[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: 94-7768]
[[Page Unknown]]
[Federal Register: April 1, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20166; 812-8764]
The Arch Fund, et al.; Notice of Application
March 25, 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: The Arch Fund, Inc. (the ``Fund''), the Arch Tax-Exempt
Trust (the ``Trust''), Mississippi Valley Advisors, Inc. (``MVA''), and
the Winsbury Company Limited Partnership dba the Winsbury Company
(``Winsbury'').
relevant act sections: Exemption requested under section 6(c) of the
Act 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 to supersede a
prior order that permits the Fund and the Trust to issue multiple
classes of shares representing interests in the same portfolio of
securities. The requested order would permit the Fund and the Trust to
offer an unlimited number of classes, add a conversion feature, and
assess and, under certain circumstances, waive a contingent deferred
sales charge (``CDSC'') on redemptions of shares.
filing date: The application was filed on January 6, 1994, and amended
on March 14, 1994. 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 April 19, 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 5th Street NW., Washington, DC 20549.
Applicants, the Fund and the Trust, P.O. Box 78069, St. Louis, MO
63178; MVA, One Mercantile Center, Seventh and Washington Streets, St.
Louis, MO 63101; and Winsbury, 1900 East Dublin-Granville Road,
Columbus, OH 43229.
for further information contact: Elaine M. Boggs, Staff Attorney, at
(202) 272-3026, 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 at the
SEC's Public Reference Branch.
Applicant's Representations
1. The Fund and the Trust are open-end management companies. The
Fund and the Trust consist of multiple investment portfolios or series,
each of which has separate investment objectives and policies. MVA
serves as investment adviser to the Fund and the Trust, and Winsbury
serves as the distributor and principal underwriter.
2. Applicants request an amendment to a prior order that permits
the Fund and the Trust to issue and sell separate classes of securities
representing interests in their portfolios that declared dividends
daily.\1\ The requested order would supersede the prior order and
permit the Fund and the Trust and each of their series to offer an
unlimited number of classes of shares in existing and future portfolios
and assess and, under certain circumstances, waive a CDSC on
redemptions of shares. Applicants request that any relief granted also
apply to other investment companies for which MVA may act in the future
as investment adviser (collectively, with the Fund and the Trust, the
``Companies'').
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\1\Investment Company Act Release Nos. 15489 (Dec. 22, 1986)
(notice) and 15532 (Jan. 13, 1987) (order).
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A. The Multiple Class Distribution System
1. Under the current distribution arrangements, portfolios of the
Fund and Trust are authorized to issue two to three classes of shares
representing interests in the same portfolio of securities. Classes may
be offered to certain qualified institutional customers at net asset
value or through financial intermediaries to individual and
institutional customers. Under the prior order, classes of shares could
be offered in connection with (a) a plan under rule 12b-1 under the
Act, (b) a non-rule 12b-1 shareholder services plan, and (c) no plan at
all.
2. Applicants propose that each Company be permitted to offer an
unlimited number of classes of shares, including the classes currently
offered. Classes of shares may be offered in connection with a plan or
plans adopted pursuant to rule 12b-1 under the Act (the ``Distribution
Plan'') and/or in connection with a non-rule 12b-1 administrative plan
(the ``Administrative Services Plan,'' collectively the Distribution
Plan and the Administrative Services Plan are the ``Plans''). Services
under the Plans may be provided by a Company's distributor and/or
administrator, or by organizations that have entered into agreements
(collectively, ``Plan Agreements'') with the Company, its distributor,
or its administrator concerning the provision of services to the
organization's clients who may be the record or beneficial owners of
shares of a particular class. The Companies also may offer classes of
shares that would be subject to front-end sales loads and/or CDSCs. The
sum of any front-end load, 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 National Association of Securities
Dealers (``NASD'').
3. Expenses of a Company that could not be attributed directly to
any one portfolio would be allocated to each portfolio based on the
relative net assets of the portfolio or as otherwise determined under
the supervision of its directors (``Company Expenses''). Expenses
attributable to a portfolio but not to a particular class would be
allocated on the basis of the relative net asset value of the
respective classes in the portfolio (``Portfolio Expenses''). Each
class will bear certain expenses attributable specifically to such
class, as set forth in condition 1 (``Class Expenses''). The net asset
value of all shares of a portfolio would be computed on the same days
and at the same times.
