[Federal Register Volume 59, Number 18 (Thursday, January 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1710]


[[Page Unknown]]

[Federal Register: January 27, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20028; 812-7913]

 

The Laurel Funds, Inc., et al.; Notice of Application

January 19, 1994.
AGENCY: Securities and Exchange Commission (``SEC'').

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

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APPLICANTS: The Laurel Funds, Inc. (``Laurel Fund''); The Boston 
Company Fund (``TBC Fund''); The Boston Company Investment Series 
(``TBCIS Fund''); and The Boston Company Tax-Free Municipal Funds 
(``TBCTF Fund'') (together, the ``Funds''); Frank Russell Investment 
Management Company (``FRIMCo''); Mellon Bank, N.A. (``Mellon Bank''); 
Russell Fund Distributors, Inc. (``RFD''), and Funds Distributor, Inc. 
(``FDI'' and together with RFD, the ``Distributors'').

RELEVANT ACT SECTIONS: Exemption requested under section 6(c) from the 
provisions of sections 2(a)(32), 2(a)(35), 18(f)(1), 18(g), 18(i), 
22(c), and 22(d) and rule 22c-1.

SUMMARY OF APPLICATION: Applicants seek an order to permit the Funds to 
issue an unlimited number of classes of shares representing interest in 
the same portfolio of securities, and assess a contingent deferred 
sales charge (``CDSC'') on certain redemptions of shares, and waive the 
CDSC in certain instances.

FILING DATES: The application was filed on May 4, 1992, and amended on 
August 24, 1992, November 20, 1992, February 19, 1993, May 20, 1993, 
and January 19, 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 14, 
1994, and should be accompanied by proof of service on the 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 Fifth Street NW, Washington, DC 20549. 
Applicants: The Laurel Funds, Inc., Frank Russell Investment Management 
Company, and Russell Fund Distributors, Inc., 909 A Street, Tacoma, 
Washington 98402; Mellon Bank, N.A., One Mellon Bank Center, 
Pittsburgh, Pennsylvania 15258; Fund Distributors, Inc., One Exchange 
Place, Boston, Massachusetts 02109.

