[Federal Register Volume 62, Number 101 (Tuesday, May 27, 1997)]
[Notices]
[Pages 28745-28748]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13695]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22669; 812-10410]
Masters' Select Investment Trust et al.; Notice of Application
May 19, 1997.
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: Masters' Select Investment Trust (the ``Trust''), each
open-end management investment company advised by, or in the future
advised by Litman/Gregory Fund Advisors, LLC (``Litman/Gregory'')
(collectively with the Trust, the ``Funds''), and Litman/Gregory.
RELEVANT ACT SECTIONS: Exemption requested under section 6(c) of the
Act from section 15(a) 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 ``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 Regulation S-X.
SUMMARY OF APPLICATION: Applicants seek an order permitting Litman/
Gregory, as investment adviser to certain portfolios of the Funds, to
enter into and modify sub-advisory contracts without obtaining
shareholder approval, and permitting the Funds to disclose only the
aggregate sub-advisory fee for each portfolio in their prospectuses and
other reports.
FILING DATES: The application was filed on October 18, 1996, and
amended on January 29, 1997, and March 19, 1997.
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 June 12, 1997,
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, NW., Washington, DC 20549.
Applicants, 4 Orinda Way, Suite 230-D, Orinda, CA 94563.
FOR FURTHER INFORMATION CONTACT: Brian T. Houihan, Senior Counsel, at
(202) 942-0526, 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
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application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch.
Applicants' Representations
1. The Trust is a registered open-end management investment company
organized as a Delaware business trust. The Trust currently consists of
one investment portfolio, The Masters Select Equity Fund (the ``Equity
Portfolio''). Additional portfolios may be formed in the future with
different investment objectives and policies (collectively with the
Equity Portfolio, the ``Portfolios'').
2. Litman/Gregory, a registered investment adviser, acts as the
investment adviser to the Equity Portfolio and is expected to act as
investment adviser to any future Portfolios of the Trust and Portfolios
of other existing and future Funds. Litman/Gregory will operate the
Portfolios in a manner substantially different from that of
conventional investment companies. Litman/Gregory has developed an
investment philosophy for the Equity Portfolio that applicants believe
capitalizes on Litman/Gregory's extensive experience evaluating
investment advisory firms using a specified set of criteria. Litman/
Gregory's investment strategy for the Equity Portfolio is based, in
part, on its belief that it is possible to identify investment managers
who will deliver superior performance relative to their peer group.
3. In each instance in which Litman/Gregory acts or will act as
investment adviser to a Portfolio, the Portfolio may have one or more
external sub-advisers (the ``Investment Managers'') pursuant to
separate sub-advisory agreements (``Management Agreements''). The
Equity Portfolio has six Investment Managers. Litman/Gregory's
investment strategy for the Equity Portfolio is to allocate assets to
Investment Managers who, based on Litman/Gregory's research, represent
complementary style groups. Applicants anticipate that Litman/Gregory
may apply a similar strategy to future Portfolios.
4. As investment adviser, Litman/Gregory has overall responsibility
for assets under management, allocates assets among Investment
Managers, monitors and evaluates the performance of the Investment
Managers, and recommends selection of Investment Managers to the
Trust's board of trustees. Each Investment Manager exercises investment
discretion over or makes investment recommendations with respect to a
portion of the assets of the Portfolio. In circumstances where the
Investment Manager makes recommendations, but does not exercise
investment discretion, Litman/Gregory will be responsible for
authorizing portfolio transactions based on such recommendations.
5. As investment adviser, Litman/Gregory receives a fee from the
Equity Portfolio computed as a percentage of the portfolio's net
assets. Litman/Gregory pays the Investment Managers out of this fee.
The fee paid to each Investment Manager is separately negotiated and
may differ from one Investment Manager to another.
6. Applicants request an exemption from section 15(a) and rule 18f-
2 to permit the Funds to enter into and modify Management Agreements
without obtaining shareholder approval. Applicants also request an
exemption from the various provisions described below that may require
them to disclose the fees paid by Litman/Gregory to the Investment
Managers.
