[Federal Register Volume 63, Number 13 (Wednesday, January 21, 1998)]
[Notices]
[Pages 3175-3178]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-1347]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22998; 812-10492]
Growth Stock Portfolio, et al.; Notice of Application
January 13, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemption under section 6(c) of the
Investment Company Act of 1940 (the ``Act'') from section 15(a) of the
Act and rule 18f-2 under the Act and from certain disclosure
requirements under the Act.
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SUMMARY OF APPLICATION: Applicants request an order that would (i)
permit applicants to hire sub-advisers and materially amend sub-
advisory agreements without shareholder approval and (ii) grant relief
from
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certain disclosure requirements regarding advisory fees paid to the
sub-advisers.
APPLICANTS: Growth Stock Portfolio (the ``Portfolio''), R. Meeder &
Associates, Inc. (``RMA''), and Sector Capital Management, L.L.C.
(``Sector,'' together with RMA, the ``Advisers'').
FILING DATES: The application was filed on January 13, 1997. Applicant
has 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 February 9, 1998
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, N.W., Washington, D.C.
20549. Applicants: Growth Stock Portfolio and R. Meeder & Associates,
Inc., 6000 Memorial Drive, Dublin, OH 43017; Sector Capital Management,
L.L.C., 5350 Poplar Avenue, Suite 490, Memphis, TN 38119.
FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Staff Attorney, at
(202) 942-0574, or Nadya B. Roytblat, 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, 450 5th Street, N.W., Washington,
D.C. 20549 (tel. 202-942-8090).
Applicants' Representations
1. The Flex-Funds and The Flex-Partners, Massachusetts business
trusts, are open-end management investment companies registered under
the Act (The Flex-Funds and The Flex-Partners are collectively referred
to as the ``Trusts''). The Highlands Growth Fund is a series of The
Flex-Funds, and the Core Equity Fund is a series of The Flex-Partners
(The Highlands Growth Fund and the Core Equity Fund are collectively
referred to as the ``Funds''). The Portfolio, a New York business
trust, is an open-end management investment company registered under
the Act. The Portfolio's securities are not registered under the
Securities Act of 1933 and the Portfolio currently does not intend to
offer its shares to the public. The Portfolio offers its shares to the
Funds through the use of offering documents (``Offering Documents'').
Neither the Trusts nor the Funds have an investment adviser because the
assets of the Funds are invested in the Portfolio, which has the same
investment objectives as the Funds.
2. RMA, an investment adviser registered under the Investment
Advisers Act of 1940 (the ``Advisers Act''), acts as investment adviser
to the Portfolio. Under an investment advisory contract, RMA (i)
provides an investment program within the limitations of the
Portfolio's investment policies and restrictions; (ii) furnishes all
executive, administrative and clerical services required for the
transaction of Portfolio business, other than accounting services and
services which are provided by the Portfolio's custodian, transfer
agent, independent accountants, and legal counsel; and (iii) provides
office space and other facilities and equipment for the management of
the affairs of the Portfolio. In addition, RMA invests the Portfolio's
cash and may invest the Portfolio's financial futures contracts and
related options. For its services, RMA receives a fee from the
Portfolio based on the net assets of the Portfolio.
3. Sector, an investment adviser registered under the Advisers Act,
serves as investment co-adviser to the Portfolio under an investment
co-advisory agreement among the Portfolio, RMA and Sector (the ``Co-
advisory Agreement''). RMA recommended to the Portfolio's board of
directors (the ``Board'') that Sector be hired as the investment co-
adviser to the Portfolio. RMA also has the right to terminate Sector as
the investment co-adviser to the Portfolio. The Co-advisory Agreement
permits Sector to enter into agreements with one or more sub-advisers
(``Sub-advisory Agreements'') to exercise investment discretion over
the Portfolio's assets.\1\
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\1\ Under the Co-advisory Agreement, Sector is authorized to
make investment decisions concerning the purchase and sale of
specific securities and other instruments.
