[Federal Register Volume 59, Number 34 (Friday, February 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3763]


[[Page Unknown]]

[Federal Register: February 18, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20070; 812-8384]

 

IDS Bond Fund, Inc., et al.; Notice of Application

February 14, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

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APPLICANTS: IDS Bond Fund, Inc., IDS California Tax-Exempt Trust, IDS 
Discovery Fund, Inc., IDS Equity Plus Fund, Inc., IDS Extra Income 
Fund, Inc., IDS Federal Income Fund, Inc., IDS Global Series, Inc., IDS 
Growth Fund, Inc., IDS High Yield Tax-Exempt Fund, Inc., IDS 
International Fund, Inc., IDS Investment Series, Inc., IDS Managed 
Retirement Fund, Inc., IDS Market Advantage Series, Inc., IDS New 
Dimensions Fund, Inc., IDS Precious Metals Fund, Inc., IDS Progressive 
Fund, Inc., IDS Selective Fund, Inc., IDS Special Tax-Exempt Series 
Trust, IDS Stock Fund, Inc., IDS Tax-Exempt Bond Fund, Inc., IDS 
Utilities Income Fund, Inc. (each series is referred to as a ``Front-
End Load Fund''), IDS Money Market Series, Inc. and IDS Tax-Free Money 
Fund, Inc. (each series is referred to as a ``Money Market Fund''), IDS 
Strategy Fund, Inc. (each series is referred to as a ``Back-End Load 
Fund'') (collectively, the ``Funds''), and IDS Financial Corporation 
(``IDS'' or the ``Investment Manager'') and IDS Financial Services Inc. 
(``IDS Financial'' or the ``Distributor'').

RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act 
for an 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 request an order that would 
supersede two prior orders that permit some of the Funds to assess and, 
under certain circumstances, waive a contingent deferred sales charge 
(``CDSC'') on certain redemptions of shares. The present order would 
(1) expand the investment companies eligible to assess a CDSC, and (2) 
permit the Funds to issue multiple classes of shares representing 
interests in the same portfolio of securities.

FILING DATES: The application was filed on May 6, 1993, and amended on 
October 1, 1993, and December 15, 1993. Applicants have agreed to file 
an additional amendment, the substance of which is incorporated herein, 
during the notice period.

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 March 14, 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 may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, DC 
20549; Applicants, Laura M. Moret, IDS Financial Corporation, IDS Tower 
10--Unit 52, Minneapolis, Minnesota 55440.

FOR FURTHER INFORMATION CONTACT:
Deepak T. Pai, Staff Attorney, at (202) 272-3809 or Robert A. 
Robertson, Branch Chief, at (202) 272-3030 (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 from 
the SEC's Public Reference Branch.

Applicants' Representations

    1. Each Fund is an open-end management investment company 
registered under the Act. The Funds currently have different 
distribution structures. Shares of the Back-End Load Funds are offered 
to investors subject to a CDSC and distribution fees adopted pursuant 
to rule 12b-1 under the Act. Shares of the Front-End Load Funds are 
offered to investors subject to a front-end sales load and rule 12b-1 
fees that are lower than those applicable to the Back-End Load Funds.
    2. Each Fund has entered into or will enter into an investment 
management agreement with IDS pursuant to which IDS provides investment 
management services. Each Fund also has entered into or will enter into 
a distribution agreement with IDS Financial pursuant to which IDS 
Financial Acts as principal underwriter for the Fund.
    3. Applicants request an exemption that would permit the Funds (a) 
to issue multiple classes of shares representing interests in the same 
portfolio of securities and (b) to assess and, under certain 
circumstances, waive a CDSC on certain redemptions of shares. The order 
would supersede two prior orders that permit some of the Funds to 
assess and, under certain circumstances, waive a CDSC.\1\ Applicants 
also request that any relief apply to any open-end management 
investment company or series within those companies that are advised by 
IDS and in the same ``group of investment companies'' with the Funds, 
as defined in rule 11a-3, that operate in a manner identical in all 
material respects to that of the Funds.
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    \1\Investors Mutual, Inc. et al. Investment Company Act Releases 
Nos. 13906 (April 26, 1984) (notice) and 13974 (May 31, 1984) 
(order), and IDS Financial Corporation, et al. Investment Company 
Act Releases Nos. 17059 (July 10, 1989) (notice) and 17099 (August 
4, 1989) (order).
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A. The Multiple Pricing System

