[Federal Register Volume 61, Number 238 (Tuesday, December 10, 1996)]
[Notices]
[Pages 65095-65098]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31335]


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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22366; 812-10166]


The Victory Portfolios, et al.; Notice of Application

December 3, 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: The Victory Portfolios, SBSF Funds, Inc. dba the Key Mutual 
Funds (the ``Key Mutual Funds'') (collectively, the ``Funds''), and 
KeyCorp Mutual Fund Advisers, Inc. (``Key Advisers'').

RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act 
granting an exemption from the provisions of section 15(a) of the Act 
and rule 18f-2 thereunder, and from certain disclosure requirements set 
forth in item 22 of Schedule 14A under the Securities Exchange Act of 
1934 (the ``1934 Act''), items 2, 5(b)(iii), and 16(a)(iii) of Form N-
1A, item 3 of Form N-14, item 48 of Form N-SAR, and sections 6-07.2(a), 
(b), and (c) of Regulation S-X.

SUMMARY OF APPLICATION: Applicants seek an order permitting Key 
Advisers, as investment adviser to the Funds, to enter into subadvisory 
contracts with sub-advisers without receiving prior shareholder 
approval, and the Funds to disclose only aggregate sub-advisory fees 
for each series in their prospectuses and other reports.

FILING DATE: The application was filed on May 23, 1996, and amended on 
September 16, 1996. Applicants have agreed to file an amendment, the 
substance of which is incorporated herein, during the notice period.

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 received by the SEC by 5:30 p.m. on December 30, 
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 may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street NW., Washington, DC 20549. 
Applicants: The Victory Portfolios and Key Mutual Funds, 3435 Stelzer 
Road, Columbus, OH 43219-3035; Key Advisers, 126 Public Square, 
Cleveland, OH 44114-1306.

FOR FURTHER INFORMATION CONTACT:
David W. Grim, Staff Attorney, at (202) 942-0571, or Mercer E. Bullard, 
Branch Chief, 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. The Victory Portfolios, a Delaware business trust, and Key 
Mutual Funds, a Maryland corporation, are open-end management 
investment companies registered with the SEC under the Act. Each Fund 
currently has one or more investment series (``Series'') with different 
investment objectives and policies.\1\
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    \1\ Applicants also request relief with respect to any future 
open-end management investment company advised by Key Advisers.
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    2. The Funds plan to establish new Series, each structured as a 
``fund of funds'' that will invest in shares of one or more other 
mutual funds beyond the limits in section 12(d)(1) of the Act. On May 
20, 1996, applicants filed an application for exemptive relief from 
sections 12(d)(1) and 17 of the Act to implement and operate these 
funds. A ``fund of funds'' may invest in an underlying fund that is 
relying on the order requested in the immediate application.
    3. Key Advisers, an Ohio corporation, is registered with the SEC as 
an investment adviser under the Investment Advisers Act of 1940 (the 
``Advisers Act''). It is a wholly-owned subsidiary of KeyCorp Asset 
Management Holdings, Inc., which is a wholly-owned subsidiary of 
KeyBank National Association, which is a wholly-owned subsidiary of 
KeyCorp. Under its current investment advisory agreement with The 
Victory Portfolios (the ``Current Agreement''), Key Advisers is 
responsible for conducting investment research and supervision and for 
the purchase and sale of investments. Under the Current Agreement, Key 
Advisers may delegate

