Penn Series Funds, Inc., et al.; Notice of Application

AGENCY:

Securities and Exchange Commission (“SEC”).

ACTION:

Notice of application under section 6(c) of the Investment Company Act of 1940 (the “Act”) for an exemption from section 15(a) of the Act and rule 19f-2 under the Act.

Summary of Application:

The order would permit applicants to enter into and materially amend investment subadvisory agreements without obtaining shareholder approval.

Applicants:

Penn Series Funds, Inc. (the “Company”), on behalf of its series (the “Funds”), and Independence Capital Management, Inc. (“ICMI”).

Filing Dates:

The application was filed on December 20, 1999. Applicants have agreed to file an amendment during the notice period, the substance of which is reflected in this notice.

Hearing or Notification of Hearing:

An order granting the requested relief will be issued unless the SEC orders a hearing. Interested persons may request a hearing be writing to the SEC's Secretary and serving applicants with a copy of the request, personally or by mail. Hearing requests should be received by the SEC by 5:30 p.m. on April 27, 2000, and should be accompanied by proof of service on applicants, in the form of an affidavit or, for lawyers, a certificate of service. Hearing requests should state the nature of the writer's interest, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the SEC's Secretary.

ADDRESSES:

Secretary, SEC, 450 5th Street, NW, Washington, DC 20549-0609. Applicants, 600 Dresher Road, Horsham, Pennsylvania 19044.

FOR FURTHER INFORMATION CONTACT:

J. Amanda Machen, Senior Counsel, (202) 942-7120, or Christine Y. Greenlees, Branch Chief, (202) 942-0564 (Office of Investment Company Regulation, Division of Investment Management).

SUPPLEMENTARY INFORMATION:

The following is a summary of the application. The complete application may be obtained for a fee at the SEC's Public Reference Branch, 450 5th Street, NW, Washington, DC 20549-0102 (tel. 202-942-8090).

Applicants' Representations

1. The Company, a Maryland corporation, is registered under the Act as an open-end management investment company. The Company currently consists of nine Funds, each with different investment objectives and policies. The Funds currently serve as the investment medium for variable life insurance policies and variable annuity contracts issued by The Penn Mutual Life Insurance Company (“Penn Mutual”) and its subsidiary, The Penn Insurance and Annuity Company, and will serve as the investment medium for variable contracts that in the future are issued by Penn Mutual or its affiliates.

2. ICMI serves as the investment adviser for each of the Funds and is registered under the Investment Advisers Act of 1940 (“Advisers Act”). ICMI provides investment advisory services to the Funds under three separate investment advisory agreements with the Company (the “Advisory Agreements”). In its capacity as investment adviser, ICMI recommends the selection or termination of one or more sub-advisers (“Managers”) to each Fund's board of directors (“Board”). In addition, ICMI oversees and monitors the performance of the Managers and may reallocate a Fund's assets among Managers. Each Manager recommended by ICMI is approved by the Board of each Fund, including a majority of directors who are not “interested persons,” as defined in section 2(a)(19) of the Act (the “Independent Directors”). Each Fund pays ICMI a fee for its services based on the Fund's net assets.

3. ICMI has entered into sub-advisory agreements (“Subadvisory Agreements”) with four Managers, each of which is registered or is exempt from registration as an investment adviser under the Advisers Act, and none of which is an affiliate of ICMI. Subject to general supervision by ICMI and the Board, each Manager is responsible for the day-to-day management of the assets of a particular Fund or a portion of the assets assigned to such Manager if managed by more than one Manager (each Fund with a Manager, a “Manager of Managers Fund”). ICMI pays the Managers out of the fees ICMI receives from the Funds.

4 Applicants request an order to permit ICMI to enter into and amend Subadvisory Agreements without obtaining Shareholder approval. The requested relief will not extend to a Manager that is an “affiliated person” (as defined in section 2(a)(3) of the Act) of either a Fund or ICMI, other than by reason of serving as Manager of the Fund “Affiliated Manager”).

