<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No.______)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
SECURITY MUNICIPAL BOND FUND
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS OF
SECURITY MUNICIPAL BOND FUND
TO BE HELD OCTOBER 29, 1999
700 SW HARRISON ST., TOPEKA, KANSAS 66636-0001
TELEPHONE 1-800-888-2461
TO THE STOCKHOLDERS OF
> SECURITY MUNICIPAL BOND FUND
Notice is hereby given that an annual meeting of the stockholders of Security
Municipal Bond Fund (the "Fund"), a Kansas corporation, will be held at the
offices of Security Municipal Bond Fund, Security Benefit Group Building, 700 SW
Harrison Street, Topeka, Kansas 66636-0001, on October 29, 1999 at 9:30 a.m.
local time ("Meeting"), for the following purposes:
1. To elect six directors to serve on the Board of Directors of the Fund
until the next annual meeting, if any, or until their successors shall
have been duly elected and qualified.
2. To ratify or reject the selection of the firm of Ernst & Young LLP as
independent accountants for the Fund's current fiscal year.
3. a. To amend the Fund's fundamental investment limitation concerning
borrowing.
b. To amend the Fund's fundamental investment limitation concerning
senior securities.
c. To eliminate the Fund's fundamental investment limitation concerning
margin purchases of securities and short sales.
d. To amend the Fund's fundamental investment limitation concerning
lending.
e. To amend the Fund's fundamental investment limitation regarding
buying or selling real estate, commodities, commodities futures
contracts or interests in oil, gas or other mineral exploration or
development programs.
f. To eliminate the Fund's fundamental investment limitation concerning
investment in other investment companies.
g. To eliminate the Fund's fundamental investment limitation concerning
pledging, mortgaging or hypothecating its assets.
h. To eliminate the Fund's fundamental investment limitation concerning
investment in puts and calls.
i. To eliminate the Fund's fundamental investment limitation concerning
illiquid and restricted securities.
4. To approve or disapprove an arrangement and new investment advisory
contract that would permit Security Management Company, LLC, the Fund's
investment adviser, with Board approval, to enter into or amend
sub-advisory agreements without stockholder approval.
5. To transact such other business as may properly come before the Meeting
or any adjournments thereof, and to adjourn the Meeting from time to
time.
The Board of Directors of Security Municipal Bond Fund has fixed the close of
business on August 31, 1999, as the record date for the determination of
stockholders of the Fund entitled to notice of and to vote at the Meeting.
THERE IS ENCLOSED A PROXY FORM SOLICITED BY THE BOARD OF DIRECTORS OF
SECURITY MUNICIPAL BOND FUND. ANY FORM OF PROXY THAT IS EXECUTED AND RETURNED,
NEVERTHELESS MAY BE REVOKED PRIOR TO ITS USE. ALL SUCH PROXIES PROPERLY EXECUTED
AND RECEIVED IN TIME WILL BE VOTED AT THE MEETING.
By order of the Board of Directors of
Security Municipal Bond Fund,
Topeka, Kansas AMY J. LEE
September __, 1999 Secretary
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IMPORTANT: STOCKHOLDERS WHO DO NOT EXPECT TO BE PRESENT IN PERSON AT THE MEETING
ARE REQUESTED TO MARK, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) TO THE
FUND, OR OTHERWISE VOTE THEIR SHARES, AS EARLY AS POSSIBLE.
<PAGE>
SECURITY MUNICIPAL BOND FUND
MEMBER OF THE SECURITY BENEFIT GROUP OF COMPANIES
700 SW HARRISON STREET, TOPEKA, KANSAS 66636-0001
ANNUAL MEETING OF STOCKHOLDERS, OCTOBER 29, 1999
PROXY STATEMENT
SOLICITATION AND REVOCATION OF PROXIES
The enclosed proxy is solicited by and on behalf of the Board of Directors of
Security Municipal Bond Fund (the "Fund"). You may vote in person at the annual
Meeting, by telephone, by Internet, or by returning your completed proxy card in
the postage-paid envelope provided. Details can be found on the enclosed proxy
insert. Do not return your proxy card if you are voting by telephone or
Internet. You may revoke your proxy by submitting another proxy or a notice of
revocation of your proxy in proper form to the Secretary of the Fund, or by
voting the shares in person at the Meeting. A second proxy form may be obtained
from the Secretary of the Fund. The cost of soliciting proxies will be borne by
Security Management Company, LLC, 700 SW Harrison Street, Topeka, Kansas
66636-0001 ("SMC" or the "Investment Manager"), which will be reimbursed by the
Fund. SMC is the investment adviser and administrator of the Fund. In addition
to solicitations by mail, some of the Investment Manager's officers and
employees, without extra remuneration, may conduct additional solicitation by
telephone, telegraph and personal interviews. Proxies are expected to be mailed
on or about September __, 1999.
VOTING SECURITIES
Only Fund stockholders of record at the close of business on August 31, 1999,
are entitled to vote at the annual Meeting. On that date, the outstanding number
of voting securities of common stock of the Fund was ______ shares. The Fund's
common stock has a par value of $0.10 per share, and each share is entitled to
one vote.
The presence, in person or by proxy, of more than 50% of the outstanding
shares of the Fund will be sufficient to establish a quorum for the conduct of
business at the Meeting. Shares held by stockholders present in person or
represented by proxy at the Meeting will be counted both for the purpose of
determining the presence of a quorum and for calculating the votes cast on the
proposals before the Meeting. Shares represented by timely and properly executed
proxies will be voted as specified. Executed proxies that are unmarked will be
voted in favor of the proposals presented at the Meeting. An abstention on any
proposal, either by proxy or by vote in person at the Meeting, will be counted
for purposes of establishing a quorum, but has the same effect as a negative
vote.
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THE FUND WILL FURNISH, WITHOUT CHARGE, A COPY OF THE ANNUAL REPORT CONTAINING
AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND A
COPY OF THE SEMI-ANNUAL REPORT CONTAINING UNAUDITED FINANCIAL STATEMENTS FOR THE
PERIOD ENDED JUNE 30, 1999, TO A STOCKHOLDER UPON REQUEST. SUCH REQUESTS SHOULD
BE DIRECTED TO THE FUND, BY WRITING THE FUND AT 700 SW HARRISON STREET, TOPEKA,
KANSAS 66636-0001, OR BY CALLING THE FUND'S TOLL-FREE TELEPHONE NUMBER
1-800-888-2461, EXTENSION 3127.
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In the event that a sufficient number of votes to approve a proposal is not
received, the persons named as proxies may propose one or more adjournments of
the Meeting to permit further solicitation of voting instructions, or for any
other purpose. A vote may be taken on any proposal prior to an adjournment if
sufficient votes have been received for approval. Any adjournment will require
the affirmative vote of a majority of those shares represented at the Meeting in
person or by proxy. Unless otherwise instructed, proxies will be voted in favor
of any adjournment. At any subsequent reconvening of the Meeting, proxies
(unless previously revoked) will be voted in the same manner as they would have
been voted at the Meeting.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The Board of Directors has proposed a slate of six persons for election as
directors of the Fund, each to hold office until the next annual meeting (if
any) or until his or her successor is duly elected and qualified. Each nominee
is currently a director of the Fund and has consented to his or her nomination
and agreed to serve if elected. Each director was elected by stockholders,
except James R. Schmank who was elected by the other directors on December 1,
1997, and Maynard F. Oliverius who was so elected on February 6, 1998. If any of
the nominees is not available for election, the persons named as proxies (or
their substitutes) may vote for other persons in their discretion. Management
has no reason to believe that any nominee will be unavailable for election.
The names of the nominees to the Fund's Board of Directors and their
respective offices and principal occupations are set forth below.
NOMINEES TO THE FUND'S BOARD OF DIRECTORS
<TABLE>
<CAPTION>
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FUND SHARES
BENEFICIALLY OWNED, ALL OTHER SECURITY
DIRECTLY OR FUNDS' SHARES OWNED DATE FIRST
NAME, AGE, ADDRESS, POSITION ON INDIRECTLY, AS OF DIRECTLY AS OF BECAME A
FUND BOARD AND PRINCIPAL OCCUPATIONS 8/31/99 8/31/99 DIRECTOR
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<S> <C> <C> <C>
DONALD A. CHUBB, JR., 54,
2222 SW 29th Street, Topeka, Kansas 66611,
POSITION ON FUND BOARD: Director of the Fund 1994
PRINCIPAL OCCUPATIONS: Business broker, Griffith & Blair Realtors.
Prior to 1997, President, Neon Tube Light Company, Inc.
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JOHN D. CLELAND*, 63,
700 SW Harrison Street, Topeka, Kansas 66636-0001,
POSITION ON FUND BOARD: President and Director of the Fund
PRINCIPAL OCCUPATIONS: Senior Vice President and Managing Member 1990
Representative, Security Management Company, LLC; Senior Vice
President, Security Benefit Group, Inc. and Security Benefit Life
Insurance Company
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PENNY A. LUMPKIN, 60,
3616 Canterbury Town Road, Topeka, Kansas 66610,
POSITION ON FUND BOARD: Director of the Fund
PRINCIPAL OCCUPATIONS: President, Vivians (Corporate Sales); Vice 1993
President, Palmer Companies (Wholesalers, Retailers and Developers);
Vice President, Bellairre Shopping Center (Leasing and Shopping
Center Management)
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MARK L. MORRIS, JR., DVM, 65,
5500 SW 7th Street, Topeka, Kansas 66606,
POSITION ON FUND BOARD: Director of the Fund 1980
PRINCIPAL OCCUPATIONS: Retired. Former General Partner, Mark Morris
Associates (Veterinary Research and Education)
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MAYNARD F. OLIVERIUS, 57,
1500 SW 10th Avenue, Topeka, Kansas 66604,
POSITION ON FUND BOARD: Director of the Fund 1998
PRINCIPAL OCCUPATIONS: President and Chief Executive Officer,
Stormont-Vail Health Care
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JAMES R. SCHMANK*, 46,
700 SW Harrison Street, Topeka, Kansas 66636-0001,
POSITION ON FUND BOARD: Vice President and Director of the Fund 1997
PRINCIPAL OCCUPATIONS: President and Managing Member Representative
of Security Management Company, LLC; Senior Vice President, Security
Benefit Group, Inc. and Security Benefit Life Insurance Company
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<FN>
*Nominees who are considered "interested persons" of Security Management Company, LLC by reason of their respective positions with
Security Management Company, LLC, the Fund's investment adviser, and Security Distributors, Inc., the Fund's principal underwriter.
