[Federal Register Volume 64, Number 176 (Monday, September 13, 1999)]
[Notices]
[Pages 49530-49533]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-23747]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23995; 812-11656]


LSA Variable Series Trust and LSA Asset Management LLC, Notice of 
Application

September 7, 1999.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under section 6(c) of the Investment 
Company

[[Page 49531]]

Act of 1940 (the ``Act'') for an exemption from section 15(a) of the 
Act and rule 18f-2 under the Act, as well as from certain disclosure 
requirements.

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Summary of Application: Applicants request an order to permit 
applicants to enter into and materially amend subadvisory agreements 
without shareholder approval and to grant relief from certain 
disclosure requirements.
Applicants: LSA Variable Series Trust (the ``Trust''), on behalf of its 
series, Focused Equity Fund, Growth Equity Fund, Disciplined Equity 
Fund, Value Equity Fund Balanced Fund, and Emerging Growth Domestic 
Equity Fund (collectively, the ``Funds''), and LSA Asset Management LLC 
(the ``Manager'') (collectively, ``Applicants'').
Filing Date: The application was filed on June 16, 1999 and amended on 
August 27, 1999.
Hearing or Notification of Hearing: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving applicants with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on October 1, 1999, 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 Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW, Washington, DC 
20549-0609; Applicants, 3100 Sanders Road, Suite J5B, Northbrook, 
Illinois 60062.

FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Senior Counsel, at 
(202) 942-0574 or George J. Zornada, 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 at the 
Commission's Public Reference Branch, 450 Fifth Street, NW, Washington, 
DC 20549-0102 (telephone (202) 942-8090).

Applicant's Representations

    1. The Trust is a Delaware business trust and is registered under 
the Act as an open-end management investment company. Each Fund has its 
own investment objective, policies and restrictions.\1\ Shares of the 
Funds will serve as the funding vehicles for variable annuity contracts 
and variable life insurance policies offered through separate accounts 
(``Separate Accounts'') of Allstate Life Insurance Company 
(``Allstate'') and other life insurance companies (owners of such 
contracts and policies, ``Owners''). The Funds are not sold directly to 
the public, although in the future shares of the Funds may also be sold 
to qualified pension plans. The Manager is a wholly-owned subsidiary of 
Allstate and is an investment adviser registered under the Investment 
Advisers Act of 1940 (``Advisers Act'').
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    \1\ Applicants also request relief with respect to all future 
series of the Trust and to all subsequently registered open-end 
management investment companies including all series thereof that in 
the future are advised by the Manger (or any entity controlling, 
controlled by, or under common control with the Manager), provided 
that such companies (1) operate in substantially the same manner as 
the Trust and (2) comply with the terms and conditions of the 
requested order (``Future Investment Companies''). The Trust is the 
only existing investment company that currently intends to rely on 
the requested order.
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    2. The Manager will serve as investment adviser to the Funds 
pursuant to an investment advisory agreement entered into with the 
Trust (``Management Agreement''). Under the Management Agreement, the 
primary responsibilities of the Manager, subject to the supervision and 
direction of the Trust's board of trustees (``Board''), are to provide 
the Trust with investment management services and to select and 
contract with one or more investment advisers (``Advisers'') to manage 
the Funds' investment portfolios. Each Fund currently will be advised 
by a single Adviser. Each Adviser recommended by the Manager will be 
selected and approved by the Board, including a majority of the 
trustees who are not ``interested persons'' (as defined in section 
2(a)(19) of the Act), of the Trust, the Manager, or the Advisers 
(``Independent Trustees''). Each Adviser is, and any future Adviser 
will be, registered as an investment adviser under the Advisers Act and 
will perform services under a subadvisory agreement (``Advisory 
Agreement'') between the Manager and the Adviser. Each Adviser's fees 
will be paid by the Manager out of the management fees received by the 
Manager from the Funds.
    3. Although the Manager is a newly-formed entity, its parent 
company, Allstate, has extensive experience in asset management and in 
evaluating and hiring investment advisers. As a wholly-owned subsidiary 
of Allstate, the Manager will have access to and draw upon Allstate's 
advisory experience and expertise. In providing investment management 
evaluation services, the Manager will conduct quantitative and 
qualitative analyses of the Advisers and will consider, among other 
factors, each Adviser's level of expertise, relative performance, 
consistency of results, and investment discipline or philosophy. The 
Manager will monitor the compliance of each Adviser with the investment 
objective and related policies and restrictions of each Fund and will 
review the performance of each Adviser and report periodically to the 
Board on such performance. The Manager is responsible for communicating 
performance expectations and evaluations to each Adviser and ultimately 
to determine whether each Advisory Agreement should be renewed, 
modified, or terminated. The Manager will provide reports to the Board 
with respect to the results of its evaluation, monitoring functions and 
determinations with respect to each Adviser.
    4. Applicants request relief to permit the manager to enter into 
and materially amend Advisory Agreements without seeking shareholder 
approval. The requested relief will not extend to an Adviser that is an 
``affiliated person,'' as defined in section 2(a)(3) of the Act, of the 
Trust or the Manager, other than by reason of serving as an Adviser to 
one or more of the Funds (``Affiliated Adviser'').
    5. Applicants also request an exemption form the various disclosure 
provisions described below that may require each Fund to disclose fees 
paid by the Manager to the Advisers. The Trust will disclose for each 
Fund (both as a dollar amount and as a percentage of the Fund's net 
assets): (a) Aggregate fees paid to the Manger and Affiliated Advisers, 
and (b) aggregate fees paid to Advisers other than Affiliated Advisers 
(``Aggregate Fee Disclosure'') The Aggregate Fee Disclosure also will 
include separate disclosure of any advisory fees paid to any Affiliated 
Adviser.