7. From 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
require disclosure of the method and amount of the investment adviser's
compensation.
8. From 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.''
9. 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(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.
10. 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 Investment Managers.
11. 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.
12. With respect to investment advisory fees, applicants propose to
disclose (both as a dollar amount and as a percentage of a Portfolio's
net assets) only the: (a) Total advisory fee charged by Litman/Gregory
with respect to each Portfolio; (b) aggregate fees paid by Litman/
Gregory to all Investment Managers managing assets of each Portfolio;
and (c) net advisory fee retained by Litman/Gregory with respect to
each Portfolio after Litman/Gregory pays all Investment Managers
managing assets of the Portfolio (collectively, the ``Aggregate Fee'').
For any Portfolio that employs an Investment Manager that is an
``affiliated person'' (as defined in section 2(a)(3) of the Act) of the
Portfolio or Litman/Gregory, other than by reason of serving as an
Investment Manager of the Portfolio (an ``Affiliated Manager''), the
Portfolio will provide separate disclosure of any fees paid to such
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 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. Applicants believe that the requested exemption from shareholder
voting requirements should be granted because Litman/Gregory will
operate the Portfolios in a manner so different from that of
conventional investment companies that shareholder approval would not
serve any meaningful purpose. Applicants argue that, by investing in a
Portfolio, shareholders, in effect, will hire Litman/Gregory to manage
the Portfolio's assets by using external portfolio managers (i.e.,
advisory firms not affiliated with
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Litman/Gregory), in combination with Litman/Gregory's proprietary
investment adviser selection and monitoring process, rather than by
using Litman/Greogy's own employees to manage the Portfolio assets.
Thus, applicants contend that shareholders will expect Litman/Gregory,
under the overall authority of the board of trustees, to take
responsibility for overseeing Investment Managers and recommending
their hiring, termination, and replacement. Applicants note that each
Portfolio's investment advisory agreement with Litman/Gregory will be
subject to shareholder approval under section 15(a). Finally,
applicants state that the trustees of each Fund, including each trustee
who is not an ``interested person'' of the Fund as defined in section
2(a)(19) of the Act (``Independent Trustees''), will consider and
approve each Management Agreement (including the specific sub-advisory
fee arrangements) in the manner required by the Act and the rules
thereunder.
3. Applicants also believe that the requested exemption will
benefit shareholders by enabling the Portfolios to operate in a less
costly and more efficient manner. Applicants argue that the requested
relief will reduce expenses because the Portfolios will not have to
prepare and solicit proxies each time a Management Agreement is entered
into or modified. Applicants believe that the Portfolios will be able
to operate more efficiently by permitting each Portfolio to hire,
terminate, and replace Investment Managers according to the judgment of
its board and Litman/Gregory. Applicants also argue that the requested
relief will relieve shareholders of the very responsibility that they
are paying Litman/Gregory to assume: the selection, termination, and
replacement of Investment Managers.
4. Applicants also believe that disclosure of the fees that Litman/
Gregory pays to each Investment Manager would not serve any meaningful
purpose since investors will pay Litman/Gregory to retain and
compensate the Investment Managers. Applicants state that, while
investment advisers typically are willing to negotiate fees lower than
those posted in their fee schedules, particularly with large
institutional clients, they are reluctant to do so where the negotiated
fees are disclosed to other prospective and existing customers. Thus,
applicants argue that the requested relief will facilitate lower
overall investment advisory fees because Investment Managers may accept
lower advisory fees from Litman/Gregory, the benefits of which will be
passed on to shareholders in the form of a lower Investment Manager
fee. Applicants believe that disclosure of each sub-advisory fee
arrangement would be complex and, given the varying asset allocation to
each Investment Manager, would not necessarily provide any meaningful
information to a shareholder. Applicants claim that, by limiting
disclosure to the Aggregate Fee, the requested relief will enable
shareholders to understand more clearly the relevant cost/expense
structure of each Portfolio.