Applicants' Legal Analysis

1. Section 15(a) of the Act makes it unlawful for any person to act as an investment adviser to a registered investment company except pursuant to a written contract that has been approved by a majority of the investment company's outstanding voting securities. Rule 18f-2 under the Act provides that each series or class of stock in a series company affected by a matter must approve the matter if the Act requires shareholder approval.

2. Section 6(c) of the Act authorizes the SEC to exempt persons or transactions from the provisions of the Act to the extent that the exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act. Applicants request relief under section 6(c) from section 15(a) of the Act and rule 18f-2 under the Act. For the reasons discussed below, applicants state that the requested relief meets the standard of section 6(c).

3. Applicants assert that the Shareholders, in effect, hire ICMI to manage a Fund's assets by using external Managers, in combination with ICMI's Manager selection and monitoring process, rather than by hiring its own employees to manage assets directly. Applicants believe that Shareholders expect that ICMI will, under the overall authority of the Board, take responsibility for overseeing the Managers and recommending their hiring, termination and replacement. Applicants argue that the requested relief will reduce Fund expenses associated with Shareholder meetings and solicitation of proxies and enable the Funds to operate more efficiently. Applicants also note that the Advisory Agreements will remain subject to the requirements of section 15 of the Act and rule 18f-2 under the Act, including the requirements for Shareholder approval.

Applicants' Conditions

Applicants agree that the order granting the requested relief will be subject to the following conditions:

1. Before any Fund may relay on the requested order, the operation of the Fund in the manner described in the application will be approved by a majority of each Fund's Shareholders, or, in the case of a Future Fund whose public Shareholders purchase shares on the basis of a prospectus containing the disclosure contemplated by condition 2 below, by the sole initial shareholder before offering shares of any Future Fund to the public.

2. The prospectus for each Manager of Managers Fund will disclose the existence, substance and effect of any order granted pursuant to the application. In addition, each Manager of Managers Fund will hold itself out to the public as employing the “manager of managers” approach described in the application. The prospectus for each Manager of Managers Fund will prominently disclose that ICMI has ultimate responsibility to oversee the Managers and recommend their hiring, termination, and replacement.

3. Within 90 days of the hiring of any new Manager, ICMI will furnish Shareholders all information about the new Manager that would be included in a proxy statement. To meet this obligation, ICMI will provide Shareholders with an information statement meeting the requirements of Regulation 14C, Schedule 14C and Item 22 of Schedule 14A under the Securities Exchange Act of 1934.

4. ICMI will not enter into a Subadvisory Agreement with any Affiliated Manager without such agreement, including the compensation to be paid thereunder, being approved by the Shareholders of the applicable Manager of Managers Fund.

5. At all times, a majority of the Company's Board will be Independent Directors, and the nomination of new or additional Independent Directors will be at the discretion of the then existing Independent Directors.

6. When a Manager change is proposed for a Manager of Managers Fund with an Affiliated Manager, the Company's Board, including a majority of the Independent Directors, will make a separate finding, reflected in the applicable Fund's Board minutes, that such change is in the best interests of the Fund and its Shareholders and does not involve a conflict of interest from which ICMI or the Affiliated Manager derives an inappropriate advantage.

7. ICMI will provide general management services to each Manager of Managers Fund, including overall supervisory responsibility for the general management and investment of each Manager of Managers Fund's securities portfolio, and, subject to Board review and approval, will (i) set each Manager or Managers Fund's overall investment strategies, (ii) recommend and select Managers, (iii) allocate, and when appropriate, reallocate a Manager of Managers Fund's assets among its Managers when a Fund has more than one Manager, (iv) monitor and evaluate Manager performance, and (v) implement procedures designed to ensure that the Manager complies with the Manager of Managers Fund's investment objectives, policies, and restrictions.

8. No director or officer of the Company, or director or officer of ICMI will own, directly or indirectly (other than through a pooled investment vehicle over which such person does not have control), any interest in a Manager, except for (i) ownership of interests in ICMI or any entity that controls, is controlled by or is under common control with ICMI; or (ii) ownership of less than 1% of the outstanding securities of any class of equity or debt of a publicly traded company that is either a Manager or an entity that controls, is controlled by, or is under common control with a Manager.