</FN>
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</TABLE>
The directors are responsible for general oversight of the Fund's business
and for assuring that the Fund is managed in the best interests of its
stockholders. The Board of Directors held four meetings during fiscal year 1998,
and each director standing for reelection attended all of those meetings, except
Mr. Oliverius who attended three Board meetings subsequent to his election in
February 1998. The Board of Directors has held four meetings so far during
fiscal year 1999 and each director standing for reelection has attended all of
the meetings, except Mr. Cleland who attended three of the four meetings. The
Board of Directors currently has one committee, the Joint Audit Committee, which
also serves as the Nominating Committee.
The following directors are members of the Fund's Joint Audit Committee: Ms.
Lumpkin, Chairperson; Dr. Morris; and Mr. Chubb. The Joint Audit Committee holds
at least one regular meeting each year, at which time it meets with the Fund's
independent accountants to review: (1) the services provided; (2) the findings
of the most recent audit; (3) management's response to the findings of the most
recent audit; (4) the scope of the audit performed; and (5) any questions or
concerns about the Fund's operations. The Joint Audit Committee met once in 1998
and has met once so far in 1999. All members of the committee participated in
the meetings.
The Nominating Committee meets on an as-needed basis. The committee did not
meet in 1998 and has not met in 1999. The purpose of the committee is to review
and recommend to the full Board of Directors candidates for election as
independent directors to fill vacancies on the Fund's Board. The Nominating
Committee will consider written recommendations from stockholders for possible
nominees. Stockholders should submit their written recommendations to the
secretary of the Fund.
The Fund's directors, except Mr. Cleland and Mr. Schmank who are "interested
persons" of the Investment Manager, receive from the Fund an annual retainer of
$1,667 and a fee of $1,000 per meeting, plus reasonable travel costs, for each
meeting of the Board of Directors attended. In addition, those directors who are
members of the Funds' joint audit committee receive a fee of $1,000 per meeting
and reasonable travel costs for each meeting of the Funds' audit committee
attended. The meeting fee (including the audit committee meeting) and travel
costs are paid proportionately by each of the 35 funds to which the Investment
Manager provides investment advisory services (collectively, the "Security Fund
Complex") based on each fund's relative net assets.
The Fund does not pay any fees to, or reimburse expenses of, its directors
who are considered "interested persons" of the Investment Manager. The aggregate
compensation paid by the Fund to each of the directors during the fiscal year
ended December 31, 1998, and the aggregate compensation paid to each of the
directors during fiscal year 1998 by the Security Fund Complex, are set forth in
the accompanying chart. Each of the directors is a director of each of the other
registered investment companies in the Security Fund Complex.
<TABLE>
<CAPTION>
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PENSION OR RETIREMENT
AGGREGATE BENEFITS ACCRUED AS
COMPENSATION PART OF FUND EXPENSES TOTAL COMPENSATION
------------ --------------------- ESTIMATED ANNUAL FROM THE SECURITY
NAME OF DIRECTOR MUNICIPAL MUNICIPAL BENEFITS UPON FUND COMPLEX,
OF THE FUND BOND FUND BOND FUND RETIREMENT INCLUDING THE FUNDS
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<S> <C> <C> <C> <C>
Donald A. Chubb, Jr. $2,167 $0 $0 $26,000
John D. Cleland 0 0 0 0
Penny A. Lumpkin 2,167 0 0 26,000
Mark L. Morris, Jr. 2,167 0 0 26,294
Maynard Oliverius* 1,500 0 0 18,000
James R. Schmank 0 0 0 0
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<FN>
*Mr. Oliverius was first elected to the Board of Directors by the other directors on February 6, 1998.
</FN>
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</TABLE>
REQUIRED VOTE
In the election of directors, each stockholder is entitled to vote that
number of shares owned as of the record date multiplied by the number of
directors to be elected. A stockholder may cast all such votes for a single
director or distribute them among two or more directors. This method of voting
for the election of directors is commonly known as "cumulative voting."
A plurality of the combined votes cast at the meeting by the stockholders of
the Fund is sufficient to approve the election of a director. THE BOARD OF
DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR ALL OF THE NOMINEES TO THE
FUND'S BOARD OF DIRECTORS.
PROPOSAL NO. 2
SELECTION OF INDEPENDENT ACCOUNTANTS
The selection by the Fund's Board of Directors of the firm of Ernst & Young
LLP as the independent accountants for the Fund for the current fiscal year to
be submitted for ratification or rejection by stockholders at the annual
meeting. The firm of Ernst & Young LLP, including a predecessor firm, Arthur
Young and Company has served the Fund as independent accountants since its
inception. The independent accountants have no direct or material indirect
financial interest in the Fund. Representatives of the firm of Ernst & Young LLP
are not expected to be present at the annual meeting. Approval of this Proposal
No. 2 requires an affirmative vote by a majority of the shares cast at the
meeting of the Fund in person or by proxy. A "majority vote" is defined as the
lesser of (a) a vote of 67% or more of the Fund shares whose holders are present
or represented by proxy at the meeting if the holders of more than 50% of all
outstanding Fund shares are present in person or represented by proxy at the
meeting, or (b) a vote of more than 50% of all outstanding Fund shares. THE
BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THIS PROPOSAL.
PROPOSAL NO. 3
TO APPROVE CHANGES TO THE FUNDAMENTAL INVESTMENT LIMITATIONS OF THE FUND
Certain investment limitations of the Fund are matters of fundamental policy
and may not be changed without the approval of the Fund's stockholders. The
Investment Manager has recommended to the Board of Directors that certain
fundamental investment limitations of the Fund be amended or eliminated as set
forth below. The Investment Manager believes that the proposed changes reflect
more modern investment practices and will more closely conform the investment
policies of the Fund to those of other mutual funds managed by the Investment
Manager. The changes will allow the Investment Manager to manage the Fund's
investments in a more streamlined and efficient manner. The Investment Manager
plans to make conforming changes to the fundamental investment policies and
limitations of the other funds under its management to further streamline its
investment and compliance processes. The Board of Directors believes that the
proposal is in the best interests of the Fund's stockholders.
The Investment Manager believes that increased standardization of fundamental
investment policies and limitations will promote operational efficiencies and
facilitate monitoring of compliance with fundamental policies. Adoption of the
revised limitations, in some cases, also will give the Fund the flexibility to
change its investment methods in the future without a stockholder vote, provided
that the Board of Directors approves any such change. Set forth below is each of
the proposed changes. Stockholders have the option to approve all, some or none
of the proposed changes.
PROPOSAL NO. 3(A)
TO AMEND THE FUND'S FUNDAMENTAL INVESTMENT LIMITATION
CONCERNING BORROWING
The Fund currently is subject to a fundamental investment limitation
concerning borrowing, and the Investment Manager recommends a change in the
fundamental investment limitation and adoption of an operating policy that may
be changed without a vote of stockholders. The current and proposed fundamental
investment limitations and proposed operating policy are set forth below.
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CURRENT PROPOSED
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Not to borrow money, except that Not to borrow in excess of 33 1/3% of
borrowings from banks for temporary its total assets.
emergency purposes may be made in an
amount up to 10% of the Fund's total As an operating policy, the Fund may
assets at the time the loan is made. not borrow money or securities for any
purposes except that borrowing up to
10% of the Fund's total assets from
commercial banks is permitted for
emergency or temporary purposes.
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The primary purpose of the proposed change to the fundamental investment
limitation concerning borrowing is to conform it to a limitation that is
expected to become standard for all funds managed by the Investment Manager. If
the proposal is approved, the amended fundamental borrowing limitation cannot be
changed without a future vote of stockholders. The operating policy could be
changed upon the vote of the Board of Directors.
Adoption of the proposed amendment is not expected to affect the way the Fund
is managed, the investment performance of the Fund, or the securities or
instruments in which the Fund invests.
The increase in the permissible level of borrowing would allow the Board of
Directors to amend the operating policy in the future to allow the Fund to
engage in leveraging. Leveraging is a speculative investment technique that
consists of purchasing securities with borrowed funds. There are risks
associated with purchasing securities while borrowings are outstanding,
including a possible reduction of income and increased fluctuation of net asset
value per share. Interest on money borrowed is an expense the Fund would not
otherwise incur, so that it may have little or no net investment income during
periods of substantial borrowings. Borrowing for investment therefore increases
both investment opportunity and risk. While the Fund has no current intention to
purchase securities while borrowings equal to 5% of its total assets are
outstanding, the flexibility to do so may be beneficial to the Fund at a future
date.
The proposed change will have no current impact on the Fund. However,
adoption of a standardized fundamental investment policy will facilitate
investment compliance efforts and will enable the Fund to respond more promptly
if circumstances suggest such a change in the future. THE BOARD OF DIRECTORS
THEREFORE UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR PROPOSAL NO. 3(A).
PROPOSAL NO. 3(B)
TO AMEND THE FUNDAMENTAL INVESTMENT LIMITATION
CONCERNING SENIOR SECURITIES
The Fund currently is subject to a fundamental investment limitation
concerning senior securities, and the Investment Manager recommends that
stockholders approve the amendment of this fundamental investment limitation.
The current and proposed fundamental investment limitations are set forth below.
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CURRENT PROPOSED
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Not to issue senior securities as Not to issue senior securities, except
defined in the Investment Company Act as permitted under the Investment
of 1940 except insofar as the Fund may Company Act of 1940.
be deemed to have issued senior
securities by reason of borrowing
money for temporary or emergency
purposes or purchasing securities on a
when-issued or delayed delivery basis.
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The primary purpose of this proposed change is to revise the Fund's
fundamental investment limitation to conform to a limitation that is expected to
become standard for all funds managed by the Investment Manager. If the proposal
is adopted, the new limitation concerning senior securities could not be changed
without a vote of stockholders.
The proposed limitation allows the Fund to issue senior securities to the
full extent permitted under the Investment Company Act of 1940 (the "1940 Act").
