[Federal Register Volume 61, Number 238 (Tuesday, December 10, 1996)]
[Notices]
[Pages 65095-65098]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31335]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22366; 812-10166]
The Victory Portfolios, et al.; Notice of Application
December 3, 1996.
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: The Victory Portfolios, SBSF Funds, Inc. dba the Key Mutual
Funds (the ``Key Mutual Funds'') (collectively, the ``Funds''), and
KeyCorp Mutual Fund Advisers, Inc. (``Key Advisers'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
granting an exemption from the provisions of section 15(a) of the Act
and rule 18f-2 thereunder, and from certain disclosure requirements set
forth in item 22 of Schedule 14A under the Securities Exchange Act of
1934 (the ``1934 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 Regulation S-X.
SUMMARY OF APPLICATION: Applicants seek an order permitting Key
Advisers, as investment adviser to the Funds, to enter into subadvisory
contracts with sub-advisers without receiving prior shareholder
approval, and the Funds to disclose only aggregate sub-advisory fees
for each series in their prospectuses and other reports.
FILING DATE: The application was filed on May 23, 1996, and amended on
September 16, 1996. Applicants have agreed to file an amendment, the
substance of which is incorporated herein, during the notice period.
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 December 30,
1996 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 5th Street NW., Washington, DC 20549.
Applicants: The Victory Portfolios and Key Mutual Funds, 3435 Stelzer
Road, Columbus, OH 43219-3035; Key Advisers, 126 Public Square,
Cleveland, OH 44114-1306.
FOR FURTHER INFORMATION CONTACT:
David W. Grim, Staff Attorney, at (202) 942-0571, or Mercer E. Bullard,
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 Victory Portfolios, a Delaware business trust, and Key
Mutual Funds, a Maryland corporation, are open-end management
investment companies registered with the SEC under the Act. Each Fund
currently has one or more investment series (``Series'') with different
investment objectives and policies.\1\
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\1\ Applicants also request relief with respect to any future
open-end management investment company advised by Key Advisers.
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2. The Funds plan to establish new Series, each structured as a
``fund of funds'' that will invest in shares of one or more other
mutual funds beyond the limits in section 12(d)(1) of the Act. On May
20, 1996, applicants filed an application for exemptive relief from
sections 12(d)(1) and 17 of the Act to implement and operate these
funds. A ``fund of funds'' may invest in an underlying fund that is
relying on the order requested in the immediate application.
3. Key Advisers, an Ohio corporation, is registered with the SEC as
an investment adviser under the Investment Advisers Act of 1940 (the
``Advisers Act''). It is a wholly-owned subsidiary of KeyCorp Asset
Management Holdings, Inc., which is a wholly-owned subsidiary of
KeyBank National Association, which is a wholly-owned subsidiary of
KeyCorp. Under its current investment advisory agreement with The
Victory Portfolios (the ``Current Agreement''), Key Advisers is
responsible for conducting investment research and supervision and for
the purchase and sale of investments. Under the Current Agreement, Key
Advisers may delegate
[[Page 65096]]
a portion of its responsibilities to a sub-adviser.
4. Key Advisers has entered into an investment sub-advisory
agreement with its affiliate, Society Asset Management, Inc., on behalf
of each Series of The Victory Portfolios except the Fund for Income
Series and the Special Growth Fund Series. With respect to the day-to-
day management of each of the Series, Society, under the sub-advisory
agreement, makes decisions concerning, and places all orders for,
purchases and sales of securities. The sub-advisory agreement does not
result in the payment of additional fees by The Victory Portfolios.
5. Key Advisers currently serves as the investment adviser to two
funds of the Key Mutual Funds that have recently commenced operations.
Spears, Benzak, Salomon & Farrell, Inc. (``SBSF''), a New York
corporation that is registered with the SEC as an investment adviser
under the Advisers Act, currently serves as the investment adviser to
the other four funds of the Key Mutual Funds. It is anticipated that
the directors and shareholders of the Key Mutual Funds will be asked to
approve Key Advisers as investment adviser to the Key Mutual Funds. The
Key Mutual Funds will not rely on the requested relief until it
receives the necessary shareholder approval and key Advisers becomes
the investment adviser.
6. Key Advisers intends to adopt a ``manager of managers'' approach
with respect to one or more existing or future Series of the Funds
(``Participating Series''). Under this approach, Key Advisers would
employ one or more investment advisers (``Money Managers'') to exercise
investment discretion over the various asset classes in which the
participating Series invest. Key Advisers would enter into a portfolio
management agreement with each Money Manager (a ``Portfolio Management
Agreement''). Each Portfolio Management Agreement would provide, among
other things, that the Money Manager would be responsible for
continuously reviewing, supervising, and administering the relevant
Participating Series' investment program with respect to the portion of
the Participating Series' assets assigned to it.
