[Federal Register Volume 59, Number 13 (Thursday, January 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1342]


[[Page Unknown]]

[Federal Register: January 20, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20017; 812-8358]

 

Cowen Funds, Inc., et al.; Notice of Application

January 13, 1994
AGENCY: Securities and Exchange Commission (the ``SEC'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``Act'').

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APPLICANTS: Cowen Funds, Inc., Cowen Income & Growth Fund, Inc., Cowen 
Standby Reserve Fund, Inc., Cowen Standby Tax-Exempt Reserve Fund, Inc. 
(together with each series of the Cowen Funds, Inc. described below, 
the ``Funds'') and Cowen & Company (``Cowen'').

RELEVANT ACT SECTIONS: Order requested under section 6(c) granting a 
conditional exemption from sections 2(a)(32), 2(a)(35), 18(f), 18(g), 
18(i), 22(c), and 22(d) of the Act, and rule 22c-1 thereunder.

SUMMARY OF APPLICATION: Applicants seek an order permitting certain 
open-end management investment companies to issue multiple classes of 
shares representing interests in the same portfolio of securities, and 
assess and, under certain circumstances, waive a contingent deferred 
sales charge (``CDSC'') on certain redemptions of the shares.

FILING DATES: The application was filed on April 19, 1993, and amended 
on November 9, 1993 and January 6, 1994.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
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 February 7, 
1994, 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. 
Applicants, Financial Square, New York, New York 10005.

FOR FURTHER INFORMATION CONTACT:
Felice R. Foundos, Senior Attorney, at (202) 272-2190, or Robert A. 
Robertson, Branch Chief, at (202) 272-3018 (Division of Investment 
Management, Office of Investment Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch.

