[Federal Register Volume 64, Number 246 (Thursday, December 23, 1999)]
[Notices]
[Pages 72120-72122]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-33343]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 24206; 812-11674]
Security Equity Fund et al.; Notice of Application
December 17, 1999.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application under section 6(c) of the Investment
Company Act of 1940 (``Act'') for an exemption from section 15(a) of
the Act and rule 18f-2 under the Act.
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SUMMARY OF APPLICATION: Applicants request an order that would permit
them to enter into and materially amend sub-advisory agreements without
shareholder approval.
APPLICANTS: Security Equity Fund, Security Growth and Income Fund,
Security Ultra Fund, Security Income Fund, Security Municipal Bond
Fund, Security Cash Fund, SBL Fund, (each a ``Fund'' and collectively,
the ``Funds''),
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and Security Management Company, LLC (``SMC'').
FILING DATES: The application was filed on July 1, 1999 and amended on
October 29, 1999. Applicants have agreed to file an amendment during
the notice period, the substance of which is reflected in this notice.
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 applicant with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on January 11, 2000 and should be accompanied by proof of service
on applicant, 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, Securities and Exchange Commission, 450 5th
Street NW, Washington, DC 20549-0609. Applicant, 700 SW Harrison,
Topeka, Kansas 66636.
FOR FURTHER INFORMATION CONTACT: Lawrence W. Pisto, Senior Counsel, at
(202) 942-0527, or George J. Zornada, Branch Chief at (202) 942-0564,
Office of Investment Company Regulation, Division of Investment
Management.
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 5th Street NW, Washington, DC
20549-0102 (tel. 202-942-8090).
Applicants' Representations
1. The Funds, each a Kansas corporation, are registered under the
Act as open-end management investment companies. Each of the Funds is
authorized to offer shares of one or more series, each with its own
investment objectives, policies and restrictions. Currently each of the
Funds, other than SBL Fund, is offered to the public. SBL Fund serves
as the funding vehicle for certain variable annuity and variable life
insurance policies issued by the Security Benefit Life Insurance
Company.
2. SMC, a Kansas limited liability company, serves as the
investment adviser to the Funds, and is registered under the Investment
Advisers Act of 1940 (``Adviser Act''). SMC is an indirectly wholly-
owned subsidiary of Security Benefit Mutual Holding Company, a Kansas
mutual insurance company.\1\
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\1\ Applicants also request relief with respect to future series
of the Funds and all future registered open-end management
investment companies that are (a) advised by SMC or any entity
controlling, controlled by, or under common control with SMC, and
(b) which operate in substantially the same manner as the Funds and
comply with the terms and conditions contained in the application.
All registered open-end management investment companies that
currently intend or rely on the requested order are named as
applicants.
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3. SMC serves as investment adviser to the Funds pursuant to an
investment advisory agreement between each Fund and SMC that was
approved by the board of directors of each Fund (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''), and the shareholders of the Funds (``Investment Advisory
Agreements''). Under the Investment Advisory Agreements, SMC has
overall general supervisory responsibility for the investment program
of the Funds and, subject to Board approval, can select one or more
subadvisers (each a ``Subadviser'' and collectively, ``Subadvisers'')
to provide one or more of the Funds with day-to-day portfolio
management services (``Subadviser Structure''). Each Subadviser is (or
will be) an investment adviser registered or exempt from registration
under the Advisers Act, and performs (or will perform) services
pursuant to a written agreement with SMC (the ``Subadvisory
Agreement''). Subadvisers' fees are paid by SMC out of the fees it
receives from the Funds at rates negotiated with the Subadvisers by
SMC. Each Fund that currently uses Subadvisers has a single Subadviser.
4. SMC makes qualitative evaluations of each Subadviser's skills
and demonstrated performance in managing assets under particular
investment styles. SMC recommends to the Board for selection those
Subadvisers that have consistently distinguished themselves and
demonstrated a high level of service and responsibility to investors.
SMC reviews, monitors and reports to the Board regarding the
performance and procedures of the Subadvisers. SMC may recommend to the
Board reallocations of assets of a Fund among Subadvisers, if
necessary, and also may recommend hiring additional Subadvisers or the
termination of Subadvisers in appropriate circumstances.
5. Applicants request relief to permit SMC to enter into and
materially amend Sub-Advisory Agreements without shareholder
approval.\2\ 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 Funds or SMC, other than by reason of serving as a Subadviser to
one or more of the Funds (an ``Affiliated Subadviser'').
