SEC Division of Investment Management staff letter: North American Security Trust

1933 Act/Rule 482
1940 Act/Rule 34bl
JONES BLOUCH
2100 PENNSYLVANIA AVENUE
WASHINGTON 20037
202 223-3500 ___________________________ J.SUMNERJONES 8CTION PUTT October 13 1992 PTJTJLC AVAILABILIT /11 Securities and Exchange Commission 450 Fifth Street N.1 Washington DC 20549 Attention Thomas Harinan Esq Chief Counsel Division of Investment Management Re North American Security Trust File Nos 3327958 and 8115797 Dear Sirs We are writing on behalf of North American Security Trust NAST registered management investment company to reest your assurance that you will not recommend to the Commission any action against NAST if in advertising the performance of its Asset Allocation Trust New Trust as permitted by Rule 482 under the Securities Act of 1933 1933 Act and Rule 34b-l under the Investment Company Act of 1940 1940 Act NAST uses for periods prior to the establishment of the New Trust the historical performance of predecessor portfolio the Moderate Asset Allocation Trust the largest of three portfolios combined to form the New Trust NAST is an open-end management investment company organized as business trust under the laws of the Commonwealth of Massa chusetts on September 28 1988 It has number of separate investment portfolios each of which is represented by separate series of shares of beneficial interest as contemplated by
Section 18f2 of the 1940 Act Prior to July 10 1992 NAST
had nine separate portfolios three of which were designated the Conservative Asset Allocation Trust the Moderate Asset Allocation Trust and the Aggressive Asset Allocation Trust NASL Financial Services Inc whollyowned subsidiary of North American Security Life Insurance Company Delaware corporation is NASTs investment adviser Pursuant to its advisory agreement with NAST it selects contracts with and compensates subadvisers for each of NASTs portfolios Prior to December 13 1991 the subadviser for the Conservative Moderate and Aggressive Asset Allocation Trusts and for three otherNAST portfolios was M.D Sass Investors Services Inc On that date

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NASTs trustees accepted the resignation of that subadviser and retained as subadviser for certain of the portfolios including the three Asset Allocation Trusts Goldman Sachs Asset Manage xnent separate operating division of Goldman Sachs Co New York limited partnership in the investment banking business On January 31 1992 the trustees of NAST approved plan of reorganization providing for the combination of the Conservative Moderate and Aggressive Asset Allocation Trusts into newly established portfolio the New Trust Following the approval of the plan of reorganization by shareholders of each of the affect ed portfolios the combination of the three portfolios was ixnple mented on July 10 1992 by the transfer of all assets of each such portfolio to the New Trust and the assumption of all liabilities of each such portfolio by the New Trust in exchange for shares of the New Trust and the immediate distribution by each such portfolio to its shareholders pro rata of the New Trust shares it received from the New Trust The three Asset Allocation Trusts were then abolished Although effected by means of newly-established portfolio the reorganization was in substance combination of the Conser vative and Aggressive Asset Allocation Trusts with and into the Moderate Asset Allocation Trust with the Moderate Asset Alloca tion Trust being the surviving entity The investment objective policies and restrictions of the Moderate Asset Allocation Trust were carried over without change to the New Trust At the time of the reorganization the net assets of the Moderate Asset Allocation Trust constituted 70% of the net assets of the New Trust whie the net assets of the Conservative and Aggressive Asset Allo.-ation Trusts constituted 21% and 9% respectively of the net assets of the New Trust In effect shareholders of the Conservative and Aggressive Asset Allocation Trusts became shareholders of the Moderate Asset Allocation Trust The reorganization had limited effect on the individual securities held by the Moderate Asset Allocation Trust At the time of the reorganization all of the individual securities held by the Conservative and Aggressive Asset Allocation Trusts were also held by the Moderate Asset Allocation Trust Moreover sixty-two of the sixty-four securities then held by the Moderate Asset Allocation Trust were also held by each of the Conservative and Aggressive Asset Allocation Trusts The principal difference in the three portfolios was the relative portion of assets held in three categories of securities equity fixed income and money market As here pertinent Rule 482e under the 1933 Act requires among other things that any quotations of investment performance of NASTs non-money market portfolios used in advertisements permitted by the rule be based on methods of computation

