[Federal Register Volume 64, Number 190 (Friday, October 1, 1999)]
[Notices]
[Pages 53428-53430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-25500]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 24054; 812-11476]
Endeavor Series Trust, et al.; Notice of Application
September 27, 1999.
agency: Securities and Exchange Commission (``SEC'').
action: Notice of application for an exemption under section 6(c) of
the Investment Company Act of 1940 (``Act'') 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: Endeavor Series Trust (the ``Trust'') and
Endeavor Management Co. (the ``Adviser'') request an order that would
permit applicants to enter into and materially amend sub-advisory
agreements without shareholder approval and grant relief from certain
disclosure requirements.
Applicants: The Trust and the Adviser.
Filing Date: The application was filed on January 20, 1999. Applicants
have agreed to file an amendment to the application, the substance of
which is reflected in this notice, 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 October 22,
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 may request
notification of a hearing by writing to the SEC's Secretary.
Addresses: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549-0609. Applicants, 2101 East Coast Highway, Suite 300, Corona del
Mar, CA 92625.
For Further Information Contact: Bruce R. MacNeil, Staff Attorney, at
(202) 942-0634, or Michael W. Mundt, 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, 450 Fifth Street, N.W., Washington,
D.C. 20549-0102 (tel. (202) 942-8090).
Applicants' Representations
1. The Trust, a Massachusetts business trust, is registered under
the Act as an open-end management investment company. The Trust is
currently comprised of thirteen separate series (each a ``Fund,'' and
together, the ``Funds''), each with its own investment objectives,
policies, and restrictions.\1\ The Funds are currently offered for sale
only to various separate accounts of a life insurance company and its
affiliates to fund variable annuity contracts or variable life
insurance policies. The Adviser, a California corporation, serves as
the investment adviser to the Funds and is registered under the
Investment Advisers Act of 1940 (``Advisers Act'').
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\1\ Applicants also request relief with respect to future series
of the Trust and all future registered open-end management
investment companies that (a) are advised by the Adviser or any
entity controlling, controlled by or under common control with the
Adviser; (b) use the multi-manager structure described in the
application; and (c) comply with the terms and conditions in the
application (``Future Funds''). The Trust is the only existing
investment company that currently intends to rely on the order.
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2. The Adviser serves as investment adviser to the Funds pursuant
to aninvestment advisory agreement between the Trust and the Adviser
that was approved by the Trust's board of trustees (``Board''),
including a majority of the trustees who are not ``interested persons''
as defined in section 2(a)(19) of the Act (``Independent Trustees''),
and each Fund's shareholders (``Advisory Agreement''). In addition,
each Fund currently is advised by a subadviser (``Subadviser'')
pursuant to a separate investment advisory agreement (``Sub-Advisory
Agreement''). Each Subadviser is an investment adviser registered under
the Advisers Act. In the future, a Fund may be advised by more than one
Subadviser. The Adviser selects each Subadviser, subject to approval by
the Board, and compensates the Subadviser out of fees paid to the
Adviser by the Fund.
3. Applicants request relief to permit the Adviser to enter into
and amend Sub-Advisory Agreements without shareholder approval. The
requested relief will not extend to a Subadviser that is an affiliated
person, as defined in section 2(a)(3) of the Act, of the Trust or the
Adviser, other than by reason of serving as a Subadviser to one or more
of the Funds (an ``Affiliated Subadviser'').
4. Applicants also request an exemption from the various disclosure
[[Page 53429]]
provisions described below that may require the Funds to disclose the
fees paid by the Adviser to the Subadvisers. The Trust will disclose
for each Fund (both as a dollar amount and as a percentage of a Fund's
net assets): (a) aggregate fees paid to the Adviser and Affiliated
Subadvisers; and (b) aggregate fees paid to Subadvisers other than
Affiliated Subadvisers (``Aggregate Fee Disclosure''). For any Fund
that employs an Affiliated Subadviser, the Fund will provide separate
disclosure of any fees paid to the Affiliated Subadviser.
Applicants' Legal Analysis
1. Section 15(a) of the Act provides, in relevant part, that it is
unlawful for any person to act as investment adviser to a registered
investment company except pursuant to a written contract that has been
approved by a majority of the investment 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.
2. Form N-1A is the registration statementused by open-end
investment companies. Item 15(a)(3) requires disclosure of the method
and amount of the investment adviser's compensation.
3. 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''). Items
22(c)(1)(ii), 22(c)(1)(iii), 22(c)(8), and 22(c)(9) of Schedule 14A,
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.
4. 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 Subadvisers.
5. Regulation S-X sets forth 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.
6. Section 6(c) of the Act provides that the SEC may exempt any
person, security, or transaction from any provision of the Act if, and
to the extent that, an 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.
