[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