[Federal Register Volume 62, Number 101 (Tuesday, May 27, 1997)]
[Notices]
[Pages 28745-28748]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13695]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22669; 812-10410]


Masters' Select Investment Trust et al.; Notice of Application

May 19, 1997.
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: Masters' Select Investment Trust (the ``Trust''), each 
open-end management investment company advised by, or in the future 
advised by Litman/Gregory Fund Advisors, LLC (``Litman/Gregory'') 
(collectively with the Trust, the ``Funds''), and Litman/Gregory.

RELEVANT ACT SECTIONS: Exemption requested under section 6(c) of the 
Act from section 15(a) 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 ``Exchange 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 Litman/
Gregory, as investment adviser to certain portfolios of the Funds, to 
enter into and modify sub-advisory contracts without obtaining 
shareholder approval, and permitting the Funds to disclose only the 
aggregate sub-advisory fee for each portfolio in their prospectuses and 
other reports.

FILING DATES: The application was filed on October 18, 1996, and 
amended on January 29, 1997, and March 19, 1997.

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 June 12, 1997, 
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, NW., Washington, DC 20549. 
Applicants, 4 Orinda Way, Suite 230-D, Orinda, CA 94563.

FOR FURTHER INFORMATION CONTACT: Brian T. Houihan, Senior Counsel, at 
(202) 942-0526, 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

[[Page 28746]]

application. The complete application may be obtained for a fee from 
the SEC's Public Reference Branch.

Applicants' Representations

    1. The Trust is a registered open-end management investment company 
organized as a Delaware business trust. The Trust currently consists of 
one investment portfolio, The Masters Select Equity Fund (the ``Equity 
Portfolio''). Additional portfolios may be formed in the future with 
different investment objectives and policies (collectively with the 
Equity Portfolio, the ``Portfolios'').
    2. Litman/Gregory, a registered investment adviser, acts as the 
investment adviser to the Equity Portfolio and is expected to act as 
investment adviser to any future Portfolios of the Trust and Portfolios 
of other existing and future Funds. Litman/Gregory will operate the 
Portfolios in a manner substantially different from that of 
conventional investment companies. Litman/Gregory has developed an 
investment philosophy for the Equity Portfolio that applicants believe 
capitalizes on Litman/Gregory's extensive experience evaluating 
investment advisory firms using a specified set of criteria. Litman/
Gregory's investment strategy for the Equity Portfolio is based, in 
part, on its belief that it is possible to identify investment managers 
who will deliver superior performance relative to their peer group.
    3. In each instance in which Litman/Gregory acts or will act as 
investment adviser to a Portfolio, the Portfolio may have one or more 
external sub-advisers (the ``Investment Managers'') pursuant to 
separate sub-advisory agreements (``Management Agreements''). The 
Equity Portfolio has six Investment Managers. Litman/Gregory's 
investment strategy for the Equity Portfolio is to allocate assets to 
Investment Managers who, based on Litman/Gregory's research, represent 
complementary style groups. Applicants anticipate that Litman/Gregory 
may apply a similar strategy to future Portfolios.
    4. As investment adviser, Litman/Gregory has overall responsibility 
for assets under management, allocates assets among Investment 
Managers, monitors and evaluates the performance of the Investment 
Managers, and recommends selection of Investment Managers to the 
Trust's board of trustees. Each Investment Manager exercises investment 
discretion over or makes investment recommendations with respect to a 
portion of the assets of the Portfolio. In circumstances where the 
Investment Manager makes recommendations, but does not exercise 
investment discretion, Litman/Gregory will be responsible for 
authorizing portfolio transactions based on such recommendations.
    5. As investment adviser, Litman/Gregory receives a fee from the 
Equity Portfolio computed as a percentage of the portfolio's net 
assets. Litman/Gregory pays the Investment Managers out of this fee. 
The fee paid to each Investment Manager is separately negotiated and 
may differ from one Investment Manager to another.
    6. Applicants request an exemption from section 15(a) and rule 18f-
2 to permit the Funds to enter into and modify Management Agreements 
without obtaining shareholder approval. Applicants also request an 
exemption from the various provisions described below that may require 
them to disclose the fees paid by Litman/Gregory to the Investment 
Managers.
    7. From N-1A is the registration statement used by open-end 
investment companies. Items 2, 5(b)(iii), and 16(a)(iii) of Form N-1A 
require disclosure of the method and amount of the investment adviser's 
compensation.
    8. From N-14 is the registration form for business combinations 
involving open-end investment companies. Item 3 of Form N-14 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.''
    9. Rule 20a-1 under the Act requires proxies solicited with respect 
to an investment company to comply with Schedule 14A under the Exchange 
Act. Item 22(a)(3)(iv) of Schedule 14A requires a proxy statement for a 
shareholder meeting at which a new fee will be established or an 
existing fee increased to include a table of the current and pro forma 
fees. Items 22(c)(1)(ii), 22(c)(1)(iii), 22(c)(8), and 22(c)(9), taken 
together, require a proxy statement for a shareholder meeting at which 
the advisory contract will be voted upon to include the ``rate of 
compensation of the investment adviser,'' the ``aggregate amount of the 
investment adviser's fees,'' a description of ``the terms of the 
contract to be acted upon,'' and, if a change in the advisory fee is 
proposed, the existing and proposed fees and the difference between the 
two fees.
    10. 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 
their investment advisers, including the Investment Managers.
    11. Regulation S-X sets forth the requirements for financial 
statements required to be included as part of investment company 
registration statements and shareholder reports filed with the SEC. 
Sections 6-07(2) (a), (b), and (c) of Regulation S-X require that 
investment companies include in their financial statements information 
about investment advisory fees.
    12. With respect to investment advisory fees, applicants propose to 
disclose (both as a dollar amount and as a percentage of a Portfolio's 
net assets) only the: (a) Total advisory fee charged by Litman/Gregory 
with respect to each Portfolio; (b) aggregate fees paid by Litman/
Gregory to all Investment Managers managing assets of each Portfolio; 
and (c) net advisory fee retained by Litman/Gregory with respect to 
each Portfolio after Litman/Gregory pays all Investment Managers 
managing assets of the Portfolio (collectively, the ``Aggregate Fee''). 
For any Portfolio that employs an Investment Manager that is an 
``affiliated person'' (as defined in section 2(a)(3) of the Act) of the 
Portfolio or Litman/Gregory, other than by reason of serving as an 
Investment Manager of the Portfolio (an ``Affiliated Manager''), the 
Portfolio will provide separate disclosure of any fees paid to such 
Affiliated Manger.

