[Federal Register Volume 64, Number 25 (Monday, February 8, 1999)]
[Notices]
[Pages 6122-6124]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2893]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 23673; 812-11406]
Horace Mann Mutual Funds et al.; Notice of Application
February 1, 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 THE APPLICATION:Appli- cants, Horace Mann Mutual Funds (the
``Company'') and Wilshire Associates Incorporated (the ``Adviser''),
request an order that would (a) permit applicants to enter into and
materially amend sub-advisory agreements without shareholder approval
and (b) grant relief from certain disclosure requirements.
FILING DATE: The application was filed on November 18, 1998. Applicants
have agreed to file an amendment to the application during the notice
period, the substance of which is reflected in this notice.
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 February 24, 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, N.W., Washington,
D.C. 20549. Applicants, c/o Christine A. Scheel, Esq., Vedder, Price,
Kaufman & Kammholz, 222 North LaSalle Street, Chicago, Illinois 60601-
1003.
FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Sr., Senior Counsel,
at (202) 942-0714, 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 from
the Commission's Public Reference Branch, 450 Fifth Street, N.W.,
Washington, D.C. 20549 (telephone (202) 942-8090).
Applicant's Representations
1. The Company, a Delaware business trust, is registered under the
Act as an open-end management investment company. The Company is
currently comprised of seven series (each a ``Fund'' and collectively,
the ``Funds''), each of which has its own investment objective,
policies and restrictions.\1\ The shares of the Funds serve as funding
vehicles for variable annuity contracts offered through separate
accounts of the Horace Mann Life Insurance Company (``Horace Mann
Life''). Horace Mann Life is a wholly-owned indirect subsidiary of
Horace Mann Educators Corporation. The Adviser, a California
corporation, will serve as investment adviser to the Funds beginning on
March 1, 1999.\2\ The Adviser is registered under the Investment
Advisers Act of 1940 (``Advisers Act'').
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\1\ Applicants also request relief with respect to future series
of the Company and all future registered open-end management
investment companies that are (a) advised by the Adviser or any
entity controlling, controlled by, or under common control with the
Adviser, and (b) operate in substantially the same manner as the
Funds and comply with the terms and conditions contained in the
application (``Future Funds''). The Company is the only existing
investment company that currently intends to rely on the order.
\2\ The Funds currently are advised by Horace Mann Investors,
Inc., an investment adviser registered under the Investment Advisers
Act of 1940.
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2. The Adviser will serve as investment adviser to the Company
pursuant to an investment advisory agreement between the Company and
the Adviser that was approved by the Board of Trustees of the Company
(``Board''), including a majority of the Trustees who are not
``interested persons,'' as defined in section 2(a)(19) of the 1940 Act
(``Independent Trustees''), and the shareholders of the Funds
(``Investment Advisory Agreement''). Under the Investment Advisory
Agreement, the Adviser has overall general supervisory responsibility
for the investment program of the Funds and, subject to the general
supervision of the Board, has authority to select and contract with one
or more subadvisers (each a ``Portfolio Manager'' and collectively,
``Portfolio Managers'') to provide one or more Funds with portfolio
management services. Each Portfolio Manager will be an investment
adviser registered under the Advisers Act and will perform services
pursuant to a written agreement with the Adviser (the ``Sub-Advisory
[[Page 6123]]
Agreement''). Portfolio managers' fees will be paid by the Adviser out
of its fees from the Funds at rates negotiated with the Portfolio
Managers by the Adviser.
3. Applicants represent that the Adviser has over 25 years of
experience in the selection and supervision of investment managers for
investment programs. These programs include insurance company assets,
mutual funds, non-registered institutional funds, and pension funds.
The Adviser primarily advises its clients regarding customized asset
allocation/multi-manager structures and facilitates the implementation
of such structures and the selection of various investment management
organizations. Through the use of its state-of-the-art proprietary
performance analytics system, the Adviser monitors managers and
investment performance. The Adviser will employ its expertise to
evaluate and select Portfolio Managers that have shown the ability to
effectuate the Adviser's investment policies and add the most value to
shareholders of the Funds. The Adviser will select those Portfolio
Managers that have distinguished themselves through successful
performance in the market sectors in which the respective Funds invest.