Applicants' Representations

    1. Each of the Funds is an open-end management investment company 
registered under the Act. Cowen Funds, Inc. consists of multiple 
series: Cowen Opportunity Fund, Cowen Special Value Fund, Cowen 
Intermediate Fixed Income Fund, and Cowen Tradition Fixed Income Fund. 
Each Fund has entered into an investment management agreement with 
Cowen under which Cowen Asset Management, a division of Cowen, provides 
management and investment advisory services to the Funds. Each Fund has 
also entered into a distribution agreement with Cowen under which Cowen 
acts as principal underwriter for each Fund. Cowen Asset Management is 
referred to herein as the ``Adviser'' and Cowen as the ``Distributor.''
    2. Currently, four of the Funds (Cowen Income & Growth Fund, Inc., 
Cowen Opportunity Fund, Cowen Intermediate Fixed Income Fund, and Cowen 
Tradition Fixed Income Fund) offer their shares at net asset value plus 
a front-end sales load. Two of the Funds (Cowen Standby Reserve Fund, 
Inc. and Cowen Standby Tax-Exempt Reserve Fund, Inc.) are money market 
funds (the ``Money Market Funds'') and issue their shares at net asset 
value without the imposition of any sales charges.
    3. Applicants request that any order issued concerning this 
application also apply to shares of any future open-end investment 
company registered under the Act that is advised by the Adviser and 
whose principal underwriter is (1) Cowen or (2) any person controlling, 
controlled by or under common control with Cowen and whose shares are 
identical in all material respects to those described in the 
application.
    4. Applicants seek relief to implement a dual distribution system. 
Under this system, each of the Funds may offer investors the option of 
purchasing shares subject to a conventional front-end sales load and 
possibly a service fee (the ``Front-End Load Option'') or subject to a 
CDSC and distribution and service fees (the ``Deferred Option''). In 
addition, under the dual distribution system, applicants may from time 
to time create one or more additional classes of shares.
    5. Under the Front-End Load Option, investors would purchase shares 
designated as Class A at the then current net asset value plus a front-
end sales load. In addition, Class A shareholders of certain Funds may 
be assessed a ``service fee'' under a rule 12b-1 plan at an annual rate 
of up to .25% of the average daily net assets of the Class A shares. 
The term ``service fee'' has the meaning given to that term in Section 
26 of Article III of the NASD's Rules of Fair Practice.
    6. Under the Deferred Option, investors would purchase shares 
designated as Class B shares at net asset value without the imposition 
of a sales load at the time of purchase. However, the shares would be 
subject to a rule 12b-1 plan with a service fee of up to .25% and a 
distribution fee of up to .75% of the average daily net asset value of 
the Class B shares. In addition, the Class B shares may be subject to a 
CDSC, as described below. The sum of any front-end sale charge, CDSC, 
and asset based sales charge imposed by the Funds will not exceed the 
maximum sales charge provided for in article III, section 26(d) of the 
Rules of Fair Practice of the NASD.
    7. The Funds may create additional classes of shares, the terms of 
which may differ from the Class A and Class B shares only in the 
following respects: (1) Each class would have a different designation; 
(2) each class might be sold under different sales arrangements (e.g., 
sales with a front-end sales load, subject to a CDSC, or at net asset 
value); (3) each class would bear any payments incurred in connection 
with a rule 12b-1 plan or a non-rule 12b-1 service plan related to that 
class (and any other costs relating to obtaining shareholder approval 
of the rule 12b-1 plan for that class or an amendment to its plan); (4) 
each class would bear expenses attributable to the particular class as 
set forth in condition 1 below (the ``Class Expenses'') and any other 
expenses that are subsequently identified and determined to be properly 
allocated to one class which shall be approved by the Commission 
pursuant to an amended order; (5) the related voting rights as to 
matters exclusively affecting one class (e.g., the adoption, amendment 
or termination of the rule 12b-1 plan) in accordance with the 
procedures set forth in rule 12b-1; and (6) each class would have 
different exchange privileges.
    8. If a Fund offers a shareholder services plan, these shares would 
be available for purchase by banks and other financial intermediaries 
for the benefit of their customers. The financial intermediaries would 
provide support services to their customers, such as processing 
shareholder orders to purchase and redeem shares, processing dividend 
payments, providing information to shareholders with respect to their 