Applicants' Legal Analysis

    1. Section 15(a) of the Act provides, in relevant part, that it is 
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 outstanding voting securities 
of such registered investment company. Rule 18f-2 provides that any 
investment advisory contract that is submitted to the shareholders of a 
series investment company under section 15(a) shall be deemed to be 
effectively acted upon with respect to any class or series of such 
company if a majority of the outstanding voting securities of such 
class or series vote for the approval of such matter.
    2. Applicants believe that the requested exemption from shareholder 
voting requirements should be granted because Litman/Gregory will 
operate the Portfolios in a manner so different from that of 
conventional investment companies that shareholder approval would not 
serve any meaningful purpose. Applicants argue that, by investing in a 
Portfolio, shareholders, in effect, will hire Litman/Gregory to manage 
the Portfolio's assets by using external portfolio managers (i.e., 
advisory firms not affiliated with

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Litman/Gregory), in combination with Litman/Gregory's proprietary 
investment adviser selection and monitoring process, rather than by 
using Litman/Greogy's own employees to manage the Portfolio assets. 
Thus, applicants contend that shareholders will expect Litman/Gregory, 
under the overall authority of the board of trustees, to take 
responsibility for overseeing Investment Managers and recommending 
their hiring, termination, and replacement. Applicants note that each 
Portfolio's investment advisory agreement with Litman/Gregory will be 
subject to shareholder approval under section 15(a). Finally, 
applicants state that the trustees of each Fund, including each trustee 
who is not an ``interested person'' of the Fund as defined in section 
2(a)(19) of the Act (``Independent Trustees''), will consider and 
approve each Management Agreement (including the specific sub-advisory 
fee arrangements) in the manner required by the Act and the rules 
thereunder.
    3. Applicants also believe that the requested exemption will 
benefit shareholders by enabling the Portfolios to operate in a less 
costly and more efficient manner. Applicants argue that the requested 
relief will reduce expenses because the Portfolios will not have to 
prepare and solicit proxies each time a Management Agreement is entered 
into or modified. Applicants believe that the Portfolios will be able 
to operate more efficiently by permitting each Portfolio to hire, 
terminate, and replace Investment Managers according to the judgment of 
its board and Litman/Gregory. Applicants also argue that the requested 
relief will relieve shareholders of the very responsibility that they 
are paying Litman/Gregory to assume: the selection, termination, and 
replacement of Investment Managers.
    4. Applicants also believe that disclosure of the fees that Litman/
Gregory pays to each Investment Manager would not serve any meaningful 
purpose since investors will pay Litman/Gregory to retain and 
compensate the Investment Managers. Applicants state that, while 
investment advisers typically are willing to negotiate fees lower than 
those posted in their fee schedules, particularly with large 
institutional clients, they are reluctant to do so where the negotiated 
fees are disclosed to other prospective and existing customers. Thus, 
applicants argue that the requested relief will facilitate lower 
overall investment advisory fees because Investment Managers may accept 
lower advisory fees from Litman/Gregory, the benefits of which will be 
passed on to shareholders in the form of a lower Investment Manager 
fee. Applicants believe that disclosure of each sub-advisory fee 
arrangement would be complex and, given the varying asset allocation to 
each Investment Manager, would not necessarily provide any meaningful 
information to a shareholder. Applicants claim that, by limiting 
disclosure to the Aggregate Fee, the requested relief will enable 
shareholders to understand more clearly the relevant cost/expense 
structure of each Portfolio.
    5. Section 6(c) authorizes the SEC 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 believe that this 
standard has been satisfied for the reasons discussed above.

