Fund is a Minnesota corporation that will register as an
open-end management investment company under the Act. LUSA Fund will be
authorized to issue its shares in more than one series, each of which
will pursue a distinct set of investment objectives by investing
substantially all of its assets in shares of certain portfolios of the
Underlying Funds (``Underlying Portfolios''). LUSA Fund will consist
initially of four portfolios: the Aggressive Growth Portfolio, the High
Growth Portfolio, the Moderate Growth Portfolio, and the Conservative
Growth Portfolio (the ``LUSA Portfolios'').
2. IAI is a registered investment adviser under the Investment
Advisers Act of 1940 (``Advisers Act''). IAI also is registered as a
transfer agent under the Securities Exchange Act of 1934. IAI is the
investment adviser and transfer agent for the Underlying Funds. IAI
will serve as investment adviser and transfer agent to LUSA Fund. IAI
will also serve as investment adviser, provide overall management,
transfer agency, dividend disbursement and investor services to the
LUSA Portfolios and the Underlying Portfolios.
3. IAI International is a registered investment adviser under the
Advisers Act. IAI International is the subadviser to the Underlying
Portfolios of IAI Investment Funds III, Inc.
4. Applicants propose a ``fund of funds'' arrangement whereby LUSA
Fund will register for sale its shares under the Securities Exchange
Act of 1933, and the LUSA Portfolios will invest substantially all of
their assets in shares of the Underlying Funds that are part of the
same ``group of investment companies'' as defined in rule 11a-3 of the
Act. In addition, investments may be made in money market instruments
for temporary defensive purposes and to maintain liquidity.
5. Each LUSA Portfolios will allocate its assets among one or more
Underlying Portfolios consistent with its investment objective. IAI, as
investment adviser to the LUSA Portfolios, will allocate each
Portfolio's assets among the Underlying Portfolios in accordance with
quantitative and fundamental analyses of current market and economic
conditions.
6. IAI will not initially charge the LUSA Portfolios an advisory
fee, although it may do so in the future. IAI may charge the LUSA
Portfolios for all other services relating to the operation of the LUSA
Portfolios. In addition, LUSA Portfolio shareholders will indirectly
pay their proportionate share of Underlying Portfolio advisory fees and
expenses. Further, LUSA Portfolio shares may be subject to sales
charges including front-end and deferred sales charges, redemption
fees, service fees and 12b-1 fees. Initially, LUSA Portfolios will be
subject to a front-end sales charge and distribution fees.
7. Applicants believe that LUSA Fund will provide investors with a
simple and effective means of structuring a diversified mutual fund
investment program suited to their general needs.
Applicants' Legal Analysis
1. Section 12(d)(1)(A) of the Act provides that no registered
investment company may acquire securities of another investment company
if such securities represent more than 3% of the acquired company's
outstanding voting stock, more than 5% of the acquiring company's total
assets, or if such securities, together with the securities of any
other acquired investment companies, represent more than 10% of the
acquiring company's total assets. Section 12(d)(1)(B) of the Act
provides that no registered open-end investment company may sell its
securities to another investment company if the sale would cause the
acquiring company to own more than 3% of the acquired company's voting
stock, or if the sale would cause more than 10% of the acquired
company's voting stock to be owned by investment companies.
2. Section 6(c) provides that the SEC may exempt any person or
transaction if 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.
Applicants request an order under section 6(c) exempting them from
sections 12(d)(1)(A) and (B) to the extent necessary to permit LUSA
Fund to
[[Page 48997]]
acquire shares of the Underlying Funds and to permit each Underlying
Fund to sell shares to LUSA Fund. Applicants request that any relief
granted pursuant to the application also apply to any future LUSA
Portfolio, and any Underlying Fund or open-end management investment
company or series thereof that is or will be part of the same ``group
of investment companies'' as LUSA Fund (as defined in rule 11a-3 under
the Act), subject to the terms and conditions of the application. For
the reasons discussed below, applicants believe it is appropriate for
the SEC to exercise its authority under section 6(c) to grant the
requested exemptions.
3. Section 12(d)(1) was intended to mitigate or eliminate actual or
potential abuses that might arise when an investment company acquires
shares of another investment company, including unnecessary duplication
of costs (such as sales loads, advisory fees and administrative costs),
undue influence by a fund holding company over its underlying funds,
the threat of large scale redemptions of the securities of the
underlying investment companies, and unnecessary complexity.
4. Applicants believe relief from section 12(d)(1) is appropriate
because none of these potential or actual abuses are present in the
proposed fund of funds structure. Applicants state that, with respect
to advisory fees, the directors of LUSA Fund, before approving advisory
fees, will find that any advisory fees charged under an advisory
contract are based upon services provided that are in addition to,
rather than duplicative of, services provided under any underlying
portfolio advisory contract.
5. Applicants state that because any sales charges or service fees
relating to the shares of LUSA Fund will not exceed the limits set
forth in rule 2830 of the National Association of Securities Dealer's
(``NASD'') Conduct Rules when aggregated with any sales charges or
service fees that LUSA Fund pays relating to its acquisition, holding,
or disposition of Underlying Fund shares, the proposed structure will
not raise the sales charge layering concerns underlying section
12(d)(1).
6. Applicants note that, although administrative and other fees may
be charged at both the LUSA Fund and Underlying Portfolio levels,
overall, administrative and other expenses may be reduced at both
levels under the proposed arrangement.