4. MVA, Winsbury, or other service contractor may choose to
reimburse or waive Class Expenses on certain classes on a voluntary,
temporary basis. The amount of Class Expenses waived or reimbursed may
vary from class to class. Class Expenses are by their nature specific
to a given class and are expected to vary from one class to another.
Applicants believe that it is acceptable and consistent with
shareholder expectations to reimburse or waive Class Expenses at
different levels for different classes of the same portfolio.
5. In addition, MVA, Winsbury, or other service contractor may
waive or reimburse Company Expenses and/or Portfolio Expenses (with or
without a waiver or reimbursement of Class Expenses) but only if the
same proportionate amount of Company Expenses and/or Portfolio Expenses
are waived or reimbursed for each class. Thus, any Company Expenses
and/or Portfolio Expenses that are waived or reimbursed would be
credited to each class of a portfolio according to the relative net
assets of the classes. Company Expenses and Portfolio Expenses apply
equally to all classes of a given portfolio. Accordingly, it may not be
appropriate to waive or reimburse Company Expenses or Portfolio
Expenses at different levels for different classes of the same
portfolio.
6. Applicants propose that share exchange privileges may be
available to shareholders to permit (a) the exchange of shares of one
portfolio for shares having similar characteristics of another
portfolio, (b) the exchange of shares of an equity portfolio or a fixed
income portfolio for shares of a money market portfolio (or vice
versa), and/or (c) the exchange of shares of one class of a portfolio
for shares of another class of the same portfolio. Any exchange of
shares will comply with rule 11a-3 under the Act.
7. Shares of some classes of shares subject to a CDSC
(``Convertible CDSC Shares'') could automatically convert into shares
of non-CDSC shares (Non-CDSC Shares'') after a prescribed period
following the purchase of Convertible CDSC Shares. Shares acquired
through the reinvestment of dividends and other distributions paid with
respect to Convertible CDSC Shares will also be Convertible CDSC
Shares. These shares will convert to Non-CDSC Shares on the earlier of
a prescribed period following the date of such reinvestment or the
conversion date of the most recently purchased Convertible CDSC Shares
which were not acquired through the reinvestment of dividends or other
distributions.
B. The CDSC
1. Applicants also request an exemption to permit the Companies to
impose a CDSC on redemptions of shares of the Companies, and to waive
the CDSC under certain circumstances. No CDSC will be imposed on an
amount that represents an increase in the shareholder's account
resulting from capital appreciation, on shares acquired through the
reinvestment of income dividends or capital gain distributions, or on
those shares purchased more than a specified period prior to
redemption. In determining whether a CDSC would be payable, it would be
assumed that shares, or amounts representing shares, that are not
subject to a CDSC would be redeemed first and other shares or amounts
would be redeemed in the order purchased. No CDSC will be imposed on
shares purchased before the effective date of the requested order.
2. Applicants request the ability to waive the CDSC on redemptions;
(a) In connection with distributions to participants of an employee
pension, profit-sharing, or other trust or qualified retirement plan or
Keogh plan, individual retirement account, or custodial account
maintained pursuant to section 403(b)(7) of the Internal Revenue Code
(the ``Code''); (b) in connection with distributions to participants in
qualified retirement or Keogh plans, individual retirement accounts, or
custodial accounts maintained pursuant to section 403(b)(7) of the Code
due to death, disability, or the attainment of a specified age; (c) in
connection with a portfolio's right to liquidate a shareholder's
account if the aggregate net asset value of shares held in the account
is less than a minimum account size; (d) redemptions in connection with
the combination of the portfolios with any other investment company
registered under the Act by merger, acquisition of assets, or by any
other transaction; (e) in connection with the death or disability of
the shareholder; (f) of shares that qualify for rights of accumulation,
privileges under a letter of intent, or quantity discount; (g)
resulting from a tax-free return of an excess contribution pursuant to
section 408(d)(4) or (5) of the Code; (h) made in connection with a
systematic withdrawal plan; (i) of shres held by current and/or former
board members, officers, and employees (and their families) of
applicants and current and/or former registered representatives or
employees (and their families) of banks or broker/dealers that have
entered into selling agreements with applicants; (j) by a state,
county, or city or any instrumentality thereof, and/or by trust
companies and bank trust departments; (k) effected by advisory accounts
managed by MVA or other firms registered (or exempt from registration)
under the Investment Advisers Act of 1940; (l) pursuant to a qualified
domestic relations order, as defined in section 414(p) of the Code; or
(m) of shares purchased with dividends or distributions earned in other
portfolios. If a portfolio waives or reduces a CDSC, such action will
be applied uniformly to all offerees in the specified class.
