[Federal Register Volume 64, Number 229 (Tuesday, November 30, 1999)]
[Notices]
[Pages 66941-66944]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31031]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 24158; 812-11684]


Fortis Series Fund, Inc. and Fortis Advisers, Inc.

November 23, 1999.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under section 6(c) of the Investment 
Company 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, Fortis Series Fund, Inc. (the 
``Company'') and Fortis Advisers, Inc. (the ``Adviser''), request an 
order to permit them to enter into and materially amend sub-advisory 
agreements without shareholder approval and to grant relief from 
certain disclosure requirements.


[[Page 66942]]


FILING DATES: The application was filed on July 2, 1999 and amended on 
October 29, 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 December 20, 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 issue 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, N.W., Washington, 
D.C. 20549-0609; Applicants, c/o Kathleen L. Prudhomme, Esq., Dorsey & 
Whitney LLP, Minneapolis, Minnesota 55402.

FOR FURTHER INFORMATION CONTACT: George J. Zornada, Branch Chief, at 
202-942-0564 (Division of Investment Management, Office of Investment 
Company Regulation).

SUPPLEMENTARY INFORMAITON: 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, N.W., 
Washington, D.C. 20549-0102 (telephone (202) 942-8090).

Applicant's Representations

    1. The Company, a Minnesota corporation, is registered under the 
Act as an open-end management investment company. The Company is 
currently comprised of eighteen series (each a ``Fund'' and 
collectively the ``Funds''), each of which has its own investment 
objective, policies and restrictions.\1\ Shares of the Funds currently 
are available exclusively as funding vehicles for variable annuity and 
variable life contracts of Fortis Benefits Insurance Company and First 
Fortis Life Insurance Company, entities under common control with the 
Adviser. The Adviser, registered under the Investment Advisers Act of 
1940 (``Adviser Act'') serves as the investment adviser to the Funds 
pursuant to investment advisory agreements (``Advisory Agreements'').
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    \1\ Applicants also request relief with respect to all future 
Funds and to all subsequently registered open-end management 
investment companies including all series thereof that in the future 
are advised by the Adviser (or an entity controlling, controlled by, 
or under common control with the Adviser), provided that such 
companies or series (a) operate in substantially the same manner as 
the Company and (b) comply with the terms and conditions of the 
requested order (``Future Funds''). Applicants state that the 
Company is the only existing registered open-end management 
investment company that currently intends to rely on the requested 
order.
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    2. Under the Advisory Agreements, the primary responsibilities of 
the Adviser, subject to the supervision of the board of directors of 
the Company (the ``Board''), are to provide the Funds with business and 
investment management services. Under certain Advisory Agreements, the 
Adviser, subject to the oversight of the Board, may delegate portfolio 
management to one or more sub-adviser (each a ``sub-Adviser'' and 
collectively the ``sub-Advisers''). Currently, each sub-advised Fund 
has only one Sub-Adviser. Each Sub-Adviser recommended by the Adviser 
is selected and approved by the Board, including a majority of the 
directors who are not ``interested persons'' (as defined in section 
2(a)(19) of the Act) (``Independent Directors''). Each Sub-Adviser is, 
and any future Sub-Adviser will be, registered as an investment adviser 
under the Advisers act and will perform services under a sub-advisory 
agreement (`sub-Advisory Agreement'') between the Adviser and the sub-
Adviser. Each Sub-Adviser's fees are paid by the Adviser out of the 
management fees received by the Adviser from the respective Fund.
    3. The Adviser recommends Sub-Advisers based on a quantitative and 
qualitative evaluation of the Sub-Adviser's skills managing assets for 
specific asset classes, investment styles, and strategies. The Adviser 
reviews, monitors and reports to the Board regarding the performance 
and investment procedures of the Sub-Advisers. The Adviser also is 
responsible for recommending whether to terminate a Sub-Adviser under 
appropriate circumstances.
    4. Applicants request reflief to permit the Adviser to enter into 
and materially amend Sub-Advisory Agreements without seeking 
shareholder approval.\2\ The requested relief will not extend to a Sub-
Adviser that is an ``affilaiated person,'' as defined in section 
2(a)(3) of the Act, of the Company or the Adviser, other than by reason 
of serving as a Sub-Adviser to one or more of the Funds (``Affiliated 
Sub-Adviser''). Currently, that are no Affiliated Sub-Adviser.
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    \2\ The term ``shareholders'' includes variable contract owners, 
as applicable.
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    5. Applicants also request an exemption from the various disclosure 
provisions described below that may require each Fund to disclose fees 
paid by the adviser to the Sub-Advisers. The Company 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 Adviser and Affiliated Sub-
Advisers, and (b) aggregate fees paid to Sub-Advisers other than 
Affiliated Sub-Advisers (``Aggregate Fee Disclosure''). The Aggregate 
Fee Disclosure also will include separate disclosure of any advisory 
fees paid to any Affiliated Sub-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.
    2. Form N-1A is the registration statement used by open-end 
investment companies. Item 15(a)(3) of Form N-1A 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 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.
    4. 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 Sub-Advisers.
    5. 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