5. Section 6(c) authorizes the SEC 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 believe that this
standard has been satisfied for the reasons discussed above.
Applicant's Conditions
Applicants agree that the following conditions may be imposed in
any order of the SEC granting the requested relief:
1. 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 each Portfolio's
outstanding voting securities, as defined in the Act, or, in the case
of a new Portfolio whose public shareholders purchase shares on the
basis of a prospectus containing the disclosure contemplated by
condition 2 below, by the sole shareholder before offering shares of
the Portfolio to the public.
2. The prospectus for each Portfolio will disclose the existence,
substance, and effect of the order. In addition, each Portfolio will
hold itself out to the public as employing the management structure
described in the application. The prospectus and any sales materials or
other shareholder communications relating to a Portfolio (collectively,
``Marketing Communications'') will prominently disclose that Litman/
Gregory has ultimate responsibility for the investment performance of
the Portfolio due to its responsibility to oversee Investment Managers
and recommend their hiring, termination, and replacement.
3. Within 60 days of the hiring of any new Investment Manager or
the implementation of any proposed material change in a Management
Agreement, Litman/Gregory will furnish shareholders all information
about the new Investment Manager or 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 Investment Managers. Such
information will include disclosure of the Aggregate Fee and any
proposed material change in the Portfolio's Management Agreement with
such new Investment Manager. To meet this obligation, Litman/Gregory
will provide shareholder 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 with
respect to the disclosure of specific fees paid to the Investment
Managers.
4. Litman/Gregory will not enter into a Management agreement with
any Affiliated Manager without such agreement, including the
compensation to be paid thereunder, being approved by the shareholders
of the applicable Portfolio.
5. At all times, a majority of each Fund's board of trustees will
be Independent Trustees, and the nomination of new or additional
Independent Trustees will be placed within the discretion of the then
existing Independent Trustees.
6. When an Investment Manager change is proposed for a Portfolio
with an Affiliated Manager, the Fund's trustees, including a majority
of the Independent Trustees, will make a separate finding, reflected in
the applicable Fund's board minutes, that such change is in the best
interests of the Portfolio and its shareholders and does not involve a
conflict of interest from which Litman/Gregory or the Affiliated
Manager derives an inappropriate advantage.
7. Independent counsel knowledgeable about the Act and the duties
of Independent Trustees will be engaged to represent the Independent
Trustees of each Fund. The selection of independent counsel will be
placed within the discretion of the Independent Trustees.
8. Litman/Gregory will provide each Fund's board of trustees no
less frequently than quarterly with information about Litman/Gregory's
profitability for each Portfolio relying on the relief requested in the
application. The information will reflect the impact on profitability
of the hiring or termination of Investment Managers during the quarter.
9. Whenever an Investment Manager to a particular Portfolio is
hired or terminated, Litman/Gregory will provide that Fund's board of
trustees with information showing the expected impact on Litman/
Gregory's profitability.
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10. Litman/Gregory will provide general management and
administrative services to the Portfolio and, subject to board review
and approval, will (a) set the Portfolio's overall investment
strategies, (b) recommend Investment Managers, (c) allocate and, when
appropriate, reallocate the Portfolio's assets among Investment
Managers, (d) monitor and evaluate Investment Manager performance, and
(e) oversee Investment Manager compliance with the Portfolio's
investment objective, policies, and restrictions.
11. No director, trustee, or officer of the Funds or Litman/Gregory
will own directly or indirectly (other than through a pooled investment
vehicle over which such person does not have control) any interest in
an Investment Manager except for (a) ownership of interests in Litman/
Gregory or any entity that controls, is controlled by or is under
common control with Litman/Gregory; 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 an Investment Manager or an entity that
controls, is controlled by or is under common control with an
Investment Manager.
12. Each Portfolio will disclose in its registration statement the
respective Aggregate Fee.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13695 Filed 5-23-97; 8:45 am]
BILLING CODE 8010-01-M