7. Applicants assert that the Funds' investors rely on the Adviser
to select Subadvisers best suited to achieve a Fund's investment
objectives. Therefore, applicants assert that, from the perspective of
the investor, the role of the Subadvisers is comparable to that of
individual portfolio managers employed by other investment advisory
firms. Applicants note that the Advisory Agreement will remain subject
to sections 15(a) and 15(c) of the Act and rule 18f-2 under the Act.
8. Applicants further assert that some Subadvisers use a ``posted''
rate schedule to set their fees. Applicants believe that some
organizations may be unwilling to serve as Subadvisers at any fee rate
other than their ``posted'' fee rates, unless the rates negotiated for
the Funds are not publicly disclosed. Applicants believe that requiring
disclosure of Subadvisers' fees may deprive the Adviser of its
bargaining power to negotiate lower rates.
Applicants' Conditions
Applicants agree that the order granting the requested relief will
be subject to the following conditions:
1. The Trust will disclose in its registration statement the
Aggregate Fee Disclosure.
2. The Trust will not enter into a Sub-Advisory Agreement, on
behalf of a Fund, with an Affiliated Subadviser without the Sub-
Advisory Agreement, including the compensation to be paid thereunder,
being approved by the shareholders of the applicable Fund (or, if the
Fund serves as a funding medium for any sub-account of a registered
separate account, pursuant to voting instructions provided by the
unitholders of the sub-account).
3. At all times, a majority of the Board 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.
4. Independent counsel knowledgeable about the Act and the duties
of Independent Trustees will be engaged to represent the Independent
Trustees. The selection of such counsel will be within the discretion
of the Independent Trustees.
5. The Adviser will provide the Board, no less often than
quarterly, information about the Adviser's profitability for each Fund
relying on the relief requested in the application. This information
will reflect the impact on profitability of the hiring or termination
of any Subadviser during the applicable quarter.
6. Whenever a Subadviser is hired or terminated, the Adviser will
provide the Board information showing the expected impact on the
Adviser's profitability.
7. When a change of Subadviser is proposed for a Fund with an
Affiliated Subadviser, the Board, including a majority of the
Independent Trustees, will make a separate finding, reflected in the
minutes of meetings of the Board, that the change of Subadviser is in
the best interests of the Fund and its shareholders (or, if the Fund
serves as a funding medium for any sub-account of a registered separate
account, in the best interests of the Fund and the unitholders of any
sub-account), and does not involve a conflict of interest from which
the Adviser or the Affiliated Subadviser derives an inappropriate
advantage.
8. Before an existing Fund may rely on the order requested in the
application, the operation of the Fund in a manner described in the
application will be approved by a majority of its outstanding voting
securities of the Fund, (or, if the Fund serves as a funding medium for
any sub-account of a registered separate account, pursuant to voting
instructions provided by the unitholders of the sub-account) as defined
in the Act, or in the case of a Future Fund whose shareholders
purchased shares on the basis of a prospectus containing the disclosure
contemplated by condition 10 below, by the sole initial shareholder(s)
before offering shares of the Future Fund to the public (or the
variable contract owners through a separate account).
9. The Adviser will provide management and administrative services
to each Fund relying on the requested order and, subject to the review
and approval of the Board, will: (a) Set the Funds' overall investment
strategies; (b) recommend Subadvisers; (c) allocate, and when
appropriate, reallocate a Fund's assets among Subadvisers; (d) monitor
and evaluate the investment performance of the Subadvisers; and (e)
implement procedures reasonably designed to ensure that the Subadvisers
comply
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with the Fund's investment objectives, policies, and restrictions.
10. The Trust will disclose in its prospectus the existence,
substance, and effect of any order granted pursuant to the 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
adviser has ultimate responsibility (subject to oversight by the Board)
to oversee the Subadvisers and recommend their hiring, termination, and
replacement.
11. Within 60 days of the hiring of any Subadviser, the affected
Fund will furnish its shareholders (or, if the Fund serves as a funding
medium for any sub-account of a registered separate account, the
unitholders of the Sub-account) with all information about the new
Subadviser that would be included in a proxy statement, except as
modified 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 Subadviser. The Adviser will meet this
condition by providing shareholders (or, if the Fund serves as a
funding medium for any sub-account of a registered separate account,
unitholders of the sub-account) with an information statement meeting
the requirements of Regulation 14C, Schedule 14C and Item 22 of
Schedule 14A under the Exchange Act, exempt as modified by the order to
permit Aggregate Fee Disclosure.
12. No trustee or officer of the Trust or director or officer of
the Adviser will own directly or indirectly (other than through a
pooled investment vehicle that is not controlled by such person) any
interest in a Subadviser, except for: (a) Ownership of interests in the
Subadviser or any entity that controls, is controlled by, or is under
common control with the Adviser; or (b) ownership of less than 1% of
the outstanding securities of any class of equity or debt of any
publicly-traded company that is either a Subadviser or controls, is
controlled by, or is under common control with a Subadviser.
For the SEC, by the Division of Investment Management, pursuant
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-25500 Filed 9-30-99; 8:45 am]
BILLING CODE 8010-01-M