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prescribed by Form N-lA and include quotations of average annual total return for the one year period and the period since inception preceding the most recently completed calendar quar ter.1 Rule 34b under the 1940 Act would declare misleading any sales literature containing performance quotations for NASTs non-money market portfolios unless it contained among other things the total return information required by Rule 482e For the one year period ending June 30 1992 the total return computed in accordance with Item 22b of Form NlA for the Conservative Moderate and Aggressive Asset Allocation Trusts was 8.46% 11.20% and 9.78% respectively For the period from inception August 28 1989 through June 30 1992 the average annual total return so computed for such portfolios was 5.23% 2.74% and 2.51% respectively We believe that the requirements of the Commissions rules governing the advertising of investment company performance in the context of the combination of the three Asset Allocation Trusts are satisfied if the New Trust uses for periods prior to the reorganization the historical performance of the Moderate Asset Allocation Trust provided the advertising material dis closes that for the period prior to July 10 1992 the performance used is that of the former Moderate Asset Allocation Trust Our conclusion in this regard is supported by the position taken by the staff in Commonwealth Funds available June 14 1989 In Commonwealth Funds where two investment companies were conbined into newly-formed third company the Division of Investment Management permitted the new third company to use the performance information of the larger of the two predecessor funds its net asset value constituting approximately 80% of the combined assets The Division conditioned its no-action position on there being prominent disclosure in the advertising material that the historical performance was based on the performance of one of the two predecessor funds In its response the staff made particular note of the facts that the fund whose investment return was to be used was the one 1ltem 22b of Form N-lA requires open-end investment compa nies other than money market funds which advertise any perfor mance data to provide average annual total return quotations for the one five and ten year periods prior to the date of the most recent balance sheet included in the registration statement in accordance with specified formula An instruction provides that if the registrants registration statement has been in effect for less than one five or ten years the time period during which the registration statement has been in effect should be substituted for the periods stated

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with greater expenses and that the investment returns of the two predecessor funds had been substantially identical Use of the performance data of the smaller fund with the lower expense ratio was rejected in part because of the representations that it would be difficult to develop performance information for the smaller fund and that the higher expense ratio of the larger fund would more closely resemble the anticipated expense levels of the new fund Since its inception the Moderate Asset Allocation Trust has had expenes levels lower than those of the Conservative and Aggressive Asset Allocation Trusts.2 However as was the case in Commonwealth Funds the expense ratios of the Moderate Asset Allocation Trust should more closely resemble the expense ratios of the New Trust because the economies of scale associated with the substantial assets of the New Trust will be comparable to those of the Moderate Asset Allocation Trust As noted the staff in Commonwealth Funds also placed some emphasis on the fact that the investment performance of the two predecessor funds had been substantially identical While the similarity of the investment performance may be pertinent consideration in choosing between the performance of one of two funds having investment objectives and policies identical to each other and substantially similar to the surviving fund it should not be significant when as here the issue involves portfolios with different investment objectives and policies where it would be unusual if the investment performance of the portfolios were the same When shareholders of one or more portfolios become through reorganization shareholders of portfolio with differ ent objectives and policies the performance of the former portfolios while relevant to such shareholders in evaluating the overall historical performance of their investment is of no significance in terms of their evaluating their investment in the 2For the two month period ended October 31 1989 the years ended October 31 1990 and 1991 and the six month period ended April 30 1992 the Moderate Asset Allocation Trust had ratios of operating expenses to average net assets annualized for periods of less than one year of 2.13% 2.63% 2.88% and 2.78% respec tively For such periods the Conservative Asset Allocation Trust had ratios of 2.25% 2.69% 2.91% and 2.96% respectively and the Aggressive Asset Allocation Trust had ratios of 2.47% 2.93% 2.97% and 2.97% respectively 31n fact expense ratios of the New Trust should be lower than the historical expense ratios of the Moderate Asset Alloca tion Trust because of an expense limitation contained in NASTs investment advisory agreement effective until October 31 1993 and from year to year thereafter unless terminated by NASL Financial that will limit portfolio expenses to 1.99% of average net assets

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new portfolio and considering whether to continue or modify such investment If the reorganization had been implemented by combination of the Conservative and Aggressive Asset Allocation Trusts into the Moderate Asset Al.ocationTrust there would be no basis for precluding the quotation of the Moderate Asset Allocation Trusts performance history prior to the date of the combination In substance such was the result of the reorganization The two smaller portfolios were combined into third the investment adviser and investment objectives and policies of which were unchanged by the transaction To preclude the quotation of the Moderate Asset Allocation Trusts historical performance because the combined assets were allocated to new portfolio would seem to be nothing more than an elevation of form over substance In our opinion no useful purpose would be served by prohib iting the use of information relating to historical performance prior to the date of the reorganization in the circumstances here presented purpose of the Commissions performance quotation rules is to show investment experience for intermediate-term and longterm investors See notes 28 and 29 of Release Nos 336753 and IC-16245 February 1988 Such purpose should be ignored only where significant change such as change in manager or in investment objectives or policies has occurred which makes use of performance data prior to the change potentially mislead ing Where as here the only change in substance is substan tial increase in net assets there is in our view no legitimate basis for depriving shareholders of the surviving portfolio many of whom will have been shareholders of the predecessor portfolio of information relating to the historical performance of the latter In view of the foregoing we request your concurrence in our view that historical performance quotations of the New Trust may consistent with Rules 482 and 34b-1 reflect the performance of the Moderate Asset Allocation Trust for periods prior to the reorganization of the three Asset Allocation Trusts into the New Trust or alternatively your assurance that you will not recom mend to the Commission any action against NAST if its adver tisements of the historical performance of the New Trust include for periods prior to the reorganization the performance of the Moderate Asset Allocation Trust NAST agrees that any perfor mance of the Moderate Asset Allocation Trust will prominently disclose that fact Very truly yours Sumnerones

