[Federal Register Volume 59, Number 62 (Thursday, March 31, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-7603]


[[Page Unknown]]

[Federal Register: March 31, 1994]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 20159; 812-8770]

 

The Woodward Funds; Notice of Application

March 24, 1994.
AGENCY: Securities and Exchange Commission (``SEC'').

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

-----------------------------------------------------------------------

APPLICANTS: The Woodward Funds (``Woodward''), NBD Bank, N.A. 
(``NBD''), First of Michigan Corporation (``FMC''). Applicants will be 
deemed to include, where appropriate, each current and pending Woodward 
portfolio as well as any subsequently created portfolio.

RELEVANT ACT SECTIONS: Order requested under sections 6(c) and 17(b) 
for an exemption from sections 12(d)(1) and 17(a), and pursuant to 
section 17(d) and rule 17d-1 to permit certain joint transactions.

SUMMARY OF APPLICATION: Applicants seek an order to permit certain non-
money market series of Woodward to utilize the cash reserves that have 
not been invested in portfolio securities (``Uninvested Cash'') to 
purchase shares of one or more of the money market series of Woodward.

FILING DATE: The application was filed on January 12, 1994. In a letter 
dated March 24, 1994, applicants' counsel stated that an additional 
amendment will be filed, the substance of which is reflected in this 
notice.

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 April 18, 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. 
Woodward, c/o NBD Bank, N.A., Transfer Agent, P.O. Box 7058, Troy, 
Michigan 48007; NBD, 611 Woodward Avenue, Detroit, Michigan 48336; FMC, 
100 Renaissance Center, 26th Floor, Detroit, Michigan 48243.

FOR FURTHER INFORMATION CONTACT: Joseph G. Mari, Senior Special 
Counsel, (202) 272-3030, or Barry D. Miller, Senior Special Counsel, 
(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. Woodward, a Massachusetts business trust, is an open-end 
management investment company registered under the Act. Woodward offers 
shares in fourteen separate investment portfolios, five of which are 
money market funds (the ``Money Market Funds'') and nine of which are 
non-money market funds (the ``Non-Money Market Funds'').\1\ NBD is the 
investment adviser, transfer agent, and custodian for each of 
Woodward's portfolios. NBD is entitled to receive an investment 
advisory fee from Woodward based upon a percentage of each portfolio's 
net assets and a percentage of the gross income earned by certain of 
the portfolios on loans of their securities.\2\ NBD's fees for serving 
as transfer agent are based primarily on the number of shareholder 
accounts and share transactions, and are not based on a percentage of 
net assets. As custodian, NBD Bank is entitled to receive (i) from the 
Money Market Funds specified fees for each clearing and settlement 
transaction, accounting and safe-keeping transaction with respect to 
investments and activity in master control and master settlement 
accounts, and (ii) from the Non-Money Market Funds, specified fees 
based upon a percentage of each portfolio's net assets, as well as 
annual account fees, asset fees, security transaction fees, and 
accounting statement fees.
---------------------------------------------------------------------------

    \1\Woodward has under registration four other separate 
investment portfolios which will be Non-Money Market Funds.
    \2\NBD has not engaged in any transactions involving loans of 
Woodward's securities for which NBD has received any compensation, 
and it will not engage in such transactions unless the SEC permits 
it to do so.
---------------------------------------------------------------------------

    2. FMC, a Delaware corporation, as sponsor and distributor of the 
portfolios, receives a fee from Woodward based upon a percentage of 
each portfolio's net assets.
    3. The Non-Money Market Funds invest in a variety of debt and/or 
equity securities. The Money Market Funds seek current income, 
liquidity and capital preservation by investing in short-term money 
market instruments such as U.S. Government securities, bank 
obligations, commercial paper, municipal obligations, or repurchase 
agreements secured by Government securities.
    4. Each Non-Money Market Fund has, or may be expected to have, 
Uninvested Cash in its custodian bank which either may be invested 
directly in individual short-term money market instruments, or may not 
otherwise be invested in any portfolio securities. Uninvested Cash of 
such Non-Money Market Funds may result from a variety of sources, 
including dividends or interest received on portfolio securities, 
unsettled securities transactions, reserves held for investment 
strategy purposes, scheduled maturity of investments, liquidation of 
investment securities to meet anticipated redemptions and dividend 
payments, and new monies received from investors.
    5. Applicants seek an order that would permit the Non-Money Market 
Funds to utilize Univested Cash to purchase shares of one or more of 
the Money Market Funds and the Money Market Funds to sell their shares 
to, and to redeem their shares from, the Non-Money Market Funds.\3\ The 
Uninvested Cash held by an individual Non-Money Market Fund at any 
particular time may not be large enough generally to make economical 
direct investments in money market instruments. By investing Uninvested 
Cash in Money Market Funds, the Non-Money Market Funds will reduce 
their transaction costs, create more liquidity, enjoy greater returns 
on the Uninvested Cash, and further diversify their holdings.
---------------------------------------------------------------------------