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4. Under the Co-Advisory Agreement, Sector (i) Reallocates the
assets of the Portfolio among the sub-advisers when necessary; (ii)
evaluates and selects sub-advisers; (iii) performs internal due
diligence on prospective sub-advisers and monitors sub-advisers'
performance through quantitative and qualitative analysis; (iv)
supervises compliance with the investment objectives and policies of
the Portfolio; (v) recommends to the Board whether Sub-advisory
Agreements should be renewed, modified, or terminated; and (vi)
recommends to the Board the addition of new sub-advisers. The Portfolio
currently has seven sub-advisers (the ``Sub-advisers''). The Sub-
advisers are responsible for reviewing supervising, and administering
the Portfolio's investment program with respect to the portion of the
Portfolio's assets assigned to them. As compensation for providing its
sub-adviser selection, monitoring and asset allocation services, Sector
currently receives a fee from RMA computed as a percentage of RMA's
investment advisory fee. Sector pays the Sub-advisers out of this fee.
5. Applicants believe that the allocation of responsibilities
between the Advisers benefits the shareholders because of the
specialization and efficiency it provides. Applicants request an
exemption from section 15(a) of the Act and rule 18f-2 under the Act to
permit them to hire Sub-advisers and materially amend Sub-advisory
Agreements without shareholder approval. Applicants also request an
exemption from various disclosure requirements described below that may
require them to disclose the fees paid to each Sub-adviser.\2\
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\2\ Applicants also request relief with respect to any other
registered open-end management investment company advised by RMA and
Sector, or a person controlling, controlled by, or under common
control with RMA and a person controlling, controlled by or under
common control with Sector (a ``Future Company''), provided that the
Future Company operates in substantially the same manner as the
Portfolio and complies with the conditions of the requested order.
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6. Applicants request an exemption to permit the Portfolio and the
Trusts to disclose (as a dollar amount and as a percentage of their net
assets: (i) aggregate fees paid to RMA and its Affiliated Sub-advisers
(as defined below); (ii) aggregate fees paid to Sector and its
Affiliated Sub-advisers (as defined below); and (iii) aggregate fees
paid to Sub-Advisers other than Affiliated Sub-Advisers (these fees are
referred to collectively as, ``Aggregate Fees''). An Affiliated Sub-
adviser is any sub-adviser that is an ``affiliated person'' (as defined
in section 2(a)(3) of the Act) of the Portfolio, the Trusts, RMA, or
Sector, other than by reason of serving as a sub-adviser of the
Portfolio.
[[Page 3177]]
Applicants' Legal Analysis
1. Section 15(a) of the Act provides, in relative 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 the contract.
2. Form 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.
3. Form 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.''
4. Rule 20a-1 under the Act requires proxies solicited with respect
to an investment company to comply with Schedule 14A under the
Securities Exchange Act of 1934 (the ``1934 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.
5. 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 Sub-advisers.
6. 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.
7. 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.
8. Applicants believe that the requested relief meets the above
standard. Applicants contend that shareholders expect Sector, under the
overall authority of the Portfolio's Board, to take responsibility for
overseeing Sub-advisers and recommending their hiring, termination, and
replacement. Applicants note that the Portfolio's investment advisory
agreement with RMA and the Co-advisory Agreement will continue to be
subject to shareholder approval under section 15(a).
9. Applicants also believe that the requested relief will benefit
shareholders by enabling the Portfolio and the Funds to operate in a
less costly and more efficient manner. Applicants argue that the
requested relief will reduce the Funds' expenses because the Funds will
not have to prepare and solicit proxies each time a Sub-advisory
Agreement is entered into or modified. Applicants also believe that the
disclosure of fees that Sector pays to each Sub-adviser would not serve
a meaningful purpose since investors will pay Sector to retain and
compensate the Sub-advisers.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to following conditions:
1. Before the 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 the Portfolio's
outstanding voting securities, as defined in the Act, and by the Funds'
shareholders in accordance with section 12(d)(1)(E)(iii)(aa) of the
Act, or, in the case of a Future Company or Fund whose public
shareholders purchase shares on the basis of a prospectus containing
the disclosure contemplated by condition 2 below, by the sole
shareholder before the offering of the Future Company's or Funds'
shares to the public.