FOR FURTHER INFORMATION CONTACT: Marc Duffy, Staff Attorney, at (202) 
272-2511, or C. David Messman, 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. Laurel Fund is a Maryland corporation registered under the Act 
as an open-end management investment company. Laurel presently consists 
of the following separate investment portfolios: The Laurel Funds, 
Inc., Laurel Prime Money Market I Portfolio, Laurel U.S. Treasury Money 
Market I Portfolio, Laurel Tax-Exempt Money Market I Portfolio, Laurel 
Prime Money Market II Portfolio, Laurel Government Money Market II 
Portfolio, Laurel U.S. Treasury Money Market II Portfolio, Laurel Stock 
Portfolio, Laurel Ginnie Mae Portfolio, Laurel Intermidate Income 
Portfolio, Laurel Short-Term Bond Fund Portfolio, Laurel Tactical Asset 
Allocation Portfolio, Laurel U.S. Treasury Only Money Market Portfolio, 
Laurel S&P 500 Stock Index Portfolio, Laurel Balanced Portfolio, Laurel 
Midcap Stock Portfolio, Laurel Bond Market Index Portfolio, and Laurel 
European Portfolio.
    2. FRIMCo is the administrator, and the RFD is the distributor of 
Laurel Fund. Mellon Bank is Laurel Fund's investment adviser, 
custodian, and transfer agent.
    3. TBC Fund, TBCIS Fund, and TBCTF Fund are Massachusetts business 
trusts. TBC Fund presently consists of the following series: Capital 
Appreciation Fund, Special Growth Fund, Government Money Fund, Cash 
Management Fund, Managed Income Fund, Asset Manager's Fund, and 
Intermediate Term Government Securities Fund. TBCIS Fund presently 
consists of the following series: International Fund, Short-Term Bond 
Fund, Asset Allocation Fund, and Contrarian Fund. TBCTF Fund consists 
of the Massachusetts Tax-Free Money Fund, Massachusetts Tax-Free Bond 
Fund, Tax-Free Money Fund, Tax-Free Bond Fund, California Tax-Free 
Money Fund, California Tax-Free Bond Fund, New York Tax-Free Money 
Fund, and New York Tax-Free Bond Fund. The Boston Company Advisors, 
Inc. is the investment adviser for, and FDI is the Distributor for TBC 
Fund, TBCIS Fund, and TBCTF Fund. The Boston Company Advisors, Inc. is 
an indirect subsidiary of Mellon Bank Corporation.
    4. Applicants request that the relief granted hereby apply to all 
existing and future portfolios of Laurel Fund, TBC Fund, TBCIS Fund, 
and TBCTF Fund (the ``Portfolios''), and to all future registered 
investment companies distributed by RFD or FDI, or for which Mellon 
Bank serves in the future as investment adviser, or for which any 
person controlling, controlled by, or under common control with Mellon 
Bank (within the meaning of section 2(a)(9) of the Act) may in the 
future serve as investment adviser. Any such future investment 
companies that rely on the requested relief will abide by all of the 
representations and conditions to the application.
    5. The Portfolios consist of both money market funds and non-money 
market funds. Shares of the Portfolios are sold and redeemed daily at 
net asset value without a sales or redemption charge. The Funds have 
adopted plans pursuant to rule 12b-1 under the Act for using up to 
0.35% of each Portfolio's net assets annually to aid in the 
distribution of their shares.
    6. Applicants propose to create a multi-class distribution system 
(the ``Multi-Class System''). The Funds will create an unlimited number 
of additional classes of shares in some or all of their existing and 
future Portfolios. Shares will be issued in connection with either a 
plan adopted pursuant to rule 12b-1 under the Act (the ``12b-1 Plan'') 
and/or a non-rule 12b-1 administrative plan (the ``Administrative 
Plan,'' and collectively with the 12b-1 Plan, the ``Plans'').
    7. With respect to each class of shares, the Funds will enter into 
a 12b-1 Plan agreement and/or an Administrative Plan agreement (the 
``Plan Agreements'') with groups, organizations or institutions 
(``Organizations'') to provide certain services to the clients, 
members, or customers of such Organizations who beneficially own shares 
offered in connection with a particular class (``Class Shareholders'').
    8. The services to be provided by Organizations to their Class 
Shareholders under the 12b-1 Plan could include: providing facilities 
to answer questions from prospective investors about the Funds; 
receiving and answering correspondence, including requests for 
prospectuses and statements of additional information; preparing, 
printing, and delivering prospectuses and shareholder reports to 
prospective Class Shareholders; complying with federal and state 
securities laws pertaining to the sale of shares; and assisting 
investors in completing application forms and selecting dividend and 
other account options.
    9. The services to be provided by Organizations to their Class 
Shareholders under the Administrative Plan could include: receiving, 
aggregating, and processing Class Shareholder orders; sweep program 
servicing; shareholder sub-accounting; providing and maintaining 
elective Class Shareholder services such as check writing and wire 
transfer services; providing and maintaining pre-authorized investment 
plans; periodic communications with Class Shareholders; acting as the 
sole shareholder of record and nominee for Class Shareholders; 
maintaining account records for Class Shareholders; answering questions 
and handling correspondence from Class Shareholders about their 
accounts; issuing confirmations for transactions by Class Shareholders; 
and similar account administrative services.
    10. The services provided pursuant to the Plans will augment or 
replace (and not be duplicative of) the services to be provided to the 
Portfolios by Mellon Bank, the Distributors, or FRIMCo. Applicants 
propose to ``unbundle'' services provided to the Portfolios to permit 
Organizations to select services they wish to provide to their Class 
Shareholders, with such services to be tailored to their Class 
Shareholders' needs.
    11. With respect to each class of shares, a Portfolio will pay an 
Organization for its services and assistance in accordance with the 
terms of its Plan and related Plan Agreement (``Plan Payments'') and 
the expense of such payments will be borne entirely by the owners of 
the class of shares of the Portfolio to which each Plan Agreement 