Although the definition of "senior security" involves complex statutory and
regulatory concepts, a senior security is generally an obligation of a fund that
has claim to the fund's assets or earnings that takes precedence over the claims
of the fund's stockholders. The 1940 Act generally prohibits mutual funds from
issuing senior securities; however, mutual funds are permitted to engage in
certain types of transactions that might be considered "senior securities"
provided certain conditions are satisfied. For example, a transaction which
obligates a fund to pay money at a future date, such as the purchase of
securities to be settled on a date that is further in the future than the normal
settlement period, may be considered a "senior security." A mutual fund is
permitted to enter into this type of transaction if it maintains a segregated
account containing liquid securities in an amount equal to its obligation to pay
cash for the securities at a future date. The Fund utilizes transactions that
may be considered "senior securities" only in accordance with applicable
requirements under the 1940 Act.
Adoption of the proposed limitation on senior securities is not expected to
affect the way in which the Fund is managed, its investment performance or the
securities or instruments in which the Fund invests. The Board of Directors
believes, however, that adoption of a standardized fundamental investment
limitation is in the best interests of stockholders because it will facilitate
the Investment Manager's compliance efforts. In addition, the Board believes
that the proposed limitation will allow the Fund to respond to developments in
the mutual fund industry and the 1940 Act which may make the use of senior
securities advantageous. THE BOARD OF DIRECTORS THEREFORE UNANIMOUSLY RECOMMENDS
THAT STOCKHOLDERS VOTE FOR PROPOSAL NO. 3(B).
PROPOSAL NO. 3(C)
TO ELIMINATE THE FUNDAMENTAL INVESTMENT LIMITATION CONCERING
MARGIN PURCHASES OF SECURITIES AND SHORT SALES
The Fund currently is subject to a fundamental investment limitation
concerning margin purchases of securities and short sales, and the Investment
Manager recommends that stockholders approve the elimination of this fundamental
investment limitation. If the proposal is approved, the Directors intend to
replace the current fundamental investment limitation with an operating policy
that could be changed without a vote of stockholders. The current fundamental
investment limitation and proposed operating policy are set forth below.
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CURRENT PROPOSED
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Not to purchase any securities on As an operating policy, the Fund does
margin (except for such short-term not currently intend to sell
credits as are necessary for the securities short, unless it owns or
clearance of purchases and sales of has the right to obtain securities
portfolio securities) or sell any equivalent in kind and amount to the
securities short. securities sold short, and provided
that transactions in futures contracts
and options are not deemed to
constitute selling securities short.
In addition, the Fund does not
currently intend to purchase
securities on margin, except that the
Fund may obtain such short-term
credits as are necessary for the
clearance of transactions, and
provided that margin payments in
connection with futures contracts and
options on futures contracts shall not
constitute purchasing securities on
margin.
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In a short sale, an investor sells a borrowed security and has a
corresponding obligation to the lender to return the identical security. In an
investment technique known as a short sale "against the box," an investor sells
short while owning the same securities in the same amount, or having the right
to obtain equivalent securities. The investor could have the right to obtain
equivalent securities, for example, through its ownership of warrants, options,
or convertible bonds.
Margin purchases involve the purchase of securities with money borrowed from
a broker. "Margin" is the cash or eligible securities that the borrower places
with a broker as collateral against the loan. The Fund's current fundamental
investment policy prohibits the Fund from purchasing securities on margin,
except to obtain such short-term credits as may be necessary for the clearance
of transactions. Policies of the Securities and Exchange Commission (SEC) also
allow mutual funds to purchase securities on margin for initial and variation
margin payments made in connection with the purchase and sale of futures
contracts and options on futures contracts. With these exceptions, mutual funds
are prohibited from entering into most types of margin purchases by applicable
policies of the SEC. The proposed non-fundamental limitation includes these
exceptions.
Elimination of the Fund's fundamental investment policy on short selling and
margin purchases is unlikely to affect the Fund's investment techniques at this
time. If the proposal is approved, however, the Board of Directors would be able
to change the proposed operating policy in the future, without a vote of
stockholders. In the event of a change in state or federal regulatory
requirements, the Fund may alter its investment practices in the future. The
Board of Directors believes that efforts to standardize operating policies will
facilitate the Investment Manager's investment compliance and are in the best
interests of stockholders. THE BOARD OF DIRECTORS THEREFORE UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS VOTE FOR PROPOSAL NO. 3(C).
PROPOSAL NO. 3(D)
TO AMEND THE FUNDAMENTAL INVESTMENT LIMITATION CONCERNING LENDING
The Fund is currently subject to a fundamental investment limitation
concerning lending, and the Investment Manager recommends a change in the
fundamental investment limitation and adoption of an operating policy that may
be changed without a vote of stockholders. The current and proposed fundamental
investment limitations and proposed operating policy are set forth below.
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CURRENT PROPOSED
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Not to make loans except that this Not to lend any security or make any
does not prohibit the purchase of a other loan if, as a result, more than
portion of an issue of publicly 33 1/3% of the Fund's total assets
distributed bonds, debentures, notes would be lent to other parties, except
or other debt securities, or entry (i) through the purchase of a portion
into a repurchase agreement. of an issue of debt securities in
accordance with its investment
objective and policies, or (ii) by
engaging in repurchase agreements with
respect to portfolio securities.
As an operating policy, the Fund does
not currently intend to lend assets
other than securities to other
parties. (This limitation does not
apply to purchases of debt securities
or to repurchase agreements.)
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This proposal if adopted will affect the way in which the Fund is managed in
that it will allow the Fund to engage in securities lending. Securities loans
are made to broker-dealers or institutional investors or other persons, pursuant
to agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent marked to market on
a daily basis. The collateral received would consist of cash, U.S. government
securities, letters of credit or such other collateral as may be permitted under
the Fund's investment program. While the securities loans are outstanding, the
Fund would continue to receive the equivalent of the interest or dividends paid
by the issuer of the securities, as well as interest on the investment of the
collateral or a fee from the borrower. The Fund would have a right to call each
loan and obtain the securities within the period of time that coincides with the
normal settlement time period for purchases and sales of such securities in
their respective markets. The Fund would not have the right to vote securities
while they are being lent, but it would call a loan in anticipation of any
important vote.
The risks in lending portfolio securities, as with other extensions of
secured credit, consist of possible delay in receiving additional collateral or
in the recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans would be made only to firms deemed
by the Investment Manager or the Fund's sub-adviser, Salomon Brothers Asset
Management Inc ("Salomon Brothers"), to be of good standing and would not be
made unless, in the judgment of the Investment Manager or Salomon Brothers, the
consideration to be earned from such loans would justify the risk.
In addition to the potential benefits of securities lending, the adoption of
standardized investment policies as proposed will advance the goals of
investment limitation standardization. THE BOARD OF DIRECTORS THEREFORE
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR PROPOSAL NO. 3(D).
PROPOSAL NO. 3(E)
TO AMEND THE FUNDAMENTAL INVESTMENT LIMITATION REGARDING BUYING
OR SELLING REAL ESTATE, COMMODITIES, COMMODITIES FUTURES CONTRACTS OR
INTERESTS IN OIL, GAS OR OTHER MINERAL EXPLORATION OR DEVELOPMENT PROGRAMS
The Fund currently is subject to a fundamental investment limitation
concerning investment in real estate, commodities, commodities futures
contracts, and interests in oil, gas or other mineral exploration programs. The
Investment Manager recommends a change in this fundamental investment
limitation. The current and proposed fundamental investment limitations are set
forth below.
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CURRENT PROPOSED
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Not to invest in real estate, mortgage Not to purchase or sell real estate
loans, commodities, commodity futures unless acquired as a result of
contracts or interests in oil, gas or ownership of securities or other
other mineral exploration or instruments (but this shall not
development programs, provided that prevent the Fund from investment in
this limitation shall not prohibit the securities or other instruments backed
purchase of securities issued by by real estate or securities of
companies, including real estate companies engaged in the real estate
investment trusts, which invest in business).
real estate or interests therein nor
transactions in financial futures Not to purchase or sell physical
contracts. commodities, except that the Fund may
enter into futures contracts and
options thereon.
As an operating policy, the Fund does
not currently intend to invest in oil,
gas, mineral leases or other mineral
exploration or development programs.
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The Fund has interpreted this fundamental investment limitation to allow the
purchase of securities or other instruments backed by real estate or securities
of companies engaged in the real estate business. The proposed investment
limitation makes explicit this interpretation and also specifically permits the
Fund to sell real estate acquired as a result of ownership of securities or
other instruments. The Investment Manager considers direct ownership of real
estate as a result of ownership of securities or other instruments to be a
remote possibility.
The Fund has interpreted the fundamental policy limitation concerning
commodities to allow investment in financial futures contracts and options
thereon. The proposed amendment of this fundamental policy limitation modernizes
the language to reflect this interpretation but does not change the Fund's
approach to investing in commodities. The Fund does not intend to engage in the
buying or selling of physical commodities such as pork, corn and wheat futures
or related commodity contracts other than financial instruments.
The proposed change would replace the fundamental investment limitation
concerning investments in oil, gas, mineral leases or other mineral exploration
or development programs with an operating policy that could be changed without a
vote of stockholders. This change would not currently affect how the Fund is
managed. Adoption of a standardized operating policy would, however, facilitate
the Investment Manger's compliance efforts and would enable the Fund to respond
more promptly in the future. THE BOARD OF DIRECTORS THEREFORE UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS VOTE FOR PROPOSAL NO. 3(E).
PROPOSAL NO. 3(F)
TO ELIMINATE THE FUNDAMENTAL INVESTMENT LIMITATION
CONCERNING INVESTMENT IN OTHER INVESTMENT COMPANIES
The Fund currently is subject to a fundamental investment limitation
concerning investment in securities of other investment companies, and the
Investment Manager recommends that stockholders approve the elimination of this
fundamental investment limitation. If the proposal is approved, the Directors
intend to replace the current fundamental investment limitation with an
operating policy which could be changed without a vote of stockholders. The
current fundamental investment limitation and proposed operating policy are set
forth below.
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CURRENT PROPOSED
- --------------------------------------------------------------------------------
Not to purchase securities of other As an operating policy, the Fund may
investment companies or acquire voting not, except in connection with a
securities, except in connection with merger, consolidation, acquisition, or
a merger, consolidation, acquisition reorganization, invest in the
or reorganization. securities of other investment
companies, except in compliance with
the Investment Company Act of 1940.