7. Subject to shareholder approval, each Participating Series would
enter into an investment advisory agreement with Key Advisers
(``Investment Advisory Agreement'') that would authorize the ``manager
of managers'' approach. Under the Investment Advisory Agreement, Key
Advisers would: (a) determine the asset classes in which Participating
Series would invest; (b) evaluate and select Money Managers; (c)
perform internal due diligence on prospective Money Managers and
thereafter monitor Money Managers' performance through quantitative and
qualitative analysis as well as in person, telephonic, and written
consultations; (d) determine the percentage of assets to be managed by
a particular Money Manager; (e) supervise compliance with the
investment objectives and policies of each Participating Series; (f)
authorize a Money Manager to engage in certain investment techniques
for a Participating Series; (g) recommend to the boards of directors of
the Funds (the ``boards'') whether Portfolio Management Agreements
should be renewed, modified, or terminated; (h) recommend to the Boards
the addition of new Money Managers as it deems appropriate; and (i)
provide overall management and supervision of the Funds' operations.
8. In return for providing the services described in paragraph 7
above, Key Advisers would receive a fee from each Participating Series,
computed as a percentage of net assets. Under the ``manager of
managers'' approach, Key Advisers would pay the Money Managers out of
this fee. The prospectus of each Participating Series will disclose the
aggregate amount of the investment advisory fee paid to Key advisers,
rather than the sub-advisory fees paid to individual Money Managers.
9. Except as discussed in the next sentence, applicants request an
order permitting Key Advisers to enter into and materially amend
Portfolio Management Agreements with Money Managers without obtaining
shareholder approval. Key Advisers will not enter into a Portfolio
Management Agreement with a Money Manager that is an affiliated person,
as defined in section 2(a)(3) of the Act, of the participating Series
or Key Advisers other than by reason of serving as Money Manager of the
Series (an ``Affiliated Money Manager''), without such agreement being
approved by the shareholders of the applicable Participating Series.
10. Applicants also request an exemption from the disclosure
provisions described below that may be deemed to require disclosure of
fees paid to each Money Manager.
11. Form N-1A is the registration statement used by open-end
management investment companies to register under the Act and to
register their securities under the Securities Act of 1933 (the ``1933
Act''). Items 2, 5(b)(iii), and 16(a)(iii) of Form N-1A, taken
together, may be deemed to require the Participating Series to disclose
compensation paid to the investment company's investment adviser and
the method of computing the fee.
12. 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.
13. Rule 20a-1 under the Act requires proxies solicited with
respect to an investment company to comply with Schedule 14A under the
1934 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 tale 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)(iii),
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 fees,''
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.
14. Form N-SAR is the semi-annual report filed with the SEC by
registered investment companies. Item 48 of Form N-SAR requires
investment companies to disclose the rate schedule for fees paid to
investment advisers.
15. 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
the 1933 Act. Sections 6-07.2(a), (b), and (c) of Regulation S-X may be
deemed to require that the Funds' financial statements contain
information concerning fees paid to the Money Managers.
16. Applicants request an exemption to permit each Participating
Series of the Funds to disclose (both as a dollar amount and as a
percentage of a Participating Series' average daily net assets) only:
the total advisory fee that Key Advisers is paid by each Participating
Series, the aggregate fees that Key Advisers pays to all Money Managers
managing the assets of each Series, and the net advisory fee retained
by Key Advisers for its services
[[Page 65097]]
provided to each Participating Series after Key Advisers pays the Money
Managers (collectively, ``Aggregate Fees''). If a Participating Series
employs an Affiliated Money Manager, the Participating Series will
provide separate disclosure of any fees paid to such Affiliated Money
Manager.
Applicants' Legal Analysis
1. Section 15(a) of the Act makes it unlawful for any person to act
as an investment adviser to a registered investment company except
pursuant to a written contract which has been approved by the vote of a
majority of the investment company's outstanding voting 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 assert that relief from section 15(a) and rule 18f-2
should be granted because the Participating Series will be operated in
a manner so different from that of conventional investment companies
that shareholder approval of advisory contracts would not serve any
meaningful purpose. Applicants contend that, by investing in a
Participating Series, shareholders, in effect, will hire key Advisers
to manage the Participating Series' assets by using its proprietary
investment adviser selection and monitoring process rather than by
hiring its own employees to manage assets directly. Applicants argue
that shareholders will expect that Key Advisers, under the overall
authority of the board, will take responsibility for overseeing Money
Managers and recommending their hiring, termination, and replacement.
3. Applicants contend that the requested relief also will benefit
shareholders by enabling the Participating Series to operate in a less
costly and more efficient manner. Applicants argue that the requested
relief will reduce expenses because a Participating Series will not
have to prepare and solicit proxies each and every time a Portfolio
Management Agreement is entered into or materially modified. Applicants
believe that the requested relief also will enable a Participating
Series to hire, terminate, and replace Money Managers more efficiently.
Applicants also contend that the requested relief will relieve
shareholders of the very responsibility that they are paying Key
Advisers to assume: the selection, termination, and compensation of
Money Managers. Finally, applicants assert that several of the
conditions in the application are designed to protect shareholder
interests through careful Board oversight of the Participating Series
and their arrangements with Key Advisers and the Money Managers.
