[Federal Register Volume 63, Number 90 (Monday, May 11, 1998)]
[Notices]
[Pages 25887-25890]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-12403]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23169; 812-10746]
CypressTree Asset Management Corporation, Inc. and North American
Funds; Notice of Application
May 4, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemption under section 6(c) of the
Investment Company Act of 1940 (the ``Act'') from section 15(a) of the
Act and rule 18f-2 under the Act as well as certain disclosure
requirements.
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SUMMARY OF APPLICATION: Applicants, CypressTree Asset Management
Corporation, Inc. (``CAM'') and North American Funds (the ``Fund''),
request an order that would (a) permit applicants to hire subadvisers
(``Managers'') and materially amend sub-advisory agreements
(``Portfolio Management Agreements'') without shareholder approval and
(b) grant relief from certain disclosure requirements.
[[Page 25888]]
FILING DATES: The application was filed on August 1, 1997 and amended
on April 7, 1998. Applicants have agreed to file an additional
amendment, the substance of which is incorporated in this notice,
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
applicant with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on May 29, 1998 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 SEC's
Secretary.
ADDRESSES: Secretary, 450 Fifth Street NE., Washington, DC 20549.
Applicants, 116 Huntingdon Avenue, Boston, Massachusetts 02116.
FOR FURTHER INFORMATION CONTACT:
Deepak T. Pai, Staff Attorney, at (202) 942-0574, or Edward P.
Macdonald, 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 at the
SEC's Public reference Branch, 450 Fifth Street NW., Washington, DC
20549 (tel. 202-942-8090).
Applicants' Representations
1. The Fund is an open-end management investment company organized
as a Massachusetts business trust and registered under the Act. The
Fund is currently comprised of fifteen separate series
(``Portfolios''), each of which has its own investment objectives and
policies. CAM, registered under the Investment Advisers Act of 1940
(the ``Advisers Act''), serves as investment adviser to the Fund. Each
Portfolio currently has one Manager, each of which is registered under
the Advisers Act.
2. The Fund and its former investment adviser, NASL Financial
Services (``NASL''), are parties to an existing order that granted
similar relief to that requested in the application (the ``Existing
Order'').\1\ On October 1, 1997, CAM acquired a portion of the assets
of NASL and of its parent, North American Security Life Insurance
Company (the ``Transaction''). Upon completion of the Transaction, CAM
began serving as investment adviser to the Fund and its Portfolios
pursuant to an investment advisory agreement (the ``Investment Advisory
Agreement''). Since CAM was not a party to the Existing Order, CAM and
the Fund request an order substantially similar to the Existing Order
so that the Fund may continue to operate in the manner in which it
currently operates.\2\ The requested order would supersede the Existing
Order as it applies to the Fund.
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\1\ NASL Financial Services, Inc., Investment Company Act
Release Nos. 22382 (December 9, 1996) (notice) and 22429 (December
31, 1996) (order).
\2\ In addition, applicants request that the relief apply to any
registered open-end investment companies that in the future are
advised by CAM or any entity controlling, controlled by, or under
common control (within the meaning of section 2(a)(9) of the Act)
with CAM. Applicants also request that the relief apply to any
series of the Fund that may be created in the future. All existing
investment companies that currently intend to rely on the order have
been named as applicants, and any other existing or future
investment companies that subsequently rely on the order will comply
with the terms and conditions in the application.
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3. Cam oversees the administration of all aspects of the business
and affairs of the Fund, including providing administrative, financial,
accounting, bookkeeping, and recordkeeping services. CAM selects,
contracts with and compensates Managers that manage the assets of the
Portfolios. CAM selects Managers based on a quantitative and
qualitative evaluation of their skills and their proven ability to
manage assets. Each Manager recommended by CAM is ultimately selected
and approved by the Fund's board of trustees (``Board''), including a
majority of the Fund's trustees who are not ``interested persons'' of
the Fund as defined in section 2(a)(19) of the Act (``Independent
Trustees''). CAM monitors each Manager's compliance with each
Portfolio's investment objectives and policies, reviews the performance
of each Manager, and periodically reports each Manager's performance to
the Board.