[[Page 66943]]

information about investment advisory fees.
    6. 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.
    7. Applicants assert that shareholders are relying on the Advisor 
to select and monitor the activities of Sub-Advisers best suited for 
the respective Funds. Applicants assert that, from the perspective of 
the shareholders, the role of Sub-Advisers with respect to a Fund is 
substantially equivalent to the role of portfolio managers employed by 
an investment adviser in a traditional investment advisory arrangement. 
Applicants contend that requiring shareholder approval of Sub-Advisory 
Agreements may impose unnecessary costs and delays on the Funds, and 
may preclude the Adviser from acting promptly in a manner in the best 
interests of a Fund. Applicants note that the Advisory Agreements will 
remain fully subject to the requirements of section 15(a) of the Act 
and rule 18f-2 under the Act.
    8. Applicants assert that some Sub-Advisers use a ``posted'' rate 
schedule to set their fees. Applicants state that the Adviser may not 
be able to negotiate below ``posted'' fee rates with Sub-Advisers if 
each Sub-Adviser's fees are required to be disclosed. Applicants submit 
that the nondisclosure of the individual Sub-Advisers' fees is in the 
best interest of the Funds and their shareholders, where the disclosure 
of such fees would increase costs to shareholders without an offsetting 
benefit to the Funds and their shareholders.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Before an existing fund may rely on the order requested in the 
application, the operation of the Fund in the manner described in the 
application will be approved by a majority of the outstanding 
securities (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 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 Future Fund to the public 
(or the variable contract owners through a separate account).
    2. Any Fund relying on the requested relief will disclose in its 
prospectus the existence, substance, and effect of any order granted 
pursuant to the application. In addition, any such Fund 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 Sub-Advisers and recommend their hiring, 
termination, and replacement.
    3. Within ninety (90) days of the hiring of any new Sub-Adviser, 
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) will be furnished all information about the new Sub-Adviser 
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 Sub-Adviser. The Adviser will meet this condition 
by providing these shareholders 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 to 
permit Aggregate Fee Disclosure.
    4. The Adviser will not enter into a Sub-Advisory Agreement with 
any Affiliated Sub-Adviser without that Sub-Advisory Agreement, 
including the compensation to be paid thereunder, being approved by the 
Fund's shareholders (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).
    5. At all times, a majority of the Board will be Independent 
Directors, and the nomination of new or additional Independent 
Directors will be at the discretion of the then-existing Independent 
Directors.
    6. When a Sub-Adviser change is proposed for a Fund with an 
Affiliated Sub-Adviser, the Board, including a majority of the 
Independent Directors, will make a separate finding, reflected in the 
Board's minutes, that the change 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 
Sub-Adviser derives an inappropriate advantage.
    7. The Adviser will provide general management services to the 
Company and the 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: (a) 
set each Fund's overall investment strategies; (b) evaluate, select, 
and recommend sub-advisers to manage all or a part of Fund's assets; 
(c) allocate and, when appropriate, reallocate a Fund's assets among 
multiple Sub-Advisers; (d) monitor and evaluate the performance of Sub-
Advisers; and (e) implement procedures reasonably designed to ensure 
that the Sub-Advisers comply with the relevant Fund's investment 
objective, policies, and restrictions.
    8. No director or officer of the Company 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 any Sub-Adviser except for: (a) ownership of interests in 
the Adviser 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 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.
    9. The Company will disclose in its registration statement the 
Aggregate Fee Disclosure.
    10. Independent counsel knowledgeable about the Act and the duties 
of Independent Directors will be engaged to represent the Independent 
Directors of the Company. The selection of such counsel will be within 
the discretion of the then-existing Independent Directors.
    11. The Adviser will provide the Board, no less than quarterly, 
with information about the Adviser's profitability on a per-Fund basis. 
This information will reflect the impact on profitability of the hiring 
or termination of any Sub-Adviser during the applicable quarter.
    12. Whenever a sub-adviser is hired or terminated, the Adviser will 
provide the Board with information showing the

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expected impact on the Adviser's profitability.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-31031 Filed 11-29-99; 8:45 am]
BILLING CODE 8010-01-M