Applicant's Conditions

    Applicants agree that the following conditions may be imposed in 
any order of the SEC granting the requested relief:
    1. Before a Portfolio may rely on the order requested in the 
application, the operation of the Portfolio in the manner described in 
the application will be approved by a majority of each Portfolio's 
outstanding voting securities, as defined in the Act, or, in the case 
of a new Portfolio whose public shareholders purchase shares on the 
basis of a prospectus containing the disclosure contemplated by 
condition 2 below, by the sole shareholder before offering shares of 
the Portfolio to the public.
    2. The prospectus for each Portfolio will disclose the existence, 
substance, and effect of the order. In addition, each Portfolio will 
hold itself out to the public as employing the management structure 
described in the application. The prospectus and any sales materials or 
other shareholder communications relating to a Portfolio (collectively, 
``Marketing Communications'') will prominently disclose that Litman/
Gregory has ultimate responsibility for the investment performance of 
the Portfolio due to its responsibility to oversee Investment Managers 
and recommend their hiring, termination, and replacement.
    3. Within 60 days of the hiring of any new Investment Manager or 
the implementation of any proposed material change in a Management 
Agreement, Litman/Gregory will furnish shareholders all information 
about the new Investment Manager or 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 Investment Managers. Such 
information will include disclosure of the Aggregate Fee and any 
proposed material change in the Portfolio's Management Agreement with 
such new Investment Manager. To meet this obligation, Litman/Gregory 
will provide shareholder with an information statement meeting the 
requirements of Regulation 14C, Schedule 14C, and Item 22 of Schedule 
14A under the Exchange Act, except as modified by the order with 
respect to the disclosure of specific fees paid to the Investment 
Managers.
    4. Litman/Gregory will not enter into a Management agreement with 
any Affiliated Manager without such agreement, including the 
compensation to be paid thereunder, being approved by the shareholders 
of the applicable Portfolio.
    5. At all times, a majority of each Fund's board of trustees will 
be Independent Trustees, and the nomination of new or additional 
Independent Trustees will be placed within the discretion of the then 
existing Independent Trustees.
    6. When an Investment Manager change is proposed for a Portfolio 
with an Affiliated Manager, the Fund's trustees, including a majority 
of the Independent Trustees, will make a separate finding, reflected in 
the applicable Fund's board minutes, that such change is in the best 
interests of the Portfolio and its shareholders and does not involve a 
conflict of interest from which Litman/Gregory or the Affiliated 
Manager derives an inappropriate advantage.
    7. Independent counsel knowledgeable about the Act and the duties 
of Independent Trustees will be engaged to represent the Independent 
Trustees of each Fund. The selection of independent counsel will be 
placed within the discretion of the Independent Trustees.
    8. Litman/Gregory will provide each Fund's board of trustees no 
less frequently than quarterly with information about Litman/Gregory's 
profitability for each Portfolio relying on the relief requested in the 
application. The information will reflect the impact on profitability 
of the hiring or termination of Investment Managers during the quarter.
    9. Whenever an Investment Manager to a particular Portfolio is 
hired or terminated, Litman/Gregory will provide that Fund's board of 
trustees with information showing the expected impact on Litman/
Gregory's profitability.

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    10. Litman/Gregory will provide general management and 
administrative services to the Portfolio and, subject to board review 
and approval, will (a) set the Portfolio's overall investment 
strategies, (b) recommend Investment Managers, (c) allocate and, when 
appropriate, reallocate the Portfolio's assets among Investment 
Managers, (d) monitor and evaluate Investment Manager performance, and 
(e) oversee Investment Manager compliance with the Portfolio's 
investment objective, policies, and restrictions.
    11. No director, trustee, or officer of the Funds or Litman/Gregory 
will own directly or indirectly (other than through a pooled investment 
vehicle over which such person does not have control) any interest in 
an Investment Manager except for (a) ownership of interests in Litman/
Gregory or any entity that controls, is controlled by or is under 
common control with Litman/Gregory; 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 an Investment Manager or an entity that 
controls, is controlled by or is under common control with an 
Investment Manager.
    12. Each Portfolio will disclose in its registration statement the 
respective Aggregate Fee.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13695 Filed 5-23-97; 8:45 am]
BILLING CODE 8010-01-M