[Federal Register Volume 60, Number 213 (Friday, November 3, 1995)]
[Notices]
[Pages 55877-55880]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27316]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21458; 812-8868]
ESC Strategic Funds, Inc. and Equitable Securities Corporation;
Notice of Application
October 27, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the Act).
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APPLICANTS: ESC Strategic Funds, Inc. (the ``Company'') and Equitable
Securities Corporation (the ``Adviser'').
RELEVANT ACT SECTIONS: Exemption requested under section 6(c) of the
Act from the provisions of section 15(a) and rule 18f-2; and from
certain disclosure requirements set forth in item 22 of Schedule 14A
under the Securities Exchange Act of 1934 (the ``Exchange Act''); items
2, 5(b)(iii), and 16(a)(iii) of Form N-1A; item 3 of Form N-14; item 48
of Form N-SAR; and sections 6-07.2(a), (b), and (c) of Regulations S-X.
SUMMARY OF APPLICATION: Applicants seek a conditional order permitting
sub-advisers (the ``Managers'') approved by the Company's board of
directors to serve as portfolio managers for the Company's series
without obtaining shareholder approval of the agreements with the
Managers, and permitting the Company to disclose only aggregate sub-
advisory fees for each series in its prospectuses and other reports.
FILING DATES: The application was filed on March 3, 1994, and amended
on August 3, 1995, and October 26, 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 received by the SEC by 5:30 p.m. on November 21,
1995, and should be accompanied by proof of service on the 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, NW., Washington, DC 20549.
Applicants, 800 Nashville City Center, 511 Union Street, Nashville,
Tennessee 37219-1743 (Attention: W. Howard Cammack, Jr.).
FOR FURTHER INFORMATION CONTACT:
Mary Kay Frech, Senior Attorney at (202) 942-0579, or Alison E. Baur,
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.
Applicants' Representations
1. The Company is a registered open-end management investment
company incorporated under Maryland law. The Company offers five
separate investment portfolios (each a ``Fund,'' and together, the
``Funds''), each with distinct investment objectives, policies, and
restrictions. These Funds are: ESC Strategic Appreciation Fund, ESC
Strategic Global Equity Fund, ESC Strategic Small Cap Fund, ESC
Strategic Income Fund, and ESC Strategic Asset
[[Page 55878]]
Preservation Fund.\1\ Shares of the Funds are offered to individuals,
institutions, corporations, and fiduciaries.
\1\Applicants also request relief with respect to any additional
Fund organized in the future and for any open-end, management
investment company advised by the Adviser, or a person controlling,
controlled by or under common control with the Adviser, in the
future, provided that such investment company operates in
substantially the same manner as the Funds and complies with the
conditions to the requested order (``Future Company'').
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2. The Adviser is a registered investment adviser and broker-dealer
that provides overall investment management for the Funds pursuant to
an investment advisory agreement (``Investment Advisory Agreement'').
3. The specific investment decisions for each Fund are made by one
or more Managers, each of whom has discretionary authority to invest
all or a portion of the assets of a particular Fund, subject to general
supervision by the Adviser and the board of directors of the Company.
Each Manager has been recommended by the Adviser, and selected and
approved by the board of directors of the Company, including a majority
of the Company's directors who are not interested persons of the
Company, the Adviser, or the Manager, as well as by the initial sole
shareholder of each Fund. Each Manager performs services pursuant to a
written portfolio management agreement (``Portfolio Management
Agreement''). Applicants currently do not anticipate that the number of
Managers for any Fund will be reduced. The number of Managers may be
increased, however, if the Company or one or more Funds experience a
significant increase in total assets over time.
4. One of the Managers, Equitable Asset Management (``EAM''), is an
affiliated person (as defined in section 2(a)(3) of the Act) of the
Adviser. EAM is one of three Managers of ESC Strategic Appreciation
Fund, and is the sole Manager of ESC Strategic Small Cap Fund and ESC
Strategic Asset Preservation Fund.
