Select Ten Plus Fund, LLC

[Federal Register Volume 64, Number 177 (Tuesday, September 14, 1999)]
[Notices]
[Pages 49829-49832]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-23953]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-24003; No. 812-11688]


Select Ten Plus Fund, LLC

September 9, 1999.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for an order pursuant to Section 6(c) of 
the Investment Company Act of 1940 (the ``Act'').

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SUMMARY OF APPLICATION: Applicant seeks an order pursuant to Section 
6(c) of the Act exempting Applicant from the provisions of Section 
12(d)(3) of the Act to the extent necessary to permit Applicant's 
portfolios to invest up to 10% of their total assets in securities of 
issuers that derive more than 15% of their gross revenues from 
securities related activities.

Applicant: Select Ten Plus Fund, LLC.

Filing Date: The application was filed on July 12, 1999, and amended on 
September 9, 1999.

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 Secretary of the SEC and serving 
Applicant with a copy of the request, personally or by mail. Hearing 
requests must be received by the SEC by 5:30 p.m. on September 29, 
1999, 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 requester'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 
Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549-0609. Applicant, 515 West Market Street, Louisville, Kentucky 
40202-3319.

FOR FURTHER INFORMATION CONTACT: Ann L. Vlcek, Senior Counsel, or Susan 
M. Olson, Branch Chief, Office of Insurance Products, Division of 
Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee from the 
Public Reference Branch of the SEC, 450 Fifth Street, N.W., Washington, 
D.C. 20549-0102, (202) 942-8090.

Applicant's Representations

    1. Applicant is a registered, open-end management investment 
company (File No. 811-09179). It consists of four non-diversified 
investment portfolios, Select Ten Plus Portfolio--March, Select Ten 
Plus Portfolio--June, Select Ten Plus Portfolio--September, and Select 
Ten Plus Portfolio--December (the ``Portfolios''). Applicant was 
organized under the laws of Delaware as a limited liability company on 
September 30, 1998. Under Delaware law, a limited liability company 
does not issue shares of stock. Instead, ownership rights are contained 
in membership interests. Each membership interest of Applicant 
(``Interest'') represents an undivided interest in the stocks held in 
one of the Portfolios.
    2. The Interests are not offered directly to the public. The only 
direct owner of the Interests is National Integrity Life Insurance 
Company (``National Integrity'') through its separate accounts. Those 
of National Integrity's variable annuity owners who have contract 
values allocated to any of the Portfolios have indirect beneficial 
rights in the Interests and have the right to instruct National 
Integrity with regard to how it votes the Interests that it holds in 
its separate accounts.
    3. Integrity Capital Advisors, Inc. (the ``Adviser''), a wholly 
owned subsidiary of ARM Financial Group, Inc., is Applicant's 
investment adviser. National Asset Management Corporation (``National 
Asset'') serves as sub-adviser to each Portfolio.
    4. Applicant states that each of the Portfolios invests 
contributions on the last business day of the month for which the 
Portfolio is named (the ``Investment Date''). Applicant states that 
each Portfolio invests approximately 10% of its assets in the common 
stock of each of the ten companies in the Dow Jones Industrial Average 
(the ``DJIA'') having the highest dividend yield as of the close of 
business on the business day prior to the Investment Date. These ten 
companies are popularly known as the ``Dogs of the Dow.''
    5. The DJIA consists of 30 stocks selected by Dow Jones & Company, 
Inc. as representative of the New York Stock Exchange and of American 
industry. Applicant states that Dow Jones & Company Inc. is not 
affiliated with Applicant and has not participated, and will not 
participate, in any way in the creation or management of the Portfolios 
or the selection of the stocks included in the Portfolios.
    6. Applicant states that the Portfolios seek total return by 
investing in shares of the ten highest dividend yielding common stocks 
in the DJIA in equal weights and holding them for twelve months. The 
Portfolios may or may not achieve that objective. At the end of a 
Portfolio's twelve-month period, the Portfolio will restructure its 
investment portfolio to invest in the ten stocks with the highest 
current dividend yield in the DJIA for another twelve months. The 
dividend yield for each stock is calculated by annualizing the last 
quarterly or semi-annual ordinary dividend distributed on that stock 
and dividing the result by the market value of that stock as of the 
close of the New York Stock Exchange on the business day prior to the 
Investment Date. This yield is historical and there is no assurance 
that any dividends will be declared or paid in the future on the stocks 
in the Portfolios.
    7. Applicant states that Interests may be purchased by separate 
accounts of National Integrity on the Investment Date. Applicant states 
that the weights of the individual stock positions are not rebalanced 
during a Portfolio's twelve-month holding period nor are additional 
contributions accepted. On the day a dividend from a stock in a 
Portfolio's investment portfolio is received it is reinvested in the 
form of additional shares of the stock. Interests may be redeemed at 
any time. Upon receipt of a redemption request, approximately equal 
dollar amounts of shares of each of the ten stocks are sold, such that 
the total dollar amount sold equals the amount of the redemption. 
Applicant states that the ten stocks held in a Portfolio are not 
expected to reflect the entire index nor are the prices of Interests 
intended to parallel or correlate with movements in the DJIA.
    8. Applicant states that the Adviser and National Asset will try, 
to the extent practicable, to maintain a minimum cash position at all 
times. Applicant represents that normally the only cash items held will 
represent amounts expected to be deducted as charges and amounts too 
small to purchase additional proportionate round lots of the ten 
stocks.
    9. Applicant states that it is not a regulated investment company 
under Subchapter M of the Internal Revenue Code of 1986, as amended 
(the ``Code''). However, as a limited liability company whose interests 
are sold only to National Integrity, Applicant states that it is 
disregarded as an entity for purposes of federal income taxation. 
Applicant states that it does not pay federal income tax on its 
interest income, dividend income or capital gains. Applicant represents 
that instead, National Integrity, through its separate accounts, is 
treated as owning the assets of Applicant directly and its tax 
obligations thereon are computed pursuant to Subchapter L of the Code 
(which governs the taxation of insurance companies). Applicant states 
that, under current tax law, interest income, dividend income and 
capital gains of Applicant are not currently taxable to National 
Integrity or to contract owners when left to accumulate within a 
variable annuity contract.
    10. Section 817(h) of the Code provides that in order for a 
variable contract that is based on a segregated asset account to 
qualify as an annuity contract under the Code, the investments made by 
that account must

