[Federal Register Volume 60, Number 226 (Friday, November 24, 1995)]
[Notices]
[Pages 58114-58116]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28615]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21501; 812-9678]
Fortis Advantage Portfolios, Inc., et al.; Notice of Application
November 13, 1995.
agency: Securities and Exchange Commission (the ``SEC'').
action: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``Act'').
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applicants: Fortis Advantage Portfolios, Inc., Fortis Equity
Portfolios, Inc., Fortis Fiduciary Fund, Inc., Fortis Worldwide
Portfolios, Inc., Fortis Growth Fund, Inc., Fortis Money Portfolios,
Inc., Fortis Securities, Inc., Fortis Series Fund, Inc., Fortis Tax-
Free Portfolios, Inc., Fortis Income Portfolios, Inc., Special
Portfolios, Inc. (collectively, the ``Funds''), and Lazard Freres & Co.
LLC (``Lazard Freres'').
relevant act sections: Order requested under sections 6(c) and 17(b) of
the Act for an exemption from section 17(a) of the Act, and under
section 6(c) for an exemption from section 17(e) of the Act and rule
17e-1 thereunder.
summary of applications: Applicants request an exemption to permit each
Fund to use certain securities dealers that are affiliated persons of
affiliated persons (``second-tier affiliates''), solely because of
subadvisory relationships with one or more other Funds, to engage in
principal transactions with the Fund. The order also would permit a
Fund to use second-tier affiliates as brokers in connection with
certain principal transactions and to pay commissions to such brokers
without complying with the monitoring and recordkeeping requirements
set forth in rule 17e-1.
filing dates: The application was filed on July 24, 1995 and amended on
September 29, 1995.
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
[[Page 58115]]
received by the SEC by 5:30 p.m. on December 8, 1995, 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 SEC's Secretary.
addresses: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, 500 Bielenberg, St. Paul, Minnesota, 55125.
for further information contact: Marianne H. Khawly, Staff Attorney, at
(202) 942-0562, or Robert A. Robertson, 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
SEC's Public Reference Branch.
Applicants' Representations
1. The Funds are Minnesota corporations. Except for Fortis
Securities, the Funds are open-end management investment companies
registered under the Act. Fortis Securities is a closed-end management
investment company registered under the Act. Fortis Advisers, a
registered investment adviser under the Investment Advisers Act of 1940
(the ``Advisers Act''), serves as investment adviser to each of the
Funds.
2. Applicants request that the relief sought in the application
also apply to any other registered investment company, or separate
portfolio thereof, that in the future (a) is a member of the Fortis
group of investment companies as defined in rule 11a-3 under the Act,
and (b) either (i) is advised by Fortis Advisers or any entity
controlling, controlled by, or under common control with Fortis
Advisers, or (ii) has its shares distributed by Fortis Investors, Inc.
or any entity controlling, controlled by, or under common control with
Fortis Investors.
3. Lazard Freres is registered as an investment adviser under the
Advisers Act and as a broker-dealer under the Securities Exchange Act
of 1934. Lazard Freres Asset Management, a separate operating division
of Lazard Freres, Morgan Stanley Asset Management Limited, and Warburg
Investment Management International Ltd. (collectively, the
``Subadvisers'') have contracted with Fortis Advisers to serve as
subadvisers for three of the portfolios within Fortis Series Fund.
4. Applicants request relief to permit an ``Eligible Dealer,'' a
hereinafter defined, to engage in principal transactions with a Fund in
the ordinary course of business. An Eligible Dealer is a person that
subadvises one or more Funds or Fund portfolios not engaging in the
relevant principal transaction that conducts advisory and securities
dealer operations via the same legal entity that is a second-tier
affiliate of the Fund or Fund portfolio engaging in the transaction
solely by reason of being a subadviser of one or more of the other
Funds. An Eligible Dealer is not (a) an affiliated person of the Fund
or Fund portfolio engaging in the transaction, (b) Fortis Advisers, or
any other entity that in the future serves as investment adviser to the
Fund or Fund Portfolio engaging in the transaction, or an affiliated
person thereof, or (c) an officer, director, employee, promoter, or
principal underwriter of any Fund or Fund portfolio, or an affiliated
person of such officer, director, employee, promoter, or principal
underwriter.
5. Applicants also request an exemption that would permit each Fund
to use an ``Eligible Broker,'' as hereinafter defined, as broker in
connection with the sale of securities to or by such Fund or Fund
portfolio on a securities exchange. An Eligible Broker is a subadviser
of one or more Funds or Fund portfolios that are not parties to the
transactions, conducts advisory and brokerage operations through the
same legal entity, and is a second-tier affiliate of the Fund or Fund
portfolio engaging in the transaction solely by reason of subadvising
one or more other Funds or Fund portfolios. The requested relief would
permit the Fund or Fund portfolio engaging in the transaction to pay
commissions, fees, or other remuneration to the Eligible Broker without
complying with the requirements set forth in rules 17e-1(b)(3) and 17e-
1(c).
6. With the exception of Lazard Freres Asset Management, each
broker-dealer that is affiliated with a subadviser to a Fund is a
separate legal entity from the subadviser. Lazard Freres Asset
Management is a separate operating division of Lazard Freres. As the
only subadviser that conducts its advisory operations through the same
legal entity, Lazard Freres is currently the only entity that satisfies
the definitions of Eligible Dealer and Eligible Broker.
Applicants' Legal Analysis
1. Applicants request an order under sections 6(c) and 17(b) of the
Act for an exemption from section 17(a) of the Act. Section 17(a),
among other things, prohibits an affiliated person of a registered
investment company, or affiliated person of such person, acting as
principal, from selling to or purchasing from such registered company
any security or other property.