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 that has been 
approved by the vote of the company's outstanding voting securities. 
Rule 18f-2 under the Act 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.

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    2. Form N-1A is the registration statement used by open-end 
investment companies. Items 3, 6(a)(1)(ii), and 15(a)(3) 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 ``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 fee,'' 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 Commission 
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 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 
Commission. 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) of the Act provides that the Commission may exempt 
any person, security, or transaction or any class or classes of 
persons, securities, or transactions from any provision of the Act, or 
from any rule thereunder, 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 policies and provisions of the 
Act. Applicants believe that their requested relief meets this standard 
for the reasons discussed below.
    8. Applicants assert that the Owners are relying on the Manager to 
select and monitor the activities of the Advisers and to respond 
promptly to any significant change in the advisory services provided to 
the Funds. Applicants submit that in many respects, the relationship 
between the Manager and the Advisers resembles the relationship between 
a traditionally structured investment company and its investment 
adviser, where no shareholder approval is required for the investment 
adviser to change a portfolio manager or revise the portfolio manager's 
salary or conditions of employment. Applicants note that the Management 
Agreement will remain fully subject to the requirements of section 
15(a) of the Act and rule 18f-2 under the Act.
    9. Applicants assert that some Advisers use a ``posted'' rate 
schedule to set their fees. Applicants believe that the Manger will not 
be able to negotiate below ``posted'' fee rates with Advisers if each 
Adviser's fees are required to be disclosed. Applicants submit that the 
nondisclosure of the individual Adviser's fees is in the best interest 
of the Funds and the Owners, where disclosure of such fees would 
increase costs to Owners without an offsetting benefit to the Trust and 
the Owners.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Before a Fund or a Future Investment Company may rely on the 
requested order, the operation of the Fund or the Future Investment 
Company will be approved by the Owners or a majority of the outstanding 
voting securities or, in the case of a Fund or a Future Investment 
Company whose public shareholders purchased shares on the basis of a 
prospectus containing the disclosure contemplated by condition 2 below, 
by the sole initial shareholder(s) before offering shares of that Fund 
or Future Investment Company to the public (or the Owners).
    2. The Trust will disclose in the prospectus the existence, 
substance, and effect of any order granted pursuant to this 
application. In addition, each Fund relying on the requested order will 
hold itself out to the public as employing the management structure 
described in the application. The prospectus will prominently disclose 
that the Manager has ultimate responsibility (subject to oversight to 
the Board) to oversee the Advisers and recommend their hiring, 
termination, and replacement.
    3. Within ninety (90) days of the hiring of any new Adviser, Owners 
with assets allocated to any subaccount of a registered Separate 
Account for which the applicable Fund serves as a funding medium will 
be furnished all information about the new Adviser or Advisory 