[[Page 49831]]

be ``adequately diversified'' in accordance with Treasury regulations.
    11. Applicant states that each Portfolio must comply with the 
Section 817(h) diversification requirements. Therefore, Applicant 
states that the Adviser and National Asset may depart from the 
Portfolios' investment strategy, if necessary, in order to satisfy 
these Section 817(h) diversification requirements. Applicant represents 
that, under all circumstances, except in order to meet Section 817(h) 
diversification requirements, the common stocks purchased for each 
Portfolio are chosen solely according to the formula described above 
and are not based on the research opinions or buy or sell 
recommendations of the Adviser or National Asset. Applicant asserts 
that neither the Adviser nor National Asset has any discretion as to 
which common stocks are purchased. Applicant states that securities 
purchased for each Portfolio may include securities of issuers in the 
DJIA that derived more than 15% of their gross revenues in their most 
recent fiscal year from securities related activities.

Applicant's Legal Analysis

    1. Section 12(d)(3) of the Act prohibits an investment company from 
acquiring any security issued by any person who is a broker, dealer, 
underwriter or investment adviser, with exceptions not relevant here. 
Rule 12d3-1 under the Act exempts from Section 12(d)(3) purchases by an 
investment company of securities of an issuer, except its own 
investment adviser, promoter or principal underwriter or their 
affiliates, that derived more than 15% of its gross revenues in its 
most recent fiscal year from securities related activities, provided 
that, among other things, immediately after any such acquisition the 
acquiring company has invested not more than 5% of the value of its 
total assets in the securities of the issuer. Applicant represents that 
each of the Portfolios undertakes to comply with all of the 
requirements of Rule 12d3-1, except the condition in subparagraph 
(b)(3) prohibiting an investment company from investing more than 5% of 
the value of its total assets in securities of a securities related 
issuer.
    2. Section 6(c) of the Act provides that the Commission by order 
upon application may conditionally or unconditionally exempt any 
person, security, or transaction, or any class or classes thereof, from 
any provision of the Act or any rule or regulation thereunder, if and 
to the extent that the exemption is necessary or appropriate in the 
public interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act.
    3. Applicant states that Section 12(d)(3) was intended (i) to 
prevent investment companies from exposing their assets to the 
entrepreneurial risks of securities related businesses, (ii) to prevent 
potential conflicts of interest, (iii) to eliminate certain reciprocal 
practices between investment companies and securities related 
businesses, and (iv) to ensure that investment companies maintain 
adequate liquidity in their portfolios.
    4. Applicant states that a potential conflict could occur, for 
example, if an investment company purchased securities or other 
interests in a broker-dealer to reward that broker-dealer for selling 
fund shares, rather than solely on investment merit. Applicant argues 
that this concern does not arise in this situation. Applicant 
represents that, generally, none of Applicant, the Adviser or National 
Asset has discretion in choosing the common stock or amount purchased. 
Applicant states that the stock must first be included in the DJIA 
(which is unaffiliated with Applicant, the Adviser or National Asset), 
and must also qualify as that of one of the ten companies in the DJIA 
that have the highest dividend yield as of the close of business on the 
business day prior to the Investment Date.
    5. Applicant states that identical exemptive relief from Section 
12(d)(3) has been granted to open-end management investment companies 
with the same limited liability company structure as Applicant. 
Applicant also asserts that identical exemptive relief from Section 
12(d)(3) has been granted to management investment companies with a 
different structure that also involves investment options underlying 
variable annuities. In addition, Applicant states that Section 12(d)(3) 
relief has been granted to unit investment trusts with no discretion to 
choose the portfolio securities or the amount purchased, but with 
discretion to sell portfolio securities to the extent necessary to meet 
redemptions.
    6. Applicant states that the Adviser and National Asset are 
obligated to follow the investment formula described above as nearly as 
practicable. Applicant represents that, like prior applicants for 
Section 12(d)(3) relief, securities purchased for each Portfolio are 
