[Federal Register Volume 59, Number 24 (Friday, February 4, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2494]
[[Page Unknown]]
[Federal Register: February 4, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel No. IC-20039; 812-8652]
The Griffin Funds, Inc., et al.; Notice of Application
January 27, 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 Griffin Funds, Inc. (``Griffin''), Griffin Financial
Investment Advisers (the ``Adviser''), Griffin Financial Services (the
``Distributor''), on behalf of Griffin and all other open-end
management investment companies for which the Adviser acts in the
future as investment adviser or the Distributor acts in the future as
principal underwriter (collectively with Griffin, the ``Funds'').
RELEVANT ACT SECTIONS: Exemption requested under section 6(c) from the
provisions of sections 2(a)(32), 2(a)(35), 18(f), 18(g), 18(i), 22(c),
and 22(d), and rule 22c-1 thereunder.
SUMMARY OF APPLICATION: Applicants seek an order that would permit the
Funds to issue an unlimited number of classes of shares representing
interests in the same portfolio of securities, assess a contingent
deferred sales charge (``CDSC'') on certain redemptions of shares, and
waive the CDSC in certain instances.
FILING DATE: The application was filed on October 22, 1993, and amended
on January 21, 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 22, 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 Fifth Street NW., Washington, DC 20549.
Applicants, 10100 Pioneer Blvd., suite 1000, Santa Fe Springs,
California 90670-3736.
FOR FURTHER INFORMATION CONTACT:
Courtney S. Thornton, Senior Attorney, (202) 272-5287, or C. David
Messman, Branch Chief, (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. Griffin is a Maryland corporation registered under the Act as an
open-end management investment company. Griffin is a series company
presently consisting of seven separate investment portfolios (the
``Portfolios''), each of which has separate investment objectives and
policies. The Portfolios are sold primarily, but not exclusively,
through offices of the Distributor, including locations in offices of
Home Savings of America, FSB, a federally chartered savings
association, which is affiliated with the Adviser and the Distributor.
2. The Adviser, an investment adviser registered under the
Investment Advisers Act of 1940, serves as investment adviser to the
Portfolios.
3. The Distributor, a broker-dealer registered under the Securities
Exchange Act of 1934, serves as the sponsor and distributor of the
Portfolios. The Distributor has entered into a distribution agreement
with Griffin, pursuant to which it has responsibility for distributing
shares of the Portfolios. The Portfolios also have adopted distribution
plans pursuant to rule 12b-1 under the Act.
4. Applicants propose to establish a multiple distribution system
(the ``Multi-Class System''). Under the Multi-Class System, some or all
of the Funds intend to offer three classes of shares: (a) a class
offered in connection with a plan adopted pursuant to rule 12b-1 under
the Act (the ``12b-1 Class''), (b) a class offered in connection with a
non-rule 12b-1 services plan (the ``Non-12b-1 Class''), and (c) a trust
class (the ``Trust Class''). In addition, the Funds may create
additional 12b-1 Class, Non-12b-1 Class, and Trust Class shares that
differ according to the characteristics described below.
5. The 12b-1 Class shares will be offered pursuant to a plan of
distribution (the ``12b-1 Plan'') approved by the directors of a Fund
in accordance with rule 12b-1 under the Act. Shares of the 12b-1 Class
will be sold to investors purchasing directly from a Fund's
distributor, or to clients of certain financial institutions that have
entered into agreements with the Fund or the Fund's distributor to
provide necessary distribution and administrative services with respect
to the 12b-1 Class. Distribution activities financed in accordance with
a 12b-1 Plan may include advertising and marketing expenses, printing
costs for new prospectuses and sales literature, and payments to
broker/dealers and others for distribution assistance.
6. The Non-12b-1 Class will be offered pursuant to a non-rule 12b-1
servicing plan (the ``Services Plan,'' and together with the 12b-1
Plans, the ``Plans'') approved by the board of directors of a Fund
under which a Fund will enter into servicing agreements with qualified
financial institutions (``Organizations'') to provide necessary
administrative support services to customers of Organizations who are
the beneficial owners of Non-12b-1 Class shares. Services provided
pursuant to a Services Plan may include subaccounting; establishing and
maintaining accounts and records; aggregating and processing purchase
and redemption orders; investing customers' assets in shares of the
Non-12b-1 Class; providing periodic statements; arranging for bank
wires; processing dividend payments; answering routine inquiries;
assisting customers in changing divided options, account designations,
and addresses; forwarding shareholder communications; and other similar
services.