    1. Applicants propose to establish multiple distribution 
arrangements (the ``Multiple Pricing System'') using different classes 
of shares within the same Fund. Under the Multiple Pricing System, each 
Fund, except the Money Market Funds, will offer investors the option of 
purchasing shares with a front-end sales load and a rule 12b-1 service 
fee of up to .25% of the average daily net asset value (``Class A 
shares'' or the Front-End Load Option''). Certain large purchasers of 
Class A shares and participants in qualified plans purchasing Class A 
shares will not be subject to a front-end sales load but will be 
subject to a CDSC not to exceed 4%. The CDSC will be eliminated in 
plans with more than 100 participants or plan assets of more than $1 
million. In addition, each Fund will offer investors the option of 
purchasing shares with a CDSC, an annual distribution charge of up to 
.75% of average daily net assets and an annual service fee of up to 
.25% of average daily net assets under a rule 12b-1 plan (``Class B 
shares'' or the ``Deferred Option''). Some Funds will offer Class C 
shares that will be offered without imposition of either a sales load, 
distribution charge, or service fee (``Class C shares''). Class C 
shares will be offered exclusively to participants and trustees in 
employee benefits plans which meet minimum requirements, and to certain 
investors that will be specified in a Fund's prospectus. The Money 
Market Funds will offer one class of shares, which may have a service 
fee.
    2. Applicants request the authority to create additional classes 
that may differ from Class A, Class B, and Class C shares only in the 
following respects: (a) the impact of the disproportionate payments 
made under the rule 12b-1 distribution plan; (b) the impact of the 
disproportionate payments made because of a non-rule 12b-1 service fee; 
(c) any different expenses for each class of shares (``Class 
Expenses''), which are set forth in condition 1 below; (d) the fact 
that the classes will vote separately with respect to the Fund's rule 
12b-1 distribution plan; (e) the different exchange privileges of the 
classes; and (f) the designation of each class.
    3. Class B shares will have a conversion feature providing for 
automatic conversion to Class A shares after a certain holding period 
of up to eight years. Upon the expiration of the holding period, Class 
B shares (except those purchased through the reinvestment of dividends 
and other distributions paid in respect of Class B shares of that Fund) 
will automatically convert to Class A shares of the Fund at the 
relative net asset values of each of the classes. Shares purchased 
through the reinvestment of dividends and other distributions paid in 
respect of Class B shares are also Class B shares. However, for 
purposes of conversion to Class A, all Class B shares in a 
shareholder's Fund account that were purchased through the reinvestment 
of dividends and other distributions paid in respect of Class B shares 
(and that have not converted to Class A shares as provided in the 
following sentence) will be considered to be held in a separate sub-
account. Each time any Class B shares in the shareholder's Fund account 
(other than those in the sub-account referred to in the preceding 
sentence) convert to Class A, a pro-rata portion of Class B shares then 
in the sub-account will also convert to Class A. The portion will be 
determined by the ratio that the shareholder's Class B shares 
converting to Class A bears to the shareholder's total Class B shares 
not acquired through dividends and distributions.
    4. Applicants contemplate that Class A shares of a Fund will be 
exchangeable only for Class A shares of the other Funds, except for 
Class A shares of the Money Market Funds which may be exchanged for 
Class B shares at the request of the shareholder. Class B shares of a 
Fund will be exchangeable only for Class B shares of the other Funds. 
Class C shares of a Fund will be exchangeable only for Class C shares 
of the other Funds. The exchange privileges will comply with rule 11a-3 
under the Act.
    5. Under the Multiple Pricing System, the net asset value of each 
class will reflect the expenses allocated to it. All expenses incurred 
by a Fund will be allocated based on the relative net asset values of 
each class, except to the extent that each class's net asset value and 
expenses will reflect the expenses of rule 12b-1 plans and any Class 
Expenses.

