[Federal Register Volume 59, Number 63 (Friday, April 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-7767]


[[Page Unknown]]

[Federal Register: April 1, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20167; 812-8322]

 

The Valiant Fund, et al.; Notice of Application

March 25, 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 Valiant Fund (the ``Trust''); Integrity Management & 
Research, Inc. (the ``Manager''); David L. Babson & Co., Inc. (the 
``Sub-Adviser''); and Integrity Investments, Inc. (the 
``Distributor'').

relevant act sections: Conditional order requested under sections 6(c) 
and 17(b) granting an exemption from sections 17(a)(1), 17(a)(2), and 
17(e)(1).

summary of application: Applicants seek a conditional order permitting 
any series of the Trust which is a money market fund (a ``Fund'') to 
(a) engage in transactions in repurchase agreements, short-term 
obligations, and tax-exempt obligations with banks that are affiliated 
persons of the Fund, or affiliated persons or affiliated persons of the 
Fund, solely because the banks own 5% or more (but less than a 
controlling interest) of the outstanding securities of the Fund (an 
``Affiliated Bank''); (b) engage in transactions in U.S. government 
securities with a primary dealer in such securities which is an 
affiliated person of a Fund solely by reason of being an Affiliated 
Bank, or an affiliated person of an Affiliated Bank (i.e., an 
affiliated person of an affiliated person of the Fund) (an ``Affiliated 
Dealer''); and (c) pay compensation to Affiliated Banks or Affiliated 
Dealers within the limits of section 17(e)(2) where they act as agent 
for the Fund in permitted transactions. Applicants request that any 
relief granted pursuant to the application also apply to future 
investment companies that are money market funds and for which the 
Manager or any entity controlling, controlled by, or under common 
control with the Manager may serve as investment adviser or for which 
the Distributor or any entity controlling, controlled by, or under 
common control with the Distributor may serve as principal underwriter.

filing date: The application was filed on March 23, 1993, and amended 
on June 1, 1993, and February 28, 1994. By letter dated March 24, 1994, 
counsel, on behalf of applicants, agreed to file a further amendment 
during the notice period to make certain technical changes. This notice 
reflects the changes to be made to the application by such further 
amendment.

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 19, 1994, 
and should be accompanied by proof of service on the applicants, in the 
form of an affidavit or, for lawyers, a certificate of service. Hearing 
requests should state the nature of the writer's interest, the reason 
for the request, and the issues contested. Persons who wish to be 
notified of a hearing may request notification by writing to the SEC's 
Secretary.

addresses: Secretary, SEC, 450 Fifth Street NW., Washington, DC 20549. 
Applicants, the Trust, 440 Lincoln Street, Worcester, Massachusetts 
01532; the Manager and the Distributor, 1715 Stickney Point Road, suite 
C7, Sarasota, Florida 34231; the Sub-Adviser, One Memorial Drive, 
Cambridge, Massachusetts 02142.

for further information contact: John V. O'Hanlon, Senior Attorney, at 
(202) 272-3922, or C. David Messman, Branch Chief, at (202) 272-3018 
(Office of Investment Company Regulation, Division of Investment 
Management).

supplementary information: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reverence Branch.

Applicant's Representations

    1. The Trust is an open-end management investment company organized 
as a Massachusetts business trust. The Trust offers four separate 
Funds: The U.S. Treasury Money Market Portfolio, the U.S. Treasury 
Income Portfolio, the General Money Market Portfolio, and the Tax-
Exempt Money Market Portfolio. The Funds are money market funds that 
use the amortized cost method to value portfolio securities pursuant to 
rule 2a-7. The Manager acts as the investment adviser to the Funds, and 
the Distributor acts as the principal underwriter to the Funds. The 
Manager has contracted with the Sub-Adviser to manage the Funds' 
portfolios.
    2. The Funds are designed exclusively for short-term investment of 
funds held in institutional accounts. Shares of the Funds are sold only 
to banks and other institutional investors that enter into servicing 
agreements with the Distributor. Such investors typically seek 
investment of funds on behalf of accounts for which they act in an 
agency, trustee, custodial, or other fiduciary capacity.
    3. Because the Funds are designed for short-term investments, the 
number of shares of the Funds held by the Funds' shareholders could 
fluctuate significantly, even on a daily basis. From time to time, the 
number of shares of one of the Funds held by a bank may exceed 5% of 
such Fund's outstanding voting shares. The Funds began operations in 
July 1993, and are relatively small. As a result, a small investment by 
a bank could cause it to become an Affiliated Bank.