chosen with respect to the specified formula. Applicant states that the 
only time any deviation from the formula would be permitted would be 
where circumstances were such that the investments of a particular 
Portfolio would fail to be ``adequately diversified'' under the Section 
817(h) diversification requirements, and would thus cause the annuity 
contracts to fail to qualify as an annuity contract under the Code. 
Applicant argues that the likelihood of this exception arising is 
extremely remote. In such a situation, Applicant states that it must be 
permitted to deviate from the investment strategy in order to meet the 
Section 817(h) diversification requirements and then only to the extent 
necessary to do so. Applicant asserts that this limited discretion does 
not raise the concerns that Section 12(d)(3) is aimed at since it does 
not give rise to the potential conflicts of interest or to the possible 
reciprocal practices between investment companies and securities 
related businesses that Section 12(d)(3) is designed to prevent.
    7. Applicant states that the liquidity of a Portfolio is not a 
concern here since each common stock selected is a component of the 
DJIA, listed on the New York Stock Exchange, and among the most 
actively traded securities in the United States.
    8. In addition, Applicant asserts that the effect of a Portfolio's 
purchase of the stock of parents of broker-dealers would be de minimis. 
Applicant states that the common stocks of securities related issuers 
represented in the DJIA are widely held and have active markets. 
Applicant states that potential purchases by a Portfolio represent an 
insignificant amount of the outstanding common stock and trading volume 
of any of these issuers. Therefore, Applicant argues that it is almost 
inconceivable that these purchases would have any significant effect on 
the market value of any of these securities related issuers.
    9. Applicant states that another possible conflict of interest is 
where broker-dealers may be influenced to recommend certain investment 
company funds which invest in the stock of the broker-dealer or any of 
its affiliates. Applicant represents that, because of the large market 
capitalization of the DJIA issuers and the small portion of these 
issuers' common stock and trading volume that are purchased by a 
Portfolio, it is extremely unlikely that any advice offered by a 
broker-dealer to a customer as to which investment company to invest in 
would be influenced by the possibility that a Portfolio is invested in 
the broker-dealer or a parent thereof.
    10. Finally, Applicant states that another potential conflict of 
interest could occur if an investment company directed brokerage to an 
affiliated broker-dealer in which the company has invested to enhance 
the broker-dealer's

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profitability or to assist it during financial difficulty, even though 
the broker-dealer may not offer the best price and execution. To 
preclude this type of conflict, Applicant agrees, as a condition of 
this application, that no company whose stock is held in any Portfolio, 
nor any affiliate of such a company, will act as broker or dealer for 
any Portfolio in the purchase or sale of any security.
    11. Applicant represents that the relief requested is substantially 
the same as that previously granted in other applications. Applicant 
represents that the relief requested is consistent with the standards 
set forth in Section 6(c) of the Act.

Applicant's Conditions

    Applicant agrees that any order granting the requested relief from 
Section 12(d)(3) of the Act shall be subject to the following 
conditions:
    1. The common stock is included in the DJIA as of the business day 
prior to the investment Date;
    2. The common stock represents one of the ten companies in the DJIA 
that have the highest dividend yield as of the close of business on the 
business day prior to the Investment Date;
    3. As of the Investment Date, the value of the common stock of each 
securities related issuer represents approximately 10% of the value of 
any Portfolio's total assets, but in no event more than 10.5% of the 
value of the Portfolio's total assets; and
    4. No company whose stock is held in any Portfolio, nor any 
affiliate thereof, will act as broker or dealer for any Portfolio in 
the purchase or sale of any security for that Portfolio.

Conclusion

    For the reasons summarized above, Applicant asserts that granting 
the requested relief is appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act.

    For the SEC, by the Division of Investment Management, pursuant 
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-23953 Filed 9-13-99; 8:45 am]
BILLING CODE 8010-01-M