The Adviser will review, monitor and report to the Board regarding the
performance and procedures of the Portfolio Managers and, subject to
Board oversight, take responsibility for selecting and terminating
Portfolio Managers.
4. Applicants request relief to permit the Adviser to enter into
and amend Sub-Advisory Agreements without shareholder approval. The
requested relief will not extend to a Portfolio Manager that is an
affiliated 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 Portfolio
Manager to one or more of the Funds (an ``Affiliated Portfolio
Manager'').
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 Portfolio Managers. The Company will
disclose for each Fund (both as a dollar amount and as a percentage of
a Fund's net assets): (i) the aggregate fees paid to the Adviser and
Affiliated Portfolio Managers; and (ii) aggregate fees paid to
Portfolio Managers other than Affiliated Portfolio Managers
(``Aggregate Fee Disclosure''). For any Fund that employs an Affiliated
Portfolio Manager, the Fund will provide separate disclosure of any
fees paid to the Affiliated Portfolio Manager.
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. Forum 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 22c(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 Portfolio 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
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 Funds' investors will rely on the
Adviser to select one or more Portfolio Managers best suited to achieve
a Fund's investment objectives. Therefore, applicants assert that, from
the perspective of the investor, the role of the Portfolio Managers is
comparable to that of individual portfolio managers employed by other
investment advisory firms. Applicants note that the Investment Advisory
Agreement will remain subject to section 15(a) of the Act and rule 18f-
2 under the Act.
9. Applicants further assert that some Portfolio Managers use a
``posted'' rate schedule to set their fees. Applicants believe that
some organizations may be unwilling to serve as Portfolio Managers at
any fee other than their ``posted'' fee rates, unless the rates
negotiated for the Funds are not publicly disclosed. Applicants believe
that requiring disclosure of Portfolio Manager's fees may deprive the
Adviser 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 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 voting
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
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the public (or the variable contract owners through a separate
account).
2. The Company will disclose in its prospectus the existence,
substance and effect of any order granted pursuant to the 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
Adviser has ultimate responsibility (subject to oversight by the Board)
to oversee the Portfolio Managers and recommend their hiring,
termination, and replacement.
3. Within 90 days of the hiring of any new Portfolio Manager,
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 Portfolio
Manager of Sub-Advisory Agreement that would be included in a proxy
statement, except as modified 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 Portfolio Manager. The
Adviser will meet this condition by providing these sharehodlers 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 to permit Aggregate Fee Disclosure.
4. The Adviser will not enter into a Sub-Advisory Agreement with an
Affiliated Portfolio Manager 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 unitholder of the sub-account.
5. 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.
6. When a Portfolio Manager change is proposed for a Fund with an
Affiliated Portfolio 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 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 Portfolio
Manager derives an inappropriate advantage.
7. The Adviser will provide the Board, no less frequently than
quarterly, will 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 Portfolio Manager during the
applicable quarter.
8. Whenever a Portfolio Manager is hired or terminated, the Adviser
will provide the Board with information showing the expected impact on
the Adviser's profitability.
9. 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, and, subject to
review and approval by the Board will (i) set each Fund's overall
investment strategies; (ii) evaluate, select and recommend Portfolio
Managers to manage all or a part of a Fund's assets; (iii) when
appropriate, allocate and reallocate a Fund's assets among multiple
Portfolio Managers; (iv) monitor and evaluate the investment
performance of Portfolio Managers; and (v) implement procedures
reasonably designed to ensure that the Portfolio Managers comply with
the relevant Fund's investment objective, policies, and restrictions.
10. No director, trustee or officer of the Company or 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
Portfolio Manager except for (i) ownership of interests in the Adviser
or any entity that controls, is controlled by, or is under common
control with the Adviser; 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 Portfolio Manager or an entity that
controls, is controlled by, or is under common control with a Portfolio
Manager.
11. The Company will disclose in its registration statement the
Aggregate Fee Disclosure.
12. Independent counsel knowledgeable about the Act and the duties
of Independent Trustees will be engaged to represent the Independent
Trustees of the Company. The selection of such counsel will remain
within the discretion of the Independent Trustees.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-2893 Filed 2-5-99; 8:45 am]
BILLING CODE 8010-01-M