holdings, arranging bank wires, answering shareholder inquiries 
relating to the services performed by the financial intermediary, and 
other similar services.These services will augment and not replace the 
services provided to the Funds by Cowen and the Funds' transfer agent 
and custodian pursuant to their respective agreements with the Funds.
    9. Under the dual distribution system, all expenses incurred by a 
Fund (other than a Money Market Fund) will be allocated among the 
various classes of shares based on the net assets of the Fund 
attributable to that class and all expenses incurred by a Money Market 
Fund will be allocated among the shares of the Fund based on the number 
of outstanding shares of such Fund regardless of class, except that 
each class's net asset value and expenses will reflect the expenses 
associated with that class's rule 12b-1 plan or service plan (if any) 
and any Class Expenses attributable to a particular class. Because of 
the higher distribution fees paid by the holders of certain classes 
(Class B), the net income attributable to and the dividends payable on 
each class with higher distribution fees would be lower than the net 
income attributable to and the dividends payable on each class with 
lower distribution fees or with no distribution fee at all (Class A). 
As a result, the net asset value per share of the classes will differ 
at times. The Money Market Funds will take steps detailed in condition 
15 below to ensure that the net asset value per share of each class of 
a Money Market Fund does not deviate from the net asset value per share 
of the other classes of such Fund.
    10. Currently, shares of the Funds generally may be exchanged for 
shares of other Funds. Applicants contemplate that each class of a Fund 
will be exchangeable only for the same class of the other Funds, 
including shares of the Money Market funds. The exchange privileges 
applicable to each class will comply with rule 11a-3 under the Act.
    11. Applicants also seek relief to permit the Funds to assess a 
CDSC on redemptions of certain classes of shares, and to permit the 
Funds to waive the CDSC on redemptions of certain shares. Shares of the 
Funds may be subject to the imposition of a CDSC if such shares are 
redeemed within a specified period after their purchase. Applicants 
currently expect that the percentage generally will vary from 5% for 
redemptions made during the first year from initial purchase to 0% for 
redemptions made after the sixth year from purchase. The CDSC will 
apply only to those shares that are issued by the Fund after the 
Commission grants the requested exemption.
    12. No CDSC would be imposed with respect to: (a) Redemptions of 
shares that were purchased more than a fixed number of years prior to 
the redemptions; (b) shares derived from reinvestment of distributions; 
or (c) the amount that represents an increase in the value of the 
shareholder's account resulting from capital appreciation. The amount 
of the CDSC will be calculated as the lesser of the amount that 
represents a specified percentage of the net asset value of the shares 
at the time of purchase, or the amount that represents such percentage 
of the net asset value of the shares at the time of redemption.
    13. In determining the applicability and rate of any CDSC, it will 
be assumed that a redemption is made first of amounts due to capital 
appreciation, next of shares representing reinvestment of dividends and 
capital gain distributions, and then of other shares held by the 
shareholder for the longest period of time. This will result in the 
charge, if any, being imposed at the lowest possible rate. If a 
shareholder who owns both Class A and Class B shares places a 
redemption request, the shareholder will be required to elect 
specifically whether the Class A or Class B shares are to be redeemed.
    14. The CDSC would be waived for the following redemptions: (a) 
Following the death or disability, as defined in section 72(m)(7) of 
the Internal Revenue Code of 1986, of a shareholder if redemption is 
made within one year of death or disability of a shareholder and (b) in 
connection with a lump-sum or other distribution following retirement 
or, in the case of an IRA or Keogh Plan or custodial account pursuant 
to section 403(b)(7) of the Code, after attaining the age of 59\1/2\. 
The charge also may be waived on any redemption that results from a 
tax-free return of an excess contribution pursuant to section 408(d)(4) 
or (5) of the Code or from death or disability of the employee. In sum, 
the CDSC may be waived on redemptions of shares that constitute 
retirement plan distributions that are permitted to be made without 
penalty pursuant to the Code, other than tax-free rollovers or 
transfers of assets. If the Funds waive the CDSC, the waiver or 
reduction will be uniformly applied to all offerees in the class 
specified.