relates. Plan Payments will not exceed 0.50% per year of the average 
daily net asset value of shares owned by Class Shareholders covered by 
such Plan Agreement. In addition, for any Organization having both a 
12b-1 Plan and Administrative Plan, aggregate Plan Payments will not 
exceed 1.00% per year. Such maximum limits on Plan Payments might be 
increased in the future, upon compliance with the provisions of the 
related Plan, but will not be increased over the limits stated above 
unless the requested exemptive order is amended, or a no-action 
position obtained from the SEC staff permitting such increase.
    12. Applicants at all times will comply with Article III, section 
26 of the Rules of Fair Practice of the National Association of 
Securities Dealers, Inc., as amended, with respect to asset-based 
distribution charges.
    13. All expenses of the Funds that cannot be attributed directly to 
any one Portfolio (``Fund Expenses'') will be allocated to each 
Portfolio based on the relative net assets of such Portfolio. Fund 
Expenses could include, for example, directors' fees and expenses, 
audit and legal fees, insurance premiums, SEC and state blue sky 
registration fees, and dues paid to organizations such as the 
Investment Company Institute.
    14. Certain expenses may be attributable to a Portfolio, but not to 
a particular class (``Portfolio Expenses''). Portfolio Expenses will be 
allocated to a class based upon the relative percentage of net assets 
of such class. Portfolio expenses could include, for example, advisory 
fees, accounting fees, custodian fees, and fees related to preparation 
of separate documents of the Portfolio. In addition, the gross income 
of each Portfolio will be allocated on a pro rata basis to each class 
based on the relative net assets of each class, and then divided by the 
number of outstanding shares in each class.
    15. In addition to the cost of Plan Payments, each class will bear 
certain expenses attributable specifically to such class, as set forth 
in Condition 1 (``Class Expenses''). The determination of which Class 
Expenses will be allocated to a particular class and any subsequent 
changes thereto will be determined by the Board of Directors of the 
Fund in the manner described in Condition 3.
    16. The Funds' investment adviser may choose to reimburse or waive 
Class Expenses on certain classes on a voluntary, temporary basis. The 
amount of Class Expenses waived or reimbursed by the investment adviser 
may vary from class to class. Class Expenses are by their nature 
specific to a given class and obviously expected to vary from one class 
to another. Applicants thus believe that it is acceptable and 
consistent with shareholder expectations to reimburse or waive Class 
Expenses at different levels for different classes of the same 
portfolio.
    17. In addition, the investment adviser may waive or reimburse Fund 
Expenses and/or Portfolio Expenses (with or without a waiver or 
reimbursement of Class Expenses) but only if the same proportionate 
amount of Fund Expenses and/or Portfolio Expenses are waived or 
reimbursed for each class. Thus, any Fund Expenses that are waived or 
reimbursed would be credited to each class of a Portfolio based on the 
relative net assets of the classes. Similarly, any Portfolio Expenses 
that are waived or reimbursed would be credited to each class of that 
Portfolio according to the relative net assets of the classes. Fund 
Expenses and Portfolio Expenses apply equally to all classes of a given 
Portfolio. Accordingly, it may not be appropriate to waive or reimburse 
Fund Expenses or Portfolio Expenses at different levels for different 
classes of the same Portfolio.
    18. Dividends paid to each class of shares will be declared and 
paid on the same days and at the same times, and except as noted below, 
will be determined in the same manner and paid in the same amounts. 
Because different Plan Payments and Class Expenses may be borne by each 
class of shares, the net income of (and dividends payable to) each 
class may be different from the net income of the other classes of 
shares of a Portfolio.
    19. Applicants also request an exemption from sections 2(a)(32), 
2(a)(35), 22(c) and 22(d), of the Act and rule 22c-1 thereunder, to the 
extent necessary to permit the Funds to assess a CDSC on certain 
redemptions of shares, and waive the CDSC in certain instances. The 
amount of the CDSC charged will vary, depending on the length of time 
shares have been held.
    20. The CDSC typically will range from 4% to 6% (but can be higher 
or lower) on shares redeemed in the first year of purchase and will be 
reduced, typically at a rate of 1% per year over the applicable CDSC 
period, so that redemptions of shares held after that period will not 
be subject to a CDSC.
    21. The CDSC will not be imposed on redemptions of shares purchased 
in connection with the reinvestment of distributions. Furthermore, no 
CDSC will be imposed on an amount which represents an increase in the 
value of a shareholder's account resulting from capital appreciation 
above the amount paid for shares purchased during the CDSC period. In 
determining whether a CDSC is applicable, a redemption will be made 
first of shares derived from reinvestment of distributions, second of 
shares purchased prior to the CDSC period, and third of shares 
purchased during the CDSC period.
    22. The Portfolios will waive the CDSC on redemptions: (a) 
following a shareholder's death or disability, as defined in section 
72(m)(7) of the Internal Revenue Code, (b) in connection with 
distributions from an individual retirement account or other qualified 
retirement plan following death, total or permanent disability, or 
reaching retirement age, and (c) in whole or in part in connection with 
shares sold to: (i) Customers of Mellon Bank Corporation, its 
subsidiaries, and affiliates (``Mellon Bank Corp.''), and The Boston 
Company, its subsidiaries (including The Boston Company Advisors, Inc.) 
and affiliates (``The Boston Company''), (ii) directors and officers of 
the Funds, and (iii) employees and retirees of Mellon Bank Corp., The 
Boston Company, the Distributors, and FRIMCo, as disclosed in the 
registration statement for the class.