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) of the Act to issue multiple
classes of shares representing interests in the same portfolio of
securities. Applicants believe that by implementing the multiple class
distribution system, the Companies would be able to facilitate the
distribution of their shares and provide a broad array of services
without assuming excessive accounting and bookkeeping costs. Applicants
also believe that the proposed allocation of expenses and voting rights
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 their request to permit
the CDSC arrangement would permit shareholders the option of having
more investment dollars working for them from the time of their share
purchases than if they chose a class with a front-end sales load.
Applicants' Conditions
Applicants agree that any order of the Commission granting the
requested relief will be subject to the following conditions:
1. Each class of shares representing interests in the same
portfolio of a Company will be identical in all respects, except as set
forth below. The only differences between the classes of shares of the
same portfolio will relate solely to:
(a) The impact of: (i) Expenses assessed to a class pursuant to a
Plan, (ii) other Class Expenses which would be limited to: (A) Transfer
agency fees identified by the transfer agent as being attributable to a
specific class of shares, (B) fees and expenses of a Company's
administrator that are identified and approved by the Company's board
as being attributable to a specific class of shares, (C) printing and
postage expenses related to preparing and distributing materials such
as shareholder reports, prospectuses, and proxies to current
shareholder of a class, (D) blue sky registration fees incurred by a
class of shares, (E) SEC registration fees incurred by a class of
shares, (F) the expense of administrative personnel and services as
required to support the shareholders of a specific class, (G)
litigation or other legal expenses or audit or other accounting
expenses relating solely to one class of shares and (H) directors' fees
incurred as a result of issues relating to one class of shares; and
(iii) any other incremental expenses subsequently identified that
should be properly allocated to one class and which are approved by the
SEC pursuant to an amended order;
(b) The fact that the classes will vote separately with respect to
a portfolio's Plans and any other matter submitted to shareholders
relating to Class Expenses, except as provided in condition 17 below;
(c) The different exchange privileges of the classes of shares;
(d) Certain conversion features offered by some of the classes;
and/or
(e) The designation of each class of shares of a portfolio.
2. The board of directors of a Company, including a majority of the
independent directors, will approve the offering of different classes
of shares under the amended multi-class distribution system. The
minutes of the meetings of the directors regarding the deliberations of
the directors with respect to the approvals necessary to implement a
multi-class system will reflect in detail the reasons for the
directors' determination that the proposed multi-class system is in the
best interests of both the Company 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 board of directors of a
Company, including a majority of the directors who are not interested
persons of the Company. Any person authorized to direct the allocation
and disposition of monies paid or payable by a Company to meet Class
Expenses shall provide to the board of 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 Company, pursuant to
their fiduciary responsibilities under the Act and otherwise, will
monitor each portfolio having a multi-class system for the existence of
any material conflicts among the interests of the various classes of
each portfolio. 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. A portfolio's investment
adviser and distributor will be responsible for reporting any potential
or existing conflicts to the directors. If a conflict arises, a
portfolio's investment adviser and/or distributor at their own cost
will remedy such conflict up to and including establishing a new
registered management investment company.
5. Any Administrative 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 directors of a Company will receive quarterly and annual
statements concerning distribution and shareholder servicing
expenditures under each Plan 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 expenditure charged to that class. Expenditures not related
to the sale or servicing of 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 paid by a portfolio 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 in the same
amount, except that Plan Payments relating to each respective class of
shares and the Class Expenses relating to each class of shares will be
borne exclusively by that class.