Applicants' Legal Analysis

    1. Applicants request an exemption under section 6(c) from sections 
18(f), 18(g), and 18(i) to issue multiple classes of shares 
representing interests in the same portfolio of securities. Applicants 
believe that, by implementing the multiple class distribution system, 
the Funds would be able to facilitate the distribution of their shares 
and provide a broad array of services without assuming excessive 
accounting and bookkeeping costs. Applicants also believe that the 
proposed allocation of expenses and voting rights is equitable and 
would not discriminate against any group of shareholders. The proposed 
arrangement does not involve borrowings, affect the Funds' existing 
assets or reserves, or increase the speculative character of the shares 
of a Fund.
    2. Applicants also request an exemption under section 6(c) from 
sections 2(a)(32), 2(a)(35), 22(c), and 22(d), and rule 22c-1, to 
assess and, under certain circumstances, waive a CDSC on redemptions of 
shares. Applicants believe that their request to permit the CDSC 
arrangement would place the purchaser in a better position than if a 
sales load were imposed at the time of sale, since the shareholder may 
have to pay only a reduced sales charge, or no sales charge at all.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. Each class of shares will represent interests in the same 
portfolio of investments of a Fund and be identical in all respects, 
except as set forth below. The only differences among the terms of the 
various classes of shares of the same Fund will relate solely to: (a) 
The designation of each class of shares of a Fund; (b) expenses 
assessed to a class as a result of a rule 12b-1 plan providing for a 
distribution fee or a service fee or a service plan (e.g., Class B, and 
possible Class A, shares would pay a rule 12b-1 service fee and Class B 
shares would pay a rule 12b-1 distribution fee); (c) different Class 
Expenses for each class of shares, which are limited to: (i) Transfer 
agency fees as identified by the transfer agent as being attributable 
to a specific class; (ii) printing and postage expenses related to 
preparing and distributing materials such as shareholder reports, 
prospectuses, and proxies to current shareholders; (iii) Blue Sky 
registration fees incurred by a class of shares; (iv) SEC registration 
fees incurred by a class of shares; (v) the expenses of administrative 
personnel and services as required to support the shareholders of a 
specific class; (vi) litigation or other legal expenses relating solely 
to one class of shares; and (vii) directors' fees incurred as a result 
of issues relating to one class of shares; (d) the related voting 
rights as to matters exclusively affecting one class of shares (e.g., 
the adoption, amendment or termination of a rule 12b-1 plan) in 
accordance with the procedures set forth in rule 12b-1, and (e) 
different exchange privileges. Any additional incremental expenses not 
specifically identified above that are subsequently identified and 
determined to be properly allocated to one class of shares shall not be 
so allocated until approved by the SEC.
    2. The directors of each of the Funds, including a majority of the 
independent directors, shall have approved the dual distribution system 
prior to the implementation of the dual distribution system by a 
particular Fund. The minutes of the meetings of the directors of each 
of the Funds regarding the deliberations of the directors with respect 
to the approvals necessary to implement the dual distribution system 
will reflect in detail the reasons for determining that the proposal 
dual distribution system is in the best interests of both the Funds and 
their respective shareholders.
    3. The initial determination of the Class Expenses that will be 
allocated to a particular class and any subsequent changes thereto will 
be reviewed and approved by a vote of the directors of the affected 
Fund, including a majority of the independent directors. Any person 
authorized to direct the allocation and disposition of monies paid or 
payable by the Fund to meet Class Expenses shall provide to the 
directors, and the directors shall review, at least quarterly, a 
written report of the amounts so expended and the purpose for which the 
expenditures were made.
    4. On an ongoing basis, the directors of the Funds, pursuant to 
their fiduciary responsibilities under the Act and otherwise, will 
monitor each Fund for the existence of any material conflicts among the 
interests of the various classes of shares. The directors, including a 
majority of the independent directors, shall take such action as is 
reasonably necessary to eliminate any conflicts that may develop. The 
Adviser and the Distributor will be responsible for reporting any 
potential or existing conflicts to the directors. If a conflict arises, 
the Adviser and the Distributor at their own expense will remedy the 
conflict up to and including establishing a new registered management 
investment company.
    5. If any class will be subject to a service plan, the service plan 
will be adopted and operated in accordance with the procedures set 
forth in rule 12b-1 (b) through (f) as if the expenditures made 
thereunder were subject to rule 12b-1, except that shareholders will 
not enjoy the voting rights specified in rule 12b-1.
    6. The directors of the Funds will receive quarterly and annual 
statements concerning distribution and shareholder servicing 
expenditures and service payments complying with paragraph (b)(3)(ii) 
of rule 12b-1, as it may be amended from time to time. In the 
statements, only distribution or shareholder servicing expenditures 
properly attributable to the sale or servicing of one class of shares 
will be used to support any distribution or shareholder servicing fee 
charged to shareholders of that class of shares. Expenditures not 
related to the sale or servicing of a specific class of shares will not 
be presented to the directors to support any fees charged to 
shareholders of that class of shares. The statements, including the 
allocations upon which they are based, will be subject to the review 
and approval of the independent directors in the exercise of their 
fiduciary duties.
    7. Dividends paid by a Fund with respect to each class of shares, 
to the extent any dividends are paid, will be calculated in the same 
manner, at the same time, on the same day, and will be in the same 
amount, except that Class Expenses and costs and distribution fees 
associated with any rule 12b-1 plan and service plan relating to a 
particular class will be borne exclusively by each respective class.
    8. The methodology and procedures for calculating the net asset 
value and dividends/distributions of the various classes and the proper 