2. Section 2(a)(3) of the Act defines ``affiliated person.'' Under
this definition, each subadviser would be a second-tier affiliate of
each Fund and Fund portfolio it does not manage, to the extent the
Funds and Fund portfolios are deemed to be under common control with,
and therefore an affiliated person of, each other Fund and each other
portfolio of the Funds. Accordingly, relief from section 17(a) is
required for an Eligible Dealer to engage in principal transactions
with a Fund.
3. Section 6(c) of the Act provides that the SEC may exempt any
person, security, or transaction, or any class or classes of persons,
securities, or transactions, from any provisions of the Act or of any
rule thereunder, if and to the extent that 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. Section 17(b) of the Act provides that the
SEC may exempt a transaction from section 17(a) of the Act if evidence
establishes that the terms of the proposed transaction, including the
consideration to be paid, are reasonable and fair and do not involve
overreaching on the part of any person concerned, and that the proposed
transaction is consistent with the policy of the registered investment
company concerned and with the general purposes of the Act. For the
reasons discussed below, applicants believe that the proposed
transactions meet the standards of sections 6(c) and 17(b).
4. Applicants believe that no element of self-dealing would be
involved in the proposed transactions because the subadviser
recommending the transaction would be dealing with an entity that in
economic reality is a competitor of the subadviser. Applicants state
that each transaction between a Fund and an Eligible Dealer would be
the product of arms-length bargaining and that the subadviser
recommending the transaction can neither lose nor gain financially on
the basis of whether the transaction is beneficial or detrimental to
the Eligible Dealer. Because the pecuniary interests of a subadviser
would be solely and directly aligned with those of the Fund it
subadvises, applicants argue, it is reasonable to conclude that the
consideration to be paid to or received by such Fund in connection with
a
[[Page 58116]]
principal transaction with an Eligible Dealer will be reasonable and
fair.
5. Applicants also request relief under sections 6(c) and 17(b) for
an exemption from section 17(a) to permit Lazard Freres to engage in
principal transactions with registered investment companies, or
portfolios of any registered investment company, of which Lazard Freres
is, or becomes in the future, a second-tier affiliate solely because of
its advisory or subadvisory relationship with other portfolios of that
investment company or other investment companies under common control
with that investment company.
6. Applicants furthermore request relief under section 6(c) for an
exemption from section 17(e) of the Act and rule 17e-1 thereunder.
Section 17(e)(2)(A) provides in relevant part that it shall be unlawful
for any affiliated person of a registered investment company, or an
affiliated person of such person, acting as broker in connection with
the sale of securities to or by such company, to receive from any
source a commission for effecting such transaction which exceeds the
usual and customary broker's commission if the sale is effected on a
securities exchange. When a subadviser is a second-tier affiliate of a
Fund and conducts brokerage operations via the same legal entity, the
brokerage component also is a second-tier affiliate of the Funds not
subadvised by the subadviser. Consequently, transactions involving a
Fund that are brokered by an Eligible Broker are subject to section
17(e)(2).
7. Rule 17e-1 provides that, for purposes of section 17(e)(2)(A), a
commission shall be deemed as not exceeding the usual and customary
broker's commission, if certain specified procedures are followed.
These procedures include the requirement in rule 17e-1(b)(3) that a
registered investment company's board of directors, including a
majority of disinterested directors, determines, no less frequently
than quarterly, that all transactions effected pursuant to the rule
comply with procedures reasonably designed to provide that the
brokerage commission is consistent with the standards set forth in the
rule. The procedures also include the requirement in rule 17e-1(c)
under the Act that the investment company maintain and preserve certain
written records about each transaction effected pursuant to the rule.
8. Applicants believe that the proposed transactions raise no
possibility of self-dealing or any concern that the Funds would be
managed in the interest of the Eligible Brokers. A subadviser who
recommends that an Eligible Broker act as broker to a particular
transaction would neither lose nor gain financially on the basis of
whether or not the transaction benefits the Eligible Broker, because
the subadviser's only pecuniary interest in the transaction is its
advisory fee, which is based on net assets under management.
Accordingly, the subadviser would have no interest in benefitting
Lazard Freres or any future Eligible Broker at the expense of the Fund
or Funds it subadvises.
9. Applicants believe that under the circumstances the monitoring
and recordkeeping provisions of rule 17e-1 would be unduly burdensome
to the Funds. Applicants believe that the situations contemplated by
the relief are similar to the arms-length bargaining that normally
prevails when an investment adviser acts on behalf of an investment
company. Accordingly, applicants believe that the proposed transactions
meet the standards of section 6(c) because they are 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.
10. Applicants also request relief under section 6(c) from section
17(e) and rule 17e-1 to permit Lazard Freres to receive commissions
from any registered investment company or portfolio thereof for which
Lazard Freres is, or becomes in the future, a second-tier affiliate
solely because of its advisory or subadvisory relationship with other
portfolios of the same investment company or other investment companies
under common control with the investment company, without compliance
with the requirements of 17e-1 (b)(3) and (c). For the reasons
discussed above, applicants believe that the proposal meets the section
6(c) standard.
Applicants' Condition
Applicants agree that the requested order is subject to the
condition that, with respect to any brokerage transactions conducted in
reliance on the requested order, applicants will comply with all of the
provisions of rule 17e-1 except those of rule 17e-1 (b)(3) and (c).
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-28615 Filed 11-22-95; 8:45 am]
BILLING CODE 8010-01-M