B. The CDSC

    1. Applicants also request an exemption to permit the Funds to 
assess a CDSC on certain redemptions of Class B shares, and waive the 
CDSC with respect to certain types of redemptions. The CDSC will be 
imposed by each Fund on a redemption of Class B shares during a 
specified period up to eight years. In determining the applicability 
and rate of any CDSC, it will be assumed that a redemption is made 
first of amounts representing capital appreciation, next of shares 
representing reinvestment of dividends and capital gains distributions, 
and finally of other shares held for the longest period of time. This 
will result in the charge, if any, being imposed at the lowest possible 
rate.
    2. The amount of the CDSC charged to a Class B shareholder of a 
Fund will depend on the number of years that have elapsed since the 
shareholder made the purchase payment from which an amount is being 
redeemed. Any changes in CDSC amounts, rates of reduction or the CDSC 
period will be reflected in the prospectus of the affected Fund, and 
the change will not adversely affect shares that were issued prior to 
the date of the change. The sum of any front-end sales charge, asset 
based sales charge, and CDSC will not exceed the maximum sales charge 
provided for in Article III, Section 26 of the Rules of Fair Practice 
of the NASD.
    3. The CDSC for Class B will be waived on redemptions of shares: 
(1) In the event of the shareholder's death; (2) held in IRAs and 
qualified plans for which IDS Acts as custodian, such as Keogh plans, 
tax-sheltered custodial accounts or corporate pension plans if the 
shareholder is at least 59\1/2\ years old, and the redemption is not 
part of a custodian-to-custodian transfer (unless a taxable retirement 
distribution), or if the redemption is part of an approved 
``substantially equal periodic payment'' arrangement; or (3) held in a 
trusteed employee benefit plan.
    4. Class A shareholders who are participants in qualified plans 
with the daily transfer recordkeeping service also maybe charged a CDSC 
on certain redemptions. In no event will the CDSC exceed 4% of the 
purchase payments made by the shareholder. The CDSC for Class A will be 
eliminated for plans with more than $1 million in plan assets or more 
than 100 participants.
    5. Class A shareholders who invest or who have aggregate 
investments in the Funds of $1 million or more may purchase Class A 
shares without paying a front-end sales load. If that investment is 
redeemed in the first two years after purchase, a CDSC of 1% may be 
imposed on the redemption.
    6. The CDSC for Class A shares will be waived: (1) In the event of 
the shareholder's death; (2) in connection with lump-sum or other 
distributions following retirement or attaining age 59\1/2\, and the 
redemption is not part of a custodian-to-custodian transfer (unless a 
taxable retirement distribution), or if the redemption is part of an 
approved ``substantially equal periodic payment'' agreement; or (3) 
with respect to loans or hardship withdrawals.
    7. The CDSC for the additional classes of shares may be different 
than the one described for Classes A and B, but will be calculated in 
the same manner.

Applicants' Legal Analysis

    1. Applicants request an exemption under section 6(c) of the Act 
from sections 18(f)(1), 18(g), and 18(i) to the extent the Multiple 
Pricing System may result in a senior security, as defined by section 
18(g), the issuance and sale of which would be prohibited by section 
18(f)(1), and to the extent the allocation of voting rights under the 
Multiple Pricing System may violate the provisions of 18(i). Applicants 
believe that the Multiple Pricing System does not raise any of the 
legislative concerns that section 18 was designed to ameliorate. The 
proposal does not involve borrowings and does not affect the Funds' 
existing assets or reserves. Applicants believe that the proposed 
allocation of expenses and voting rights relating to the rule 12b-1 
plans in the manner described above is equitable and would not 
discriminate against any group of shareholders.
    2. Applicants also request an exemption under section 6(c) from 
sections 2(a)(32), 2(a)(35), 22(c), and 22(d) of the Act and rule 22c-1 
thereunder to assess and, under certain circumstances, waive a CDSC on 
redemptions of shares. Applicants believe that the imposition of the 
CDSC is fair and in the best interests of their shareholders because it 
applies only to amounts representing purchase payments and does not 
apply to amounts representing increases in the value of an investor's 
account through capital appreciation or to amounts representing 
reinvestment of distributions.