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a portion of its responsibilities to a sub-adviser.
    4. Key Advisers has entered into an investment sub-advisory 
agreement with its affiliate, Society Asset Management, Inc., on behalf 
of each Series of The Victory Portfolios except the Fund for Income 
Series and the Special Growth Fund Series. With respect to the day-to-
day management of each of the Series, Society, under the sub-advisory 
agreement, makes decisions concerning, and places all orders for, 
purchases and sales of securities. The sub-advisory agreement does not 
result in the payment of additional fees by The Victory Portfolios.
    5. Key Advisers currently serves as the investment adviser to two 
funds of the Key Mutual Funds that have recently commenced operations. 
Spears, Benzak, Salomon & Farrell, Inc. (``SBSF''), a New York 
corporation that is registered with the SEC as an investment adviser 
under the Advisers Act, currently serves as the investment adviser to 
the other four funds of the Key Mutual Funds. It is anticipated that 
the directors and shareholders of the Key Mutual Funds will be asked to 
approve Key Advisers as investment adviser to the Key Mutual Funds. The 
Key Mutual Funds will not rely on the requested relief until it 
receives the necessary shareholder approval and key Advisers becomes 
the investment adviser.
    6. Key Advisers intends to adopt a ``manager of managers'' approach 
with respect to one or more existing or future Series of the Funds 
(``Participating Series''). Under this approach, Key Advisers would 
employ one or more investment advisers (``Money Managers'') to exercise 
investment discretion over the various asset classes in which the 
participating Series invest. Key Advisers would enter into a portfolio 
management agreement with each Money Manager (a ``Portfolio Management 
Agreement''). Each Portfolio Management Agreement would provide, among 
other things, that the Money Manager would be responsible for 
continuously reviewing, supervising, and administering the relevant 
Participating Series' investment program with respect to the portion of 
the Participating Series' assets assigned to it.
    7. Subject to shareholder approval, each Participating Series would 
enter into an investment advisory agreement with Key Advisers 
(``Investment Advisory Agreement'') that would authorize the ``manager 
of managers'' approach. Under the Investment Advisory Agreement, Key 
Advisers would: (a) determine the asset classes in which Participating 
Series would invest; (b) evaluate and select Money Managers; (c) 
perform internal due diligence on prospective Money Managers and 
thereafter monitor Money Managers' performance through quantitative and 
qualitative analysis as well as in person, telephonic, and written 
consultations; (d) determine the percentage of assets to be managed by 
a particular Money Manager; (e) supervise compliance with the 
investment objectives and policies of each Participating Series; (f) 
authorize a Money Manager to engage in certain investment techniques 
for a Participating Series; (g) recommend to the boards of directors of 
the Funds (the ``boards'') whether Portfolio Management Agreements 
should be renewed, modified, or terminated; (h) recommend to the Boards 
the addition of new Money Managers as it deems appropriate; and (i) 
provide overall management and supervision of the Funds' operations.
    8. In return for providing the services described in paragraph 7 
above, Key Advisers would receive a fee from each Participating Series, 
computed as a percentage of net assets. Under the ``manager of 
managers'' approach, Key Advisers would pay the Money Managers out of 
this fee. The prospectus of each Participating Series will disclose the 
aggregate amount of the investment advisory fee paid to Key advisers, 
rather than the sub-advisory fees paid to individual Money Managers.
    9. Except as discussed in the next sentence, applicants request an 
order permitting Key Advisers to enter into and materially amend 
Portfolio Management Agreements with Money Managers without obtaining 
shareholder approval. Key Advisers will not enter into a Portfolio 
Management Agreement with a Money Manager that is an affiliated person, 
as defined in section 2(a)(3) of the Act, of the participating Series 
or Key Advisers other than by reason of serving as Money Manager of the 
Series (an ``Affiliated Money Manager''), without such agreement being 
approved by the shareholders of the applicable Participating Series.
    10. Applicants also request an exemption from the disclosure 
provisions described below that may be deemed to require disclosure of 
fees paid to each Money Manager.
    11. Form N-1A is the registration statement used by open-end 
management investment companies to register under the Act and to 
register their securities under the Securities Act of 1933 (the ``1933 
Act''). Items 2, 5(b)(iii), and 16(a)(iii) of Form N-1A, taken 
together, may be deemed to require the Participating Series to disclose 
compensation paid to the investment company's investment adviser and 
the method of computing the fee.
    12. Item 3 of Form N-14, the registration form for business 
combinations involving mutual funds, requires the inclusion of a 
``table showing the current fees for the registrant and the company 
being acquired and pro forma fees, if different, for the registrant 
after giving effect to the transaction using the format prescribed'' in 
item 2 of Form N-1A.
    13. Rule 20a-1 under the Act requires proxies solicited with 
respect to an investment company to comply with Schedule 14A under the 
1934 Act. Item 22 of Schedule 14A sets forth the requirements 
concerning the information that must be included in a proxy statement. 
Item 22(a)(3)(iv) requires a proxy statement for a shareholder meeting 
at which a new fee will be established or an existing fee increased to 
include a tale of the current and pro forma fees using the format 
prescribed in item 2 of Form N-1A. Items 22(c)(1)(ii), 22(c)(1)(iii), 
22(c)(8), and 22(c)(9), taken together, require that a proxy statement 
for a shareholder meeting at which an advisory contract is to be voted 
upon shall include the ``rate of compensation of the investment 
adviser,'' the ``aggregate amount of the investment adviser's fees,'' 
the ``terms of the contract to be acted upon,'' and, if a change in 
fees is proposed, the existing and proposed rate schedule for advisory 
fees paid to the advisers.
    14. Form N-SAR is the semi-annual report filed with the SEC by 
registered investment companies. Item 48 of Form N-SAR requires 
investment companies to disclose the rate schedule for fees paid to 
investment advisers.
    15. Regulation S-X sets forth the requirements for financial 
statements required to be included as part of the registration 
statements and shareholder reports filed with the SEC under the Act and 
the 1933 Act. Sections 6-07.2(a), (b), and (c) of Regulation S-X may be 
deemed to require that the Funds' financial statements contain 
information concerning fees paid to the Money Managers.
    16. Applicants request an exemption to permit each Participating 
Series of the Funds to disclose (both as a dollar amount and as a 
percentage of a Participating Series' average daily net assets) only: 
the total advisory fee that Key Advisers is paid by each Participating 
Series, the aggregate fees that Key Advisers pays to all Money Managers 
managing the assets of each Series, and the net advisory fee retained 
by Key Advisers for its services