4. Applicants argue that, under the manager of managers approach,
disclosure of fees paid to Money Managers would not serve any
meaningful purpose since investors will pay Key Advisers to retain and
compensate the Money Managers. Applicants also contend that many Money
Managers charge their customers for advisory services according to a
``posted'' fee schedule. Applicants note that, while Money Managers may
be willing to negotiate fees lower than those posted in the schedule,
particularly with large institutional clients, they are reluctant to do
so where the fees are disclosed to other prospective and existing
customers. Thus, applicants contend that the requested disclosure
relief may encourage Money Managers to negotiate lower advisory fees
with Key Advisers, the benefits of which ultimately may be passed on to
shareholders.
5. 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 order granting the requested relief shall
be subject to the following conditions:
1. Before a Participating Series may rely on the order requested
herein, the operation of the Participating Series in the manner
described in the application will be approved by a majority of each
Participating Series' outstanding voting securities, as defined in the
Act, or, in the case of a newly-created Participating Series whose
public shareholders purchased shares on the basis of a prospectus
containing the disclosure contemplated by condition 2 below, by the
sole shareholder before offering shares of the Participating Series to
the public.
2. The prospectus for each Participating Series will disclose the
existence, substance, and effect of the order. In addition, each
Participating Series will hold itself out to the public as employing
the ``manager of managers'' approach described in the application. The
prospectus and any sales materials or other shareholder communications
relating to the Participating Series will prominently disclose that Key
Advisers has ultimate responsibility for the investment performance of
the Participating Series due to its responsibility to oversee Money
Managers and recommend their hiring, termination, and replacement.
3. Within 60 days of the hiring of any new Money Manager or the
implementation of any proposed material change in a Portfolio
Management Agreement, Key Advisers will furnish shareholders all
information about the new Money Manager or Portfolio Management
Agreement that would be included in a proxy statement, except as
modified by the order with respect to the disclosure of fees paid to
the Money Managers. Such information will include disclosure of the
Aggregate Fees and any change in such disclosure caused by the addition
of a new Money Manager or any proposed material change in a
Participating Series' Portfolio Management Agreement. To meet this
obligation, within 60 days of the hiring of a new Money Manager or the
implementation of any material change to the terms of a Portfolio
Management Agreement, Key Advisers will provide shareholders with an
information statement meeting the requirements of Regulation 14C and
Schedule 14C under the 1934 Act. The information statement also will
meet the requirements of Item 22 of Schedule 14A under the 1934 Act,
except as modified by the order with respect to the disclosure of fees
paid to the Money Managers.
4. Key Advisers will not enter into a Portfolio Management
Agreement with any Affiliated Money Manager without such agreement,
including the compensation to be paid thereunder, being approved by the
shareholders of the applicable Participating Series.
5. At all times, a majority of each Fund's Board will not be
``interested persons'' of the Funds within the meaning of the Act
(``Non-interested Trustees''), and the nomination of new or additional
Non-interested Trustees will be placed within the discretion of the
then existing Non-interested Trustees.
6. When a Money Manager change is proposed for a Participating
Series with an Affiliated Money Manager, the Funds' trustees, including
a majority of Non-interested Trustees, will make a separate finding,
reflected in that Fund's board minutes, that such change is in the best
interest of the Participating Series and its shareholders and does not
involve a conflict of interest from which Key Advisers or the
Affiliated Money Manager derives an inappropriate advantage.
7. Separate counsel knowledgeable about the Act and the duties of
Non-
[[Page 65098]]
interested Trustees will be retained to represent each Fund's Non-
interested Trustees. The selection of such counsel will be placed
within the discretion of the Non-interested Trustees.
8. Key Advisers will provide each Fund's Board no less frequently
than quarterly with information about Key Advisers' profitability for
each Participating Series relying on the relief requested in the
application. Whenever a Money Manager to a particular Participating
Series is hired or terminated, Key Advisers will provide the Fund's
Board with information showing the expected impact on Key Advisers'
profitability, and quarterly reports will reflect the impact on
profitability of the hiring or termination of Money Managers during the
quarter.
9. Key Advisers will provide general management and administrative
services to the Participating Series and, subject to board review and
approval, will: (a) set the Participating Series' overall investment
strategies, (b) recommend Money Managers, (c) allocate and, when
appropriate, reallocate the Participating Series' assets among Money
Managers, (d) monitor and evaluate Money Manager performance, and (e)
oversee Money Manager compliance with the Participating Series'
investment objective, policies, and restrictions.
10. No director, trustee, or officer of the Funds or Key Advisers
will own directly or indirectly (other than through a pooled investment
vehicle over which such person does not have control) any interest in a
Money Manager except for: (a) ownership of interests in Key Advisers or
any entity that controls, is controlled by, or is under common control
with Key Advisers; 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 Money Manager or an entity that controls, is
controlled by, or is under common control with a Money Manager.
For the SEC, by the Division of Investment Management, pursuant
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-31335 Filed 12-9-96; 8:45 am]
BILLING CODE 8010-01-M