Applicants' Legal Analysis

    1. Applicants seek an order permitting (a) a Fund to enter into 
repurchase agreements with an Affiliated Bank; (b) a Fund to enter into 
purchase and sales transactions with respect to obligations having one 
year or less to maturity issued by an Affiliated Bank (``short-term 
obligations''); (c) a Fund to enter into purchase and sales 
transactions with respect to tax-exempt obligations from or through an 
Affiliated Bank; (d) a Fund to enter into purchase and sales 
transactions with respect to U.S. government securities from or through 
a primary dealer in such securities which is an Affiliated Dealer; and 
(e) an Affiliated Bank or Affiliated Dealer to accept compensation 
within the limits of section 17(e)(2) when it acts as agent for any 
Fund in a permitted transaction.
    2. Section 2(a)(3) of the Act provides, in pertinent part, that any 
person directly or indirectly owning, controlling, or holding with 
power to vote 5% or more of the outstanding voting securities of any 
other person is an affiliated person of that person. Thus, a bank that 
is a record owner of 5% or more of the outstanding shares of one of the 
Funds on behalf of the bank's agency and fiduciary accounts may be 
deemed to be an affiliated person of each of the Funds.
    3. Section 17(a), in pertinent part, prohibits an affiliated person 
of a registered investment company, or any affiliated person of such a 
person, acting as principal, from selling to or purchasing from such 
registered company, or any company controlled by such registered 
company, any security or other property.
    4. Section 17(e)(1) of the Act prohibits any affiliated person of a 
registered investment company, or any affiliated person of such person, 
acting as agent, from accepting from any source compensation, other 
than a regular salary or wages from such registered company, for the 
purchase or sale of any property to or for such registered company or 
any controlled company thereof, except in the course of such person's 
business as an underwriter or broker. Section 17(e)(2) provides that an 
affiliated person of a registered investment company, acting as broker 
in connection with the sale of securities to or by such registered 
company or any controlled company thereof, may not receive from any 
source a commission, fee, or other remuneration for effecting such 
transaction which exceeds certain specified levels. Applicants state 
that a bank that wished to purchase or sell securities for a Fund could 
not satisfy the Act's definition of ``underwriter,'' and is 
specifically excluded from the definition of ``broker.'' Thus, it could 
not rely on the ``safe harbor'' of section 17(e)(2) or the ``except'' 
clause in section 17(e)(1).
    5. Section 17(b) provides that the Commission may exempt a 
transaction from the provisions of section 17(a) if evidence 
establishes that the terms of the proposed transaction, including the 
consideration to be paid, are reasonable and fair and do not involve 
overreaching on the part of any person concerned, and that the proposed 
transaction is consistent with the policy of the registered investment 
company concerned and with the general purposes of the Act. Section 
6(c) provides that the Commission may conditionally or unconditionally 
exempt any person, security, or transaction, or any class or classes of 
persons, securities, or transactions, from any provision or provisions 
of the Act or of any rule or regulation thereunder, if and 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.
    6. Applicants state that section 17(a)'s prohibition against 
securities transactions between the Funds and an Affiliated Bank or 
Affiliated Dealer unreasonably reduces the breadth of investment 
alternatives available to the Funds. Applicants anticipate that a 
number of banks with which the Funds otherwise would effect 
transactions will become Affiliated Banks. Applicants assert that the 
disqualification of even a few major banks from the universe of money 
market instrument issuers and dealers with whom the Funds may do 
business would significantly disadvantage the Funds' shareholders by 
unduly restricting and inhibiting proper portfolio management, and by 
increasing the Funds' exposure to adverse credit risks. Applicants also 
are concerned that a Fund inadvertently may engage in securities 
transactions with an Affiliated Bank or Affiliated Dealer.
    7. Without relief from section 17(e)(1), Affiliated Banks and 
Affiliated Dealers are unable to accept compensation where they act as 
agent for the Funds in connection with the purchase of securities from 
the Funds or the sale of securities to the Funds. Applicants are 
concerned that section 17(e)(1)'s prohibition inhibits the Funds' 
discretion to select the best broker available for execution of their 
securities transactions.
    8. Applicants will create internal control procedures for the 
careful monitoring of securities transactions with Affiliated Banks and 
Affiliated Dealers. These procedures, which are described in the 
conditions set forth below, will place responsibility for monitoring 
the fairness of such transactions on the trustees of the Trust.
    9. Applicants state that there is no express or implied 
understanding between any applicant and any bank (or its bank holding 
company or affiliated persons) that is (or may become) an Affiliated 
Bank that the Manager or the Sub-Adviser will cause any of the Funds to 
enter into transactions with such bank (or its bank holding company or 
affiliated persons). Moreover, applicants specifically state that the 
Funds do not intend and are not requesting exemptive relief under the 
Act in order to permit allocation of securities transactions to banks 
(or their bank holding companies or affiliated persons) based upon 
investment in any of the Funds by such banks or their clients and 
customers. The Sub-Adviser represents that, consistent with its 
fiduciary duties to the Funds, it will initiate all purchase and sale 
transactions between a Fund and an Affiliated Bank (or its bank holding 
company or affiliated persons) and that it will enter into such 
transactions with the interests of the Funds' shareholders solely in 
mind.
    10. Applicants note that the Funds are money market funds subject 
to rule 2a-7. Rule 2a-7 imposes investment restrictions requiring that 
the Funds diversify their portfolios and hold only high quality 
securities subject to minimal credit risk, and certain record-keeping 
and reporting requirements. Applicants submit that rule 2a-7's 