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provided to each Participating Series after Key Advisers pays the Money 
Managers (collectively, ``Aggregate Fees''). If a Participating Series 
employs an Affiliated Money Manager, the Participating Series will 
provide separate disclosure of any fees paid to such Affiliated Money 
Manager.

Applicants' Legal Analysis

    1. Section 15(a) of the Act makes it unlawful for any person to act 
as an investment adviser to a registered investment company except 
pursuant to a written contract which has been approved by the vote of a 
majority of the investment company's outstanding voting securities. 
Rule 18f-2 provides that each series or class of stock in a series 
company affected by a matter must approve such matter if the Act 
requires shareholder approval.
    2. Applicants assert that relief from section 15(a) and rule 18f-2 
should be granted because the Participating Series will be operated in 
a manner so different from that of conventional investment companies 
that shareholder approval of advisory contracts would not serve any 
meaningful purpose. Applicants contend that, by investing in a 
Participating Series, shareholders, in effect, will hire key Advisers 
to manage the Participating Series' assets by using its proprietary 
investment adviser selection and monitoring process rather than by 
hiring its own employees to manage assets directly. Applicants argue 
that shareholders will expect that Key Advisers, under the overall 
authority of the board, will take responsibility for overseeing Money 
Managers and recommending their hiring, termination, and replacement.
    3. Applicants contend that the requested relief also will benefit 
shareholders by enabling the Participating Series to operate in a less 
costly and more efficient manner. Applicants argue that the requested 
relief will reduce expenses because a Participating Series will not 
have to prepare and solicit proxies each and every time a Portfolio 
Management Agreement is entered into or materially modified. Applicants 
believe that the requested relief also will enable a Participating 
Series to hire, terminate, and replace Money Managers more efficiently. 
Applicants also contend that the requested relief will relieve 
shareholders of the very responsibility that they are paying Key 
Advisers to assume: the selection, termination, and compensation of 
Money Managers. Finally, applicants assert that several of the 
conditions in the application are designed to protect shareholder 
interests through careful Board oversight of the Participating Series 
and their arrangements with Key Advisers and the Money Managers.
    4. Applicants argue that, under the manager of managers approach, 
disclosure of fees paid to Money Managers would not serve any 
meaningful purpose since investors will pay Key Advisers to retain and 
compensate the Money Managers. Applicants also contend that many Money 
Managers charge their customers for advisory services according to a 
``posted'' fee schedule. Applicants note that, while Money Managers may 
be willing to negotiate fees lower than those posted in the schedule, 
particularly with large institutional clients, they are reluctant to do 
so where the fees are disclosed to other prospective and existing 
customers. Thus, applicants contend that the requested disclosure 
relief may encourage Money Managers to negotiate lower advisory fees 
with Key Advisers, the benefits of which ultimately may be passed on to 
shareholders.
    5. Section 6(c) authorizes the Commission to exempt persons or 
transactions from the provisions of the Act to the extent that such 
exemptions are appropriate in the public interest and consistent with 
the protection of investors and the purposes fairly intended by the 
policies and provisions of the Act. Applicants assert that their 
request satisfies these standards.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. Before a Participating Series may rely on the order requested 
herein, the operation of the Participating Series in the manner 
described in the application will be approved by a majority of each 
Participating Series' outstanding voting securities, as defined in the 
Act, or, in the case of a newly-created Participating Series whose 
public shareholders purchased shares on the basis of a prospectus 
containing the disclosure contemplated by condition 2 below, by the 
sole shareholder before offering shares of the Participating Series to 
the public.
    2. The prospectus for each Participating Series will disclose the 
existence, substance, and effect of the order. In addition, each 
Participating Series will hold itself out to the public as employing 
the ``manager of managers'' approach described in the application. The 
prospectus and any sales materials or other shareholder communications 
relating to the Participating Series will prominently disclose that Key 
Advisers has ultimate responsibility for the investment performance of 
the Participating Series due to its responsibility to oversee Money 
Managers and recommend their hiring, termination, and replacement.
    3. Within 60 days of the hiring of any new Money Manager or the 
implementation of any proposed material change in a Portfolio 
Management Agreement, Key Advisers will furnish shareholders all 
information about the new Money Manager or Portfolio Management 
Agreement that would be included in a proxy statement, except as 
modified by the order with respect to the disclosure of fees paid to 
the Money Managers. Such information will include disclosure of the 
Aggregate Fees and any change in such disclosure caused by the addition 
of a new Money Manager or any proposed material change in a 
Participating Series' Portfolio Management Agreement. To meet this 
obligation, within 60 days of the hiring of a new Money Manager or the 
implementation of any material change to the terms of a Portfolio 
Management Agreement, Key Advisers will provide shareholders with an 
information statement meeting the requirements of Regulation 14C and 
Schedule 14C under the 1934 Act. The information statement also will 
meet the requirements of Item 22 of Schedule 14A under the 1934 Act, 
except as modified by the order with respect to the disclosure of fees 
paid to the Money Managers.
    4. Key Advisers will not enter into a Portfolio Management 
Agreement with any Affiliated Money Manager without such agreement, 
including the compensation to be paid thereunder, being approved by the 
shareholders of the applicable Participating Series.
    5. At all times, a majority of each Fund's Board will not be 
``interested persons'' of the Funds within the meaning of the Act 
(``Non-interested Trustees''), and the nomination of new or additional 
Non-interested Trustees will be placed within the discretion of the 
then existing Non-interested Trustees.
    6. When a Money Manager change is proposed for a Participating 
Series with an Affiliated Money Manager, the Funds' trustees, including 
a majority of Non-interested Trustees, will make a separate finding, 
reflected in that Fund's board minutes, that such change is in the best 
interest of the Participating Series and its shareholders and does not 
involve a conflict of interest from which Key Advisers or the 
Affiliated Money Manager derives an inappropriate advantage.
    7. Separate counsel knowledgeable about the Act and the duties of 
Non-