allocation of expenses among the various classes have been reviewed by 
an expert (the ``Independent Examiner''). The Independent Examiner has 
rendered a report to applicants which has been provided to the staff of 
the SEC stating that the methodology and procedures are adequate to 
ensure that the calculations and allocations will be made in an 
appropriate manner. On an ongoing basis, the Independent Examiner, or 
an appropriate substitute Independent Examiner, will monitor the manner 
in which the calculations and allocations are being made and, based 
upon such review, will render at least annually a report to the Funds 
that the calculations and allocations are being made properly. The 
reports of the Independent Examiner shall be filed as part of the 
periodic reports filed with the SEC pursuant to sections 30(a) and 
30(b)(1) of the Act. The work papers of the Independent Examiner with 
respect to these reports, following request by the Funds which the 
Funds agree to make, will be available for inspection by the SEC's 
staff upon the written request for these work papers by a senior member 
of the Division of Investment Management or of a Regional Office of the 
SEC, limited to the Director, an Associate Director, the Chief 
Accountant, the Chief Financial Analyst, an Assistant Director, and any 
Regional Administrators or Associate or Assistant Administrators. The 
initial report of the Independent Examiner is a ``report on policies 
and procedures placed in operation'' and the ongoing reports will be 
``reports on policies and procedures placed in operation and tests of 
operating effectiveness'' as defined and described in Statement of 
Auditing Standards No. 70 of the American Institute of Certified Public 
Accountants (``AICPA''), as it may be amended from time to time, or in 
similar auditing standards as may be adopted by the AICPA from time to 
time.
    9. The applicants have adequate facilities in place to ensure 
implementation of the methodology and procedures for calculating the 
net asset value and dividends/distributions among the various classes 
of shares and the proper allocation of expenses among the classes of 
shares and this representation has been concurred with by the 
Independent Examiner in the initial report referred to in condition 8 
above and will be concurred with by the Independent Examiner, or an 
appropriate substitute Independent Examiner, on an ongoing basis at 
least annually in the ongoing reports referred to in condition 8 above. 
The applicants agree to take immediate corrective action if the 
Independent Examiner, or appropriate substitute Independent Examiner, 
does not so concur in the ongoing reports.
    10. The prospectuses of the Funds will contain a statement to the 
effect that a salesperson and any other person entitled to receive any 
compensation for selling or servicing Fund shares may receive different 
compensation with respect to one particular class of shares over 
another in the Fund.
    11. The Distributor will adopt compliance standards as to when 
shares of a particular class may appropriately be sold to particular 
investors. The applicants will require all persons selling shares of 
the Funds to agree to conform to these standards.
    12. The conditions pursuant to which the exemptive order is granted 
and the duties and responsibilities of the directors of the Funds with 
respect to the dual distribution system will be set forth in guidelines 
that will be furnished to the directors as part of the materials 
setting forth the duties and responsibilities of the directors.
    13. Each Fund will disclose in its prospectus the respective 
expenses, performance data, distribution arrangements, services, fees, 
sales loads, CDSCs, and exchange privileges applicable to each class of 
shares in every prospectus, regardless of whether all classes of shares 
are offered through each prospectus. The shareholder reports of each 
Fund will disclose the respective expenses and performance data 
applicable to each class of shares in every shareholder report. The 
shareholder reports will contain, in the statement of assets and 
liabilities and statement of operations, information related to the 
Fund as a whole generally and not on a per class basis. Each Fund's per 
share data, however, will be prepared on a per class basis with respect 
to the classes of shares of the Fund. To the extent any advertisement 
or sales literature describes the expenses or performance data 
applicable to any class of shares, it will disclose the respective 
expenses and/or performance data applicable to all classes of shares. 
The information provided by applicants for publication in any newspaper 
or similar listing of the Fund's net asset values and public offering 
prices will present each class of shares separately.
    14. Applicants acknowledge that the grant of the exemptive order 
requested by this application will not imply SEC approval, 
authorization, or acquiescence in any particular level of payments that 
the Funds may make pursuant to rule 12b-1 plans or service plans in 
reliance on the exemptive order.
    15. To ensure that the net asset value per share of each class of 
shares of a Money Market Fund remains the same regardless of variations 
in net income among the classes from day to day, no class will on any 
day bear any expenses associated with that class's rule 12b-1 plan or 
service plan (if any) and Class Expenses that would cause the accrued 
expenses of such class for such day to exceed its allocated gross 
income. To accomplish this, each Money Market Fund may seek to obtain 
undertakings from its service providers stating that, if necessary to 
prevent the accrued expenses of any class from exceeding the allocated 
gross income of such class on any given day, they will waive some or 
all of the payments to which they otherwise would have been entitled. 
If such waivers are not obtained or they are not sufficient to prevent 
the expenses associated with a class's rule 12b-1 plan or service plan 
(if any) and Class Expenses from exceeding its gross income on any 
given day, the Adviser and/or the Distributor will within five business 
days, reimburse the Money Market Fund in such amount as may be 
necessary to prevent such expenses from exceeding a class's gross 
income for the day. Fees and expenses waived by a service provider or 
reimbursed to the Fund by the Adviser and/or the Distributor will not 
be carried forward or recouped at a future date.
    16. Applicants will comply with the provisions of proposed rule 6c-
10 under the Act, Release No. 16619 (November 2, 1988), as the rule is 
currently proposed and as it may be reproposed, adopted, or amended.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-1342 Filed 1-19-94; 8:45 am]
BILLING CODE 8010-01-M