5. The Adviser is responsible for recommending to the Company's
board of directors the retention of one or more Managers for each Fund,
for allocating and reallocating assets among Managers of Funds with
multiple Managers, and for recommending the termination of a Manager
when deemed advisable. The Adviser selects Managers based on the
continuing quantitative and qualitative evaluation of their skills and
proven abilities in managing assets pursuant to a specific investment
style. The Adviser monitors continually the performance of Managers as
well as management firm staffs and organizations to assess overall
competence. For the advisory services the Adviser provides the Funds,
each Fund pays an investment advisory fee to the Adviser. The Adviser,
out of these fees, pays the Managers' fees at no additional cost to the
Funds.
6. For three of the Funds, the Adviser seeks to enhance performance
and reduce market risk by allocating a Fund's assets among multiple
``specialist'' Managers (the ``Multiple Manager Strategy''). Under this
strategy, the Adviser allocates portions of a Fund's assets among
multiple Managers with dissimilar investment styles and security
selection disciplines. The Adviser monitors the performance of both the
total Fund portfolio and of each Manager. The Adviser, to the extent it
deems appropriate to achieve the overall objectives of the particular
Fund, will reallocate Fund assets among individual Managers or
recommend to the Company's board of directors that it employ or
terminate particular Managers. As a result of this strategy, the
Adviser believes the Funds with multiple Managers may achieve a better
rate of return with lower volatility than typically would be expected
of any one management style.
7. Applicants request an order permitting the Company to enter into
new or materially amended Portfolio Management Agreements with the
Managers without obtaining shareholder approval. Without the requested
relief, the Company would be prohibited from entering promptly into a
new Portfolio Management Agreement or amending materially an existing
Portfolio Management Agreement, and would be prohibited from continuing
relations with an existing Manager whose contract has been assigned as
a result of a change of control, unless the particular Fund involved
were to incur the expense of convening a special shareholder meeting.
Although shareholders will not vote on a new Manager or a materially
amended Portfolio Management Agreement, applicants will furnish
shareholders an information statement within sixty days that includes
all the information that would have been provided in a proxy statement.
Moreover, applicants will not enter into a Portfolio Management
Agreement with any Manager that is an affiliated 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 Manager to one or more of the Funds (an
``Affiliated Manager'') without such agreements being approved by the
shareholders of the applicable Fund. The Investment Advisory Agreement
between the Adviser and the Fund would in all cases continue to be
subject to the shareholder voting requirements of the Act.
8. Applicants request an exemption from the various disclosure
provisions that may require applicants or others to disclose the fees
paid by the Adviser to individual Managers. Applicants propose to
disclose (both as a dollar amount and as a percentage of a Fund's net
assets) in the Funds' registration statements and other public
documents only the aggregate amount of fees paid by the Adviser to the
Managers of each Fund (``Limited Fee Disclosure''). Limited Fee
Disclosure means: (a) Fees paid to the Adviser by each Fund, in dollar
amount and as a percentage of each Fund's assets; (b) aggregate fees
paid by the Adviser to Managers of each Fund; (c) net advisory fees
retained by the Adviser with respect to each Fund after payment of
Managers' fees; and (d) fees paid by a Fund to any Affiliated Manager.
Applicants' Legal Analysis
1. Section 15(a) makes it unlawful for any person to act as an
investment adviser to a registered investment company except pursuant
to a written contract which precisely describes all compensation to be
paid thereunder and which has been approved by a majority of the
investment company's outstanding securities. Rule 18f-2 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. Applicants state that the Company's structure is different from
that of traditional investment companies. In addition to its Adviser/
Manager structure for all Funds, the Company offers the Multiple
Manager strategy of portfolio management to investors with certain
investment objectives. Applicants state that shareholders receive the
benefit of the Adviser's constant supervision of these Managers, so
that the proportion of their assets subject to particular Manager
styles can be reallocated (or new Managers introduced) in response to
changing market conditions or Manager performance, in an attempt to
improve the Fund's overall performance.