    \3\Prior to submission of this application, certain of the 
applicants had participated in such activity. Applicants have 
discontinued such practice pending their receipt of an exemptive 
order of the SEC. Any exemptive relief only will be prospective in 
its application.
---------------------------------------------------------------------------

    6. Under the proposal, no sales charge, contingent deferred sales 
charge, rule 12b-1 fee, or other underwriting or distribution fee would 
be charged by a Money Market Fund, or by the distributor, with respect 
to purchases of shares of such Money Market Funds made with Uninvested 
Cash by any Non-Money Market Fund, or upon the redemption of shares of 
such Money Market Funds by any Non-Money Market Fund. The shareholders 
of the Non-Money Market Funds would not be subject to the imposition of 
double management fees. NBD will reduce its fees charged to each Non-
Money Market Fund by an amount equal to the net asset value of the Non-
Money Market Fund's holdings in any Money Market Fund times the rate at 
which advisory and other fees are charged by NBD to such Money Market 
Funds (excluding amounts that could have been charged but were waived), 
provided that such fees are based on a percentage of the Money Market 
Fund's net assets (the ``Reduction Amount'').
    7. If NBD waives any portion of its Non-Money Market Fund fees or 
bears any portion of the expenses of a Non-Money Market Fund (an 
``Expense Waiver''), the adjusted fees for the Non-Money Market Fund 
(gross fees minus Expense Waiver) will be calculated without reference 
to the Reduction Amount. If the Reduction Amount exceeds adjusted fees, 
NBD will reimburse the appropriate Non-Money Market Fund in an amount 
equal to such excess.
    8. To ensure that the Non-Money Market Funds will not exert any 
undue influence in the voting process for any matter submitted to a 
vote by the shareholders of the Money Market Funds, the Non-Money 
Market Funds will vote their shares of each of the Money Market Funds 
in proportion to the vote by all other shareholders of such Money 
Market Fund. The Non-Money Market Funds will purchase and redeem shares 
of each of the Money Market Funds at the same time and price, and will 
receive dividends and bear expenses on the same basis, as all other 
shareholders of such Money Market Fund. The Money Market Funds each 
will establish a separate account on their books for each of the Non-
Money Market Funds which have invested therein. If a Non-Money Market 
Fund were to require cash for any expenditure, investment, or 
redemption of its shares, it would redeem the exact amount of shares of 
Money Market Funds needed for such purposes.
    9. Applicants also request relief that would permit the Non-Money 
Market Funds to invest Uninvested Cash in, and hold shares of, a Money 
Market Series in excess of the percentage limitations set forth in 
section 12(d)(1)(A). The value of the shares held by a Non-Money Market 
Fund, however, will be limited as follows: (a) Each Non-Money Market 
Fund will be permitted to invest Uninvested Cash in, and hold shares 
of, a Money Market Fund only to the extent that (i) the Non-Money 
Market Fund's aggregate investment in the Money Market Fund does not 
exceed the greater of 5% of such Non-Money Market Fund's total net 
assets or $2.5 million, and (ii) the Non-Money Market Fund's aggregate 
investment in all investment companies (including all Money Market 
Funds) does not exceed 10% of such Non-Money Market Fund's total net 
assets; and (b) no single Non-Money Market Fund will be permitted to 
own more than 3% of the outstanding shares of any single Money Market 
Fund or any other investment company.
    10. The investment by the Non-Money Market Funds in shares of the 
Money Market Funds will be in accordance with each Woodward portfolio's 
investment restrictions and will be consistent with their policies as 
recited in each portfolio's registration statement.

Applicants' Legal Analysis

    1. Under section 6(c), the SEC may exempt any person or transaction 
from any provision of the Act or any rule thereunder to the extent that 
such exemption is necessary or appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act. Applicants seek 
relief under section 6(c) for an exemption from section 12(d)(1)(A), 
and so the exemption granted from section 17 applies to a class of 
transactions, rather than to a single transaction. The proposed 
transactions meet the standards for relief under section 6(c) because 
they will allow the applicant Funds to increase their return on 
investments, reduce certain transaction costs, and avoid a reduction in 
or possible loss of investment opportunities.
    2. Section 12(d)(1)(A) sets certain limits on an investment 
company's ability to invest in the shares of another investment 
company. Section 12(d)(1) is intended to protect an investment 
company's shareholders from undue influence over portfolio management 
through the threat of large scale redemptions, the acquisition of 
voting control, the layering of sales charges and advisory fees, and 
the creation of a complex structure that makes it difficult for a 
stockholder to ascertain the true value of the subject security. 
Applicants' proposal does not create any of those perceived abuses.
    3. Section 17(a) makes it unlawful for any affiliated person of a 
registered investment company, acting as principal, to sell any 
security to, or purchase any security from, such investment company. 
The portfolios of Woodward might be deemed to be affiliated persons of 
each other by virtue of being under common control because Woodward has 
one board of trustees.
    4. Section 17(b) permits the SEC to exempt a transaction from 
section 17(a) if the terms of the proposed transaction, including the 
consideration to be paid or received, are reasonable and fair and do 
not involve overreaching on the part of any person concerned, and the 
proposed transaction is consistent with the policy of each registered 
investment company concerned and the general purposes of the Act.\4\
---------------------------------------------------------------------------