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\2\ The term ``shareholder'' includes variable life insurance
policy and variable annuity contract owners that are unitholders of
any separate account for which the Funds serve as a funding medium.
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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. 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 policy and provisions of the
Act. Applicants request an exemption under section 6(c) of the Act from
section 15(a) of the Act and rule 18f-2 under the Act to permit them to
enter into and materially amend Sub-Advisory Agreements without
shareholder approval.
3. Applicants assert that under the Subadviser Structure, the
Funds' shareholders rely on SMC to select and monitor one or more
Subadvisers best suited to achieve a Fund's investment objectives.
Applicants contend 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
contend that requiring shareholder approval of Sub-Advisory Agreements
would impose expenses and unnecessary delays on the Funds, and may
preclude SMC from promptly acting in a manner considered advisable by
the Board. Applicants note that the Management Agreement will remain
subject to section 15(a) of the Act and rule 18f-2 under the Act,
including the requirements for shareholder approval.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
[[Page 72122]]
1. No fund will enter into a subadvisory agreement with an
Affiliated Subadviser without such agreement, including the
compensation to be paid thereunder, being approved by the shareholders
of the Fund (or, if the Fund serves as a funding medium for any sub-
account of a registered separate account, then pursuant to voting
instructions by the unitholders of the sub-account).
2. At all times, a majority of each Fund's Board will be persons
who are Independent Directors, and the nomination of new or additional
Independent Directors will be at the discretion of the then-existing
Independent Directors.
3. When a change of Subadviser is proposed for a Fund with an
Affiliated Subadviser, the Fund's Board, including a majority of the
Independent Directors, will make a separate finding, reflected in the
Fund's Board minutes, that such 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 that the change does not involve a conflict of interest from which
SMC or the Affiliated Subadviser derives an inappropriate advantage.
4. SMC will provide management services to the Funds, including
overall supervisory responsibility for the general management and
investment of each Fund, and, subject to review and approval by the
applicable Fund's Board will (a) set each Fund's overall investment
strategies; (b) evaluate, select and recommend Subadvisers to manage
all or a part of a Fund's assets; (c) when appropriate, allocate and
reallocate a Fund's assets among multiple Subadvisers; (d) monitor and
evaluate the investment performance of Subadvisers; and (e) implement
procedures reasonably designed to ensure that the Subadvisers comply
with the relevant Fund's investment objectives, policies, and
restrictions.
5. Within 90 days of the hiring of any new Subadviser, SMC will
furnish shareholders (or, if the Fund serves as a funding medium for
any sub-account of a registered separate account, SMC will furnish the
unit holders of the sub-account) with respect to the appropriate Fund
with all information about the new Subadviser that would be included in
a proxy statement. Such information will include any changes caused by
the addition of a new Subadviser. To meet this condition, SMC will
provide shareholders (or, if the Fund serves as a funding medium for
any sub-account of a registered separate account, then by providing
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 Securities Exchange Act of 1934.
6. Any Fund relying on the requested relief will disclose in its
prospectus the existence, substance and effect of any order granted
pursuant to this application. In addition, any such Fund will hold
itself out as employing the management structure described in the
application. The prospectus will prominently disclose that SMC has
ultimate responsibility to oversee the Subadvisers and recommend their
hiring, termination, and replacement.
7. Before a Fund may rely on the order, the operation of the Fund
in the manner described in the application will be approved by a
majority of the Fund's outstanding voting 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 Fund whose
public shareholders (or variable contract owners through a separate
account) purchase shares on the basis of a prospectus containing the
disclosure contemplated by Condition 6 above, by the sole initial
shareholder(s) before the shares of such Fund are offered to the public
(or the variable contract owners through a separate account).
8. No director or officer of the Funds or director or officer of
SMC will own directly or indirectly (other than through a pooled
investment vehicle that is not controlled by such director or officer)
any interest in a Subadviser except or (a) ownership of interests in
SMC or any entity that controls, is controlled by, or is under common
control with SMC; or (b) ownership of less than 1% of the outstanding
securities of any class of equity or debt securities of a publicly-
traded company that is either a Subadviser or controls, is controlled
by, or is under common control with a Subadviser.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-33343 Filed 12-22-99; 8:45 am]
BILLING CODE 8010-01-M