[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''),

[[Page 72121]]

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