Applicant's Conditions

    Applicants agree that any 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 the Fund, and be identical in all respects, 
except as set forth below. The only differences among the classes of 
shares of the Fund will relate solely to: (a) the impact of the 
disproportionate payments made under the rule 12b-1 distribution plan; 
(b) the impact of the disproportionate payments made because of a non-
rule 12b-1 service fee; (c) any different Class Expenses which are 
limited to: (i) Any transfer agency fees 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) Commission 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; (vii) fees and expenses of members of boards incurred as a 
result of issues relating to one class of shares; (viii) costs relating 
to obtaining shareholder approval of a rule 12b-1 plan for a class or 
an amendment to a rule 12b-1 plan; (ix) and any other incremental 
expenses subsequently identified that should be properly allocated to 
one class which shall be approved by the Commission pursuant to an 
amended order; (d) the fact that the classes will vote separately with 
respect to the Fund's rule 12b-1 distribution plan, except as provided 
in condition 15 below; (e) the different exchange privileges of the 
classes of shares; and (f) the designation of each class of shares of 
the Fund.
    2. The members of the board of each Fund, including a majority of 
the independent board members, shall have approved the Multiple Pricing 
System. The minutes of the meetings of the board of the Fund regarding 
the deliberation of the board with respect to the approvals necessary 
to implement the Multiple Pricing System will reflect in detail the 
reasons for determining that the proposed Multiple Pricing System is in 
the best interests of the Fund and its shareholders.
    3. The initial determination of the Class Expenses that will be 
allocated to a particular class of a Fund and any subsequent changes 
thereto will be reviewed and approved by a vote of the board of the 
affected Fund, including a majority of the independent board members. 
Any person authorized to direct the allocation and disposition of 
monies paid or payable by a Fund to meet Class Expenses shall provide 
to the board, and the board 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 members of the boards of each 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 
members of the boards of each Fund, including a majority of the 
independent board members, shall take such action as is reasonably 
necessary to eliminate any conflicts that may develop. The Investment 
Manager and the Distributor will be responsible for reporting any 
potential or existing conflicts to the members of the boards. If a 
conflict arises the Investment Manager and the Distributor at their own 
costs will remedy the conflict up to and including establishing a new 
registered management investment company.
    5. The shareholders services 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 need not enjoy the voting rights specified in 
rule 12b-1.
    6. The members of the boards of the Funds will receive quarterly 
and annual Statements concerning distribution expenditures 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 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 specific class 
of shares will not be presented to the members of the boards to support 
rule 12b-1 fees charged to shareholders of that class of shares. The 
Statements, including the methods of allocations upon which they are 
based, will be subject to the review and approval of the independent 
board members 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 and on the same day and will be in the same 
amount, except for fee payments made under the rule 12b-1 plans and any 
Class Expenses.
    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 has been reviewed by 
an independent examiner. The independent examiner has rendered a report 
to applicants which has been provided to the staff of the Commission, 
filed as exhibit E to the application 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 this 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 
Commission 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 a request by the Funds that the Funds agree to make, will be 
available for inspection by the Commission's staff upon the written 
request for these 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 independent examiner is a 
``report on policies and procedures placed in operation'' and 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 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 several classes 
of shares and the proper allocation of expenses among the several 
classes of shares and the independent examiner has concurred with this 
representation in the initial report referred to in condition (7) above 
and the Funds 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 (7) 
above. Applicants will take immediate corrective measures if this 
representation is not concurred in by the independent examiner, or 
appropriate substitute independent examiner.
    10. The prospectuses of the Funds will include a statement to the 
effect that a financial planner and any other person entitled to 
receive compensation for selling or servicing shares of the Funds may 
receive a different amount of compensation for selling one particular 
class of shares of the Fund over another.
    11. The Distributor will adopt compliance standards as to when 
shares of a particular class may 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 members of the Boards of the 
Funds with respect to the Multiple Pricing System will be furnished to 
the members of the Boards.
    13. Each Fund will disclose in its prospectus the respective 
expenses, performance data, distribution arrangements, services, fees, 
sales loads, deferred sales loads, conversion features 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 Fund 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 Fund as a whole 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 all 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 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 Funds' net asset values and public 
offering prices will separately present each class of shares.
    14. Applicants acknowledge that the grant of the exemptive order 
requested by this application will not imply Commission approval, 
authorization or acquiescence in any particular level of payments that 
the Funds may make pursuant to rule 12b-1 plans in reliance on the 
exemptive order.
    15. Any class of shares with a conversion feature will convert into 
another 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 shares will be subject to 
an asset-based sales charge and/or service fee (as those terms are 
defined in ART III Sec. 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.
    16. If a Fund implements any amendment to its rule 12b-1 plan or, 
if presented to shareholders, adopts or implements any amendment of a 
non-rule 12b-1 shareholder services plan that would increase materially 
the amount that may be borne by the Target Class (the class into which 
the shares of another class convert) shares under the plan, existing 
Purchase Class (the class from which shares convert) will stop 
converting into Target Class shares unless the Purchase Class 
shareholders, voting separately as a class, approve the proposal. The 
members of the board 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 members of 
the board 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 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 members of the board reasonably believe will not be subject to 
federal taxation. In accordance with Condition 4, any additional cost 
associated with the creation, exchange, or conversion of New Target 
Class or New Purchase Class shares shall be borne solely by the 
Investment Manager and the Distributor. 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 plan and the relationship of such plan to 
the Purchase Class shares are disclosed in an effective registration 
statement.
    17. Applicants will comply with the provisions of proposed rule 6c-
10 under the Act (see Investment Company Release No. 16619) (Nov. 2, 
1988), as such rule is currently proposed and as it may be reproposed, 
adopted or amended.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-3763 Filed 2-17-94; 8:45 am]
BILLING CODE 8010-01-M