[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
[[Page 66944]]
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