1iUifLi.Ci
Our Ref No 92-609CC
North American
RESPONSE OF THE OFFICE OF CHIEF COUNSEL Security Trust DIVISION OF INVESTMENT MANAGEMENT File No 811-5797 Your letter of October 13 1992 requests our assurance that we would not recommend that the Commission take any enforcement action if North American Security Trust NAST advertises the performance of one of its portfolios the Asset Allocation Trust New Trust as described in your letter NAST Massachusetts business trust is an openend management investment company On January 31 1992 NASTs trustees approved plan to reorganize three of its portfolios the Conservative Asset Allocation Trust Conservative Trust the Moderate Asset Allocation Trust Moderate Trust and the Aggressive Asset Allocation Trust Aggressive Trust collectively the Asset Allocation Trusts into newly established portfolio the New Trust NAST implemented the reorganization on July 10 1992 .1/ Rather than treating the New Trust as new portfolio with no historical performance data prior to its establishment on July 10 1992 you propose to advertise the historical performance of the New Trust using for periods prior to July 10 1992 the performance data for the Moderate Trust You represent that any advertising material containing historical performance would prominently disclose that for the period prior to July 10 1992 the performance used is that of the Moderate Trust In 1988 the Commission amended rule 482 under the Securities Act of 1933 and adopted rule 34b-1 under the Investment Company Act of 1940 to standardize the computation of mutual fund performance for presentation in advertisements and sales literature Rule 482e provides in relevant part 1/ Each of the Asset Allocation Trusts transferred all of its assets and liabilities to the New Trust in exchange for shares of the New Trust and immediately distributed New Trust shares rata to its shareholders The three Asset Allocation Trusts were then dissolved Investment Company Act Release No 16245 Feb 1988 The Commission stated in this release that the amendments to rule 482 preclude performance information about any related entity to the fund such as its adviser i.e other funds or private accounts controlled by the adviser where the use of such performance is intended as substitute for the performance of the fund Id footnote 31 Because we view the New Trust as continuation of the Moderate Trust we do not believe that the Moderate Trusts performance is substitute for the performance of the New Trust

that any advertisement by an open-end investment company that contains performance information must include the funds average annual total return for one five and ten year periods Rule 34b-1 provides that sales literature containing performance information is misleading unless it contains among other things the total return information required by rule 482e In determining whether surviving fund or new fund resulting from reorganization may use the historical performance of one of several predecessor funds funds should compare the attributes of the surviving or new fund and the predecessor funds to determine which predecessor fund if any the surviving or new fund most closely resembles Among other factors funds should compare the various funds investment advisers investment objectives policies and restrictions expense structures and expense ratios asset size and portfolio composition These factors are substantially similar to the factors the staff considers in determining the accounting survivor of business combination involving investment companies We believe that generally the survivor of business combination for accounting purposes i.e the fund whose financial statements are carried forward will be the fund whose historical performance may be used by new or surviving fund With respect to the factors set forth in the preceding paragraph you make the following representations Although effected by means of newly established portfolio the reorganization was in substance combination of the Conservative and Aggressive Trusts with and into the Moderate Trust The New Trust has the same adviser and subadviser and the same investment objectives policies and restrictions as the Moderate Trust Of the three Asset Allocation Trusts the expense ratio of the Moderate Trust most closely resembles the expense ratio of the New Trust At the time of the reorganization the net assets of the Moderate Trust constituted 70% of the net assets of the New Trust while the net assets of the Conservative and Aggressive Trusts constituted 21% and 9% respectively All of the securities held by the Conservative and Aggressive Trusts at the time of the reorganization also were held by the Moderate Trust Finally the financial statements of the New Trust reflect the fact that the Moderate Trust was the accounting survivor of the reorganization involving the three Asset Allocation Trusts 4/ 3/ Telephone conversation between .3 Sumner Jones counsel to NAST and the undersigned July 22 1994 4/ North American Funds Semi-Annual Report for the period ending April 30 1994 at 23 71

In light of the foregoing we would not recommend that the Commission take any enforcement action against NAST if it advertises the historical performance of the New Trust using for periods prior to the reorganization the performance data of the Moderate Trust Our position is based on the facts and representations contained in your letter and specifically your representation that any advertising material containing historical performance data will disclose prominently that for the period prior to July 10 1992 the performance used is that of the Moderate Trust /7 BarryiA Mendelson Senidr Counsel