Applicants' Legal Analysis:

    1. Applicants seek an exemptive order to the extent that the Multi-
Class System might be deemed to (a) result in a ``senior security'' 
within the meaning of section 18(g) of the Act, and thus be prohibited 
by section 18(f)(1); and (b) violate the equal voting provisions of 
section 18(i) of the Act.
    2. Section 18 is intended to prevent investment companies from 
issuing excessive amounts of senior securities and thereby increasing 
unduly the speculative character of their junior securities, or from 
operating without adequate assets or reserves. The proposed arrangement 
does not involve borrowings and does not affect the Portfolios' 
existing assets or reserves. Nor will the proposed arrangement increase 
the speculative character of the shares of a Portfolio since all shares 
will participate pro rata in all of a Portfolio's income and expenses, 
with the exception of Plan Payments and Class Expenses.
    3. The proposed allocation of expenses and voting rights is 
equitable and will not discriminate against any group of shareholders. 
Further, since all shares of a Portfolio will be redeemable at all 
times, no class of shares will have any preference or priority in the 
usual sense (that is, no class will have distribution or liquidation 
preferences will respect to particular assets, and no class will be 
protected by any reserve or other account).
    4. Applicants believe that the imposition of the CDSC is fair, 
consistent with the policy and provisions of the Act, and in the best 
interest of those shareholders on whom it is imposed. Shares sold 
subject to a CDSC will be designed to permit the investor to purchase 
shares without the assessment of a front-end sales load, and at the 
same time permit the Distributors to pay securities dealers selling 
shares of a class a commission on the sale of those shares. Proceeds 
from the CDSC will be used in whole or in part to defray the expenses 
of the Distributors and of the selling broker-dealers relating to 
providing distribution-related services to the investor choosing those 
classes.