7. The Trust Class will be sold primarily to financial institutions
in their capacity as fiduciaries for certain accounts, such as living
trusts, irrevocable trusts, foundations, endowments, retirement plans,
and agency or custodial accounts. The financial institutions provide
services for the beneficial owners of Trust Class shares, such as
determining the appropriateness of investments, working with attorneys
or accountants under the terms of a fiduciary relationship, providing
tax information, preparing and sending account statements, responding
to inquiries, forwarding shareholder communications, and establishing
and maintaining account records. Trust Class shares will not be subject
to 12b-1 Plans or Services Plans.
8. The services provided under the Plans will not duplicate the
services provided to the Funds by the Adviser or the Distributor.
Applicants will comply with the recent amendments to Article III,
Section 26, of the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. (the ``NASD'') regarding asset-based sales
charges and service fees. See Securities Exchange Act Release No. 30897
(July 7, 1992).
9. The Funds may in the future create one or more classes of shares
that would bear higher ongoing distribution charges and/or services
fees (``Class B shares'') and that would automatically convert into
shares of another class that bears lower ongoing distribution charges
and/or services fees (``Class A shares'') up to six year after the
purchase of Class B shares.
Shares purchased though the reinvestment of dividends and other
distributions paid in respect of Class B shares also would be Class B
shares. For purposes of conversion to Class A shares, Class B shares
purchased through reinvestment of dividends and other distributions
will be considered to be held in a separate sub-account. Each time any
class B shares not purchased through reinvestment of dividends or other
distributions convert to Class A shares, a pro rata portion of the
Class B shares held in the sub-account will convert into Class A
shares. The pro rata protion will be equal to the percentage of the
shareholder's Class B shares not purchased through reinvestment of
dividends or other distributions that are converting into Class A
shares relative to the shareholder's total Class B shares not purchased
through reinvestment of dividends or other distributions.
10. The conversion of Class B shares into Class A shares would be
subject to the availability of an opinion of counsel or Internal
Revenue Service private letter ruling to the effect that the conversion
of Class B shares does not constitute a taxable event under federal
income tax law. The conversion may be suspended if such a ruling or
opinion is not available. In that event, no further conversions would
occur and Class B shares might be subject to a higher level of ongoing
distribution charges and/or service fees for an indefinite period.
11. Shareholders generally will be limited to exchanging shares
only for shares of the same or a similar class of shares of another
portfolio within the same group of investment companies, as such term
is defined in rule 11a-3 under the Act. The exchange policies of the
Funds would, in all events, comply with rule 11a-3.
12. In addition to expenses incurred under a 12b-1 Plan or Services
Plan, each class of shares will bear certain expenses specifically
attributable to the particular class as set forth in Condition 1 below
(``Class Expenses''). The determination of which Class Expenses will be
allocated to a particular class and any subsequent changes thereto will
be determined by a Fund's directors in the manner described in
Condition 3 below.
13. Each portfolio of a Fund will be charged with the direct
liabilities of that portfolio and with a portion of the general
liabilities of the Fund in the same proportion that the assets of the
portfolio bear to the assets of the Fund. In addition, all outstanding
shares representing interests in the same portfolio will bear the
portfolio expenses, which would first be allocated pro rata to each
class on the basis of the relative net asset value of the respective
class, and then further allocated on a per share basis within the
class, except that each class will bear the Class Expenses applicable
to such class.
14. Applicants also propose that the Funds be permitted to impose a
CDSC on redemptions of one or more classes of shares that are not
subject to a front-end sales load and waive the CDSC in certain
instances. The amount of the CDSC and the timing of its imposition may
vary. Applicants also propose to impose a CDSC of up to 1% on
redemptions that occur within a year of the purchase date of certain
classes of shares that are subject to a front-end sales load in cases
where the front-end sales load has been waived because the initial
purchases of such shares totals $1,000,000 or more.
15. No CDSC will be imposed with respect to redemptions
attributable to increases in the value of an account above the net cost
of the investment due to increases in the net asset value per share. No
CDSC will be imposed on shares acquired through reinvestment of income
dividends or capital gain distributions, or shares purchased a
specified period of time prior to the redemptions. In determining
whether a CDSC is payable, it will be assumed that shares, or amounts
representing shares, that are not subject to a CDSC are redeemed first
and that other shares or amounts are then redeemed in the order
purchased. No CDSD will be imposed on any shares purchased prior to the
effective date of the order.
16. Applicants intend to waive the CDSC on redemptions of shares in
one or more of the following categories: (a) Following the death or
disability (as defined in the Internal Revenue Code of 1986, as
amended) of a shareholder; (b) representing a minimum required
distribution from an IRA or other retirement plan to a shareholder who
has reached age 70\1/2\; (c) incurred by current employees of the
investment adviser to the Funds, or by current or former directors of
the Funds; or (d) resulting from a Fund's right to liquidate a
shareholder's account if the aggregate net asset value of shares held
in the account is less than the effective minimum account size.