7. Applicants also state that there is little risk that IAI will
exercise inappropriate control over the Underlying Funds. Applicants
believe that because IAI is the investment adviser to the Underlying
Funds and because LUSA Fund will only acquire shares of Underlying
Funds, a redemption from one Underlying Fund will simply lead to the
investment of the proceeds in another Underlying Fund.
8. No LUSA Portfolio will invest in any Underlying Portfolio unless
the Underlying Portfolio may not acquire securities of any other
investment company in excess of the limits contained in section
12(d)(1)(A) of the Act, except for securities received as a dividend or
as a result of a plan of reorganization of any company. The exception
for securities received as a dividend or as a result of a plan of
reorganization is based on section 12(d)(1)(D). Section 12(d)(1)(D)
permits an investment company to exceed the limits contained in section
12(d)(1)(A) in the event that the investment company exceeds the limits
because it acquires investment company shares as a dividend, as a
result of an offer of exchange, or pursuant to a plan of reorganization
(other than a plan devised for the purpose of evading section
12(d)(1)(A)). No Underlying Portfolio will participate in any plan of
reorganization devised for the purpose of evading the provisions of
section 12(d)(1)(A).
9. Section 17(a) of the Act generally makes it unlawful for an
affiliated person of a registered investment company to sell securities
to, or purchase securities from, the company. Section 17(b) of the Act
authorizes the SEC to exempt a proposed transaction from section 17(a)
if evidence establishes that: (a) The terms of the proposed transaction
are reasonable and fair and do not involve overreaching; (b) the
proposed transaction is consistent with the policies of the registered
investment company involved: and (c) the proposed transaction is
consistent with the general provisions of the Act. Because LUSA Fund
and the Underlying Funds are advised by IAI, LUSA Fund and the
Underlying Funds could be deemed to be affiliates of one another.
Accordingly, purchases by LUSA Fund of the shares of the Underlying
Funds, and the sale by the Underlying Funds of their shares to LUSA
Fund could be deemed to be principal transactions between affiliated
persons under section 17(a). Accordingly, applicants request an
exemption under sections 17(b) and 6(c) from the prohibitions of
section 17(a).\1\
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\1\ Section 17(b) applies to a specific proposed transaction,
rather than an ongoing series of future transactions. See Keystone
Custodian Funds, 21 S.E.C. 295, 298-99 (1945). Section 6(c)
frequently is used, along with section 17(b), to grant relief from
section 17(a) to permit an ongoing series of future transactions.
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10. Applicants believe that relief is appropriate because the
consideration paid for the sale and redemption of shares of the
Underlying Portfolios is fair and reasonable in that it will be based
upon the net asset values of the Underlying Portfolios, and the
investment of assets of the LUSA Portfolios in shares of the Underlying
Portfolios will be effected in accordance with the investment
restrictions and policies of each LUSA Portfolio. Applicants also
believe that the proposed arrangement is consistent with the purposes
of the Act.
Applicants' Conditions
Applicants will comply with the following procedures as conditions
to any SEC order:
1. LUSA Fund and each Underlying Portfolio will be part of the same
``group of investment companies'' as defined in rule 11a-3 of the Act.
2. LUSA Fund will not invest in any Underlying Portfolio unless the
Underlying Portfolio may not acquire securities of any other investment
company in excess of the limits contained in section 12(d)(1)(A) of the
Act, except for securities received as a dividend or as a result of a
plan of reorganization of any company.
3. At least a majority of LUSA Fund's directors will not be
``interested persons'' as defined in section 2(a)(19) of the Act.
4. Any sales charge or service fees charged with respect to shares
of LUSA Fund, when aggregated with any sales charges or service fees
paid by LUSA Fund relating to its acquisition, holding or disposition
of shares of the Underlying Portfolio, shall not exceed the limits set
forth in rule 2830 of the NASD's Conduct Rules.
5. Prior to approving any advisory contract under section 15 of the
Act, the board of directors of LUSA Fund, including a majority of the
directors who are not ``interested persons'' as defined in section
2(a)(19) of the Act, will find that the advisory fees charged under
such contract, if any, are based on services that are in addition to,
rather than duplicative of, the services provided under any Underlying
Portfolios advisory contract. These findings and their bases will be
recorded fully in the minute books of LUSA Fund.
6. Applicants will provide the following information in electronic
format to the Chief Financial Analyst of the SEC's Division of
Investment
[[Page 48998]]
Management as soon as reasonably practicable following the fiscal year-
end of each LUSA Portfolio, unless the chief Financial Analyst notifies
applicants that the information need no longer be submitted: (a)
Monthly average total assets for each LUSA Portfolio and each
Underlying Portfolios; (b) monthly purchase and redemptions (other than
by exchange) for each LUSA Portfolio and each Underlying Portfolio; (c)
monthly exchanges into and out of each LUSA Portfolio and each
Underlying Portfolio; (d) month-end allocations of each LUSA
Portfolio's assets among the Underlying Portfolios; (e) annual expense
ratios for each LUSA Portfolio and each Underlying Portfolio; and (f) a
description of any vote taken by the shareholders of any Underlying
Portfolio, including a statement of the percentage of votes cast for
and against the proposal by LUSA Fund and by the other shareholders of
that Underlying Portfolio.
For the SEC, by the Division of Investment Management, Under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-23703 Filed 9-16-96; 8:45 am]
BILLING CODE 8010-01-M