2. The Funds' prospectuses, the Portfolio's Offering Documents,
and, if applicable, the Portfolio's prospectus will disclose the
existence, substance, and effect of any order granted pursuant to this
application. In addition, the Portfolio and the Funds will hold
themselves out to the public as employing the ``manager of managers''
approach described in the application. The Funds' prospectuses, the
Portfolio's Offering Documents, and, if applicable, the Portfolio's
Prospectus will prominently disclose that RMA and Sector have ultimate
responsibility for the investment performance of the Portfolio due to
RMA's responsibility to oversee Sector and Sector's responsibility to
oversee Sub-advisers and recommend their hiring, termination, and
replacement.
3. The Portfolio and the Funds will disclose the Aggregate Fees in
their registration statements.
4. Within 90 days of the hiring of any new Sub-adviser, RMA and
Sector will furnish to the holders of the beneficial interests of the
Portfolio and the Funds' shareholders all information about the new
Sub-adviser or Sub-advisory Agreement that would be included in a proxy
statement, except as modified by the order with respect to the
disclosure of Aggregate Fees. Such information will include disclosure
of the Aggregate Fees and any change in such disclosure caused by the
addition of a new Sub-adviser. To meet this obligation, RMA and Sector
will provide the holders of the beneficial interests of the Portfolio
and the Funds' shareholders, within 90 days of the hiring of a Sub-
adviser, 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 Aggregate Fees.
5. Sector and the Portfolio will not enter into a Sub-advisory
Agreement with any Affiliated Sub-adviser without such agreement,
including the compensation to be paid thereunder, being approved by the
holders of the beneficial interests of the Portfolio and by the Funds'
shareholders in accordance with section 12(d)(1)(E)(iii)(aa) of the
Act.
6. At all times, a majority of the Portfolio's Board will not be
``interested persons'' within the meaning of section 2(a)(19) of the
Act (``Independent Trustees'') and the nomination of new or additional
Independent Trustees will be placed within the discretion of the then
existing Independent Trustees.
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7. When a Sub-adviser change is proposed when the Portfolio has an
Affiliated Sub-adviser, the Portfolio's Board, including a majority of
the Independent Trustees, will make a separate finding reflected in its
minutes, that such change is in the best interest of the Portfolio and
its investors and does not involve a conflict of interest from which
RMA, Sector, or the Affiliated Sub-adviser derives an inappropriate
advantage.
8. RMA will provide general management services to the Portfolio,
subject to Portfolio Board review. Sector will, subject to Portfolio
Board review and approval, (i) together with RMA, set the Portfolio's
overall investment strategies, (ii) select Sub-advisers, (iii) allocate
and, when appropriate, reallocate the Portfolio's assets among Sub-
advisers, (iv) monitor and evaluate Sub-adviser performances, and (v)
supervise Sub-adviser compliance with the Portfolio's investment
objective, policies, and restrictions.
9. Independent counsel knowledgeable about the Act and the duties
of Independent Trustees will be retained to represent the Independent
Trustees. The selection of such counsel will be placed within the
discretion of the Independent Trustees.
10. Sector will provide the Portfolio's Board no less frequently
than quarterly with information about Sector's profitability for each
series of the Portfolio relying on the relief requested in the
application. Whenever a Sub-adviser is hired or terminated, Sector will
provide the Portfolio's Board with information showing the expected
impact on Sector's profitability, and quarterly reports will reflect
the impact on profitability of the hiring or termination of Sub-
advisers during the quarter.
11. No director, trustee, or officer of Sector, RMA, or the
Portfolio will own directly or indirectly (other than through a pooled
investment vehicle over which such person does not have control) any
interest in a Sub-adviser except for: (a) Ownership of interests in RMA
or Sector or any entity that controls, is controlled by, or is under
common control with RMA or Sector; 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 Sub-adviser or an entity that controls,
is controlled by, or is under common control with a Sub-adviser.
For the SEC, by the Division of Investment Management, pursuant
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-1347 Filed 1-20-98; 8:45 am]
BILLING CODE 8010-01-M