[Federal Register Volume 64, Number 176 (Monday, September 13, 1999)]
[Notices]
[Pages 49530-49533]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-23747]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 23995; 812-11656]
LSA Variable Series Trust and LSA Asset Management LLC, Notice of
Application
September 7, 1999.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application under section 6(c) of the Investment
Company
[[Page 49531]]
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 request an order to permit
applicants to enter into and materially amend subadvisory agreements
without shareholder approval and to grant relief from certain
disclosure requirements.
Applicants: LSA Variable Series Trust (the ``Trust''), on behalf of its
series, Focused Equity Fund, Growth Equity Fund, Disciplined Equity
Fund, Value Equity Fund Balanced Fund, and Emerging Growth Domestic
Equity Fund (collectively, the ``Funds''), and LSA Asset Management LLC
(the ``Manager'') (collectively, ``Applicants'').
Filing Date: The application was filed on June 16, 1999 and amended on
August 27, 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 October 1, 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 issues
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, NW, Washington, DC
20549-0609; Applicants, 3100 Sanders Road, Suite J5B, Northbrook,
Illinois 60062.
FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Senior Counsel, at
(202) 942-0574 or George J. Zornada, 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
Commission's Public Reference Branch, 450 Fifth Street, NW, Washington,
DC 20549-0102 (telephone (202) 942-8090).
Applicant's Representations
1. The Trust is a Delaware business trust and is registered under
the Act as an open-end management investment company. Each Fund has its
own investment objective, policies and restrictions.\1\ Shares of the
Funds will serve as the funding vehicles for variable annuity contracts
and variable life insurance policies offered through separate accounts
(``Separate Accounts'') of Allstate Life Insurance Company
(``Allstate'') and other life insurance companies (owners of such
contracts and policies, ``Owners''). The Funds are not sold directly to
the public, although in the future shares of the Funds may also be sold
to qualified pension plans. The Manager is a wholly-owned subsidiary of
Allstate and is an investment adviser registered under the Investment
Advisers Act of 1940 (``Advisers Act'').
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\1\ Applicants also request relief with respect to all future
series of the Trust and to all subsequently registered open-end
management investment companies including all series thereof that in
the future are advised by the Manger (or any entity controlling,
controlled by, or under common control with the Manager), provided
that such companies (1) operate in substantially the same manner as
the Trust and (2) comply with the terms and conditions of the
requested order (``Future Investment Companies''). The Trust is the
only existing investment company that currently intends to rely on
the requested order.
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2. The Manager will serve as investment adviser to the Funds
pursuant to an investment advisory agreement entered into with the
Trust (``Management Agreement''). Under the Management Agreement, the
primary responsibilities of the Manager, subject to the supervision and
direction of the Trust's board of trustees (``Board''), are to provide
the Trust with investment management services and to select and
contract with one or more investment advisers (``Advisers'') to manage
the Funds' investment portfolios. Each Fund currently will be advised
by a single Adviser. Each Adviser recommended by the Manager will be
selected and approved by the Board, including a majority of the
trustees who are not ``interested persons'' (as defined in section
2(a)(19) of the Act), of the Trust, the Manager, or the Advisers
(``Independent Trustees''). Each Adviser is, and any future Adviser
will be, registered as an investment adviser under the Advisers Act and
will perform services under a subadvisory agreement (``Advisory
Agreement'') between the Manager and the Adviser. Each Adviser's fees
will be paid by the Manager out of the management fees received by the
Manager from the Funds.
3. Although the Manager is a newly-formed entity, its parent
company, Allstate, has extensive experience in asset management and in
evaluating and hiring investment advisers. As a wholly-owned subsidiary
of Allstate, the Manager will have access to and draw upon Allstate's
advisory experience and expertise. In providing investment management
evaluation services, the Manager will conduct quantitative and
qualitative analyses of the Advisers and will consider, among other
factors, each Adviser's level of expertise, relative performance,
consistency of results, and investment discipline or philosophy. The
Manager will monitor the compliance of each Adviser with the investment
objective and related policies and restrictions of each Fund and will
review the performance of each Adviser and report periodically to the
Board on such performance. The Manager is responsible for communicating
performance expectations and evaluations to each Adviser and ultimately
to determine whether each Advisory Agreement should be renewed,
modified, or terminated. The Manager will provide reports to the Board
with respect to the results of its evaluation, monitoring functions and
determinations with respect to each Adviser.
4. Applicants request relief to permit the manager to enter into
and materially amend Advisory Agreements without seeking shareholder
approval. The requested relief will not extend to an Adviser that is an
``affiliated person,'' as defined in section 2(a)(3) of the Act, of the
Trust or the Manager, other than by reason of serving as an Adviser to
one or more of the Funds (``Affiliated Adviser'').
5. Applicants also request an exemption form the various disclosure
provisions described below that may require each Fund to disclose fees
paid by the Manager to the Advisers. The Trust 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 Manger and Affiliated Advisers,
and (b) aggregate fees paid to Advisers other than Affiliated Advisers
(``Aggregate Fee Disclosure'') The Aggregate Fee Disclosure also will
include separate disclosure of any advisory fees paid to any Affiliated
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.