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Elimination of the above fundamental limitation is not expected to have a
significant impact on the Fund's investment practices, because the Fund
currently does not expect to invest in shares of other investment companies.
However, investment in shares of money market mutual funds may from time to time
offer a convenient way to invest the Fund's idle cash. To the extent that the
Fund invests in shares of other investment companies, it will have the effect of
requiring stockholders to pay the operating expenses of two mutual funds. THE
BOARD OF DIRECTORS THEREFORE UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
PROPOSAL NO. 3(F).
PROPOSAL NO. 3(G)
TO ELIMINATE THE FUNDAMENTAL INVESTMENT LIMITATION CONCERNING
PLEDGING, MORTGAGING OR HYPOTHECATING THE FUND'S ASSETS
The Fund currently is subject to a fundamental investment limitation
concerning pledging, mortgaging or hypothecating its assets, and the Investment
Manager recommends that stockholders approve the elimination of this fundamental
investment limitation. The current fundamental investment limitation is as
follows: "Not to pledge, mortgage or hypothecate its assets, except to secure
borrowings permitted by fundamental investment policy 2."
The Investment Manager recommends eliminating this fundamental limitation
primarily in the interests of making it conform to limitations that are expected
to become standard for all funds managed by the Investment Manager. The
Investment Manager further believes that this limitation is inconsistent with
the purposes of amending the fundamental investment limitations concerning
borrowing and senior securities. Those proposed limitations, if adopted, would
enable the Fund to respond more promptly if circumstances with respect to
borrowing and pledging of assets in the future suggest a change in the Fund's
policies.
Elimination of this fundamental investment limitation is unlikely to affect
the Fund's investment techniques at this time. In the event of a change in state
or federal regulatory requirements, the Fund may alter its investment practices
in the future. The Board of Directors believes that efforts to standardize
operating policies will facilitate the Investment Manager's investment
compliance and are in the best interests of stockholders. THE BOARD OF DIRECTORS
THEREFORE UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR PROPOSAL NO. 3(G).
PROPOSAL NO. 3(H)
TO ELIMINATE THE FUNDAMENTAL INVESTMENT LIMITATION
CONCERING INVESTMENT IN PUTS AND CALLS
The Fund is currently subject to a fundamental investment limitation
concerning investment in puts and calls, and the Investment Manager recommends
that stockholders approve the elimination of this fundamental investment
limitation. If the proposal is approved, the directors intend to replace the
current fundamental investment limitation with an operating policy that could be
changed without a vote of stockholders. The current fundamental investment
limitation and proposed operating policy are set forth below.
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CURRENT PROPOSED
- --------------------------------------------------------------------------------
Not to write, purchase or sell put or As an operating policy, the Fund may
call options or combinations thereof, buy and sell exchange-traded and
except that it may purchase and hold over-the-counter put and call options,
puts or "standby commitments" relating including index options, securities
to municipal securities, as described options, currency options and options
in the prospectus. on futures, provided that a call or
put may be purchased only if after
such purchase, the value of all call
and put options held by the Fund will
not exceed 5% of the Fund's total
assets. The Fund may write only
covered put and call options.
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A call option on a security gives the purchaser of the option, in return for
a premium paid to the writer (seller), the right to buy the underlying security
at the exercise price at any time during the option period. Upon exercise by the
purchaser, the writer (seller) of a call option has the obligation to sell the
underlying security at the exercise price. When the Fund purchases a call
option, it will pay a premium to the party writing the option and a commission
to the broker selling the option. If the option is exercised by the Fund, the
amount of the premium and the commission paid may be greater than the amount of
the brokerage commission that would be charged if the security were to be
purchased directly. By writing a call option, the Fund assumes the risk that it
may be required to deliver the security having a market value higher than its
market value at the time the option was written. The Fund will write call
options in order to obtain a return on its investments from the premiums
received and will retain the premiums whether or not the options are exercised.
Any decline in the market value of the Fund's portfolio securities will be
offset to the extent of the premiums received (net of transaction costs). If an
option is exercised, the premium received on the option will effectively
increase the exercise price.
The Fund will write only covered call options. This means that the Fund will
own the security subject to the option or an option to purchase the same
underlying security, having an exercise price equal to or less than the exercise
price of the "covered" option, or will establish and maintain with its custodian
for the term of the option, an account consisting of cash or liquid securities
having a value equal to the fluctuating market value of the optioned securities
or currencies. During the option period, the writer of a call option has given
up the opportunity for capital appreciation above the exercise price should the
market price of the underlying security increase, but has retained the risk of
loss should the price of the underlying security decline. Writing call options
also involves the risk relating to the Fund's ability to close out options it
has written.
A put option on a security gives the purchaser of the option, in return for
premium paid to the writer (seller), the right to sell the underlying security
at the exercise price at any time during the option period. Upon exercise by the
purchaser, the writer of a put option has the obligation to purchase the
underlying security at the exercise price. The Fund will write only covered put
options, which means that the Fund will maintain in a segregated account cash or
liquid securities in an amount not less than the exercise price or the Fund will
own an option to sell the underlying security or currency subject to the option
having an exercise price equal to or greater than the exercise price of the
"covered" option at all times in which the put option is outstanding. By writing
a put option, the Fund will assume the risk that it may be required to purchase
the underlying security at a price in excess of its current market value.
Options can be highly volatile and could result in reduction of the Fund's
total return, and the Fund's attempt to use such investments for hedging
purposes may not be successful. Losses from options could be significant if the
Fund were unable to close out its position due to distortions in the market or
lack of liquidity.
The use of options involves investment risks and transaction costs to which
the Fund would not be subject absent the use of options. If Salomon Brothers
seeks to protect the Fund against potential adverse movements in the securities,
currency or interest rate markets using options, and such markets do not move in
a direction adverse to the Fund, the Fund could be left in a less favorable
position than if such strategies had not been used. Risks inherent in the use of
options include: (a) the risk that interest rates, securities prices and
currency markets will not move in the directions anticipated; (b) imperfect
correlation between the price of options and movements in the prices of the
securities or currencies being hedged; (c) the fact that skills needed to use
options strategies are different from those needed to select portfolio
securities; (d) the possible absence of a liquid secondary market for any
particular instrument at any time; and (e) the possible need to defer closing
out certain hedged positions to avoid adverse tax consequences. The Fund's
ability to terminate option positions established in the over-the-counter market
may be more limited than in the case of exchange-traded options and may also
involve the risk that securities dealers participating in such transactions
would fail to meet their obligations to the Fund.
The Board of Directors has considered the risks associated with investment in
options and believes that the use of options may be beneficial to the Fund under
certain circumstances. The Board of Directors further believes that adoption of
standardized operating policies will contribute to the overall objectives of
standardization. THE BOARD OF DIRECTORS THEREFORE UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE FOR PROPOSAL NO. 3(H).
PROPOSAL NO. 3(I)
TO ELIMINATE THE FUNDAMENTAL INVESTMENT LIMITATION
CONCERING ILLIQUID AND RESTRICTED SECURITES
The Fund currently is subject to a fundamental investment limitation
concerning restricted and illiquid securities, and the Investment Manager
recommends that stockholders approve the elimination of this fundamental
investment limitation. If the proposal is approved, the Directors intend to
replace the current fundamental investment limitation with an operating policy
that could be changed without a vote of stockholders. The current fundamental
investment limitation and proposed operating policy are set forth below.
- --------------------------------------------------------------------------------
CURRENT PROPOSED
- --------------------------------------------------------------------------------
Not to invest in securities which are As an operating policy, the Fund may
not readily marketable, securities the not invest more than 10% of its total
disposition of which is restricted assets in illiquid securities. The
under federal securities laws or Fund may invest in securities which
repurchase agreements maturing in more are restricted as to disposition under
than seven days (collectively the federal securities laws, including
"illiquid securities") if, as a securities that are eligible for
result, more than 10% of the Fund's resale pursuant to Rule 144A under the
net assets would be invested in Securities Act of 1933, subject to the
illiquid securities. limitation on investment in illiquid
securities.
- --------------------------------------------------------------------------------
The Fund's current fundamental limitation limits investment in illiquid
securities, including restricted securities, to 10% of its total assets. The
Board of Directors believes that the proposed operating policy is in the best
interests of stockholders, because it allows investment in restricted
securities, including Rule 144A securities, in excess of 10% of the Fund's total
assets if such securities are found to be liquid. Elimination of this
fundamental policy also offers the benefits of standardized limitations and the
flexibility to respond more promptly if increased investment in illiquid or
restricted securities would be beneficial to the Fund in the future.
Rule 144A permits certain qualified institutional buyers, such as the Fund,
to trade in privately placed securities even though such securities are not
registered under the Securities Act of 1933. Salomon Brothers under the
direction of the Board of Directors will determine whether securities purchased
under Rule 144A are illiquid and therefore subject to the Fund's restriction of
investing no more than 10% of its net assets in illiquid securities. Increased
investment in restricted securities could have the effect of increasing the
amount of the Fund's assets invested in illiquid securities. THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR PROPOSAL NO. 3(I).
REQUIRED VOTE
Each of Proposal Nos. 3(a) through 3(i) will be adopted if it is approved by
the vote of a majority of outstanding shares of the Fund, as defined in the 1940
Act. A "majority vote" is defined as the lesser of (a) a vote of 67% or more of
the Fund shares whose holders are present or represented by proxy at the Meeting
if the holders of more than 50% of all outstanding Fund shares are present in
person or represented by proxy at the Meeting, or (b) a vote of more than 50% of
all outstanding Fund shares.
Each change that is approved by stockholders will become effective upon the
conclusion of the Meeting and the investment limitations will be as described
above and set forth in Exhibit A. For any change that is not approved, the
Fund's current investment limitation, as set forth in the applicable sub-portion
of Proposal 3, will remain unchanged. The Board of Directors believes that all
of the proposed changes to the fundamental investment limitations of the Fund,
as set forth in Proposal No. 3, are in the best interests of stockholders. THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING FOR ALL OF THE CHANGES SET
FORTH IN PROPOSAL NO. 3.