restrictions and requirements also minimize opportunities for abuse.
    11. Based upon the foregoing, applicant believes that the terms of 
the proposed transactions are reasonable and fair and do not involve 
overreaching on the part of any person concerned, that the proposed 
transactions are consistent with the policy of each of Funds, and that 
the requested exemption is 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' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. The board of trustees of the Trust (a) will adopt procedures, 
pursuant to which transactions may be effected for the Funds, which are 
reasonably designed to provide that the conditions in paragraphs 2 
through 7 below and the requirements of Investment Company Act Release 
No. 13005 (February 2, 1983) have been complied with; (b) will make and 
approve such changes as the board deems necessary; and (c) will 
determine no less frequently than quarterly that such transactions made 
during the preceding quarter were effected in compliance with such 
procedures. These procedures also will be approved by a majority of the 
non-interested trustees of the Trust. The investment adviser of each 
Fund will implement these procedures and make decisions necessary to 
meet these conditions, subject to the direction and control of the 
board of trustees of the Trust.
    2. No Fund will engage in securities transactions with an 
Affiliated Bank (or its bank holding company or affiliated persons) 
that is an investment adviser to such Fund. No Fund will purchase 
short-term obligations of an Affiliated Bank (or its bank holding 
company or affiliated persons) if, as a result, more than 5% of its 
total assets would be invested in such obligations of the Affiliated 
Bank (or its bank holding company or affiliated persons). No Fund will 
engage in transactions with an Affiliated Bank or Affiliated Dealer 
that exercises a controlling influence over that Fund (and 
``controlling influence'' shall be deemed to include, but is not 
limited to, directly or indirectly, owning, controlling, or holding 
more than 25% of the outstanding voting securities of the Fund).
    3. The Funds (a) will maintain and preserve permanently in an 
easily accessible place a written copy of the procedures (and any 
modifications thereto) described in paragraph 1, and (b) will maintain 
and preserve for a period of not less than six years from the end of 
the fiscal year in which any transactions occurred, the first two years 
in an easily accessible place, a written record of each such 
transaction setting forth a description of the security purchased or 
sold, the identity of the person on the other side of the transaction, 
the terms of the purchase or sale transaction, and the information or 
materials upon which the determinations described below were made. 
Without limiting the foregoing, such record will, for each transaction, 
document the quotations required by condition 5 below, including the 
names of the dealers, the names of the securities, the prices quoted, 
and the times and dates the quotations were received.
    4. The security to be purchased or sold by a Fund will be 
consistent with the investment objectives and policies of that Fund as 
recited in the Fund's registration statement, and will be consistent 
with the interests of that Fund and its shareholders. Further, the 
security to be purchased or sold by that Fund must be comparable in 
terms of quality, yield, and maturity to other similar securities that 
are appropriate for the Fund and that are being purchased or sold 
during a comparable period of time. In the case of transactions in 
Unrated Securities, as defined in rule 2a-7(a)(20), in addition to the 
requirements of rule 2a-7 applicable to such Unrated Securities, all 
determinations with respect to comparability of such securities to 
rated securities will be reviewed and approved at least quarterly by a 
majority of the Fund's trustees who are not interested persons of the 
Fund.
    5. The terms of the transactions must be reasonable and fair to the 
shareholders of the Fund and cannot involve overreaching of the Fund or 
its shareholders on the part of any person concerned. In considering 
whether the price to be paid or received for a security is reasonable 
and fair, the price of the security will be analyzed with respect to 
comparable transactions involving similar securities being purchased or 
sold during a comparable period of time. With respect to purchase or 
sale transactions, the Funds or their advisers must obtain such 
information as they deem necessary to determine that the price to be 
paid or received for the security is at least as favorable as that 
available from other sources. With respect to transactions involving 
repurchase agreements, the Funds or their advisers must obtain such 
information as they deem necessary to determine that the income to be 
earned from the repurchase agreement is at least equal to that 
available from other sources. Without limiting the foregoing, in making 
such determinations, the Funds or their advisers will obtain 
competitive quotations from at least two other dealers with respect to 
the type of security involved (the same instrument, credit rating, 
maturity, and segment, if any, but not necessarily the identical 
security or issuer), except that if quotations are unavailable from two 
such dealers, only one other competitive quotation is required. With 
respect to prospective purchases of securities, these dealers must be 
those who have securities of the categories and the type desired in 
their inventories and who are in a position to quote favorable prices 
with respect thereto. With respect to the prospective disposition of 
securities, these dealers must be those who, in the experience of the 
Funds and their advisers, are in a position to quote favorable prices.
    6. The commission, fee, spread, or other remuneration to be 
received by the Affiliated Bank or Affiliated Dealer must be reasonable 
and fair compared to the commission, fee, spread, or other remuneration 
received by brokers or dealers in connection with comparable 
transactions involving similar securities being purchased or sold 
during a comparable period of time, but in no event will such fee, 
commission, spread, or other remuneration exceed that which is stated 
in section 17(e)(2) of the Act.
    7. Any repurchase agreement will be collateralized fully within the 
meaning of rule 2a-7.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-7767 Filed 3-31-94; 8:45 am]
BILLING CODE 8010-01-M