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 interested Trustees will be retained to represent each Fund's Non-
interested Trustees. The selection of such counsel will be placed 
within the discretion of the Non-interested Trustees.
    8. Key Advisers will provide each Fund's Board no less frequently 
than quarterly with information about Key Advisers' profitability for 
each Participating Series relying on the relief requested in the 
application. Whenever a Money Manager to a particular Participating 
Series is hired or terminated, Key Advisers will provide the Fund's 
Board with information showing the expected impact on Key Advisers' 
profitability, and quarterly reports will reflect the impact on 
profitability of the hiring or termination of Money Managers during the 
quarter.
    9. Key Advisers will provide general management and administrative 
services to the Participating Series and, subject to board review and 
approval, will: (a) set the Participating Series' overall investment 
strategies, (b) recommend Money Managers, (c) allocate and, when 
appropriate, reallocate the Participating Series' assets among Money 
Managers, (d) monitor and evaluate Money Manager performance, and (e) 
oversee Money Manager compliance with the Participating Series' 
investment objective, policies, and restrictions.
    10. No director, trustee, or officer of the Funds or Key Advisers 
will own directly or indirectly (other than through a pooled investment 
vehicle over which such person does not have control) any interest in a 
Money Manager except for: (a) ownership of interests in Key Advisers or 
any entity that controls, is controlled by, or is under common control 
with Key Advisers; or (b) ownership of less than 1% of the outstanding 
securities of any class of equity or debt of a publicly traded company 
that is either a Money Manager or an entity that controls, is 
controlled by, or is under common control with a Money Manager.

    For the SEC, by the Division of Investment Management, pursuant 
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-31335 Filed 12-9-96; 8:45 am]
BILLING CODE 8010-01-M