8. The methodology and procedures for calculating the net asset
value and dividends and distributions of the various classes in any
portfolio having a multi-class distribution system and the proper
allocation of expenses among the various classes in each such portfolio
have been reviewed by an expert (the ``Expert'') who has rendered a
report to the Company involved, which report 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 the Company involved 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
the Company involved (which the Company agrees to provide), will be
available for inspection by the SEC staff upon the written request to
the Company for such work papers by a senior member of the Division of
Investment Management or a regional office of the SEC. Authorized staff
members would be 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
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 as 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 value and dividends and distributions of the various classes
of shares and the proper allocation of expenses among the various
classes of shares and this representation will be 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 with by the
Expert or appropriate substitute Expert.
10. The prospectus of each portfolio having a multi-class system
will contain a statement to the effect that a salesperson and any other
person entitled to receive compensation for selling or servicing shares
in a portfolio may receive different compensation with respect to one
particular class of shares over another in the same portfolio.
11. The distributor for a Company having a multi-class system will
adopt compliance standards for any portfolio which has a multi-class
system, which standards will relate to when each class of shares may
appropriately be sold to particular investors. Applicants will require
all persons selling shares of a portfolio having a multi-class system
to agree to conform to such applicable standards.
12. The conditions pursuant to which the exemptive order is granted
and the duties and responsibilities of the directors with respect to
the multi-class system will be set forth in guidelines which will be
furnished to the directors of a Company having a multi-class system.
13. Each portfolio having a multi-class system will disclose the
respective expenses, performance data, distribution arrangements,
services, fees, front-end sales loads, CDSCs, conversion features, and
exchange privileges applicable to each class of shares in a portfolio
in every prospectus relating to such portfolio, regardless of whether
all classes of shares are offered through each prospectus. Each such
portfolio will disclose the respective expenses and performance data
applicable to all classes of shares in a portfolio in every shareholder
report relating to such portfolio. 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, it will also disclose the respective 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 any portfolio's net asset value and public offering price
will present each class of shares separately.
14. Applicants acknowledge that the grant of the exemptive order,
amending the prior order, requested by the application will not imply
SEC approval, authorization, or acquiescence in any particular level of
payments that the portfolios may make pursuant to a Plan in reliance on
the exemptive order.
15. If a CDSC arrangement is implemented with respect to shares of
a portfolio, applicants agree to comply with the provisions of proposed
rule 6c-10 under the Act, Investment Company Act Release No. 16619
(Nov. 2, 1988), as currently proposed and as it may be reproposed,
adopted or amended.
16. 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 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.
17. If a Company implements any amendment to its Distribution
Plan(s) (or, if presented to shareholders, adopts or implements any
amendment to an Administrative Plan or Plans) that would increase
materially the amount that may be borne by the Non-CDSC Shares under
the Plan, existing Convertible CDSC Shares will stop converting into
the Non-CDSC Shares unless the Convertible CDSC Shares, voting
separately as a class, approve the proposal. The directors shall take
such action as is necessary to ensure that existing Convertible CDSC
Shares are exchanged or converted into a new class of shares (``New
Non-CDSC Shares''), identical in all material respects to the Non-CDSC
Shares as they existed prior to implementation of the proposal, no
later than the date such shares previously were scheduled to convert
into Non-CDSC Shares. If deemed advisable by the directors to implement
the foregoing, such action may include the exchange of all existing
Convertible CDSC Shares for a new class (``New Convertible CDSC
Shares''), identical to the existing Convertible CDSC Shares in all
material respects except that the New Convertible CDSC Shares will
convert into New Non-CDSC Shares. New Non-CDSC Shares or New
Convertible CDSC Shares may be formed without further exemptive relief.
Exchanges or conversions described in this condition shall be effected
in a manner that the directors 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 Non-
CDSC Shares or New Convertible CDSC Shares shall be borne solely by the
adviser and the distributor. Convertible CDSC Shares sold after the
implementation of the proposal may convert into Non-CDSC Shares subject
to the higher maximum payment, provided that the material features of
the Non-CDSC Share plan and the relationship of such plan to the
Convertible CDSC Shares are disclosed in an effective registration
statement.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-7768 Filed 3-31-94; 8:45 am]
BILLING CODE 8010-01-M