Agreement that would be included in a proxy statement, except as 
modified by the order to permit Aggregate Fee Disclosure. This 
information will include Aggregate Fee Disclosure and any change in 
such disclosure caused by the addition of a new Adviser. The Manager 
will satisfy this condition by providing these Owners with an 
information statement meeting the requirements of Regulation 14C and 
Schedule 14C under the 1934 Act and Item 22 of Schedule 14A under the 
1934 Act, except as modified permit Aggregate Fee Disclosure.
    4. The Manager will not enter into an Advisory Agreement with any 
Affiliated Adviser without that Advisory Agremenet, including the 
compensation to paid thereunder, being approved by the Owners with 
assets allocated to any subaccount of a registered Separate Account for 
which the applicable Fund serves as a funding medium or by the 
shareholders in the case of a publicly available Fund.
    5. At all times, a majority of the Board will be Independent 
Trustees and the nomination of new or additional Independent Trustees 
will continue to be at the discretion of the then-existing Independent 
Trustees.
    6. When an Adviser change is proposed for a Fund with an Affiliated 
Adviser, the Board, including a majority of the Independent Trustees, 
will make a separate finding, reflected in the Board minutes, that the 
change is in the best interests of the Fund and Owners with assets 
allocated to any subaccount of a registered Separate Account for which 
the fund serves as a funding medium or shareholders in the case of 
publicly available Fund and does not involve a conflict of interest 
from which the Manager or the Affiliated Adviser 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 the Trust. The selection of such counsel will be within the 
discretion of the Independent Trustees of the Trust.
    8. The Manager will provide the Board, no less frequently than 
quarterly, with information about the Manager's profitability on a per-
Fund basis. This information will reflect the impact on profitability 
of the hiring or termination

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of any Adviser during the applicable quarter.
    9. Whenever an Adviser is hired or terminated, the Manager will 
provide the Board with information showing the expected impact on the 
Manger's profitability.
    10. The Manager will provide general management services to the 
Trust and its Funds, including overall supervisory responsibility for 
the general management and investment of each Fund's securities 
portfolio and, subject to review and approval by the Board, will: (i) 
Set each Fund's overall investment strategies; (ii) evaluate, select, 
and recommend Advisers to manage all or part of a Fund's portfolio; 
(iii) allocate and, when appropriate, reallocate a Fund's assets among 
multiple Advisers; (iv) monitor and evaluate the performance of 
Advisers; and (v) implement procedures reasonably designed to ensure 
that the Advisers comply with each Fund's investment objective, 
policies, and restrictions.
    11. No trustee/director of officer of the Trust or director or 
office of the Manger will own directly or indirectly (other than 
through a pooled investment vehicle that is not controlled by that 
trustee/director or office) any interest in any Adviser except for: (i) 
Ownership of interests in the Manager or any entity that controls, is 
controlled by, or is under common control with the Manger; or (ii) 
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 Adviser 
or an entity that controls, is controlled by, or is under common 
control with an Adviser.
    12. The Trust will disclose in its registration statement the 
Aggregate Fee Disclosure.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-23747 Filed 9-10-99; 8:45 am]
BILLING CODE 8010-01-M