PROPOSAL NO. 4
APPROVAL OF AN ARRANGEMENT AND NEW INVESTMENT ADVISORY
CONTRACT THAT WOULD PERMIT SECURITY MANAGEMENT COMPANY, LLC,
WITH BOARD APPROVAL, TO ENTER INTO OR AMEND SUB-ADVISORY
AGREEMENTS WITHOUT STOCKHOLDER APPROVAL
The Board of Directors (the "Board") of the Fund recommends the approval of
an arrangement, along with a new Investment Advisory Contract, that together
would permit SMC, subject to Board approval, to enter into and/or amend
sub-advisory agreements without obtaining the approval of Fund stockholders. If
the proposal were approved, SMC on behalf of the Fund, would be provided with
greater flexibility in retaining the services of one or more sub-advisers,
replacing a sub-adviser or materially amending the terms of its contract with a
sub-adviser, including the Fund's sub-adviser, Salomon Brothers Asset Management
Inc, 7 World Trade Center, New York, New York 10048 ("Salomon Brothers"). SMC
has engaged Salomon Brothers to provide investment advisory services to the Fund
pursuant to a sub-advisory agreement dated as of May 1, 1998. SMC has no present
intention to change the Fund's sub-adviser or its current sub-advisory
agreement.
Section 15(a) of the 1940 Act requires that all contracts pursuant to which
persons serve as investment advisers to investment companies be approved by
stockholders. As interpreted, this requirement would apply to the appointment of
sub-advisers to the Fund. In order to obtain stockholder approval in accordance
with Section 15(a) of the 1940 Act, the Fund would have to prepare and
distribute proxy materials and hold a special meeting of stockholders, causing
it to incur costs and delays in implementing contracts with sub-advisers. The
SEC, however, has granted conditional exemptions from the stockholder approval
requirements. SMC and the Fund have applied for such an exemption. If the
exemption is granted and the proposal is approved, any sub-advisory agreement
entered into would continue to require the approval of a majority of the Board,
including a majority of the Directors who are not "interested persons" of the
Fund or SMC (as defined in the 1940 Act). Thus, the Board could, if it
determined it to be in the best interests of the Fund and its investors,
authorize SMC to hire or replace one or more sub-advisers, including Salomon
Brothers, or change the terms of sub-advisory agreements, including SMC's
current sub-advisory agreement with Salomon Brothers. The Fund would not have to
obtain approval of stockholders, who would instead receive notice of the change,
including the same information they would receive in a proxy statement if their
approval were required.
The Board has approved the submission of an application to the SEC for an
order exempting the Fund from the requirement of the 1940 Act that stockholders
approve sub-advisory agreements or amendments thereto. On July 23, 1999, the
Board met to consider placing this proposal on the agenda for the stockholder
meeting. After consideration of information about the proposal that was provided
by SMC (including the information contained in the exemptive application), the
Board concluded that the proposal is reasonable, fair, and in the best interest
of the Fund and its stockholders. Accordingly, the Board unanimously approved
the proposal and voted to recommend its approval by stockholders. As noted
above, this proposal also involves the consideration of a new Investment
Advisory Contract between the Fund and SMC. The new contract simply recognizes
the fact that SMC may in the future, with Board approval, retain the services of
one or more sub-advisers, replace sub-advisers or amend sub-advisory contracts
as contemplated in this proposal. The new Investment Advisory Contract does NOT
provide for any increase in the investment advisory fee paid to SMC. The
existing and new Investment Advisory Contracts are described in more detail
below under the headings "Existing Investment Advisory Contract" and "New
Investment Advisory Contract", respectively.
The Board now seeks the approval of Fund stockholders which would: (i)
authorize SMC on behalf of the Fund to enter into sub-advisory agreements or
amend such agreements without obtaining stockholder approval; and (ii) approve
the new Investment Advisory Contract between the Fund and SMC. The Fund's use of
the authority that would be granted by this proposal is contingent upon the
SEC's issuance of an order permitting the Fund to do so.
BOARD CONSIDERATION OF PROPOSAL NO. 4
At its July 23, 1999 meeting, the Board considered various information
provided by SMC, including the information contained in the exemptive
application submitted to the SEC. Based on this information, the Board concluded
that approval of the proposal is in the best interests of the Fund and its
investors. Among the things considered by the Board in reaching this conclusion
was that (i) the proposal would permit the Fund to avoid the costs and
administrative burden that would be incurred if the Fund was compelled to
conduct a proxy solicitation each time SMC and the Board determine to hire a
sub-adviser or amend a sub-advisory agreement; (ii) approval of the sub-advisory
agreement tends to be less important to Fund stockholders than such approval may
be to stockholders which do not use the services of a sub-adviser and (iii) the
proposal would maintain important safeguards and protections for Fund
stockholders. The information considered by the Board is discussed in greater
detail below.
Currently, in order to approve a sub-advisory agreement (including the
requirement to re-approve a sub-advisory agreement that has been terminated as a
result of an "assignment"), to substitute one sub-adviser for another, or to
amend a sub-advisory agreement, the Fund must obtain the approval of
stockholders. Seeking this approval imposes costs and burdens on the Fund and,
indirectly, upon stockholders. Some of these costs include printing costs for
the proxy statements, proxy cards, and return envelopes; postage (including
return postage); tabulation of proxy cards; if necessary, solicitation and other
expenses incurred in order to obtain a quorum; and the costs of the meeting
itself. Accordingly, the Board considered that the proposal would permit the
Fund to minimize these expenses and administrative burdens if the Fund's
sub-adviser were changed or amendments made to sub-advisory agreements.
In addition, under the current arrangement, once SMC and the Board determine
that using the services of one or more sub-advisers (or replacing or eliminating
a sub-adviser, or amending a sub-advisory agreement once a sub-adviser is
retained) is in the best interest of stockholders, a delay may occur until the
Fund can obtain the necessary approval of stockholders. Typically, it requires
approximately three months to prepare a proxy solicitation, send it to
stockholders, receive and tabulate the result, and hold the meeting. During this
period, the Fund loses the benefit of the addition or replacement of the
sub-adviser, or the amendment to the sub-advisory agreement. Approval of the
proposal would permit the Board and SMC to reduce or eliminate this delay.
The second factor considered by the Board was the fact that, to the extent a
Fund uses the services of one or more sub-advisers, the sub-adviser plays a role
analogous to that of an individual portfolio manager employed by a typical
mutual fund's investment adviser, making approval of sub-advisory agreements
less important. In the case of a mutual fund that does not use a sub-adviser,
the fund's investment adviser provides corporate management and administrative
services, along with portfolio management services. Typically, the investment
adviser chooses an individual or individuals on its staff to perform the actual
day-to-day management of the portfolio. Although the investment adviser
discloses to stockholders the individual's identity, the company is not required
to, and does not, submit approval of the choice of individual to the
stockholders. Rather, accountability lies with the investment adviser itself,
which has the responsibility of monitoring the individual's investment
performance and replacing the individual if doing so is in the best interest of
stockholders.
Under a structure where sub-advisers are used, the sub-adviser takes the
place of the individual portfolio manager. The investment adviser has ultimate
accountability for the performance of the sub-advisers. The Board believes that,
stockholders expect SMC to select and retain sub-advisers who successfully meet
the Fund's objectives and policies and replace those who do not. The Board
further believes that, in such cases, stockholders will determine to rely on
SMC's ability to select, monitor, and terminate sub-advisers just as
stockholders in funds which do not use sub-advisers elect to rely upon the
investment adviser to select individual portfolio managers and analysts on its
staff and supervise them accordingly.
The third factor considered by the Board was that the proposal preserves
certain protections and safeguards for the Fund and its stockholders. For
example, although the proposal would authorize SMC on behalf of the Fund to
enter into or amend sub-advisory agreements, any change in the investment
advisory contract between the Fund and SMC, or the replacement of SMC itself,
would continue to require approval of Fund stockholders. In addition,
stockholders would receive the same information about sub-advisers as they
currently would. In the event SMC, with the approval of the Board, determines to
replace a sub-adviser or to make a material change in a sub-advisory agreement,
stockholders would receive, within ninety days of the change, the same
information about the sub-adviser and sub-advisory agreement they would receive
in a proxy statement if their approval were required.
APPROVAL BY SEC
As noted above, the Board has approved the submission of an application to
the SEC for an order of exemption from certain requirements of the 1940 Act in
order to permit the Fund to use the authority to enter into or amend
sub-advisory agreements as contemplated by this proposal. Any use of that
authority is contingent upon obtaining the requested order from the SEC. The
application for exemption contains conditions to which the order would be
subject. The conditions are set forth in Exhibit B. It is possible that the SEC
may require certain changes to the application or impose additional conditions
prior to granting the order. The Fund will agree to such changes if the Board
and SMC determine that it is in the best interests of the Fund and its
stockholders to do so. It is also possible that the SEC may refuse to grant the
order entirely, although the SEC has granted similar exemptions to other mutual
fund companies under similar circumstances in the past. In that case, the Board
will take what further actions it deems to be in the best interests of the Fund
and its stockholders.
REQUIRED VOTE
The proposal will be adopted if it is approved by the vote of a majority of
outstanding shares of Fund, as defined in the 1940 Act. A "majority vote" is
defined as the lesser of (a) a vote of 67% or more of the Fund shares whose
holders are present or represented by proxy at the meeting if the holders of
more than 50% of all outstanding Fund shares are present in person or
represented by proxy at the meeting, or (b) a vote of more than 50% of all
outstanding Fund shares. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR
PROPOSAL NO. 4.
EXISTING INVESTMENT ADVISORY CONTRACT
SMC currently serves as the investment adviser to the Fund pursuant to the
terms of an Investment Advisory Contract dated October 7, 1983, as amended (the
"Existing Contract"). The Existing Contract was last approved by the Board of
Directors of the Fund on February 10, 1999 and was last approved by Fund
stockholders on April 27, 1984. The Existing Contract has not been submitted to
stockholders for approval since that date. Unless superseded by the proposed new
Investment Advisory Contract, the Existing Contract will continue in effect
until May 1, 2000, and from year to year thereafter providing such continuance
is specifically approved by the vote of a majority of the Board of Directors of
the Fund (including a majority of such directors who are not parties to the
contract or interested persons of any such party) cast in person at a meeting
specifically called for voting on such renewal.