3. Applicants assert that, by investing in a Fund, investors are
effectively electing to have the Adviser select one or more Managers
best suited to achieve that Fund's investment objectives. Applicants
argue that, because the Managers are concerned only with selection of
portfolio investments in accordance with a Fund's investment objectives
and policies, the role of the Managers is comparable to that of
individual portfolio managers employed
[[Page 55879]]
by other investment firms. Applicants contend, therefore, that it is
the Adviser, not the Managers, on whom the Company's investors rely for
investment management services.
4. Applicants state that the Company's prospectuses and statements
of additional information have continuously disclosed that applicants
were seeking exemptive relief from the requirement for shareholders to
approve the retention of new Managers. Applicants assert that, without
exemptive relief, the Company would be required to call a shareholders
meeting whenever it decides to employ new or additional Managers, or to
approve a new Portfolio Management Agreement after an assignment or due
to a material change in terms. Applicants argue that, given the nature
of the Company's operations and investors' reasons for investing in the
Funds, requiring shareholder approval of the Portfolio Management
Agreements would merely increase the Funds' expenses and delay the
prompt implementation of actions deemed advisable by the Adviser and
the Company's board of directors.
5. Form N-1A is the registration statement used by open-end
management investment companies to register under the Act and register
their securities under the Securities Act of 1933 (the ``Securities
Act''). Items 2, 5(b)(iii), and 16(a)(iii) of Form N-1A require the
Company to disclose in its prospectus the investment adviser's
compensation and the method of computing the advisory fee.
6. Item 3 of Form N-14, the registration form for business
combinations involving mutual funds, requires the inclusion of a
``table showing the current fees for the registrant and the company
being acquired and pro forma fees, if different, for the registrant
after giving effect to the transaction using the format prescribed'' in
item 2 of Form N-1A.
7. Rule 20a-1 under the Act requires proxies solicited with respect
to an investment company to comply with Schedule 14A under the Exchange
Act. Item 22 of Schedule 14A sets forth the requirements concerning the
information that must be included in a proxy statement. Item
22(a)(3)(iv) requires a proxy statement for a shareholder meeting at
which a new fee will be established or an existing fee increased to
include a table of the current and pro forma fees using the format
prescribed in item 2 of Form N-1A. Items 22(c)(1)(ii), 22(c)(1)(ii),
22(c)(8), and 22(c)(9), taken together, require that a proxy statement
for a shareholder meeting at which an advisory contract is to be voted
upon shall include the ``rate of compensation of the investment
adviser,'' the ``aggregate amount of the investment adviser's fee,''
the ``terms of the contract to be acted upon,'' and, if a change in
fees is proposed, the existing and proposed rate schedule for advisory
fees paid to the advisers, including the Managers.
8. Form N-SAR is the semi-annual report filed with the SEC by
registered investment companies. Item 48 of Form N-SAR provides that
the Funds must disclose the rate schedule for fees paid to their
investment advisers, including the Managers.
9. Regulation S-X sets forth the requirements for financial
statements required to be included as part of the registration
statements and shareholder reports filed with the SEC under the Act and
under the Securities Act. Items 6-07(2) (a), (b), and (c) of Regulation
S-X require that the Funds' financial statements contain information
concerning fees paid to the Managers by the Adviser.
10. Applicants state that all shareholders of the Funds will be
fully advised of the fees charged by the Adviser for its investment
advisory services because these fees will be disclosed in the Company's
prospectuses and statements of additional information. Thus, each
investor will know in advance the rate of investment advisory fees that
each Fund will bear. Applicants argue that each investor, therefore,
will be able to determine whether its cost for investment advisory
services, including the selection and supervision of Managers and the
reallocation of assets among multiple Managers from time to time, is
competitive with the services and costs that the investor could obtain
elsewhere. Under these circumstances, applicants assert that the
particular fees of the Managers are not relevant to the investor.
11. Applicants believe that it is desirable for the Adviser to have
maximum flexibility in negotiating fees with Managers. Applicants argue
that some organizations will be unwilling to serve as Managers at any
fee rate other than their ``posted'' fee rates unless the rates
negotiated for the Funds are not publicly disclosed. Therefore, to
force disclosure of a Manager's fees would tend to deprive the Adviser
of its bargaining power while producing no benefit to shareholders.
