[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