Under the Existing Contract, SMC furnishes the Fund with investment research
and advice and an investment program. In addition, SMC provides for the
compilation and maintenance of records relating to its duties as required by the
rules and regulations of the SEC. Under the terms of the Existing Contract, SMC
is not subject to any liability for any errors of judgment or mistake of law or
for any loss sustained by reason of the adoption of any investment policy so
long as such recommendation shall have been made with due care and in good
faith. Nothing in the Existing Contract, however, shall protect SMC against any
liability to the Fund or its shareholders by reason of willful misfeasance, bad
faith, or gross negligence in the performance of its duties or by reason of its
reckless disregard of its obligations and duties under the agreement.
SMC pays its expenses in connection with providing investment advisory
services to the Fund under the Existing Contract. SMC has also agreed that, if
the total annual expenses of the Fund, exclusive of interest, taxes,
distribution fees paid under the Fund's Class A and Class B distribution plans,
brokerage fees and extraordinary expenses, but inclusive of its own investment
advisory fee, exceeds one percent of the Fund's average net assets, SMC will
contribute to the Fund such funds or waive such portion of its fee as may be
necessary to insure that the annual expenses of the Fund will not exceed one
percent of average net assets.
For its services under the Existing Contract, SMC receives from the Fund, on
an annual basis, a fee equal to .50% of the average daily closing value of the
Fund, such fee computed daily and payable monthly. SMC received from the Fund
advisory fees of $113,719 during the fiscal year ended December 31, 1998. No
brokerage commissions were paid by the Fund to an affiliated broker for the year
ended December 31, 1998. The Existing Contract may be terminated without penalty
at any time upon sixty days' notice by the Board of Directors of the Fund, by
vote of the holders of a majority of the outstanding voting securities of the
Fund, or by SMC. The Existing Contract is terminated automatically in the event
of its assignment (as such term is defined in the Investment Company Act of
1940).
SMC also serves as the Fund's administrative and transfer agent. SMC received
from the Fund $20,469 for administrative services and $13,726 for transfer
agency services during the year ended December 31, 1998.
PROPOSED INVESTMENT ADVISORY CONTRACT
SMC proposes to enter into a new Investment Advisory Contract (the "New
Contract") with the Fund. A form of the New Contract is attached hereto as
Exhibit C. The form of the New Contract was proposed by SMC and was approved by
the Board of Directors of the Fund (including a majority of such directors who
are not parties to such contract or interested persons of any such party) on
July 23, 1999. Other than the provisions relating to sub-advisory arrangements,
there are no material differences between the Existing Contract and the New
Contract. In particular, the New Contract does NOT provide for any increase in
the investment advisory fee paid to SMC. It is expected that the New Contract
will become effective on November 1, 1999, provided that on the Meeting date it
is approved by a majority vote of the holders of the outstanding voting
securities of the Fund.
In approving the New Contract, and in recommending that stockholders approve
the New Contract, the Board considered such factors as it deemed reasonably
necessary and appropriate, including (1) the nature, extent and quality of the
services expected to be provided to the Fund by SMC; (2) SMC's past investment
performance with respect to the Fund; (3) the costs of services to be provided
by SMC; (4) the fact that the compensation payable to SMC by the Fund is the
same under the New Contract as it is under the Existing Contract; (5) other
sources of revenue accruing to SMC and its affiliates as a result of its
relationship with the Fund, including any intangible benefits that accrue to SMC
and its affiliates; (6) the Fund's expenses compared to other funds and (7) such
other factors as the Board deemed relevant. The Board gave equal weight to each
of the above factors when considering approval of the New Contract. Based on the
considerations above, the Board determined that the New Contract is in the best
interests of the Fund and its stockholders.
MORE INFORMATION ABOUT THE INVESTMENT MANAGER AND DISTRIBUTOR
Security Distributors, Inc. ("SDI"), 700 SW Harrison Street, Topeka, Kansas
66636-0001, is principal underwriter of the Fund. SDI is a wholly-owned
subsidiary of Security Benefit Group, Inc. ("SBG"), a holding company wholly
owned by Security Benefit Life Insurance Company ("SBL"). SMC is a limited
liability company owned by its members, SBL and SBG. SBL is wholly owned by
Security Benefit Corp. (except for shares held by the Directors of SBL as
required by Kansas law) and Security Benefit Corp. is wholly-owned by Security
Benefit Mutual Holding Company. For the fiscal year ended December 31, 1998, the
Fund paid $3,709 in Class A sales commissions to SDI.
The principal occupations, and positions with SMC and the Fund, of the
principal executive officer and each officer and director of SMC are as follows:
EXECUTIVE OFFICERS OF THE FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NAME, AGE AND ADDRESS* PRINCIPAL OCCUPATION POSITION WITH SMC POSITION WITH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
James R. Schmank, 46** President and Managing Member Representative, SMC; President and Managing Vice President
Senior Vice President, Security Benefit Group, Member Representative and Director
Inc. and Security Benefit Life Insurance Company
- ------------------------------------------------------------------------------------------------------------------------------------
John D. Cleland,63 Senior Vice President and Managing Member Senior Vice President President and Director
Representative, SMC; Senior Vice President, and Managing Member
Security Benefit Group, Inc. and Security Benefit Representative
Life Insurance Company
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas A. Swank, 39 Senior Vice President and Portfolio Manager, SMC; Senior Vice President None
Senior Vice President, Security Benefit Group, and Portfolio Manager
Inc. and Security Benefit Life Insurance Company
- ------------------------------------------------------------------------------------------------------------------------------------
Amy J. Lee, 38 Secretary, SMC; Vice President, Associate General Secretary Secretary
Counsel and Assistant Secretary, Security Benefit
Group, Inc. and Security Benefit Life Insurance
Company
- ------------------------------------------------------------------------------------------------------------------------------------
Brenda M. Harwood, 35 Assistant Vice President and Treasurer, SMC; Assistant Vice Treasurer
Assistant Vice President, Security Benefit Group, President and Treasurer
Inc. and Security Benefit Life Insurance Company
- ------------------------------------------------------------------------------------------------------------------------------------
Christopher D. Swickard, 33 Assistant Secretary, SMC; Assistant Vice President Assistant Secretary Assistant Secretary
and Assistant Counsel, Security Benefit Group,
Inc. and Security Benefit Life Insurance Company
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
*All located at 700 SW Harrison Street, Topeka, Kansas 66636-0001 unless otherwise noted.
**Principal executive officer
</FN>
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following chart shows the shares of common stock of the Fund beneficially
owned by directors and executive officers of the Fund.
- --------------------------------------------------------------------------------
NUMBER OF SHARES
BENEFICIALLY OWNED
NAME AND POSITION* AS OF AUGUST 31, 1999 PERCENTAGE OF CLASS
- --------------------------------------------------------------------------------
CLASS A CLASS B CLASS A CLASS B
All directors and executive _______ None ______% 0
officers as a group
- --------------------------------------------------------------------------------
*No director or "named executive officer" of the Fund beneficially owned any
shares of common stock of the Fund as of August 31, 1999, except as shown in
the above chart.
- --------------------------------------------------------------------------------
STOCKHOLDER PROPOSALS
Unless otherwise required under the Investment Company Act of 1940,
ordinarily it will not be necessary for the Fund to hold annual meetings of
stockholders. Stockholder proposals must be received at least 120 days prior to
the next meeting of stockholders, whenever held.
OTHER MATTERS
The audited financial statements of the Fund are found in the Annual Report
for the fiscal year ended December 31, 1998, which was mailed to stockholders on
or about March 1, 1999.
The Board of Directors of the Fund is not aware of any other matters to come
before the Meeting or any adjournments thereof other than those specified
herein. If any other matters should come before the Meeting, it is intended that
the persons named as proxies in the enclosed form(s) of proxy, or their
substitutes, will vote the proxy in accordance with their best judgment on such
matters.
By order of the Board of Directors of
Security Municipal Bond Fund,
AMY J. LEE
Secretary
<PAGE>
EXHIBIT A
PROPOSED FUNDAMENTAL INVESTMENT LIMITATIONS
1. Not to invest less than 80% of its assets in securities which are exempt
from regular federal income tax but which may be subject to alternative
minimum tax, except for temporary defensive purposes.
2. Not to borrow in excess of 33 1/3% of its total assets.
3. Not to issue senior securities, except as permitted under the Investment
Company Act of 1940.
4. Not to lend any security or make any other loan if, as a result, more than
33 1/3% of the Fund's total assets would be lent to other parties, except
(i) through the purchase of a portion of an issue of debt securities in
accordance with its investment objective and policies, or (ii) by engaging
in repurchase agreements with respect to portfolio securities.
5. Not to engage in the business of underwriting securities issued by other
persons except to the extent that the Fund may technically be deemed an
underwriter under the Securities Act of 1933 in purchasing and selling
portfolio securities.
6. Not to purchase or sell physical commodities, except that the Fund may enter
into futures contracts and options thereon.
7. Not to purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the Fund from
investment in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business).
8. Not to purchase a security if, as a result, with respect to 75% of the value
of the Fund's total assets, more than 5% of the value of its total assets
would be invested in the securities of any one issuer (other than
obligations issued by the U.S. government, its agencies or
instrumentalities).
9. Not to invest more than 25% of the Fund's total assets in securities the
issuers of which are in the same industry. For purposes of this limitation,
the U.S. government, its agencies or instrumentalities, and state or
municipal governments and their political subdivisions are not considered
members of any industry.
<PAGE>
EXHIBIT B
CONDITIONS PROPOSED BY THE FUND AND SMC TO THE SEC
AS PART OF THEIR APPLICATION FOR EXEMPTIVE RELIEF
1. SMC will not enter into a sub-advisory agreement with any Affiliated
Sub-adviser without such agreement, including the compensation to be paid
thereunder, being approved by the stockholders of the applicable Fund.
2. At all times, a majority of each Fund's Directors will be persons each of
whom is not an "interested person" of that Fund defined in Section 2(a)(19)
of the 1940 Act ("Disinterested Directors"), and the nomination of new or
additional Disinterested Directors will be placed within the discretion of
the then existing Disinterested Directors.