4. Pursuant to the Portfolio Management Agreements, the specific
investment decisions for each Portfolio are, and will continue to be,
made by one or Managers, each of whom has discretionary authority to
invest all or a portion of the assets of a particular Portfolio subject
to general supervision by CAM and the Board. None of the Managers,
except Standish, Ayer & Wood, manager of the Tax-sensitive Equity
Portfolio, is an affiliate of CAM.
5. As compensated for its services, CAM receives a fee from the
Fund computed as an annual percentage of the current value of the net
assets of each Portfolio. Managers' fees are paid by CAM out of its fee
from the Portfolios at negotiated rates. Fees paid to a Manager of a
Portfolio with multiple Managers would depend both on the fee rate
negotiated with CAM and on the percentage of the Portfolio's assets
allocated to that Manager by CAM.
6. Applicants request an exemption from section 15(a) of the Act
and rule 18f-2 under the Act to permit Managers approved by the Board
to serve as portfolio managers for the Portfolios without shareholder
approval. Shareholder approval will continue to be required for any
Manager that is an ``affiliated person'' (as defined in section 2(a)(3)
of the Act), other than by reason of serving as a Manager of the
Portfolio (an ``Affiliated Manager'').
7. Applicants also request an exemption from the various disclosure
provisions described below that may require the Fund to disclose the
fees paid by CAM to the Managers. The Fund will disclose for each
Portfolio (both as a dollar amount and as a percentage of a Portfolio's
net assets): (i) Aggregate fees paid to CAM and Affiliated Managers;
and (ii) aggregate fees paid to Managers other than Affiliated Managers
(``Limited Fee Disclosure''). For any Portfolio that employs an
Affiliated Manager, the Portfolio will provide separate disclosure of
any fees paid to the Affiliated Manger.
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 which has been
approved by the vote of a majority of the outstanding voting securities
of such registered investment company. Rule 18f-2 under the Act
provides that any investment advisory contract that is submitted to the
shareholders of a series investment company under section 15(a) shall
be deemed to be effectively acted upon with respect to any class or
series of such company if a majority of the outstanding voting
securities of such class or series vote for the approval of such
matter.
2. Form N-1A is the registration statement used by open-end
investment companies. Items 2, 5(b)(iii), and 16(a)(iii) of Form N-1A
(and after the effective date of the amendments to Form N-1A, items 3,
6(a)(1)(ii), and 15(a)(3), respectively) require disclosure of the
method and amount of the investment adviser's compensation.
[[Page 25889]]
3. Form N-14 is the registration form for business combinations
involving open-end investment companies. Item 3 of Form N-14 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.''
4. 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''). Item
22(a)(3)(iv) of Schedule 14A 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. Items 22(c)(1)(ii), 22(c)(1)(iii), 22(c)(8), and 22(c)(9), 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 fees,'' 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.
5. 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
their investment advisers, including the Managers.
6. 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 SEC.
Sections 6-07(2)(a), (b), and (c) of Regulation S-X require that
investment companies include in their financial statements information
about investment advisory fees.
7. Section 6(c) authorizes the SEC to exempt persons or
transactions from the provisions of the Act to the extent that an
exemption is 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.
8. Applicants assert that the Fund's investors rely on CAM to
select one or more Managers best suited to achieve a Portfolio's
investment objectives. Therefore, applicants assert that, from the
perspective of the investor, the role of the Managers is comparable to
that of individual portfolio managers employed by other investment
company advisory firms. Applicants note that the Investment Advisory
Agreement will remain subject to shareholder approval.