Applicants assert that the Adviser's ability to secure the services of
Managers for the Funds at rates lower than their posted rates benefits
both the Funds and their shareholders. If the Adviser were to lose
negotiating flexibility through forced disclosure of a Manager's fees,
applicants state that the Adviser might be forced to seek an increase
in its own fees or to back off from its expense cap commitment.
Further, they argue that opportunities for future reductions as Fund
assets increase might be diminished. Thus, applicants believe that
forced disclosure of Managers' fees could have negative repercussions
for the Funds' shareholders.
12. Section 6(c) authorizes the Commission to exempt persons or
transactions from the provisions of the Act to the extent that such
exemptions are 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 assert that their
request satisfies these standards.
Applicants' Conditions
Applicants agree that the following conditions may be imposed in
any order of the Commission granting the requested relief:
1. The Company will disclose in its registration statement the
Limited Fee Disclosure.
2. The Adviser will not enter into a Portfolio Management Agreement
with any Affiliated Manager without such agreement, including the
compensation to be paid thereunder, being approved by the shareholders
of the applicable Fund.
3. At all times, a majority of the Company's directors will be
persons each of whom is not an ``interested person'' of the Company as
defined in section 2(a)(19) of the Act (``Independent Directors''), and
the nomination of new or additional Independent Directors will be
placed with the discretion of the then existing Independent Directors.
4. 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 placed
within the discretion of the then existing Independent Directors.
5. The Adviser will provide the board of directors of the Company,
no less frequently than quarterly, information about the Adviser's
profitability on a per-Fund basis. Such information will reflect the
impact on profitability of the hiring or termination of any Managers
during the applicable quarter.
6. Whenever a Manager is hired or terminated, the Adviser will
provide the board of directors of the Company information showing the
expected impact on the Adviser's profitability.
[[Page 55880]]
7. When a Manager change is proposed for a fund with a Affiliated
Manager, the Company's directors, including a majority of the
Independent Directors, will make a separate finding, reflected in the
Company's board minutes, that such change is in the best interests of
the Fund and its shareholders and does not involve a conflict of
interest from which the Adviser or the Affiliated Manager derives an
inappropriate advantage.
8. The Adviser will provide general management services to the
Company and the Funds and, subject to review and approval by the
Company's board of directors will: (a) set the Funds' overall
investment strategies; (b) select Managers; (c) allocate and, when
appropriate, reallocate a Fund's assets among Managers; (d) monitor and
evaluate the performance of Managers; and (e) ensure that the Managers
comply with the Funds; investment objectives, policies, and
restrictions.
9. Within 60 days of the hiring of any new Manager or the
implementation of any proposed material change in a Portfolio
Management Agreement, shareholders will be furnished all information
about a new Manager or Portfolio Management Agreement that would be
included in a proxy statement, except as modified by the order to
permit Limited Fee Disclosure. Such information will include Limited
Fee Disclosure and any change in such disclosure caused by the addition
of a new Manager or any proposed material change in a Portfolio
Management Agreement. The Adviser will meet this condition by providing
shareholders, within 60 days of the hiring of a Manager or the
implementation of any material change to the terms of a Portfolio
Management Agreement, with an information statement meeting the
requirements of Regulation 14C and Schedule 14C under the Exchange Act.
The information statement will also meet the requirements of Schedule
14A, except as modified by the order to permit Limited Fee Disclosure.
10. The Company will disclosure in its prospectuses the existence,
substance, and effect of any other granted pursuant to the application.
11. Before a Future Company that does not presently have an
effective registration statement may rely on the order, its initial
shareholder will approve the Adviser/Manager structure before such
Future Company offers its shares to the public.
12. No director or officer of the Company or the Adviser will own
directly or indirectly (other than through a pooled investment vehicle
that is not controlled by any such director or officer) any interest in
a Manager 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 to a publicly-traded company
that is either a Manager or an entity that controls, is controlled by,
or is under common control with a Manager.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-27316 Filed 11-2-95; 8:45 am]
BILLING CODE 8010-01-M