3. When a Sub-adviser change is proposed for a Fund with an Affiliated
Sub-adviser, the Fund's Directors, including a majority of the Disinterested
Directors, will make a separate finding, reflected in the Fund's board
minutes, that such change is in the best interests of the Fund and its
stockholders and does not involve a conflict of interest from which SMC or
the Affiliated Sub-adviser derives an inappropriate advantage.
4. With respect to a structure in which multiple Sub-advisers are used for a
single Fund, SMC will provide general management services to each such Fund,
including overall supervisory responsibility for the general management and
investment of such Fund's securities portfolios, and, subject to review and
approval by the applicable Fund's Board of Directors, will (i) set the
Fund's overall investment strategies; (ii) select Sub-advisers; (iii)
allocate and, when appropriate, reallocate a Fund's assets among SMC and one
or more Sub-advisers; (iv) monitor and evaluate the performance of the
Sub-advisers; and (v) implement procedures reasonably designed to ensure
that the Sub-advisers comply with the relevant Fund's investment objectives,
policies and restrictions.
5. Within 90 days of the hiring of any new Sub-adviser, SMC will furnish
stockholders all information about the new sub-adviser that would be
included in a proxy statement. Such information will include any change in
such disclosure caused by the addition of a new Sub-adviser. SMC will meet
this condition by providing stockholders with an information statement which
meets the requirements of Regulation 14C and Schedule 14C under the 1934
Act. The information statement will also meet the requirements of Item 22 of
Schedule 14A under the 1934 Act.
6. Each Fund will disclose in its respective Prospectus the existence,
substance, and effect of any order granted pursuant to the Application. In
addition, each Fund will hold itself out to the public as employing the
management structure described in the Application. The prospectus relating
to a Fund will prominently disclose that SMC has the ultimate responsibility
to oversee Sub-advisers and recommend their hiring, termination and
replacement.
7. Before a Fund may rely on the requested order, the operations of the Fund in
the manner described in the Application will have been or will be approved
by a majority of that Fund's outstanding voting securities, as defined in
the 1940 Act. In the case of a Fund whose stockholders purchase shares on
the basis of a prospectus containing the disclosure contemplated by
condition 6 above, such approval will be obtained from the sole initial
stockholder before offering shares of such Fund to the public.
8. No director or officer of the Funds or director or officer of SMC will own
directly or indirectly (other than through a pooled investment vehicle that
is not controlled by any such director or officer) any interest in a
Sub-adviser except for (i) ownership of interests in SMC or any entity that
controls, is controlled by or is under common control with SMC; 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 Sub-adviser or
an entity that controls, is controlled by or is under common control with a
Sub-adviser.
<PAGE>
EXHIBIT C
INVESTMENT ADVISORY CONTRACT
THIS AGREEMENT, made this 1st day of November, 1999, between SECURITY MUNICIPAL
BOND FUND, a Kansas corporation (hereinafter referred to as the "Fund"), and
SECURITY MANAGEMENT COMPANY, LLC, a Kansas limited liability company
(hereinafter referred to as the "Management Company");
WITNESSETH:
WHEREAS, the Fund is engaged in business as an open-end, management investment
company registered under the Federal Investment Company Act of 1940 (the "1940
Act"); and
WHEREAS, the Company is authorized to issue shares of capital stock in separate
Series, with each such Series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Company intends initially to offer shares in one series to be
designated Security Municipal Bond Fund (the "Initial Series"), such series
together with all other series subsequently established by the Company with
respect to which the Company desires to retain the Management Company to render
investment advisory services hereunder and with respect to which the Management
Company is willing so to do, being herein collectively referred to as the
"Series", and
WHEREAS, the Management Company is willing to provide investment research and
advice to the Fund on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual agreements made
herein, the parties hereto agree as follows:
1. EMPLOYMENT OF MANAGEMENT COMPANY. The Fund hereby employs the Management
Company to act as investment adviser to the Initial Series with respect to
the investment of its assets, and to supervise and arrange the purchase of
securities for the Initial Series and the sale of securities held in the
portfolio of the Initial Series, subject always to the supervision of the
board of directors of the Fund (or a duly appointed committee thereof),
during the period and upon and subject to the terms and conditions herein
set forth. The Management Company hereby accepts such employment and agrees
to perform the services required by this Agreement for the compensation
herein provided.
In the event the Company establishes one or more series other than the
Initial Series with respect to which it desires to retain the Management
Company to render investment advisory services hereunder, it shall notify
the Management Company in writing. If the Management Company is willing to
render such services it shall notify the Company in writing, whereupon such
series shall become a Series subject to the terms and conditions hereunder,
and to such amended or additional provisions as shall be specifically agreed
to by the Company and the Management Company in accordance with applicable
law.
2. INVESTMENT ADVISORY DUTIES.
(a) The Management Company shall regularly provide each Series with
investment research, advice and supervision, continuously furnish an
investment program and recommend which securities shall be purchased
and sold and what portion of the assets of each series shall be held
uninvested and arrange for the purchase of securities and other
investments held in the portfolio of each Series. All investment advice
furnished by the Management Company to each Series under this Section 2
shall at all times conform to any requirements imposed by the
provisions of the Fund's Articles of Incorporation and Bylaws, the 1940
Act, the Investment Advisors Act of 1940 and the rules and regulations
promulgated thereunder, any other applicable provisions of law, and the
terms of the registration statements of the Fund under the Securities
Act of 1933 ("1933 Act") and the 1940 Act, all as from time to time
amended. The Management Company shall advise and assist the officers or
other agents of the Fund in taking such steps as are necessary or
appropriate to carry out the decisions of the board of directors of the
Fund (and any duly appointed committee thereof) with regard to the
foregoing matters and the general conduct of the Fund's business.
(b) Subject to the provisions of the Investment Company Act of 1940 (the
"1940 Act") and any applicable exemptions thereto, the Management
Company is authorized, but is under no obligation, to enter into
sub-advisory agreements (the "Sub-Advisory Agreements") with one or
more sub-advisers (each a "Sub-adviser") to provide investment advisory
services to any Series of the Fund. Each Sub-adviser shall have
investment discretion with respect to the assets of the Series assigned
to that Sub-adviser by the Management Company. The Management Company
shall not be responsible or liable with respect to any investment
decision made by a Sub-adviser, whether such decision be to purchase,
sell or hold such investment. Consistent with the provisions of the
1940 Act and any applicable exemption thereto, the Investment Manager
may enter into Sub-Advisory Agreements or amend Sub-Advisory Agreements
without the approval of the shareholders of the effected Series.
3. PORTFOLIO TRANSACTIONS AND BROKERAGE.
(a) Transactions in portfolio securities shall be effected by the
Management Company, through brokers or otherwise, in the manner
permitted in this Section 3 and in such manner as the Management
Company shall deem to be in the best interests of the Fund after
consideration is given to all relevant factors.
(b) In reaching a judgment relative to the qualification of a broker to
obtain the best execution of a particular transaction, the Management
Company may take into account all relevant factors and circumstances,
including the size of any contemporaneous market in such securities;
the importance to the Fund of speed and efficiency of execution;
whether the particular transaction is part of a larger intended change
in portfolio position in the same securities; the execution
capabilities required by the circumstances of the particular
transaction; the capital required by the transaction; the overall
capital strength of the broker; the broker's apparent knowledge of or
familiarity with sources from or to whom such securities may be
purchased or sold; as well as the efficiency, reliability and
confidentiality with which the broker has handled the execution of
prior similar transactions.
(c) Subject to any statements concerning the allocation of brokerage
contained in the Fund's prospectus, the Management Company is
authorized to direct the execution of portfolio transactions for the
Fund to brokers who furnish investment information or research services
to the Management Company. Such allocation shall be in such amounts and
proportions as the Management Company may determine. If a transaction
is directed to a broker providing brokerage and research services to
the Management Company, the commission paid for such transaction may be
in excess of the commission another broker would have charged for
effecting that transaction, if the Management Company shall have
determined in good faith that the commission is reasonable in relation
to the value of the brokerage and research services provided, viewed in
terms of either that particular transaction or the overall
responsibilities of the Management Company with respect to all accounts
as to which it now or hereafter exercises investment discretion. For
purposes of the immediately preceding sentence, "providing brokerage
and research services" shall have the meaning generally given such
terms or similar terms under Section 28(e)(3) of the Securities
Exchange Act of 1934, as amended.
(d) In the selection of a broker for the execution of any transaction not
subject to fixed commission rates, the Management Company shall have no
duty or obligation to seek advance competitive bidding for the most
favorable negotiated commission rate to be applicable to such
transaction, or to select any broker solely on the basis of its
purported or "posted" commission rates.
(e) In connection with transactions on markets other than national or
regional securities exchanges, the Fund will deal directly with the
selling principal or market maker without incurring charges for the
services of a broker on its behalf unless, in the best judgment of the
Management Company, better price or execution can be obtained in
utilizing the services of a broker.
4. ALLOCATION OF EXPENSES AND CHARGES. The Management Company shall provide
investment advisory, statistical and research facilities and all clerical
services relating to research, statistical and investment work, and shall
provide for the compilation and maintenance of such records relating to
these functions as shall be required under applicable law and the rules and
regulations of the Securities and Exchange Commission. Other than as
specifically indicated in the preceding sentence, the Management Company
shall not be required to pay any expenses of the Fund, and in particular,
but without limiting the generality of the foregoing, the Management Company
shall not be required to pay office rental or general administrative
expenses; board of directors' fees; legal, auditing and accounting expenses;
insurance premiums; broker's commissions; taxes and governmental fees;
membership dues; fees of custodian, transfer agent, registrar and dividend
disbursing agent (if any); expenses of obtaining quotations on the Series'
portfolio securities and pricing of the Series' shares; expenses (including
clerical expenses) of issue, sale or redemption of shares of the Fund's
capital stock; costs and expenses in connection with the registration of
such capital stock under the 1933 Act and qualification of the Fund's
capital stock under the Blue Sky laws of the states where such stock is
offered; costs and expenses in connection with the registration of the Fund
under the 1940 Act and all periodic and other reports required thereunder;
expenses of preparing reports, proxy statements, prospectuses and notices to
stockholders and of printing and distributing reports, proxies, prospectuses
and notices to existing stockholders; costs of stationery; costs of
stockholder and other meetings; expenses of maintaining the Fund's corporate
existence; and such nonrecurring expenses as may arise including litigation
affecting the Fund and the legal obligations the Fund may have to indemnify
its officers and directors.