[[Page 49532]]
2. Form N-1A is the registration statement used by open-end
investment companies. Items 3, 6(a)(1)(ii), and 15(a)(3) of Form N-1A
require disclosure of the method and amount of the investment adviser's
compensation.
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 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.
5. 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 Advisers.
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
Commission. 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) 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.
8. Applicants assert that the Owners are relying on the Manager to
select and monitor the activities of the Advisers and to respond
promptly to any significant change in the advisory services provided to
the Funds. Applicants submit that in many respects, the relationship
between the Manager and the Advisers resembles the relationship between
a traditionally structured investment company and its investment
adviser, where no shareholder approval is required for the investment
adviser to change a portfolio manager or revise the portfolio manager's
salary or conditions of employment. Applicants note that the Management
Agreement will remain fully subject to the requirements of section
15(a) of the Act and rule 18f-2 under the Act.
9. Applicants assert that some Advisers use a ``posted'' rate
schedule to set their fees. Applicants believe that the Manger will not
be able to negotiate below ``posted'' fee rates with Advisers if each
Adviser's fees are required to be disclosed. Applicants submit that the
nondisclosure of the individual Adviser's fees is in the best interest
of the Funds and the Owners, where disclosure of such fees would
increase costs to Owners without an offsetting benefit to the Trust and
the Owners.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. Before a Fund or a Future Investment Company may rely on the
requested order, the operation of the Fund or the Future Investment
Company will be approved by the Owners or a majority of the outstanding
voting securities or, in the case of a Fund or a Future Investment
Company 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 Fund
or Future Investment Company to the public (or the Owners).
2. The Trust will disclose in the prospectus the existence,
substance, and effect of any order granted pursuant to this
application. In addition, each Fund relying on the requested order will
hold itself out to the public as employing the management structure
described in the application. The prospectus will prominently disclose
that the Manager has ultimate responsibility (subject to oversight to
the Board) to oversee the Advisers and recommend their hiring,
termination, and replacement.
3. Within ninety (90) days of the hiring of any new Adviser, Owners
with assets allocated to any subaccount of a registered Separate
Account for which the applicable Fund serves as a funding medium will
be furnished all information about the new Adviser or Advisory
Agreement 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 Adviser. The Manager
will satisfy this condition by providing these Owners with an
information statement meeting the requirements of Regulation 14C and
Schedule 14C under the 1934 Act and Item 22 of Schedule 14A under the
1934 Act, except as modified permit Aggregate Fee Disclosure.
4. The Manager will not enter into an Advisory Agreement with any
Affiliated Adviser without that Advisory Agremenet, including the
compensation to paid thereunder, being approved by the Owners with
assets allocated to any subaccount of a registered Separate Account for
which the applicable Fund serves as a funding medium or by the
shareholders in the case of a publicly available Fund.
5. At all times, a majority of the Board will be Independent
Trustees and the nomination of new or additional Independent Trustees
will continue to be at the discretion of the then-existing Independent
Trustees.
6. When an Adviser change is proposed for a Fund with an Affiliated
Adviser, 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 Fund and Owners with assets
allocated to any subaccount of a registered Separate Account for which
the fund serves as a funding medium or shareholders in the case of
publicly available Fund and does not involve a conflict of interest
from which the Manager or the Affiliated Adviser 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 the Trust. The selection of such counsel will be within the
discretion of the Independent Trustees of the Trust.
8. The Manager will provide the Board, no less frequently than
quarterly, with information about the Manager's profitability on a per-
Fund basis. This information will reflect the impact on profitability
of the hiring or termination
[[Page 49533]]
of any Adviser during the applicable quarter.
9. Whenever an Adviser is hired or terminated, the Manager will
provide the Board with information showing the expected impact on the
Manger's profitability.
10. The Manager will provide general management services to the
Trust and its 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: (i)
Set each Fund's overall investment strategies; (ii) evaluate, select,
and recommend Advisers to manage all or part of a Fund's portfolio;
(iii) allocate and, when appropriate, reallocate a Fund's assets among
multiple Advisers; (iv) monitor and evaluate the performance of
Advisers; and (v) implement procedures reasonably designed to ensure
that the Advisers comply with each Fund's investment objective,
policies, and restrictions.
11. No trustee/director of officer of the Trust or director or
office of the Manger will own directly or indirectly (other than
through a pooled investment vehicle that is not controlled by that
trustee/director or office) any interest in any Adviser except for: (i)
Ownership of interests in the Manager or any entity that controls, is
controlled by, or is under common control with the Manger; 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 an Adviser
or an entity that controls, is controlled by, or is under common
control with an Adviser.
12. The Trust will disclose in its registration statement the
Aggregate Fee Disclosure.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-23747 Filed 9-10-99; 8:45 am]
BILLING CODE 8010-01-M