Applicants' Conditions

    If the requested order is granted, applicants agree to the 
following conditions:
    1. Each class of shares of a Portfolio will represent interests in 
the same portfolio of investments, and be identical in all respects, 
except for differences related to: (a) Certain Class Expenses, which 
are limited to: (i) Transfer agent fees identified by the transfer 
agent as being attributable to a specific class of shares; (ii) 
printing and postage expenses related to preparing and distributing 
materials such as shareholder reports, prospectuses, and proxies to 
current shareholders of a specific class; (iii) blue sky registration 
fees incurred by a class of shares; (iv) SEC registration fees incurred 
by a class of shares; (v) the expense of the Funds' administrator and 
other 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; (vii) directors' fees 
incurred as a result of issues relating to one class of shares; and 
(viii) organizational expenses incurred to establish a particular class 
of shares; (b) expenses assessed to a class pursuant to a 12b-1 Plan or 
Administrative Plan; (c) voting rights as to matters exclusively 
affecting one class of shares; (d) dividend and net asset value 
differences reflecting different Plan Payments and Class Expenses; (e) 
class designation; and (f) exchange privileges. Any additional 
incremental expenses not specifically identified above which are 
subsequently identified and determined to be properly allocated to one 
class of shares shall not be so allocated until approved by the SEC 
pursuant to an amended order.
    2. The directors of the Funds, including a majority of the 
independent directors will approve the offering of different classes of 
shares pursuant to the Multi-Class System. The minutes of the meetings 
of the directors regarding the deliberations of the directors with 
respect to the approvals necessary to implement the Multi-Class System 
will reflect in detail the reasons for the directors' determination 
that the proposed Multi-Class System is in the best interests of the 
Funds, the Portfolios, and shareholders.
    3. The initial determination of the Class Expenses, if any, that 
will be allocated to a particular class and any subsequent changes 
thereto will be reviewed and approved by a vote of the board of 
directors of the Funds, including a majority of the independent 
directors. Any person authorized to direct the allocation and 
disposition of monies paid or payable by a Portfolio to meet Class 
Expenses shall provide to the board of directors, and the directors 
shall review, at least quarterly, a written report of the amounts so 
expended and the purposes for which such expenditures were made.
    4. On an ongoing basis, the directors, pursuant to their fiduciary 
responsibilities under the Act and otherwise, will monitor the 
Portfolios 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 such conflicts that may develop. 
The investment adviser and distributor of the Funds will be responsible 
for reporting any potential or existing conflicts to the directors. If 
a conflict arises, the investment adviser and the distributor at their 
own cost will remedy such conflict up to and including establishing a 
new registered management investment company.
    5. The Distributors will adopt compliance standards as to when each 
class of shares may be sold to particular investors. Applicants will 
require all persons selling shares of the Funds to agree to conform to 
such standards.
    6. The Administrative Plans 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 need not enjoy the voting rights specified in 
rule 12b-1.
    7. The directors will receive quarterly and annual statements 
concerning the amounts expended under the Administrative Plans and 12b-
1 Plans and the related Plan Agreements complying with paragraphs 
(b)(3)(ii) of rule 12b-1, as it may be amended from time to time. In 
the statements, only expenditures properly attributable to the sale or 
servicing of a particular class of shares will be used to justify any 
distribution or servicing fee charged to that class. Expenditures not 
related to the sale or servicing of a particular class will not be 
presented to the directors to justify any fee attributable to that 
class. 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.
    8. Dividends paid by a Portfolio with respect to a class of shares 
will be calculated in the same manner, at the same time, on the same 
day, and will be in the same per share amount as dividends paid by that 
Portfolio with respect to each other class of shares of the Portfolio, 
except that Plan Payments made by a class under its Plan and any Class 
Expenses will be borne exclusively by the affected class.
    9. 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 classes has been reviewed by an expert 
(the ``Expert'') who has rendered a report to the applicants, which 
report has been provided to the staff of the SEC, that such methodology 
and procedures are adequate to ensure that such calculations and 
allocations will be made in an appropriate manner. On an ongoing basis, 
the Expert, or an appropriate substitute Expert, 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 Expert will 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 Expert with respect to such reports, following 
request by the Funds (which the Funds agrees to provide), will be 
available for inspection by the SEC staff upon written request by a 
senior member of the Division of Investment Management or a regional 
office of the SEC. Authorized staff members will be limited to the 
director, an associate director, the chief accountant, the chief 
financial analyst, an assistant director, and any regional 
administrators or associate and assistant administrators. The initial 
report of the Expert is a ``Special Purpose'' report on the ``Design of 
a System'' as defined and described in Statement of Auditing Standards 
(``SAS'') No. 44 of the American Institute of Certified Public 
Accountants (``AICPA'') and the ongoing reports will be ``reports on 
policies and procedures placed in operation and tests of 
effectiveness'' as defined and described in SAS No. 70 of the 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.
    10. Applicants have adequate facilities in place to ensure 
implementation of the methodology and procedures for calculating the 
net asset value and dividends/distributions of 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 Expert in 
the initial report referred to in Condition 9 above and will be 
concurred with by the Expert, or an appropriate substitute Expert, on 
an ongoing basis at least annually in the ongoing report referred to in 
that condition. Applicants will take immediate corrective action if the 
Expert, or appropriate substitute Expert, does not so concur in the 
ongoing reports.
    11. The prospectuses of each class of a Portfolio will include a 
statement to the effect that a salesperson and any other person 
entitled to receive compensation for selling or servicing shares may 
receive different compensation with respect to one particular class of 
shares over another in the Portfolio.
    12. The conditions pursuant to which the exemptive order is 
granted, and the duties and responsibilities of the directors with 
respect to the Multi-Class System will be set forth in guidelines to be 
furnished to the directors.
    13. A Portfolio will disclose the respective expenses, performance 
data, distribution arrangements, services, fees, and exchange 
privileges (if any) applicable to each class of shares in every 
prospectus, regardless of whether all classes of shares are offered 
through each prospectus. Any shareholder report to a class of shares 
which contains expense and performance data will disclose the 
respective expenses and performance data applicable to all classes of 
shares of that Portfolio. The shareholder reports will contain, in the 
statement of assets and liabilities and statement of operations, 
information related to the Portfolio as a whole generally and not on a 
per class basis. Each Portfolio's per share data, however, will be 
prepared on a per class basis with respect to all classes of shares of 
such Portfolio. To the extent that any advertisement or sales 
literature describes the expenses or performance data applicable to any 
class of shares of a Portfolio, it also will disclose the respective 
expenses and/or performance data applicable to all classes of shares of 
a Portfolio. The information provided by applicants for publication in 
any newspaper or similar listing of a Portfolio's net asset value or 
public offering price will present each class of shares separately.
    14. Applicants acknowledge that the grant of the requested 
exemptive order does not imply SEC approval, authorization of, or 
acquiescence in any particular level of payments that a Portfolio may 
make to Organizations pursuant to any Plan in reliance on the exemptive 
order.
    15. Applicants will comply with proposed rule 6c-10 under the Act, 
(Investment Company Act Release No. 16619 (November 2, 1988)), as such 
rule is currently proposed and as it may be reproposed, adopted, or 
amended.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-1710 Filed 1-26-94; 8:45 am]
BILLING CODE 8010-01-M