5. COMPENSATION OF MANAGEMENT COMPANY.
(a) As compensation for the services rendered by the Management Company as
provided herein, for each of the years this agreement is in effect, the
Fund shall pay the Management Company an annual fee equal to 0.5 of 1%
of the average daily closing value of the net assets of the Initial
Series computed on a daily basis. Such fee shall be adjusted and
payable monthly. If this Agreement shall be effective for only a
portion of a year, then the Management Company's compensation for said
year shall be prorated for such portion. For purposes of this Section
5, the value of the net assets of the Initial Series shall be computed
in the same manner on each business day as of the normal close of the
New York Stock Exchange as the value of such net assets is computed in
connection with the determination of the net asset value of the shares
of the Initial Series as described in the Fund's prospectus.
(b) For each of the Fund's full fiscal years during the term of this
Agreement, the Management Company guarantees that the aggregate annual
expenses of every character, exclusive of interest and taxes,
extraordinary expenses (such as litigation), and distribution fees paid
under the Fund's Class A and Class B Distribution Plans, but inclusive
of the Management Company's compensation, incurred by the Fund shall
not exceed an amount equal to one percent of the average net assets of
the Fund for the year, such net assets to be calculated on a daily
basis. The Management Company agrees, on a monthly basis, to contribute
to the Fund such funds or to waive such portion of its fee as may be
necessary to insure that such aggregate annual expenses will not exceed
said amount. If this Agreement shall be effective for only a portion of
one of the Fund's fiscal years, then the maximum annual expenses shall
be prorated for such portion. Brokerage fees and commissions incurred
in connection with the purchase or sale of any securities by the Fund
shall not be deemed to be expenses within the meaning of this paragraph
(b).
6. MANAGEMENT COMPANY NOT TO RECEIVE COMMISSIONS. In connection with the
purchase or sale of portfolio securities for the account of the Fund,
neither the Management Company nor any officer or director of the Management
Company shall act as principal or receive any compensation from the Fund
other than its compensation as provided for in Section 5 above. If the
Management Company, or any "affiliated person" (as defined in the Investment
Company Act of 1940) receives any cash credits, commissions or tender fees
from any person in connection with transactions in portfolio securities of
the Fund (including but no limited to the tender or delivery of any
securities held in such portfolio), the Management Company shall immediately
pay such amount to the Fund in cash or as a credit against any then earned
but unpaid management fees due by the Fund to the Management Company.
7. LIMITATION OF LIABILITY OF MANAGEMENT COMPANY. So long as the Management
Company shall give the Fund the benefit of its best judgment and effort in
rendering services hereunder, the Management Company shall not be liable for
any errors of judgment or mistake of law, or for any loss sustained by
reason of the adoption of any investment policy or the purchase, sale or
retention of any security on its recommendation, whether or not such
recommendation shall have been based upon its own investigation and research
or upon investigation and research made by any other individual, firm or
corporation, if such recommendation shall have been made and such other
individual, firm or corporation shall have been selected with due care and
in good faith. Nothing herein contained shall, however, be construed to
protect the Management Company against any liability to the Fund or its
contract owners by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties under this Agreement. As used in
this Section 7, "Management Company" shall include directors, officers and
employees of the Management Company, as well as that corporation itself.
8. OTHER ACTIVITIES NOT RESTRICTED. Nothing in this Agreement shall prevent the
Management Company or any officer thereof from acting as investment adviser
for any other person, firm, or corporation, nor shall it in any way limit or
restrict the Management Company or any of its directors, officers,
stockholders or employees from buying, selling, or trading any securities
for its own accounts or for the accounts of others for whom it may be
acting; provided, however, that the Management Company expressly represents
that it will undertake no activities which, in its judgment, will conflict
with the performance of its obligations to the Fund under this Agreement.
The Fund acknowledges that the Management Company acts as investment adviser
to other investment companies, and it expressly consents to the Management
Company acting as such; provided, however, that if in the opinion of the
Management Company, particular securities are consistent with the investment
objectives of, and desirable purchases or sales for the portfolios of, one
or more Series and one or more of such other investment companies or series
of such companies at approximately the same time, such purchases or sales
will be made on a proportionate basis if feasible, and if not feasible, then
on a rotating or other equitable basis.
9. DURATION AND TERMINATION OF AGREEMENT. This Agreement shall become effective
on November 1, 1999, provided that on or before that date it has been
approved by a majority of the holders of the outstanding voting securities
of the Fund. This Agreement shall continue in force until November 1, 2001,
and for successive 12-month periods thereafter, unless terminated, provided
that each such continuance is specifically approved at least annually
thereafter by (a) the vote of a majority of the entire board of directors of
the Fund, or, with respect to each Series, by the vote of a majority of the
outstanding voting securities of such Series (as defined in the 1940 Act),
and (b) the vote of a majority of those directors who are not parties to
this Agreement or interested persons (as such term is defined in the 1940
Act) of any such party cast in person at a meeting called for the purpose of
voting on such approval. In the event that this Agreement is approved by
such vote of the outstanding voting securities of one or more Series but not
of one or more others, this Agreement shall continue in effect with respect
to the former Series and, with respect to the latter may continue in effect
until such approval by the latter Series of this Agreement or of a new
agreement with the Management Company or with another party is obtained,
provided that compensation paid with respect to such Series pending such
approval is no greater than the lesser of the Management Company's actual
costs incurred hereunder or the amount due pursuant to Section 5 hereof.
This Agreement may be terminated at any time without payment of any penalty,
by the Fund upon the vote of a majority of the Fund's board of directors or,
with respect to any Series, by a majority of the outstanding voting
securities of such Series, or by the Management Company, in each case on
sixty (60) days' written notice to the other party. This Agreement shall
automatically terminate in the event of its assignment (as such term is
defined in the 1940 Act).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective corporate officers thereto duly authorized on the
day, month and year first above written.
SECURITY MUNICIPAL BOND FUND
(Corporate Seal)
ATTEST: By:
------------------------------
President
- ------------------------------
Secretary
SECURITY MANAGEMENT COMPANY, LLC
(Corporate Seal)
ATTEST: By:
------------------------------
President
- ------------------------------
Secretary
<PAGE>
[SBG LOGO]
The Security Benefit
Group of Companies
700 SW Harrison St.
Topeka, Kansas 66636-0001
SECURITY MUNICIPAL BOND FUND
Special Meeting of Stockholders
October 29, 1999
The undersigned hereby appoints John D. Cleland, Donald A. Chubb, Jr.,
and James R. Schmank, and each of them, with full power of
substitution, as proxies of the undersigned to vote at the
above-stated special meeting, and at all adjournments thereof, all
shares of
SECURITY MUNICIPAL BOND FUND
held by the undersigned at the Special Meeting of Stockholders of the
Fund to be held at 9:30 AM, local time, on October 29, 1999, at
Security Benefit Group Building, 700 Harrison Street, Topeka, Kansas
66636-0001, and at any adjournment thereof, in the manner directed
below with respect to the matters referred to in the proxy statement
for the meeting, receipt of which is hereby acknowledged, and in the
proxies' discretion, upon such other matters as may properly come
before the meeting or any adjournment thereof.
In order to avoid the additional expense of further solicitation to
your Fund, we strongly urge you to review, complete, and return your
ballot as soon as possible. Your vote is important regardless of the
number of shares you own. The Board of Directors recommends a vote for
each of the following proposals. These voting instructions will be
voted as specified and in the absence of specification will be treated
as granting authority to vote "FOR" each proposal.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: [X]
KEEP THIS PORTION FOR YOUR RECORDS
- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
- --------------------------------------------------------------------------------
SECURITY MUNICIPAL BOND FUND
NOTE: Please sign exactly as the name appears on this card. EACH joint owner
must sign the proxy. When signing as executor, administrator, attorney, trustee
or guardian, or as custodian for a minor, please give the FULL title of such. If
a corporation, please give the FULL corporate name and indicate the signer's
office. If a partner, please sign in the partnership name.
PLEASE EXECUTE, SIGN, DATE, AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.
VOTE ON PROPOSALS
FOR AGAINST ABSTAIN
1. To elect six directors to serve on the Board of
Directors of the Fund until the next annual
meeting, if any, or until their successors shall
have been duly elected and qualified. |_| |_| |_|
2. To ratify or reject the selection of the firm of
Ernst & Young LLP as independent accountants for
the Fund's current fiscal year. |_| |_| |_|
3. a. To amend the Fund's fundamental investment
limitation concerning borrowing. |_| |_| |_|
3. b. To amend the Fund's fundamental investment
limitation concerning senior securities. |_| |_| |_|
3. c. To eliminate the Fund's fundamental investment
limitation concerning margin purchases of
securities and short sales. |_| |_| |_|
3. d. To amend the Fund's fundamental investment
limitation concerning lending. |_| |_| |_|
3. e. To amend the Fund's fundamental investment
limitation regarding buying or selling real
estate, commodities, commodities futures
contracts or interests in oil, gas or other
mineral exploration or development programs. |_| |_| |_|
3. f. To eliminate the Fund's fundamental investment
limitation concerning investment in other
investment companies. |_| |_| |_|
3. g. To eliminate the Fund's fundamental investment
limitation concerning pledging, mortgaging or
hypothecating its assets. |_| |_| |_|
3. h. To eliminate the Fund's fundamental investment
limitation concerning investment in puts and
calls. |_| |_| |_|
3. i. To eliminate the Fund's fundamental investment
limitation concerning illiquid and restricted
securities. |_| |_| |_|
4. To approve or disapprove an arrangement and new
investment advisory contract that would permit
Security Management Company, LLC, the Fund's
investment adviser, with Board approval, to enter
into or amend sub-advisory agreements without
stockholder approval. |_| |_| |_|
5. To transact such other business as may properly
come before the Meeting or any adjournments
thereof, and to adjourn the Meeting from time to
time. |_| |_| |_|
- ------------------------------------------- ---------------------------------
Signature (PLEASE SIGN WITHIN BOX) Date Signature (Joint Owners) Date
- --------------------------------------------------------------------------------