    \4\The policies of the Non-Money Market Funds permit the 
purchase and sale of money market instruments, including shares of a 
money market fund.
---------------------------------------------------------------------------

    5. Section 17(d) and rule 17d-1 thereunder, in the absence of an 
order granted by the SEC, prohibit an affiliated person of a registered 
investment company, or an affiliated person of such person, acting as 
principal, from participating in, or effecting any transaction in 
connection with, any joint enterprise or other joint arrangement in 
which any such registered investment company, or a company controlled 
by such registered company is a participant. Under rule 17d-1, the SEC 
may permit a proposed joint transaction if participation by a 
registered investment company is consistent with the provisions, 
policies and purposes of the Act and not on a basis less advantageous 
than that of other participants.
    6. The terms of the proposed transactions are consistent with the 
provisions, policies and purposes of the Act and participation by 
Woodward is not on a basis different from or less advantageous than 
that of other participants. The investment by the Non-Money Market 
Funds in shares of the Money Market Funds would be on the same basis 
and would be indistinguishable from any other shareholder account 
maintained by the Money Market Funds. The Non-Money Market Funds will 
participate on a fair and reasonable basis, relative to the size of 
their investment, in the returns and expenses of the Money Market 
Funds.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. The Money Market Funds will calculate their net asset values in 
accordance with rule 2a-7 under the Act.
    2. The shares of the Money Market Funds sold to and redeemed from 
the Non-Money Market Funds will not be subject to a sales load, 
redemption fee, or distribution fee under a plan adopted in accordance 
with rule 12b-1.
    3. NBD will reduce its fees charged to each Non-Money Market Fund 
by the Reduction Amount.
    4. If NBD waives any portion of its Non-Money Market Fund fees or 
bears any portion of the expenses of a Non-Money Market Fund (an 
``Expense Waiver''), the adjusted fees for the Non-Money Market Fund 
(gross fees minus Expense Waiver) will be calculated without reference 
to the Reduction Amount. Adjusted fees then will be reduced by the 
Reduction Amount. If the Reduction Amount exceeds adjusted fees, NBD 
will reimburse the appropriate Non-Money Market Fund in an amount equal 
to such excess.
    5. Each of the Non-Money Market Funds will be permitted to invest 
Uninvested Cash in, and hold shares of, a Money Market Fund only to the 
extent that (a) the Non-Money Market Fund's aggregate investment in the 
Money Market Fund does not exceed the greater of 5% of the Non-Money 
Market Fund's total net assets, or $2.5 million, and (b) the Non-Money 
Market Fund's aggregate investment in all investment companies 
(including all Money Market Funds) does not exceed 10% of such Non-
Money Market Fund's total net assets. No Non-Money Market Fund of 
Woodward will be permitted to own more than 3% of the total outstanding 
voting stock of any Money Market Fund or of any other investment 
company. For purposes of these limitations, each Woodward portfolio 
will be treated as a separate investment company. Accordingly, a single 
Non-Money Market Fund's investments and share ownership of a particular 
Money Market Fund will not be aggregated with the Non-Money Market Fund 
investments and share ownership of any other Woodward portfolio for 
purposes of determining whether the foregoing limitations have been 
satisfied.
    6. The Non-Money Market Funds will vote their shares of each of the 
Money Market Funds in the same proportion as the votes of all other 
shareholders in such Money Market Funds.
    7. The Non-Money Funds will purchase and redeem shares of each of 
the Money Market Funds as of the same time and at the same price, and 
will receive dividends and bear their proportionate share of expenses 
on the same basis, as other shareholders of such Money Market Funds. A 
separate account will be established in the shareholder records of each 
of the Money Market Funds for each of the acquiring Non-Money Market 
Funds.
    8. All reductions and reimbursements of Non-Money Market Fund fees 
in connection with the purchase and sale of shares of the Money Market 
Funds as described herein will be permanent and will not be subject to 
recoupment by NBD or by any future service providers at a later date.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-7603 Filed 3-30-94; 8:45 am]
BILLING CODE 8010-01-M