9. Applicants further assert some Managers use a ``posted'' rate
schedule to set their fees, particularly at lower asset levels. Based
upon CAM's discussions with prospective Managers and NASL, applicants
believe that some organizations may be unwilling to serve as Managers
at any fee rate other than their ``posted'' fee rates, unless the rates
negotiated for the Portfolios are not publicly disclosed. Applicants
believe that requiring disclosure of Managers' fees may deprive CAM of
its bargaining power while producing no benefit to shareholders, since
the total advisory fee they pay would not be affected.
Applicants' Conditions
Applicants agree that the following conditions may be imposed in
any order of the Commission granting the requested relief:
1. The Fund will disclose in its registration statement the Limited
Fee Disclosure.
2. CAM will not enter into a Portfolio Management Agreement with
any Affiliated Manager without that agreement, including the
compensation to be paid thereunder, being approved by the shareholders
of the applicable Portfolio.
3. At all times, a majority of the Board will be Independent
Trustees, and the nomination of new or additional Independent Trustees
will be at the discretion of the then existing Independent Trustees.
4. Independent counsel knowledgeable about the Act and the duties
of Independent Trustees will be engaged to represent the Independent
Trustees of the Fund. The selection of such counsel will remain within
the discretion of the Independent Trustees.
5. CAM will provide the Board, no less frequently than quarterly,
with information about CAM's profitability for each Portfolio relying
on the requested relief. The information will reflect the impact on
profitability of the hiring or termination of any Manager during the
applicable quarter.
6. Whenever a Manager is hired or terminated, CAM will provide the
Board information showing the expected impact on CAM's profitability.
7. When a Manager change is proposed for a Portfolio with an
Affiliated Manager, the Board, including a majority of the Independent
Trustees, will make a separate finding, reflected in the Board minutes,
that the change is in the best interests of the Portfolio and its
shareholders and does not involve a conflict of interest from which CAM
or the Affiliated Manager derives an inappropriate advantage.
8. Before a Portfolio may rely on the order requested in the
application, the operation of the Portfolio in the manner described in
the application will be approved by a majority of its outstanding
voting securities, as defined in the Act, or, in the case of a new
Portfolio whose public shareholders purchased shares on the basis of a
prospectus containing the disclosure contemplated by condition 11
below, by the sole initial shareholder(s) before offering shares of
that Portfolio to the public.
9. CAM will provide general management services to the Fund and its
Portfolios, including overall supervisory responsibility for the
general management and investment of the Portfolios' securities
portfolio, and, subject to review and approval by the Board, will (i)
set the Portfolio's overall investment strategies; (ii) select
Managers; (iii) when appropriate, allocate and reallocate the Fund's
assets among multiple Managers; (iv) monitor and evaluate the
performance of Managers; and (v) ensure that the Managers comply with
the Portfolio's investment objectives, policies and restrictions.
10. Within 60 days of the hiring of any new Manager, shareholders
will be furnished all information about the 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. CAM will meet this
condition by providing shareholders, within 60 days of the hiring of a
Manager, with an information statement meeting the requirements of
Regulation 14C and Schedule 14C under the Exchange Act. The information
statement also will meet the requirements of Schedule 14A under the
Exchange Act, except as modified by the order to permit Limited Fee
Disclosure.
11. The Fund will disclose in its prospectus the existence,
substance, and effect of any order granted pursuant to the application.
In addition, each Portfolio will hold itself out to the public as
employing the ``Manager of Managers'' structure described in the
application. The prospectus will prominently disclose that CAM has
ultimate responsibility (subject to oversight by the Board) to oversee
the Managers and recommend their hiring, termination, and replacement.
[[Page 25890]]
12. No trustee or officer of the Fund or director or officer of CAM
will own directly or indirectly (other than through a pooled investment
vehicle over which such person does not have control) any interest in a
Manager except for (i) ownership of interests in CAM or any entity that
controls, is controlled by, or is under common control with CAM; or
(ii) 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
Manager or an entity that controls, is controlled by, or is under
common control with a Manager.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-12403 Filed 5-8-98; 8:45 am]
BILLING CODE 8010-01-M