Applicants may waive the CDSC in the case of some, but not all, of
these categories, provided that the selected waiver categories will be
provided on a Fund-wide basis. Applicants' prospectuses will list all
available waiver categories.
Applicants' Legal Analysis
1. Applicants request an exemptive order to the extent that the
proposed Multi-Class System might be deemed to 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 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 Multi-Class
System does not involve borrowings and does not affect the Funds'
existing assets or reserves. Nor will the Multi-Class System increase
the speculative character of the shares of a Fund, since all shares
will participate pro rata in all of a Fund's income and expenses (with
the exception of Class Expenses).
3. Applicants assert that the Multi-Class system will preserve
mutuality of risk with respect to all shares of a Fund. Further, since
all shares will be redeemable at all times, no class of shares will
have any preference or priority over any other class in a Fund in the
usual sense (that is, no class will have distribution or liquidation
preferences with respect to particular assets and no class will be
protected by any reserve or other account), and the similarities (and,
with respect to Class Expenses and associated voting rights,
dissimilarities) of the shares will be fully disclosed in the
prospectuses for each class of a Fund, investors will not be given
misleading impressions as to the safety or risk of the shares and the
nature of the shares will not be rendered speculative.
4. Applicants also request an exemption from the provisions of
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. Applicants believe that the implementation of the CDSC in
the manner and under the circumstances described above would be fair,
in the public interest and the interest of the shareholders of the
Funds, and would be consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the Act.
Applicants' Conditions
Applicants agree that any order of the SEC granting the requested
relief will be subject to the following conditions:
1. Each class of shares representing interests in the same
portfolio of a Fund will be identical in all respects, except for
differences related to: (a) The method of financing 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,
reports, and proxies to current shareholders of a specific class or to
regulatory agencies with respect to a specific class of shares; (iii)
blue sky registration or qualification fees incurred by a class of
shares; (iv) SEC registration fees incurred by a class of shares; (v)
the expense of administrative personnel and services as required to
support the shareholders of a specific class of shares; (vi) different
levels of 12b-1 Plan and/or Services Plan fees and expenses (``Plan
Payments'') incurred by a class of shares; (vii) litigation or other
legal expenses relating solely to one class of shares; and (viii)
directors' fees incurred as a result of issues relating to one class of
shares; (b) priorities with respect to the payment of dividends and
distributions (which priorities would reflect only the impact of Class
Expenses properly allocated to one class); (c) the net asset values of
the various classes of shares in a portfolio that may differ as a
result of the allocation of Class Expenses; (d) voting rights of the
classes with respect to the Plans; (e) the different exchange
privileges, if any, of such classes as described in the prospectuses
(and statements of additional information) of the portfolios and
consistent with any order granted pursuant to this application; (f)
class designation differences; and (g) the conversion of shares of one
class to shares of a second class up to six years after the purchase of
the shares of the first class, which classes differ with respect to the
distribution services and administrative support fees payable by such
classes of shares. 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 a Fund, including a majority of the independent
directors, will approve the creation of additional classes of shares
from time to time by an affirmative vote prior to the creation of any
such class. The minutes of the meetings of the directors regarding the
deliberations of the directors with respect to the approvals necessary
to create any additional class of shares will reflect in detail the
reasons for the directors' determination that the creation is in the
best interests of both the Fund involved and its 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 a Fund,
including a majority of the directors who are not interested persons of
the Fund. 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 purposes for which such expenditures were made.
4. On an ongoing basis, the directors of a Fund, pursuant to their
fiduciary responsibilities under the Act and otherwise, will monitor
the portfolios for the existence of any material conflicts between the
interests of the 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
Distributor and the Adviser will be responsible for reporting any
potential or existing conflicts to the directors. If a conflict arises,
the Distributor and the Adviser at their own cost, will remedy such
conflict up to and including establishing a new registered management
investment company.
5. Any Services Plan will be adopted and operated in accordance
with the procedures set forth in paragraphs (b) through (f) of rule
12b-1 as if the expenditures made thereunder were subject to rule 12b-
1, except that shareholders of the Non-12b-1 class will not receive the
voting rights specified in rule 12b-1.
6. The directors of a Fund will receive quarterly and annual
statements concerning Plan Payments (including, in the case of 12b-1
Plans, expenditures relating to distribution) complying with paragraph
(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 (in
the case of 12b-1 shares) or servicing of a particular class of shares
will be used to justify any distribution (in the case of 12b-1 shares)
or servicing fee charged to that class. Expenditures not related to 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.
7. Dividends or other distributions paid by a Fund with respect to
each class of its 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 paid at the same dividend rate, except that any Plan Payments
and other Class Expenses relating to a particular class of shares will
be borne exclusively by the applicable class.
