Applications, hearings, determinations, etc.: CypressTree Asset Management Corp., Inc., et al.,

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Federal Register: May 11, 1998 (Volume 63, Number 90)NoticesPage 25887-25890From the Federal Register Online via GPO Access [wais.access.gpo.gov]

DOCID:fr11my98-107

SECURITIES AND EXCHANGE COMMISSION

Rel. No. IC-23169; 812-10746CypressTree 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.

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.

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FILING DATES: The application was filedon 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.

\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.

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.

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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 filedwith 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 filedwith 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.

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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. 98-12403Filed5-8-98; 8:45 amBILLING CODE 8010-01-M

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