8. The methodology and procedures for calculating the net asset
values, dividends, and distribution of the classes of shares and the
proper allocation of expenses between those classes have been reviewed
by an expert (the ``Expert'') who has rendered a report to applicants,
which 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
applicants that the calculations and allocations are being made
properly. The reports of the Expert 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 Expert with respect to such
reports, following request by a Fund (which the Fund agrees to
provide), will be available for inspection by the SEC staff, upon the
written request to the Fund for such work papers, by a senior member of
the Division of Investment Management, 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
``report on the 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 SAS No. 70 of the AICPA, as it may be amended from time to
time, or in similar auditing standards that may be adopted by the AICPA
from time to time.
9. Applicants have adequate facilities in place to ensure
implementation of the methodology and procedures for calculating the
net asset values, dividends and distributions of the classes of shares
and the proper allocation of expenses between such classes of shares,
and this representation has been concurred with by the Expert in the
initial report referred to in Condition 8 above and will be concurred
with by the Expert, or an appropriate substitute Expert, on an ongoing
basis at least annually in the ongoing reports referred to in Condition
8 above. Applicants will take immediate corrective measures if this
representation is not concurred in by the Expert or appropriate
substitute Expert.
10. The prospectus for each portfolio with more than one class will
contain 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 for selling or servicing one
particular class of shares over another class in the same portfolio.
11. The distributor of a Fund will adopt compliance standards as to
when each class of shares may appropriately be sold to particular
investors. Applicants will require all persons selling shares to agree
to conform to such standards.
12. The conditions pursuant to which the exemptive order is granted
and the duties and responsibilities of the directors of a Fund with
respect to the Plans and related agreements will be set forth in
guidelines which will be furnished to the directors of the Fund.
13. Each portfolio will disclose the respective expenses,
performance data, distribution arrangements, services, fees, transfer
agency expenses, sales loads, deferred sales loads, conversion
features, and exchange privileges applicable to each class of shares of
such portfolio in every prospectus, regardless of whether all classes
of shares in the portfolio are offered through the prospectus. Each
portfolio will disclose the respective expenses and performance data
applicable to all classes 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
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 any advertisement or sales literature describes the expenses or
performance data applicable to any class of shares in a portfolio, it
will also disclose the respective expenses and/or performance data
applicable to all classes of shares in each portfolio. The information
provided by a Fund for publication in any newspaper or similar listing
of each portfolio's net asset value and public offering price will
present each class of shares separately.
14. Any class of shares with a conversion feature (``Purchase
Class'') will convert into another class (``Target Class'') of shares
on the basis of the relative net asset values of the two classes,
without the imposition of any sales load, fee, or other charge. After
conversion, the converted class will be subject to an asset-based sales
charge and/or service fee (as those terms are defined in Article III,
Section 26 of the NASD's Rules of Fair Practice), if any, that in the
aggregate are lower than the asset-based sales charge and service fee
to which they were subject prior to the conversion.
15. If a Fund implements any amendment to its 12b-1 Plan (or, if
presented to shareholders, adopts or implements any amendment of a
Services Plan) that would increase materially the amount that may be
borne by the Target Class shares under the plan, Purchase Class shares
will stop converting into Target Class unless the holders of Purchase
Class shares, voting separately as a class, approve the proposal. The
directors of the Funds shall take such action as is necessary to ensure
that existing Purchase Class shares are exchanged or converted into a
new class of shares (``New Target Class''), identical in all material
respects to Target Class shares as they existed prior to implementation
of the proposal, no later than such shares previously were scheduled to
convert into Target Class shares. If deemed advisable by the directors
of the Funds to implement the foregoing, such action may include the
exchange of all existing Purchase Class shares for a new class (``New
Purchase Class''), identical to existing Purchase Class shares in all
material respects except that New Purchase Class shares will convert
into New Target Class shares. New Target Class shares or New Purchase
Class shares may be formed without further exemptive relief. Exchanges
or conversions described in this condition shall be effected in a
manner that the directors of the Funds reasonably believe will not be
subject to federal taxation. In accordance with Condition 4 above, any
additional cost associated with the creation, exchange, or conversion
of New Target Class shares or New Purchase Class shares shall be borne
solely by the adviser and the distributor of the Fund. Purchase Class
shares sold after the implementation of the proposal may convert into
Target Class shares subject to the higher maximum payment, provided
that the material features of the Target Class shares plan and the
relationship of such plan to the Purchase Class shares are disclosed in
an effective registration statement.
16. 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
a Fund may make pursuant to a Plan in reliance on the exemptive order.
17. Applicants will comply with the provisions of proposed rule 6c-
10 under the Act (Investment Company Act Release No. 16619 (Nov. 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.
Jonathan G. Katz,
Secretary.
[FR Doc. 94-2494 Filed 2-3-94; 8:45 am]
BILLING CODE 8010-01-M